<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission file number 0-16509
CITIZENS, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-0755371
---------------------------------------- ---------------------------------
(State of incorporation) (IRS Employer Identification No.)
400 East Anderson Lane, Austin, Texas 78752
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 837-7100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
-------------------- -----------------------------------------
Class A Common Stock American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes X No .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K (X).
-----
As of March 10, 1996, aggregate market value of the Class A voting stock held
by non-affiliates of the Registrant was approximately $107,977,995.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report incorporates certain portions of the definitive proxy
material of the Registrant in respect of its 1996 Annual Meeting of
Shareholders.
Number of shares of common stock outstanding as of March 10, 1996
Class A: 19,337,325
Class B: 621,049
This report contains a total of 81 pages.
The index to exhibits is found on page 78.
<PAGE> 2
PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
Citizens, Inc. ("Citizens") operates primarily as an insurance holding
company. It was incorporated in 1977. Citizens is the parent holding
company that directly or indirectly owns 100% of Citizens Insurance
Company of America ("CICA"), Computing Technology, Inc. ("CTI"),
Insurance Investors, Inc. ("III"), American Liberty Financial
Corporation ("ALFC'), American Liberty Life Insurance Company
("ALLIC'), American Liberty Securities Corporation ("ALSC"), Funeral
Homes of Louisiana ("FHL") and Funeral Homes of America ("FHA").
Additionally, Citizens owns indirectly, 94.48% of First American
Investment Corporation ("FAIC"). Collectively, Citizens and its
subsidiaries are referred to herein as the "Company." Pertinent
information relating to Citizens' subsidiary companies is set forth
below:
<TABLE>
<CAPTION>
YEAR STATE OF BUSINESS
SUBSIDIARY INCORPORATED INCORPORATION ACTIVITY
---------- ------------ ------------- -----------------------
<S> <C> <C> <C>
CICA 1968 Colorado Life insurance
CTI 1986 Colorado Data processing
III 1965 Texas Aircraft transportation
ALFC 1977 Louisiana Holding company
ALLIC 1978 Louisiana Life insurance
ALSC 1981 Louisiana Dormant Broker/Dealer
FAIC 1984 Louisiana Holding company
FHL 1989 Louisiana Funeral home
FHA 1993 Louisiana Dormant
</TABLE>
On December 9, 1994, Citizens announced that it had signed definitive
written agreements for the acquisition of (i) American Liberty
Financial Corporation, a Baton Rouge, Louisiana based life insurance
holding company with $26 million in assets, $8 million of stockholders'
equity, annual revenues of $9 million and $40 million of insurance in
force and (ii) Insurance Investors & Holding Co. ("Investors"), a
Peoria, Illinois based life insurance holding company with
approximately $2.5 million in assets, $1 million of stockholders'
equity, approximately $140,000 of annual revenues and $6 million of
insurance in force.
The American Liberty agreement, which closed on September 14, 1995,
provided that American Liberty shareholders would receive 1.10 shares
of Citizens' Class A Common Stock for each share of American Liberty
Common Stock owned and 2.926 shares of Citizens' Class A Common Stock
for each one share of American Liberty Preferred Stock owned. Citizens
issued approximately 2,340,000 Class A shares in connection with the
transaction, which was accounted for as a purchase. The companies
continue to operate in their respective locations under a combined
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management team with progress towards consolidation of computer data
processing on the Citizens' system.
ALFC conducts certain non-insurance businesses through subsidiaries.
In the early 1980's, ALFC incorporated several corporations which
became general partners in oil and gas partnerships. These
partnerships own working interest in oil properties in Louisiana and
Oklahoma. In 1981, ALFC formed a subsidiary to market certain
securities, but this corporation has been relatively inactive since
1983. In addition, in 1984, ALFC incorporated First American
Investment Corporation which, in turn, has formed two funeral home
subsidiaries. Citizens is currently assessing, from a business
perspective, if it will continue or dispose of the non-insurance
businesses. Citizens has no current plans to participate in the oil
and gas business. ALFC's non-insurance businesses are immaterial to
Citizens overall structure. Citizens plans to continue to devote
virtually all of its resources to the development and operation of its
insurance business.
The Investors agreement provides that Investors' shareholders would
receive one share of Citizens' Class A Common Stock for each eight
shares of Investors Common Stock owned. Additionally, Citizens would
acquire all shares of Central Investors Life Insurance Company (a 94%
owned subsidiary of Investors) not already owned by Investors, based
upon an exchange ratio of one share of Citizens' Class A common stock
for each four shares of Central Investors owned. The acquisition of
these two companies involved the issuance of approximately 171,000 of
Citizens' Class A shares which will be accounted for as a purchase.
The agreement was closed on March 12, 1996 following approval by the
shareholders of the respective companies. The transaction had no
effect on 1995 operations.
(B) FINANCIAL INFORMATION REGARDING THE INSURANCE BUSINESS
Citizens, through CICA and ALLIC, currently operates principally in
one business segment, that of selling selected lines of individual
life and accident and health ("A&H") insurance policies. Except for
certain insignificant operations acquired as a part of American
Liberty Financial Corporation's holdings, Citizens has no present
intention to engage in any non-insurance related business. The
following tables set forth certain statistical information concerning
the operations of the Company for each of the five years ended
December 31, 1995. The information is presented in accordance with
generally accepted accounting principles.
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TABLE I
The following table sets forth (i) life insurance in force and (ii) mean life
insurance in force.
<TABLE>
<CAPTION>
IN FORCE MEAN LIFE
BEGINNING IN FORCE INSURANCE
OF YEAR END OF YEAR IN FORCE
(a)(b) (a)(b) (a)(b)
---------- ---------- ----------
<S> <C> <C> <C>
1995 $2,144,709 $2,151,955 $2,148,332
1994 2,030,615 2,144,709 2,087,662
1993 1,696,606 2,030,615 1,863,610
1992 1,339,964 1,696,606 1,518,285
1991 1,006,300 1,339,964 1,173,132
</TABLE>
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(a) In thousands (000s)
(b) Before ceding reinsurance to reinsurers.
The increases in insurance in force as shown above reflect the volumes of new
business written by the Company over the past five years. Approximately
$40,243,000 of the 1995 increase relates to the acquisition of American Liberty
Financial Corporation described above. Additionally, the change from 1991 to
1992 reflects the acquisition of First Centennial Corporation ("FCC"), an
insurance holding company.
TABLE II
The following table sets forth (i) the ratio of lapses and surrenders
to mean life insurance in force and (ii) life reinsurance ceded.
<TABLE>
<CAPTION>
RATIO OF REINSURANCE CEDED(b)
LAPSES AND -----------------------------
SURRENDERS AMOUNT REINSURANCE
LAPSES AND TO MEAN OF PREMIUM
SURRENDERS(a) IN FORCE REINSURANCE(a) CEDED
-------------- ---------- --------------- ------------
<S> <C> <C> <C> <C>
1995 $87,273 4.1% $290,677 $2,241,111
1994 84,390 4.0 285,104 2,309,672
1993 98,712 5.3 303,727 1,939,425
1992 83,305 5.5 238,677 1,486,531
1991 57,922 4.9 236,757 1,317,406
</TABLE>
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(a) In thousands (000s)
(b) Approximately 95 percent of the reinsurance is yearly renewable term
insurance, with the remainder being coinsurance.
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TABLE III
The following table sets forth information with respect to total insurance
premiums.
<TABLE>
<CAPTION>
ORDINARY ANNUITY & ACCIDENT
LIFE(a) UNIVERSAL LIFE GROUP LIFE AND HEALTH TOTAL
----------- -------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1995 $45,120,631 $119,335 $ 306,256 $698,206 $46,244,428
1994 42,984,741 75,564 541,370 259,250 43,860,925
1993 36,491,961 106,955 1,106,590 284,510 37,990,016
1992 28,415,877 3,067 469,514 316,395 29,204,853
1991 22,210,299 6,991 400,324 350,875 22,968,489
</TABLE>
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(a) After deduction for reinsurance ceded.
Premium income has grown substantially since 1991 due to the volume of new
business written each year. However, new sales of life insurance decreased in
1995, therefor, overall the increase during 1995 is less than for previous
years. The acquisition of ALFC lessened the decrease in new sales, although
only three months of ALFC's premiums are reflected in the above table for 1995
since the acquisition occurred on September 14, 1995. In 1992, the FCC
acquisition added a small block of Universal Life business to the Company's
portfolio. Additionally, during 1992, the Federal Government increased the
amount of insurance for veterans under the Servicemen's Group Life Insurance
program, causing a one-time increase in group life premiums. The growth in 1995
was the result of a management decision to slow the rate of growth while
directing efforts toward increasing capitalization.
TABLE IV
The following table sets forth information relating to the ratio of
underwriting and other expenses to insurance revenues.
<TABLE>
<CAPTION>
COMMISSIONS, UNDERWRITING
AND OPERATING EXPENSES,
POLICY RESERVE INCREASES,
COMMISSIONS, UNDERWRITING POLICYHOLDER BENEFITS AND
AND OPERATING EXPENSES DIVIDENDS TO POLICYHOLDERS
-------------------------- ------------------------------
RATIO TO RATIO TO
INSURANCE INSURANCE INSURANCE
PREMIUMS(a) AMOUNT PREMIUMS AMOUNT PREMIUMS
------------ ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
1995 $46,244,428 $17,369,414 37.6% $50,761,275 109.7%
1994 43,860,925 17,461,910 39.8 48,763,076 111.2
1993 37,990,017 15,918,491 41.9 43,644,554 114.9
1992 29,204,853 13,546,624 46.4 35,301,078 120.8
1991 22,968,489 11,187,768 48.7 27,853,117 121.3
</TABLE>
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(a) After premiums ceded to reinsurers.
The ratios of expenses to premiums has declined each year since 1989. These
declines are the result of three factors: 1) underwriting and operating
expenses have generally not increased at the same rate as premium income due to
the Company's efficient method of operation; 2) sales
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<PAGE> 6
commissions as a percentage of total premium income are declining annually as
the business enters renewal stages and commissions are paid at a lower rate
than first year; and 3) the amount of new insurance writings annually
represents a smaller percentage of the Company's total premium income.
TABLE V
The following table sets forth changes in new business produced
between participating and nonparticipating policies.
<TABLE>
<CAPTION>
PARTICIPATING NONPARTICIPATING
TOTAL NEW ------------------- -----------------------
BUSINESS (a) AMOUNT (a) PERCENT AMOUNT (a) PERCENT
------------ ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
1995 $296,811 $271,108 91.3% $25,703 8.7%
1994 380,281 352,535 92.7 27,739 7.3
1993 376,460 345,882 91.9 30,578 8.1
1992 315,142 278,694 88.4 36,448 11.6
1991 274,066 240,212 87.6 33,854 12.4
</TABLE>
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(a) In thousands (000s)
The percentage of the new business produced that is participating has increased
steadily due to the fact that the Ultra Expansion products are all
participating and represent the majority of new business. The decline in new
business during 1995 was caused in part by disruptions in the international
market. See Management's Discussion and Analysis.
TABLE VI
The following table sets forth changes in new business issued according to
policy types.
<TABLE>
<CAPTION>
WHOLE LIFE
AND ENDOWMENT TERM UNIVERSAL LIFE
TOTAL NEW ------------------- ------------------- -------------------
BUSINESS (a) AMOUNT (a) PERCENT AMOUNT (a) PERCENT AMOUNT (a) PERCENT
------------ ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 $296,811 $270,963 91.3% $25,848 8.7% $ 0 -
1994 380,281 352,357 92.7 27,924 7.3 0 -
1993 376,460 345,516 91.9 30,777 8.1 0 -
1992 315,142 279,941 88.8 34,243 10.9 958 0.3%
1991 274,066 239,932 87.6 34,134 12.4 0 -
</TABLE>
- ----------
(a) In thousands (000s)
This table illustrates that virtually all of the new business written is whole
life. The 1995 results reflect a decrease in new business during the year.
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TABLE VII
The following table sets forth deferred policy acquisition costs
capitalized and amortized compared to new business issued.
<TABLE>
<CAPTION>
DEFERRED POLICY
TOTAL NEW ACQUISITION COSTS
BUSINESS ------------------------
ISSUED CAPITALIZED AMORTIZED
------------ ----------- -----------
<S> <C> <C> <C>
1995 $296,811,000 $10,579,704 $8,511,876
1994 380,281,000 13,128,049 7,203,593
1993 376,460,000 13,472,064 6,455,401
1992 315,142,000 10,670,569 4,412,007
1991 274,066,000 8,136,789 2,789,659
</TABLE>
Capitalized policy acquisition expenses increased steadily until 1994, such
increases reflecting the growing amount of new business issued. In 1994, the
rate of capitalization was affected by an adjustment due to the lower interest
environment. The amortization of these costs has grown as the aggregate
deferred acquisition cost asset has increased. For 1995, the capitalized
decrease reflects the reduction in the amount of new business produced and
lower commission expenses incurred as a result thereof.
TABLE VIII
The following table sets forth investment results.
<TABLE>
<CAPTION>
RATIO OF NET
INVESTMENT INCOME
MEAN AMOUNT OF NET INVESTMENT TO MEAN AMOUNT
INVESTED ASSETS (a) INCOME (b) OF INVESTED ASSETS (a)
------------------- -------------- ----------------------
<S> <C> <C> <C>
1995 $111,926,695 $7,026,909 6.3%
1994 90,419,823 5,295,784 5.9
1993 82,598,407 4,771,079 5.8
1992 66,704,026 3,929,495 5.9
1991 50,920,030 4,117,165 8.1
</TABLE>
-------------
(a) The years 1992 forward includes assets acquired from FCC on July 31,
1992. The year 1995 includes assets acquired from ALFC on September
14, 1995.
(b) Does not include realized and unrealized gains and losses on
investments.
The rate of return on invested assets declined in 1992 primarily due to the
sale of higher yielding bonds to realize capital gains. Since these gains were
not a component of investment income, and the proceeds were reinvested at lower
prevailing interest rates, the 1993 ratio of net to mean was lower. Available
returns continued to be less in 1994 than in earlier periods of time; however,
in mid to late 1994, yields began to increase and the Company was able to
obtain a slight growth in the return on invested assets. This growth continued
throughout most of 1995.
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(c) NARRATIVE DESCRIPTION OF BUSINESS
(i) BUSINESS OF CITIZENS
Citizens' principal business is ownership of CICA and ALFC and
their affiliates. Additionally, it provides management services to
these companies under a management services agreement. At December
31, 1995, Citizens had approximately 75 full and part-time
employees.
(ii) BUSINESS OF CICA
Historically, CICA's revenues have been derived from insurance
premiums and revenues from investments. CICA is a
Colorado-domiciled life insurance company marketing primarily
ordinary whole-life products on an international basis through
marketing companies. During the fiscal year ended December 31,
1995, 99.2% of CICA's premium income was attributable to life,
endowment and term insurance; 0.2% to individual annuities; and
0.6% to accident and health insurance. Of the life policies in
force at December 31, 1995, 13.2% were nonparticipating and 86.8%
were participating.
The Ultra Expansion products are a series of participating whole
life policies targeted for international markets. All of the
Ultra products are participating with dividends ranging from 2% of
the premium in the first year to 123% in the 20th year. A unique
feature of the Ultra plans is that the dividends are payable
immediately upon payment of the annual premium. In late 1990, an
immediate endowment was added to the product line. This endowment
is paid annually in an amount determined by the insured at the
time the policy is sold. In December 1992, CICA added a flexible
amount deposit rider as a new feature to the ultra products. All
of these products carry surrender charges for the first 14 years
and continuing benefit limitations to exclude certain causes of
death that are not anticipated in standard mortality ratings.
There are no other material policies or products offered by CICA.
The CICA underwriting policy requires a medical examination of
applicants for ordinary insurance in excess of certain prescribed
limits. These limits are graduated according to the age of the
applicant and the amount of insurance. Generally, the maximum
amount of ordinary life insurance issued domestically without a
medical examination is $200,000 for ages 0 through 35; $100,000
for ages 36 through 45; $50,000 for ages 46 through 50; $15,000
for ages 51 through 55; and $10,000 for ages 56 and over. Medical
examinations are required for most all non-U.S. applicants for
life insurance, except children.
On life policies, CICA's maximum coverage on any one life is not
limited by company policy. However, CICA reinsures the amount of
coverage which is in excess of its retention policy. See
"Business of CICA - Reinsurance." CICA does not accept
substandard risks above Table 6 (generally policyholders who
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cannot qualify for standard ordinary insurance because of past
medical history) in exchange for which CICA would charge higher
premiums.
CICA has $22.4 million of insurance in force on individuals that
are classified as substandard risks, the majority of such business
having been acquired in the purchase of other companies.
Management believes the exposure to loss as a result of insuring
these individuals is minimal, since the premiums are increased to
cover the nature of the risk, additional reserves are established,
and the amount of insurance represents less than 1.1% of the total
insurance in force.
GEOGRAPHICAL DISTRIBUTION OF BUSINESS. For the year ended
December 31, 1995, insurance policies held by residents of the
State of Texas accounted for 2.7% of CICA's total premium income
from direct business, and policies held by residents of Colorado
represented 2.1% of premium income from direct business for the
same period. All other states of the United States totaled 3.1%
of the premium income from direct business with no single state,
except as set forth above, accounting for as much as 1% of premium
income. Business on foreign residents accounted for the remaining
91.8%. For the years ended December 31, 1994 and 1993, residents
of the State of Texas accounted for 3.0% and 3.9%, respectively of
CICA's total premium income. Residents of Colorado provided 2.1%
and 2.6%, respectively, during the same period. No other states in
the U.S. amounted to 1% of total premium income during the
periods. Business on foreign citizens represented 91.8% of 1994
and 92.5% of 1993 premium income.
The participating whole life policies accepted by CICA on high net
worth residents of foreign countries have an average face amount
of approximately $60,000 and are marketed primarily to the top 5%
of the population in terms of household income.
CICA accepts applications for international insurance policies
marketed by several independent international marketing firms with
whom CICA has nonexclusive marketing contracts. These firms
market life insurance products to citizens of foreign countries,
with a present emphasis in Latin America. Such life products are
specially designed by CICA to be compatible with marketing methods
and commission requirements.
The international marketing firms have many years' experience
marketing life insurance products for CICA. The contract with the
marketers provides that they have the responsibility for
recruiting and training salesmen. They are responsible for all of
their overhead costs and bear the expense of awards. These firms
are guarantor for any advances against future commissions made by
CICA to marketers. In consideration for the services rendered,
the marketing contractors receive an override commission on all
new policies sold by them or their salesmen. See "Business of
CICA - Commissions." The marketing contracts may be terminated
for various causes, at any time by mutual consent of the parties
or upon 30 days' notice by either party.
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<PAGE> 10
These firms provide recruitment, training and supervision of their
managers and salesmen in the sale of dollar-denominated life
insurance products; however, all managers and salesmen contract
directly with CICA and receive their commission from CICA.
Accordingly, should the marketing arrangement between any firm and
CICA be canceled for any reason, CICA believes it could continue
suitable marketing arrangements with the individuals of the
marketing firms without appreciable loss of present and future
sales. There is, however, always a risk that sales could
decrease.
At present, CICA is dependent on the non-U.S. markets for
virtually all of its new business. This subjects CICA to
potential risks with regard to the continued ability to write such
business should adverse events occur in the countries from which
CICA receives applications. These potential risks include lapses
of policies if funds that flow out of such countries were to
become restricted and the improbable necessity that incorporating
an insurance subsidiary in such countries would become required.
Based on more than 30 years' experience in the marketplace in
which CICA competes, management believes such risks are not
material. The Company maintains no assets outside the U.S. and
requires all premiums to be paid in the U.S. with U.S. dollars via
drafts drawn on banks in the U.S.; therefore, it could lose no
funds from currency devaluation or foreign appropriation.
Further, management does not believe that the flow of funds will
be restricted in the future, because almost all of the insureds
are in the upper percentiles of incomes in their country. Such
insureds are actively involved in business leadership roles in
their communities and would be vehemently opposed to funds flow
restriction. Many of the inherent risks in foreign countries,
such as political instability, hyper-inflation and economic
disruptions tend to improve rather than hurt CICA's business
because it encourages individuals to convert assets out of local
currencies to the more stable U.S. dollar. Additionally,
management has made a concerted effort to expand the number of
foreign countries from which it accepts business in an effort to
reduce the impact on CICA of political or economic problems in any
one country or region.
MARKETING OPERATIONS. CICA holds licenses to do business in 11
states and accepts applications from numerous foreign countries.
CICA's operations are conducted on the independent contractor
basis, with a sales force at December 31, 1995 of 1,308
individuals and December 31, 1994 of 1,328 individuals.
COMMISSIONS. CICA's marketing managers are independent
contractors, responsible for their respective expenses, that are
compensated on a percentage of premium basis. The maximum amount
of commission expense which may be incurred by CICA on an
individual life insurance policy is 110% of the first year
premium, 10% of the premium for each of the next nine years and 2%
of the premium for the eleventh and subsequent years as a
continuing service fee. Percentage amounts paid to salesmen on
individual term, annuity and accident and health insurance are
substantially less than the levels paid for individual
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<PAGE> 11
ordinary life insurance. The marketing managers receive
overriding first year and renewal commissions on business written
by agents under their supervision and all marketing expenses
except sales conventions related thereto are included in the above
percentages.
RESERVES. CICA establishes actuarial reserves as liabilities to
meet obligations on all outstanding policies. Reserves and
deferred acquisition costs are prepared in conformity with the
American Academy of Actuaries Committee on Financial Reporting
Principles. In determining such reserves CICA used the 1955 to
1960, 1965 to 1970, and 1975 to 1980 Select and Ultimate Mortality
Tables with interest rates at 4% or in a range graded from 9% to
5% with recent issues reserved at 7% graded to 6 1/2%. Withdrawal
assumptions are based primarily on actual historical experience.
Statutory reserves are used for paid-up life business. Claims
reserves include an amount equal to the expected benefit to be
paid on reported claims in addition to an estimate of claims that
are incurred but not reported, based on actual historical
experience. CICA receives an independent actuarial certification
of its reserves prepared in accordance with both Generally
Accepted Accounting Principles and Statutory Accounting
Principles. The certifications have noted no deficiencies for the
years presented herein.
REINSURANCE. CICA assumes and cedes insurance with other
insurers, reinsurers and members of various reinsurance pools.
Reinsurance arrangements are utilized to provide greater
diversification of risk and minimize exposure on larger risks.
(a) INSURANCE CEDED. CICA generally retains $75,000 of risk
on any one person. As of December 31, 1995, the aggregate amount
of life insurance ceded amounted to $289,675,000 or 13.7% of total
direct and assumed life insurance in force. CICA is contingently
liable with respect to ceded insurance should any reinsurer be
unable to meet the obligations reinsured.
As of December 31, 1995, CICA had in effect automatic reinsurance
agreements that provide for cessions of ordinary insurance from
CICA. Additionally, CICA has reinsurance treaties in force with
several reinsurers of life and accident and health insurance.
These treaties provide for both automatic and facultative
reinsurance of standard and substandard risks ceded to them by
CICA for life, accident and health and supplemental benefits above
CICA's retention limit on a yearly renewable term, coinsurance or
modified coinsurance basis.
A treaty with Employers Reassurance (ERC) has historically been
the primary vehicle utilized by CICA for its international
business. The treaty is structured in such a way as to allow CICA
to "self administer" the cessions on a reduced cost basis. Prior
to July 1, 1993, 100% of the risk up to $300,000 in excess of
CICA's retention was ceded to ERC. On July 1, 1993, the treaty
was amended and a like agreement was executed with Businessmen's
Assurance (BMA). During
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<PAGE> 12
1995, a third carrier was added as a principal reinsurer, Riunione
Adriatica di Sicurta, of Italy (RAS).
The ERC and BMA agreements provide that on risks reinsured in
specified countries on and after July 1, 1993, 70% of each risk in
excess of CICA's retention will be ceded to ERC and 30% to BMA.
The RAS agreement provides that on risks reinsured in specified
countries on or after January 1, 1995, 100% of the risk in excess
of CICA's retention will be ceded to RAS. CICA pays the premium
to ERC, BMA and RAS on an annual basis and is responsible for the
production of the reporting monthly and annually to ERC, BMA and
RAS to allow proper accounting for the treaties.
The cessions are on a yearly renewable term basis and are
automatic up to $300,000 for ERC and RAS and $425,000 for BMA at
which point the reinsurance is subject to a facultative review by
the reinsurers. At December 31, 1995, CICA had ceded $210,891,000
in face amount of insurance to ERC, $27,040,000 to BMA and
$16,906,000 to RAS under these agreements.
RAS is an unauthorized reinsurer in the state of Colorado; however
RAS has agreed to comply with all Colorado statutes regarding such
companies. Under these statutes, RAS will provide a letter of
credit, issued by a U.S. bank meeting the Colorado requirements,
equal to any liabilities it incurs under this agreement.
Citizens closely monitors the solvency of its reinsurers to
minimize the risk of loss in the event of a failure by one of the
parties. The primary reinsurers of the Company, ERC, BMA and RAS
are large, well capitalized entities which have no current or
prior history of financial difficulty.
(b) INSURANCE ASSUMED. At December 31, 1995, CICA had in
force reinsurance assumed as follows:
<TABLE>
<CAPTION>
TYPE OF AMOUNT
BUSINESS IN FORCE AT
NAME OF COMPANY LOCATION ASSUMED END OF YEAR
--------------- ---------- -------- -----------
<S> <C> <C> <C>
Prudential Insurance Newark, Ordinary
Company (Prudential) New Jersey Group Life $285,001,000
</TABLE>
The reinsurance agreement with Prudential provides for CICA to
assume a portion of the insurance under a group insurance policy
issued by Prudential to the Administrator of Veterans' Affairs, in
accordance with the Servicemen's Group Life Insurance provisions
of Sub-Chapter III of Chapter 19, of Title 38, United States Code.
CICA's portion of the total insurance under the policy is
allocated to CICA in accordance with the criteria established by
the Administrator. The agreement continues in full force and
effect at December 31, 1995.
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<PAGE> 13
CICA has also entered into a Serviceman's Group Life Insurance
Conversion Pool Agreement with Prudential, under the above
described agreement, whereby CICA assumed a portion of the risk of
Prudential under the group policy due to excess mortality under
the conversion pool agreement resulting from issuing conversion
policies as prescribed for membership in the conversion pool.
INVESTMENTS. State insurance statutes prescribe the quality and
percentage of the various types of investments which may be made
by insurance companies and generally permit investment in
qualified state, municipal, federal and foreign government
obligations, high quality corporate bonds, preferred and common
stock, real estate and mortgage loans by certain specified
percentages. The Company's invested assets at December 31, 1995
were distributed as follows: fixed maturities - 78.9%, equity
securities - none, mortgage loans - 1.7%, policy loans - 16.6%,
government insured student loans - 0.3%, short-term investments -
2.2% and other long-term investments - 0.3% (see Note 2 of the
"Notes to Consolidated Financial Statements"). Citizens did not
foreclose on any mortgage loans in 1995. All mortgage loans are
supported by independently appraised real estate. The investment
policy of Citizens with regard to mortgage loans is consistent
with the provisions of the Colorado Insurance Code
At December 31, 1995, 97.2% of Citizens investments in fixed
maturities were comprised of U.S. Treasury Securities and
obligations of U.S. government corporations and agencies,
including U.S. government guaranteed mortgage-backed securities.
Of these mortgage-backed securities, all were guaranteed by U.S.
government agencies or corporations that are backed by the full
faith and credit of the U.S. government or that bear the implied
full faith and credit of the U.S. government.
REGULATION. CICA is subject to regulation and supervision by the
insurance department of each state or other jurisdiction in which
it is licensed to do business. These departments have broad
administrative powers relating to the granting and revocation of
licenses to transact business, the licensing of marketing persons,
the approval of policy forms, the advertising and solicitation of
insurance, the form and content of mandatory financial statements,
the reserve requirements, and the type of investments which may be
made. CICA is required to file detailed annual reports with each
such insurance department, and its books and records are subject
to examination at any time. In accordance with state laws and the
rules and practices of the National Association of Insurance
Commissioners, CICA is examined periodically by examiners of its
domiciliary state and by representatives (on an "association" or
"zone" basis) of the other states in which it is licensed to do
business. CICA's most recent examination which was completed
during 1992, was for the six years ended December 31, 1991, and
was conducted by a public accounting firm representing the
Colorado Division of Insurance. CICA has been notified by the
Colorado Division of Insurance to expect an examination in the
third quarter of 1996 as of December
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<PAGE> 14
31, 1995. Citizens is audited annually by an independent public
accounting firm. See also "Management's Discussion and Analysis
of Results of Operations."
Various states, including Colorado, have enacted "Insurance
Holding Company" legislation which requires the registration and
periodic reporting by insurance companies which control, or are
controlled by, other corporations or persons. Under most of such
legislation, control is presumed to exist with the ownership of
ten percent or more of an insurance company's voting securities.
Citizens is subject to such regulation and has registered under
such statutes as a member of an "insurance holding company
system." The legislation typically requires periodic disclosure
concerning the transactions between the registered insurer, the
ultimate controlling party, and all affiliates and subsidiaries of
the ultimate controlling party, and in many instances requires
prior approval of intercorporate transfers of assets (including in
some instances payment of dividends by the insurance subsidiary)
within the holding company system.
Since Citizens does not physically conduct business in countries
outside the U.S. but rather accepts applications from overseas
marketers, it is not subject to regulation in countries where
most of its insureds are residents. The prospect of such
regulation is viewed as remote by management of Citizens because
obtaining insurance through application by mail outside of one's
country is a common practice in many foreign countries,
particularly those where CICA's insureds reside.
COMPETITION. The life insurance business is highly competitive,
and CICA competes with a large number of stock and mutual
companies. CICA believes that its premium rates and its policies
are generally competitive with those of other life insurance
companies, many of which are larger than CICA, selling similar
types of insurance.
CICA's marketing plan stresses the sale of dollar-denominated life
insurance products to high net worth individuals residing in
foreign countries, with present emphasis in Latin America.
Approximately 92% of the Company's total first year and renewal
premium income during 1995 came from that market, and a similar
percentage of new insurance production during 1994 and 1993 was
derived from that source. See "Business of CICA - Geographical
Distribution of Business". Management believes that CICA is a
significant competitor in this market and attributes its success
in penetrating that market to the expertise of management, the
uniqueness of its life insurance products and competitiveness of
its pricing methods.
CICA faces competition from several other American life insurance
companies that also sell U.S. dollar denominated policies to
non-U.S. citizens, with no one company being dominant in the
market. Some companies may be deemed to have a competitive
advantage due to histories of successful operations and large
agency forces. Management believes that its experience, combined
with the
-14-
<PAGE> 15
special features of the Ultra Expansion policies allows CICA to
compete effectively in maintaining and pursuing new business.
Management believes that CICA competes indirectly with non-U.S.
companies in its business, particularly with respect to Latin
American companies. CICA, as a U.S. domestic insurer paying
claims in U.S. dollars in the U.S., has a different clientele and
product than foreign-domiciled companies. CICA's product is
usually acquired by persons in the top 5% of income of their
respective countries. The policies sold by foreign companies
are sold broadly and are priced based on the mortality of the
entire populace of the respective geographic region. Because of
the predominance of lower incomes in most of these countries,
the mortality experience tends to be very high on the average,
causing mortality charges which are considered unreasonable based
on the life mortality experience of the upper five percent of
income of the population.
Additionally, the assets that back up the policies issued by
foreign companies are invested in the respective countries, and
thus, are exposed to the inflationary risks and economic crises
that historically have impacted many foreign countries. Another
reason that CICA experiences an advantage is that many of its
policyholders desire to transfer capital out of their countries
due to the perceived financial strength and security of the United
States by foreigners. Also, management realizes that CICA
competes indirectly with other U.S. and European insurers in
countries where CICA's insureds reside. CICA's experience has
been that its market niche is in attracting insureds who want the
safety and security of a U.S. domestic insurer. Management of
Citizens considers it to be difficult and speculative to estimate
the potential of the foreign market for U.S. insurers. However,
based upon the volume of new premium generated by CICA that
originates from several countries in Latin America, management
believes that CICA receives a substantial share of such business.
However, Citizens does not have market share data to confirm
management's belief.
In CICA's limited block of accident and health insurance, (0.6% of
total premium income), it is in competition with many casualty and
life insurance companies as well as with voluntary and
government-sponsored plans for meeting hospitalization and medical
expenses such as Blue Cross/Blue Shield, "Medicare" and
"Medicaid." Future expansion of such programs or the
establishment of additional government health programs could
adversely affect the future of accident and health insurance on
CICA's books, most of which has been acquired in the acquisition
of other companies.
FEDERAL INCOME TAXATION. CICA is a "small company" as that term
is defined in the Internal Revenue Code (the "Code"), section 806.
As such, CICA qualified for a special small company deduction
(presently equal to 60% of "tentative life insurance company
taxable income") which serves to decrease significantly the amount
of tax which might otherwise have to be paid.
-15-
<PAGE> 16
The Omnibus Reconciliation Act of 1993 (the "1993 Act") was signed
into law on August 10, 1993. Among its provisions was an increase
to corporate tax rates to 35% on taxable income between
$10,000,000 and $15,000,000 and to 38% on taxable income between
$15,000,000 and $18,300,000. This legislation had no material
impact on the financial position of the Company.
The Revenue Reconciliation Act of 1990 revised the method in which
insurance companies claim deductions for policy acquisition costs.
Previously, insurance companies were allowed to deduct actual
policy acquisition costs as they were incurred. Beginning in
1990, policy acquisition costs are determined as a percentage of
annual net premiums and are then deductible on a straight-line
basis over a ten-year period rather than treated as an immediate
deduction. This change in treatment for acquisition costs has had
a significant impact on CICA's taxable income due to the
relatively large amounts of such deferrals caused by the increases
in new business. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations". CICA presently
qualifies for a small company exception which allows it to deduct
the costs over a shorter five-year period.
CICA files a consolidated Federal income tax return with Citizens
and its subsidiaries. At December 31, 1995, the Company had net
operating loss carryforwards of $497,526 available to offset
taxable income in future years and $400,242 in net operating loss
carryforwards available to offset future alternative minimum
taxable income.
(iii) BUSINESS OF CTI
CTI is a wholly-owned subsidiary of CICA and engages in the
business of providing data processing services and acquisition and
leasing of furniture and equipment for its parent as well as data
processing services and software to other companies. Pursuant to
an Information Systems Management and Services Contract dated
October 1, 1991, CTI provides data processing services to the
Company for a fixed fee of $60,000 per month. In October, 1992,
this fee was lowered to $53,000. As of and for the year ended
December 31, 1995, CTI's total assets were $875,000 and revenues
were $675,000. All intercompany fees and expenses have been
eliminated in the consolidated financial statements.
(iv) BUSINESS OF III
For much of the past decade, III has been dormant. In August,
1993, Citizens sold the stock of III to CICA for its book value.
CICA subsequently contributed debit balances receivable of
approximately $169,000 to III. III collected such receivables
and, as additional consideration, received an airplane which it
operates for Citizens and CICA. During 1994, CICA made an
additional capital contribution of $200,000 to III. Also, during
1994, III acquired a different
-16-
<PAGE> 17
airplane for use in providing aviation transportation and services
to Citizens and the airplane previously owned by III was sold. As
of and for the year ended December 31, 1995, III's total assets
were $841,000 and revenues were $173,000. All intercompany fees
and expenses have been eliminated in the consolidated financial
statements.
(v) BUSINESS OF ALFC
ALFC is a wholly-owned subsidiary of Citizens. Currently dormant,
ALFC served as the parent holding company for the American Liberty
group prior to the acquisition by Citizens as described above.
ALFC's total assets, which consist primarily of investments in its
subsidiaries' stock, were $8,215,000 and revenues were $320,000.
All intercompany fees and expenses have been eliminated in the
consolidated financial statements.
(vi) BUSINESS OF ALLIC
Historically, ALLIC's revenues have been derived from insurance
premiums and revenues from investments. ALLIC is a
Louisiana-domiciled life insurance company marketing primarily
ordinary, whole-life products and accident and health, specified
disease, hospital indemnity and accidental death policies. During
the fiscal year ended December 31, 1995, 48.1% of ALLIC's premium
income was attributable to life, endowment and term insurance;
4.0% to individual annuities; and 47.9% to accident and health
insurance. Of the life policies in force at December 31, 1995,
80.9% were nonparticipating and 19.1% were participating.
The products offered by ALLIC are focused on niche markets in
which the Company believes it can effectively compete. The
primary niches currently targeted include the sale of "pre-need"
burial policies and daily hospital indemnity policies for
specified illness.
On life policies, ALLIC's maximum coverage on any one life is not
limited by company policy. However, ALLIC reinsures the amount of
coverage which is in excess of the its retention policy. See
"Business of ALLIC - Reinsurance."
GEOGRAPHICAL DISTRIBUTION OF BUSINESS. For the year ended
December 31, 1995, insurance policies held by residents of the
State of Oklahoma accounted for 48.5% of ALLIC's total premium
income from direct business. Policies held by residents of
Mississippi represented 15.1%, Louisiana-12.4%, Georgia-9.9%,
Texas- 8.1%, and Florida 2.2% of premium income from direct
business for the same period. All other states of the United
States totaled 1.8% of the premium income from direct business
with no single state, except as set forth above, accounting for as
much as 2% of premium income. For the year ended December 31,
1994, residents of Oklahoma accounted for 41.6% of total premium
income from direct business. Policies held by residents of
Mississippi
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<PAGE> 18
represented 14.5%, Louisiana-12.9%, Georgia-11.7%, Texas-7.9%, and
Florida 2.1% of premium income for the same period. No other
states in the U.S. amounted to 2% of total premium income during
the period.
The life policies written by ALLIC have an average face amount of
approximately $4,000. The low face amount is typical for pre-need
and burial business. At December 31, 1995, ALLIC had
approximately 10,000 such policies in force.
MARKETING OPERATIONS. ALLIC holds licenses to do business in 20
states. ALLIC's operations are conducted through independent
contractors on a basis similar to a general agency approach, with
a marketing force at December 31, 1995 of 340 representatives.
COMMISSIONS. ALLIC's marketing representatives are independent
contractors, responsible for their respective marketing-related
expenses, and they are compensated on a percentage of premium
basis. The maximum amount of commission expense which may be
incurred by ALLIC on an individual life insurance policy is 105%
of the first year premium, 15% of the second through tenth year
premium. For accident and health insurance, the maximum
commission is 100% of premium in the first year and 18%
thereafter. Marketing managers receive overriding first year and
renewal commissions on business written by individuals under their
supervision.
RESERVES. ALLIC records actuarial reserves established to meet
obligations on outstanding policies as liabilities. Reserves and
deferred acquisition costs are prepared in conformity with the
American Academy of Actuaries Committee on Financial Reporting
Principles. In determining such reserves ALLIC used the 1965 to
1970 Select and Ultimate Mortality Tables with interest rates at
7% level for life Purchase GAAP reserves. Statutory reserves are
used for paid-up life business. Withdrawal assumptions are based
primarily on actual historical termination rates. Accident and
Health Purchase GAAP reserves are determined using various
percentages of published 1974 Cancer Tables with Linton C
termination rates and 1984 NAIC Cancer Tables with Linton CC
termination rates and interest at 7% level. Historic GAAP
reserves for pre-need life insurance were calculated using a
graded death benefit and 100% of the 1965 to 1970 Ultimate Table,
7% interest, with terminations on single premium business assumed
to be 2% per year and Linton A rates on all other plans. Claims
reserves include an amount equal to the expected benefit to be
paid on reported claims in addition to an estimate of claims that
are incurred but not reported, based on actual historical
experience. ALLIC receives an independent Actuarial certification
of its reserves prepared in accordance with both Generally
Accepted Accounting Principles and Statutory Accounting
Principles. The certifications have noted no deficiencies for the
years presented herein.
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<PAGE> 19
REINSURANCE. ALLIC cedes insurance with other insurers,
reinsurers and members of various reinsurance pools. Reinsurance
arrangements are utilized to provide greater diversification of
risk and minimize exposure on larger risks.
(a) INSURANCE CEDED. ALLIC generally retains $30,000 of risk
on any one person for life insurance and retains 10% of each
accidental benefit risk on accident and health insurance policies.
As of December 31, 1995, the aggregate amount of life insurance
ceded amounted to $1,002,000 or 2.5% of total direct and assumed
life insurance in force. ALLIC is contingently liable with
respect to ceded insurance should any reinsurer be unable to meet
the obligations assumed by it.
As of December 31, 1995, ALLIC had in effect one automatic
reinsurance agreement that provide for cessions of ordinary
insurance from ALLIC in excess of its retention of $30,000 with a
minimum cession of $2,000. On accident and health insurance,
there is an additional agreement which provides for automatic
cession of 90% of accidental death risks.
A treaty with Businessmen's Assurance (BMA) is the primary vehicle
utilized by ALLIC for its life reinsurance and Life Reassurance
for its accidental death risks. ALLIC closely monitors the
solvency of its reinsurers to minimize the risk of loss in the
event of a failure by one of the parties. The primary reinsurers
of the Company, BMA and Life Re are large, well capitalized
entities which have no current or prior history of financial
difficulty.
(b) INSURANCE ASSUMED. At December 31, 1995, ALLIC had in
force no reinsurance assumed.
INVESTMENTS. State insurance statutes prescribe the quality and
percentage of the various types of investments which may be made
by insurance companies and generally permit investment in
qualified state, municipal, federal and foreign government
obligations, high quality corporate bonds, preferred and common
stock, real estate and mortgage loans by certain specified
percentages. The Company's invested assets at December 31, 1995
were distributed as follows: fixed maturities - 95.2%, equity
securities - none, mortgage loans - none, policy loans - 1.3%,
government insured student loans - none, short-term investments -
3.5% and other long-term investments - none.
At December 31, 1995, 20.2% of ALLIC investments in fixed
maturities were comprised of U.S. Treasury Securities and
obligations of U.S. government corporations and agencies,
including U.S. government guaranteed mortgage backed securities.
Of these mortgage-backed securities, all were guaranteed by U.S.
government agencies or corporations that are backed by the full
faith and credit of the U.S. government or that bear the implied
full faith and credit of the U.S. government. Of the remaining
bonds, 77.5% are corporate securities and
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<PAGE> 20
2.3% are issued by States or Territories of the U.S. and Canada.
Less than 1.5% of ALLIC's bonds are less than investment grade.
REGULATION. ALLIC is subject to regulation and supervision by the
insurance department of each state or other jurisdiction in which
it is licensed to do business.
These insurance departments have broad administrative powers
relating to the granting and revocation of licenses to transact
business, the licensing of salesmen, the approval of policy forms,
the advertising and solicitation of insurance, the form and
content of mandatory financial statements, the reserve
requirements, and the type of investments which may be made.
ALLIC is required to file detailed annual reports with each such
insurance department, and its books and records are subject to
examination at any time. In accordance with state laws and the
rules and practices of the National Association of Insurance
Commissioners, ALLIC is examined periodically by examiners of its
domiciliary state and by representatives (on an "association" or
"zone" basis) of the other states in which it is licensed to do
business. ALLIC's most recent examination which was completed
during 1995, was for the three years ended December 31, 1994, and
was conducted by the Louisiana Division of Insurance.
Various states, including Louisiana, have enacted "Insurance
Holding Company" legislation which requires the registration and
periodic reporting by insurance companies which control, or are
controlled by, other corporations or persons. Under most of such
legislation, control is presumed to exist with the ownership of
ten percent or more of an insurance company's voting securities.
Citizens is subject to such regulation and has registered under
such statutes as a member of an "insurance holding company
system." The legislation typically requires periodic disclosure
concerning the transactions between the registered insurer, the
ultimate controlling party, and all affiliates and subsidiaries of
the ultimate controlling party, and in many instances requires
prior approval of intercorporate transfers of assets (including in
some instances payment of dividends by the insurance subsidiary)
within the holding company system.
COMPETITION. The life insurance business is highly competitive
and ALLIC competes with a large number of stock and mutual
companies. ALLIC believes that its premium rates and its policies
are generally competitive with those of other life insurance
companies, many of which are larger than ALLIC, selling similar
types of insurance.
ALLIC's marketing plan stresses the sale of pre-need or burial
policies as its primary life insurance product. Approximately
fifty-two percent (52%) of the Company's total first year and
renewal premium income during 1995 came from that market and a
similar percentage of new insurance production during 1994 was
derived from that source. See "Business of ALLIC - Geographical
Distribution of Business". Management believes that ALLIC has the
potential to
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<PAGE> 21
be a significant competitor in this market and attributes its
success in penetrating that market to the expertise of management,
the uniqueness of its life insurance products and competitiveness
of its pricing methods.
ALLIC faces competition from several other life insurance
companies that also sell pre-need and burial policies, with no one
company being dominant in the market. Some companies may be
deemed to have a competitive advantage due to histories of
successful operations and large agency forces. Management
believes that its experience, combined with the special features
of the pre-need program allows ALLIC to compete effectively in
maintaining and pursuing new business.
The second aspect of ALLIC's marketing program involves the sale of
hospital indemnity policies for specified illnesses. This block of
business accounted for approximately 48% of total first year and
renewal premium in 1995. ALLIC is in competition with many life
insurance companies as well as with voluntary and
government-sponsored plans for meeting hospitalization and medical
expenses such as Blue Cross/Blue Shield, "Medicare" and "Medicaid."
Future expansion of such programs or the establishment of
additional government health programs could adversely affect the
future of accident and health insurance on ALLIC's books; however,
the Company is confident that it will remain a competitor in this
field due to the uniqueness of its products.
FEDERAL INCOME TAXATION. ALLIC is a "small company" as that term
is defined in the Internal Revenue Code (the "Code"), section 806.
As such, ALLIC qualified for a special small company deduction
(presently equal to 60% of "tentative life insurance company
taxable income") which serves to decrease significantly the amount
of tax which might otherwise have to be paid.
The Omnibus Reconciliation Act of 1993 (the "1993 Act") was signed
into law on August 10, 1993. Among its provisions was an increase
to corporate tax rates to 35% on taxable income between
$10,000,000 and $15,000,000 and to 38% on taxable income between
$15,000,000 and $18,300,000. This legislation had no material
impact on the financial position of the Company.
The Revenue Reconciliation Act of 1990 revised the method in which
insurance companies claim deductions for policy acquisition costs.
Previously, insurance companies were allowed to deduct actual
policy acquisition costs as they were incurred. Beginning in
1990, policy acquisition costs are determined as a percentage of
annual net premiums and are then deductible on a straight-line
basis over a ten-year period rather than treated as an immediate
deduction. This change in treatment for acquisition costs has had
a significant impact on ALLIC's taxable income due to the
relatively large amounts of such deferrals caused by the increases
in new business. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations". ALLIC presently
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<PAGE> 22
qualifies for a small company exception which allows it to deduct
the costs over a shorter five-year period.
ALLIC filed a consolidated Federal income tax return with ALFC and
its subsidiaries prior to the acquisition by Citizens.
(vii) BUSINESS OF ALSC
ALSC was incorporated on July 1, 1981 for the purpose of
recruiting and training a sales staff to market specific
qualifying securities. This NASD registered broker/dealer is a
wholly-owned subsidiary of ALFC and has been relatively inactive
since 1983. For the year ended December 31, 1995, ALSC had total
assets of $26,100 and total revenues of $1,000.
(viii) BUSINESS OF FAIC
FAIC was formed in November 1984 for the purpose of organizing and
financing proposed funeral home companies (FHL and FHA) and a
proposed Louisiana life insurance company. FAIC offered stock to
residents of the State of Louisiana during 1993 and 1994, raising
approximately $1,200,000 in gross proceeds. FHL was capitalized
with approximately $530,000 of the offering proceeds and FHA was
capitalized with approximately $500,000. The offering was
suspended in 1995 and management does not anticipate reactivating
it. Currently, FAIC's activities are limited to ownership of FHL
and FHA, comprising its total assets of $1.1 million at December
31, 1995 with total revenues of $32,000.
(ix) BUSINESS OF FHL
Formed in 1989, FHL owns and operates a funeral home in Baker,
Louisiana. Constructed in 1992, the Baker Funeral Home
constitutes the primary business function of FHL. At December 31,
1995, FHL had total assets of $556,000 and total revenues of
$187,000.
(x) BUSINESS OF FHA
FHA was formed in 1993 to construct an additional funeral home.
Currently those plans have been suspended and the company is
dormant. At December 31, 1995, FHA had total assets of $509,000
and total revenues of $29,000.
ITEM 2. DESCRIPTION OF PROPERTIES
CICA owns its principal office in Austin, Texas, consisting of an
80,000 square foot office building. Approximately 27,000 square feet
is occupied by CICA and its affiliates with the remainder of the
building being leased or for lease. At December 31, 1995, the
occupancy rate of the property was approximately 99%.
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<PAGE> 23
CICA also owns 1.10 acres of land with a 13,000 square foot office
building which previously served as the Company's executive offices.
The property has a book value of $158,000. A triple-net lease was
executed during 1995 on the building for a term of three years, with a
purchase option at a price of $850,000 during the period.
During 1995, CICA acquired a 7,500 square foot office property in
Wheatridge, Colorado for $116,000. This property, which has
previously been appraised for $475,000, is vacant as of December 31,
1995 pending completion of minor interior renovations. Management
expects to use this building in conjunction with the Company's
operations.
Additionally, the Company owns two parcels of commercial property
acquired in 1991. In March, 1996, a sale contract was executed on one
of the properties, which has a book value of $134,700, for $200,000.
The remaining property, with a book value of $107,234, has a sale
contract pending for $185,000.
Through the acquisition of ALFC described above, the Company also owns
a 6,324 square foot funeral home in Baker, Louisiana with a total cost
of $473,000. This facility is owned and operated by a subsidiary,
FHL. Additionally, ALFC leases approximately 9,345 square feet of
office space in Baton Rouge, Louisiana for $5,000 per month. This
space was used by ALFC for its corporate offices and is on a
month-to-month lease.
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time may be a party to various legal
proceedings incidental to its business. Management does not expect
the ultimate resolution of these legal proceedings to have a material
adverse impact on the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders of Citizens during the
fourth calendar quarter of 1995.
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<PAGE> 24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Citizens' Class A common stock is traded on the
American Stock Exchange (Amex). The high and low prices per
share as supplied by the Amex Monthly Statistical Report are as
follows. Prior to April, 1994, Citizens' Class A common stock
was traded over the counter on the NASDAQ National Market System
and the prices were supplied by the NASDAQ Monthly Statistical
Report. These prices represent inter-dealer quotes and therefore
may not represent actual transactions.
<TABLE>
<CAPTION>
1995 1994
----------- ------------
QUARTER ENDED HIGH LOW HIGH LOW
------------- ----- ---- ----- -----
<S> <C> <C> <C> <C>
March 31 9.25 7.13 $8.00 $7.75
June 30 9.69 8.25 8.25 8.12
September 30 15.63 7.25 8.38 7.63
December 31 9.88 8.06 9.13 7.63
</TABLE>
(b) Citizens' Class A common stock is listed on the
American Stock Exchange under the symbol CIA.
(c) As of December 31, 1995, the approximate number of
record owners of Citizens' Class A common stock was 15,000.
Management estimates the number of beneficial owners to be
approximately 43,000.
(d) Citizens has not paid dividends in any of the past
three years and does not intend to pay cash dividends in the
immediate future. For restrictions on the present and future
ability to pay dividends, see Note 7 of the "Notes to
Consolidated Financial Statements."
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<PAGE> 25
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth, in summary form, selective data of the
Company. This data, which is not covered in the report of the
independent auditors, should be read in conjunction with the
consolidated financial statements and notes which are included
elsewhere herein (amounts in thousands except per share amounts).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
------------------------------------------------------------------
1993 1992 1991
1995 1994 (AS RESTATED) (AS RESTATED) (AS RESTATED)
-------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET OPERATING REVENUES $ 53,271 $ 49,157 $ 42,761 $ 33,134 $27,086
NET INCOME $ 2,750 $ 4,175 $ 5,526 $ 3,907 $ 4,720
NET INCOME PER SHARE $ .16 $ .25 $ .34 $ .24 $ .31
TOTAL ASSETS $205,486 $149,798 $134,105 $116,230 $76,482
TOTAL LIABILITIES $140,773 $114,742 $106,090 $ 93,442 $63,282
TOTAL STOCKHOLDERS' EQUITY $ 64,713 $ 35,056 $ 28,015 $ 22,787 $13,083
BOOK VALUE PER SHARE $ 3.24 $ 1.99 $ 1.68 $ 1.37 $ .83
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On December 9, 1994, Citizens announced that it had signed definitive
written agreements for the acquisition of (i) American Liberty
Financial Corporation, a Baton Rouge, Louisiana-based life insurance
holding company with $26 million in assets, $8 million of stockholders'
equity, revenues of $9 million and $40 million of life insurance in
force and (ii) Insurance Investors & Holding Co., a Peoria, Illinois
based life insurance holding company with $2.5 million in assets and $1
million of stockholders' equity.
The American Liberty acquisition was completed on September 14, 1995
with American Liberty shareholders receiving 1.10 shares of Citizens'
Class A Common Stock for each share of American Liberty Common Stock
owned and 2.926 shares of Citizens' Class A Common Stock for each share
of American Liberty Preferred Stock owned. Citizens issued
approximately 2.3 million Class A shares in connection with the
transaction, which was accounted for as a purchase
The Insurance Investors agreement provides that, following the
acquisition by Citizens, Investors' shareholders will receive one share
of Citizens' Class A Common Stock for each eight shares of Investors
Common Stock owned. Additionally, Citizens will acquire all shares of
Central Investors Life Insurance Company, a 95% owned subsidiary of
Insurance Investors & Holding, based upon an exchange ratio of one
share of Citizens' Class A common stock for each four shares of Central
Investors owned. The transaction was completed on March 12, 1996
following approval by shareholders of Investors and Central and
involves issuance of approximately 171,000 of Citizens' Class A shares.
The transaction will be accounted for as a purchase.
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<PAGE> 26
RESULTS OF OPERATIONS
Net income for the year ended December 31, 1995 was $2,750,212 or $.16
per share compared to $4,174,558 or $.25 per share in 1994 and
$5,526,393 or $.34 per share in 1993. Decreased writing of new life
insurance premiums contributed to the lower earnings in 1995, coupled
with increased operating expenses incurred to acquire and convert
ALFC. The smaller amount of capital gains on the Company's fixed
maturity portfolio in 1994 compared to prior years was the primary
reason for the reduction in net income compared to 1993. Realized
losses in 1994 were $9,356, compared to gains of $2,120,837 in 1993.
Total revenues for the year ended December 31, 1995 were $53,271,337
compared to $49,156,709 in 1994, an increase of 8.4%. The smaller
increase in revenues during 1995 resulted primarily from a reduction
in new premium sales, whose decline offset increase investment income
during the year. Management expects to see revenues increase
substantially in 1996 when ALFC is included for the full year. In
1995, the revenues of ALFC are included only from the purchase date of
September 14, 1995, and as such, only $2.8 million of ALFC's total
revenues of $9 million are included in the Company's results. The
1994 revenues were 15% greater than 1993 when total revenues were
$42,761,095. The predominant reason for the increase in revenues
through 1994 is the growth in premium income, which increased by 49.9%
over the three-year period ended December 31, 1994.
Premium income reached $46,125,093 in 1995, a 5.3% increase over the
previous year when premium income totaled $43,785,361. The 1994
amount represented a 15.6% increase over 1993 when premiums amounted
to $37,883,061. The increase through 1994 is attributable to the
success of the Company's Ultra Expansion products that were introduced
to the market in late 1987. Sales of the products were relatively
insignificant until mid-1988 at which time the sales force obtained a
thorough understanding of the features of the products and how to
market them. New business began to increase almost immediately after
the second calendar quarter of 1988 and grew each year from the $4
million produced in 1988, reaching $11.3 million in 1993 and in 1994
exceeded $11.8 million. During 1995, production dipped to $9.5
million. In 1994 and 1995, management did not emphasize new business
production due to its desire to increase Company capitalization before
further expanding its premium writing. Additionally, during 1995, the
Company saw significant disruption in the Argentine economy, lowering
sales from that region which had been a major contributor to the
Company's overall sales in recent years. Management believes the
disruption has passed in that market and expects to see improved
production from that area in 1996. Additionally, only a small portion
of the premium revenues of ALFC are included in the 1995 results as
described above. Management expects ALFC to continue to make
significant contributions to the Company's premium income in future
years. However, as the Company grows and the size of its premium base
expands, it will be more difficult to achieve the dramatic
-26-
<PAGE> 27
increases in premium levels seen in earlier years when the Company was
smaller. During 1995, insurance in force, measured in face amount,
exceeded $2.15 billion.
Net investment income increased 32.7% during 1995 to $7,026,909 from
$5,295,784 in 1994. In 1993, such income was $4,771,079. The 1995
results reflect actions taken during late 1994 and early 1995 to
extend the duration of the Company's portfolio slightly to take
advantage of higher yields. Overall, the duration was increased to
approximately 6 years from 4 to 5 years. Additionally, the
acquisition of ALFC, which increased the Company's invested assets by
approximately $17 million, contributed, along with the Company's own
internal growth. ALFC represented $550,000 of 1995's investment
income; however, this amount represented only slightly more than three
months of earnings on ALFC's asset base. Management expects ALFC to
contribute approximately $2 million to investment income in 1996. The
increase in 1994 reflects the growth in the Company's invested asset
base, which grew by 9.5%. The 1993 results were impacted by actions
taken by management during the first and fourth quarters of that year
to take advantage of volatility in the bond market. During those
quarters management made substantial sales of bonds to realize gains
of approximately $800,000 which are included in other income. The
proceeds were temporarily invested in short-term Treasury Bills until
the volatility subsided at which time the funds were reinvested in
longer term instruments. Management estimates that the reduction in
investment income during the period the funds were invested in such
short-term instruments to be approximately $400,000; however,
management believes the transactions to be beneficial in that the net
effect was to increase net income for 1993 by approximately $800,000.
The low yields available in the bond market during the Company's
growth period have made it difficult to increase the return on the
Company's invested assets without exposing the portfolio to undue
risk; however, management believes that as yields rise (which occurred
during 1994 and early 1995) the Company is positioned to take
advantage of the investment opportunities that will present themselves
and, thus, enhance future returns. Management hired the investment
advisory firm of Asset Allocation and Management, Inc. of Chicago
("AAM"), Illinois in late 1995 to manage the Company's fixed maturity
portfolio. It is the belief of management that an overall increase in
returns can be achieved by implementing the plans of AAM to provide
more diversity in the portfolio without significantly increasing risk.
Future policy benefit reserves increased $11,033,763 in 1995, compared
to $11,910,751 in 1994 and $10,160,523 in 1993. The decreased
production in 1995, coupled with lower reserves as a result of a lower
capitalization rate on policy acquisition costs, along with higher
surrender activity in the international market as a result of the
disruption described above, were the reasons for the lower reserve
increase in 1995. Increasing premium income and favorable persistency
in relation to premiums are the primary reasons for the increases in
1993 and 1994. Increases in surrender activity on the block of
Universal Life business acquired in the First Centennial Corporation
acquisition in 1992 slowed the level of increase, particularly in 1994.
These surrenders, which were expected by management, were increased by
the relatively low interest rates paid on these plans during 1994
compared to the rates that were in effect several
-27-
<PAGE> 28
years ago when the plans were sold. Additionally, in the early years
of a policy, the net reserves (benefit reserve less deferred
acquisition costs) are small due to the large capitalized costs in the
first and second policy years. As the policy matures, the reserve
increases. Also, approximately 18% of new premium is passed through
to the policyowner in the form of endowments (dividends) and therefore
not reserved. The Company's reserves are certified annually by an
independent actuary. Such certification noted no deficiencies for the
years presented.
Overall policyholder dividends remained relatively stable in 1995
amounting to $2,422,168 from $2,381,581 in 1994 and $2,418,456 in
1993. In late 1993, management reduced the dividends paid on various
domestic plans to reflect the lower levels of return that were
available in the bond market. As a result, the dividends paid in 1994
were less than those paid in 1993 and 1995 was only slightly larger
than 1994. Virtually all CICA's policies that have been sold since
1989 are participating. Participating policies represent a large
majority (87%) of the Company's business in force and 91.3% of new
issues in 1995. As a result, management expects continued growth in
this item; however, dividends are factored into the policies' premiums
and thus management does not believe continued increases in dividend
expense will impair or dilute future profitability.
Claims and surrenders increased 15.9% in 1995, reaching $19,282,954
from $16,635,259 in 1994. In 1993, such expenses were $14,166,018.
The 1995 and 1994 increases result primarily from growth in surrenders
and endowments.
Death benefits increased to $2,923,339 in 1995, compared to $2,533,569
in 1994. In 1993, such benefits were $3,115,247. A large portion of
the 1995 increase ($290,945) is attributable to the acquisition of ALFC
in September. The remaining increase in 1995 is due to the growth in
the Company's in force business. During 1994, the claims incurred on
the Servicemen's Group Life Insurance program ("Segli") returned to
levels seen prior to 1993, declining by approximately $500,000.
Additionally, during 1994 claims on the Company's in force business
remained static with those incurred in 1993, despite the increasing
block of business in force. The 1993 results were impacted by an
approximately $500,000 increase in claims assumed under the Segli
program which were incurred as a result of an increase in the amount of
insurance provided to participants in the program and the increased
level of participation that the Company obtained due to its growth in
recent years. An increase in premium income received from the program
offset such increase. The Company has continued to adhere to its
strict underwriting policy which requires complete medical examinations
on all applicants who are foreign residents, except children,
regardless of age or face amount of the policy applied for. For 1996
and future years, management expects to initiate a change to more
selective medical examinations in conjunction with dry spot blood tests
and extensive medical questions on the application in order to lower
the cost of new business without sacrificing necessary information for
the underwriter. Additionally, X-rays and electrocardiograms are
required depending on age and face amount of the policy. On all
policies of $150,000 or more, inspection reports are required which
detail the background resources and
-28-
<PAGE> 29
lifestyle of the applicant. The Company has developed numerous
contacts throughout Latin America with which its underwriters can
validate information contained in the application, medical or
inspection report.
Endowment expense grew from $4,475,462 in 1994 to $4,631,261 in 1995,
a 3.4% increase. Beginning in late 1990, Citizens introduced a new
series of plans called "Ultra Expansion Plus" which carried an
immediate endowment benefit of an amount elected by the policyowner.
This endowment is factored into the premium of the policy and is paid
annually. Management does not expect this benefit to adversely impact
profitability since it is factored into the cost of the policy.
Policy surrenders were $10,611,335 in 1995, compared to $8,637,306 in
1994 and $5,761,190 in 1993. The increase in surrenders is, in the
opinion of management, due to acquisitions and the growing block of
business in force, as well as representative of the economic problems
seen in Argentina during 1995.
During 1995, commissions declined to $10,273,173. Commissions
increased 3.1% in 1994 to $12,382,372 from $12,011,822 in 1993. The
majority of such amounts paid relates to first year commissions which
were $7,292,264, $9,925,028 and $10,423,648, respectively, in 1995,
1994, and 1993. The decline in first year commissions during 1995
relates to the slowdown in new sales discussed earlier.
Underwriting, acquisition and insurance expenses increased to
$7,102,401 in 1995 from $5,079,538 in 1994 and $4,331,669 in 1993. The
1995 expense increase reflects the growth experienced by the Company in
recent years, particularly in the marketing area. As a result of a
change in late 1993 in the management of marketing efforts, the Company
absorbs a greater portion of the expense in exchange for paying lower
first year commissions. The growth in expense in 1994 is primarily
related to the increased home office marketing costs. Additionally, a
portion of the 1993 increase relates to a one-time charge of $425,000
related to an extension of exercise periods for options to purchase
100,000 shares of the Company's Class A common stock. The charge
represents the difference between the exercise price and the fair
market value of the shares as of the extension date.
Capitalized deferred policy acquisition costs were $10,579,704 in
1995, compared to $13,128,049 in 1994 and $13,472,064 in 1993. The
decline in amounts in 1995 reflects the lower level of new sales
experienced during the year, as well as the lower interest rate
environment. The decrease from 1993 to 1994 relates to the adjustment
of capitalization for 1994 issued policies to reflect the lower
interest rates available to be earned on the Company's investment
portfolio compared to earlier years. Amortization of these costs was
$8,511,876, $7,203,593 and $6,455,401, respectively in 1995, 1994, and
1993.
Realized losses on investments were $109,096 in 1995 and $9,356 in
1994, compared to gains of $2,120,837 in 1993. The majority ($63,000)
of the 1995 loss relates to the disposal of a parcel of real estate
acquired in the acquisition of First Centennial
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<PAGE> 30
Corporation and foreclosed on several years ago. Management made
several moves during 1993 to take advantage of the price volatility in
the bond market to achieve gains.
LIQUIDITY AND CAPITAL RESOURCES
Stockholders' equity increased substantially in 1995 to $64,712,990
from $35,055,373 in 1994. The acquisition of ALFC was the primary
reason for the growth in equity during 1995 amounting to $27 million
of the increase.
On October 27, 1994, Citizens completed the offering of 916,375 shares
of its Class A Common Stock under an exemption from registration under
the Securities Act of 1933. The offering was made under Regulation S,
which permits shares offered outside of the United States to non-United
Stated persons pursuant to its guidelines may be resold in the United
States by persons who are not an issuer, underwriter or dealer
following a certain period after the close of the offering period. The
offering price was $7.00 per share. The closing market price of the
Class A common shares on the date of the offering commencement was
$7.75 per share (as reported by the American Stock Exchange). The
Company sold 916,375 shares, generating gross proceeds of more than
$6.4 million, and net proceeds of approximately $5.4 million.
Management was pleased with the amount of capital generated through the
offering; however, it believes that the offering period was too short
in light of the manner in which business is typically transacted
overseas. Because of the success of the offering in the limited time
period, a second offering was initiated in May 1995. As of December
31, 1995, approximately 95,500 shares had been purchased through the
second Reg. S offering, resulting in a net increase to capital of
$638,980.
Invested assets grew to $130,024,739 in 1995 from $93,828,650 at
December 31, 1994, an increase of 38.6%. The acquisition of ALFC
contributed approximately $17 million to said increase. The balance
of the growth is attributable to the internal growth achieved by the
Company. At December 31, 1995, fixed maturities have been categorized
into two classifications: Fixed maturities held to maturity, which
are valued at amortized cost, and fixed maturities available for sale
which are valued at market. The Company does not have a plan to make
material dispositions of fixed maturities during 1996; however,
because of continued uncertainty regarding long-term interest rates,
management cannot rule out sales during 1996. Fixed maturities held
to maturity, amounting to $5,636,785 consist primarily of U.S.
Treasury securities. Management has the intent and believes the
Company has the ability to hold the securities to maturity.
The Company's mortgage loan portfolio, which constitutes 2.8% of
invested assets at December 31, 1995, has historically been composed
of small residential loans in Texas. At December 31, 1995, one
mortgage loan was in default with a principal balance of approximately
$92,000. During 1995, the loan to an affiliate described below was
foreclosed. At December 31, 1994, two mortgage loans were in default;
one to an affiliate of the Company, Continental Investors Life
Insurance Company, in
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<PAGE> 31
the amount of $112,794, and another in the principal amount of
$30,665. Management believes that in the event of foreclosure there
is more than adequate collateralization on both loans to avoid
exposure to loss. Management has established a reserve of $145,080
(approximately 7.5% of the mortgage portfolio's balance) to cover
potential unforeseen losses in the Company's mortgage portfolio.
Policy loans comprise 14.5% of invested assets at December 31, 1995
compared to 16.2% at December 31, 1994. These loans, which are
secured by the underlying policy values, have yields ranging from 5%
to 10% percent and maturities that are related to the maturity or
termination of the applicable policies. Management believes that the
Company maintains more than adequate liquidity despite the uncertain
maturities of these loans.
Cash balances of the Company in its primary depository, Texas Commerce
Bank Austin, Texas, were significantly in excess of Federal Deposit
Insurance Corporation (FDIC) coverage at December 31, 1995.
Management monitors the solvency of all financial institutions in
which it has funds to minimize the exposure for loss. At December 31,
1995, management does not believe the Company is at risk for such a
loss. During 1996, the Company intends to utilize short-term Treasury
Bills and highly-rated commercial paper as cash management tools to
minimize excess cash balances and enhance return.
In February 1992, the Company paid cash for an 80,000 square foot
office building in Austin, Texas to serve as its primary office. This
building will, in the opinion of management, provide adequate space
for the Company's operations for many years. Renovation and
remodeling of the property began in the third quarter of 1992 and the
Company relocated to the building in September 1993. The Company
occupies approximately 27,000 square feet of space in the building.
The Company's former office property, consisting of approximately
13,000 square feet in Austin, with a carrying value of $158,000 was
leased to a third party on a triple-net basis for three years during
1995. The lease provides that the party can purchase the building
during the first 18 months of the lease for $850,000 cash, with no
lease payments applying to the purchase price.
CICA owned 1,955,457 shares of Citizens Class A common stock at
December 31, 1995 (2,075,685 shares at December 31, 1994). For
statutory accounting purposes, CICA received written approval from the
Colorado Insurance Department to carry its investment in Citizens at
50% of the fair market value limited to 8% of admitted assets
($8,976,000), which differs from prescribed statutory accounting
practices. Statutory accounting practices prescribed by Colorado
require that the Company carry its investment at market value reduced
by the percentage ownership of Citizens by CICA, limited to 2% of
admitted assets. As of December 31, 1995, that permitted transaction
increased statutory surplus by $4,077,000 over what it would have been
had prescribed accounting practice been followed. In the Citizens'
consolidated financial statements, this stock is shown as treasury
stock. During 1995, Citizens re-acquired 115,943 of these shares and
retired them.
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<PAGE> 32
CICA had outstanding at December 31, 1995, a $533,000 surplus
debenture payable to Citizens. For statutory accounting purposes,
this debenture is a component of surplus, while for GAAP it is
eliminated in consolidation. Citizens has recognized a liability for
its related obligation to a bank in a like amount.
The NAIC has established minimum capital requirements in the form of
Risk-Based Capital ("RBC"). Risk-based capital factors the type of
business written by a company, the quality of its assets, and various
other factors into account to develop a minimum level of capital
called "authorized control level risk-based capital" and compares this
level to an adjusted statutory capital that includes capital and
surplus as reported under Statutory Accounting Principles, plus
certain investment reserves. Should the ratio of adjusted statutory
capital to control level risk-based capital fall below 200%, a series
of actions by insurance regulators begins. At December 31, 1995 and
1994, CICA's ratios were 700.6% and 560.6%, respectively, well above
minimum levels. ALLIC's ratios were 939.6% and 1,000.8%,
respectively, also well above minimum levels.
The Deficit Reduction Act of 1984 added Section 807 to the Internal
Revenue Code ("IRC") which mandated the use of a new method for
computing tax reserves. In general, Section 807 provides that tax
reserves can never exceed the amount taken into account in computing
statutory reserves. The applicable reserve is the higher of the net
surrender value of the contract or the reserve determined by means of
a formula. The term "net surrender value" means the cash value of the
policy reduced by any penalty or charge imposed upon surrender.
The formula approach used in computing the reserve consists of the
following:
(1) The tax reserve method applicable to the contract -
generally the Commissioners' Reserve Valuation Method (CRVM) for
life insurance contracts, the Commissioners' Annuities Reserve
Valuation Method (CARVM) for annuity contracts, and the two-year
full preliminary term method for non-cancelable accident and
health contracts;
(2) The greater of the applicable Federal interest rate or
the prevailing state assumed interest rate which is the highest
assumed interest rate permitted by 26 states for computing
reserves of a life insurance or an annuity contract at the time
the contract is issued; and
(3) The most recent commissioner's standard table permitted
under the insurance laws of 26 states at the time the contract is
issued.
Generally, under prior law, a life insurance company's deduction for
increases in its reserves was based upon reserves required for state
law purposes which were computed using lower conservative interest
rate assumptions. The 1984 Act's
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<PAGE> 33
required use of higher interest rates results in substantially lower
tax reserves and lower increases in reserves, and thereby higher
levels of taxable income and tax.
The Budget Reconciliation Act of 1990 added IRC Section 848 which
requires insurance companies, beginning in 1990, to capitalize and
amortize policy acquisition expenses. For statutory accounting
purposes, these acquisition expenses are deducted in the year
incurred.
The enactment of the two provisions above has had a severe impact upon
the effective tax rate paid by CICA, resulting in effective tax rates
exceeding 100% in each of the last three years. The impact of such
high effective tax rates is that CICA is forced to pay Federal income
taxes out of surplus, rather than income, thereby limiting the
statutory surplus available for use in writing new business. Although
these provisions have little effect on the Company's overall results on
a GAAP basis as a result of the recognition of deferred taxes, they do
have a considerable impact on the results under Statutory Accounting
Principles which do not recognize such items. For 1995, CICA incurred
tax expense on a Statutory basis at an effective tax rate of 74%
(eliminating intercompany capital gains). For the year ended December
31, 1994, taxes were incurred at an effective rate of approximately
289% of income before tax. For 1993, the incurred rate was 131%. In
the event that CICA was unable to attract additional capital, as it did
in 1994, its ability to write new business would be severely limited
due to the ongoing drain on Statutory surplus. Management believes the
Company has adequate levels of capital on hand with the additional
capital infused during 1994 and 1995 to continue to expand the
Company's writing of new business.
FINANCIAL ACCOUNTING STANDARDS
In December 1992, the FASB issued Statement 113 "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts" ("Statement 113"). Statement 113 eliminated the net
reporting of reinsurance amounts in the balance sheet previously
required by Statement 60 "Accounting by Insurance Enterprises."
Statement 113 also provides accounting guidance for ceding enterprises
as well as disclosure requirements and guidance on assessing transfer
of risk in reinsurance contracts. Furthermore, it precludes immediate
recognition of gains related to reinsurance contracts unless the
ceding enterprise's liability to its policyholders is extinguished.
The Company adopted Statement 113 in the first quarter of 1993. There
was no impact on the consolidated financial statements due to
implementation of the risk transfer provisions.
In May 1993, the FASB issued Statement 114 "Accounting by Creditors
for Impairment of a Loan" ("Statement 114"). Statement 114 requires
impaired loans to be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or
at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. Statement 114 is
effective
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<PAGE> 34
for years beginning after December 15, 1994 Implementation did not
have a material impact on the Company's financial statements.
Also in 1993, the FASB issued Statement 115 "Accounting for Certain
Investments in Debt and Equity Securities" ("Statement 115").
Statement 115 requires the classification of debt and equity
securities as held to maturity, trading or available for sale based on
established criteria. Trading securities are bought and held
principally for the purpose of resale in the near term. The Company
had no investment securities classified as trading at January 1, 1994,
December 31, 1994 or December 31, 1995. Held-to-maturity securities
are those in which the Company has the ability and intent to hold the
security until maturity. All other securities not included in trading
or held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted
for the amortization or accretion of premiums or discounts.
Unrealized holding gains and losses on trading securities are included
in earnings. Unrealized holding gains and losses, net of the related
tax effect, on available-for-sale securities are excluded from
earnings and are reported as a separate component of stockholders'
equity until realized. Transfers of securities between categories are
recorded at fair value at the date of transfer. Unrealized holding
gains and losses are recognized in earnings for transfers into trading
securities. Unrealized holding gains or losses associated with
transfers of securities from held-to-maturity to available-for-sale
are recorded as a separate component of stockholders' equity. The
unrealized holding gains or losses included in the separate component
of equity for securities transferred from available-for-sale to
held-to-maturity are maintained and amortized into earnings over the
remaining life of the security as an adjustment to yield in a manner
consistent with the amortization or accretion of premium or discount
on the associated security.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary is charged to earnings resulting in the establishment of a
new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when
earned. Realized gains and losses for securities classified as
available-for-sale and held-to-maturity are included in earnings and
are derived using the specific identification method for determining
the cost of securities sold. The Company adopted Statement 115 at
January 1, 1994. The impact on the consolidated stockholders' equity
due to the implementation was $690,388 relating to the unrealized
gains on the available-for-sale portfolio, net of deferred tax.
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<PAGE> 35
ITEM 8. FINANCIAL STATEMENTS
CITIZENS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
Independent auditor's report 42
Consolidated balance sheets at
December 31, 1995 and 1994 43-44
Consolidated statements of operations
- years ended December 31, 1995, 1994 and 1993 45-46
Consolidated statements of stockholders' equity
- years ended December 31, 1995, 1994 and 1993 47
Consolidated statements of cash flows
- years ended December 31, 1995, 1994 and 1993 48-49
Notes to consolidated financial statements 50-72
Schedules at December 31, 1995 and 1994:
Schedule II - Condensed Financial
Information of Registrant 73-75
Schedules for each of the years in the three-year
period ended December 31, 1995:
Schedule IV - Reinsurance 76
</TABLE>
All other schedules have been omitted as the required information is
inapplicable or the information required is presented in the financial
statements or the notes thereto filed elsewhere herein.
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<PAGE> 36
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the 24 months preceding the date of the audited financial
statements of Citizens included herein, there has been no change of
accountants made by Citizens, nor has it reported on Form 8-K any
disagreements between Citizens and its independent accountants.
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<PAGE> 37
PART III
Items 10, 11, 12, and 13 of this Report incorporate by reference the
information in the Company's definitive proxy material under the headings
"Stock and Principal Stockholders," "Control of the Company," and "Election of
Directors," to be filed with the Securities and Exchange Commission within 120
days after December 31, 1995.
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<PAGE> 38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------- ---------------------------------------------------------------
(a) 1 AND 2 FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The financial statements and schedules listed on the
following index to financial statements and financial
statement schedules are filed as part of this Form 10-K.
(a) 3 EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
<S> <C> <C>
(1) Underwriting Agreement N/A
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession (e)
(3) 3.1 Articles of Incorporation; as amended (d)
3.2 Bylaws (b)
(4) Instruments defining the rights of security
holders, including debentures N/A
(5) Opinion re: Legality N/A
(6) Opinion re: Discount on Capital Shares N/A
(7) Opinion re: Liquidation Preference N/A
(8) Opinion re: Tax Matters N/A
(9) Voting Trust Agreement N/A
(10) Material Contracts
10.1 Plan and Agreement of
Exchange by and among
First Centennial
Corporation, First
Centennial Life
Insurance Company, and
Citizens, Inc.,
as amended (a)
10.2 Kenneth R. Bearden
Conversion Agreement
with Citizens, Inc.
dated February 27, 1992 (a)
10.3 Agreement to Cancel
First Centennial Class B
Common Stock dated
February 27, 1992 (a)
10.4 Termination of Agreement
between First Centennial
Corporation, Global
Management Corporation
and American Trust
Insurance Company, Ltd. (a)
10.5 Automatic Yearly
Renewable term (NR) Life
Reinsurance Agreement
between Citizens
Insurance Company of
America and The
Centennial Life
Insurance Company dated
March 1, 1982 (a)
</TABLE>
-38-
<PAGE> 39
<TABLE>
<S> <C> <C>
10.6 Summary of Coinsurance
Agreement between
Citizens Insurance
Company of America and
Alabama Reassurance
Company dated December
31, 1985 (a)
10.7 International Marketing
Agreement - Citizens
Insurance Company of
America and Negocios
Savoy, S.A. (a)
10.8 Articles and Plan of
Merger between Citizens
Insurance Company of
America and First
Centennial Life
Insurance Company (a)
10.9 Stock Purchase Agreement
between Citizens
Insurance Company of
America and Citizens,
Inc. (c)
10.10 Plan and Agreement of
Merger by and among
American Liberty
Financial Corporation,
American Liberty Life
Insurance Company,
Citizens, Inc. and
Citizens Acquisition,
Inc., as amended (f)
10.11 Plan and Agreement of
Merger and Exchange by
and among Insurance
Investors & Holding Co.,
Central Investors Life
Insurance Company of
Illinois, Citizens, Inc.
and Citizens
Acquisition, Inc. (g)
(11) Statement re: Computation of per share earnings N/A
(12) Statement re: Computation of ratios N/A
(13) Annual report to security holders, Form 10-Q or
quarterly report to security holders N/A
(14) Material foreign patents N/A
(15) Letter re: Unaudited interim financial statements N/A
(16) Letter re: Change in certifying accountant N/A
(17) Letter re: Director resignation N/A
(18) Letter re: Change in accounting principles N/A
(19) Report furnished to security holders N/A
(20) Other documents or statements to security holders N/A
(21) Subsidiaries of the registrant Filed
herewith
(22) Published report regarding matters submitted to a
vote of security holders N/A
(23) Consents of expert and counsel Filed
herewith
(24) Power of Attorney See signature page
(25) Statement of eligibility of trustee N/A
(26) Invitations for competitive bids N/A
</TABLE>
-39-
<PAGE> 40
<TABLE>
<S> <C> <C>
(27) Financial Data Schedule Filed
herewith
(28) Information from reports furnished to state
insurance regulatory authorities N/A
(29) Additional Exhibits N/A
</TABLE>
- ---------------
(a) Filed as a part of the Registration Statement on Form S-4, SEC File No.
33--47531, filed on or about May 2, 1992.
(b) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1991 and incorporated herein by reference.
(c) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1992 and incorporated herein by reference.
(d) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated herein by reference.
(e) Filed with or referenced in the Registrant's Current Report on Form 8-K
dated December 9, 1994 and incorporated herein by reference.
(f) Filed as a part of the Registration Statement on Form S-4, SEC File No.
33--59039, filed on or about May 2, 1995.
(g) Filed as a part of the Registration Statement on Form S-4, SEC File No.
33--63275, filed on or about October 6, 1995.
(b) REPORTS ON FORM 8-K
None.
-40-
<PAGE> 41
CITIZENS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
Independent auditors' report 42
Consolidated balance sheets at
December 31, 1995 and 1994 43-44
Consolidated statements of operations
- years ended December 31, 1995, 1994 and 1993 5-46
Consolidated statements of stockholders' equity
- years ended December 31, 1995, 1994 and 1993 47
Consolidated statements of cash flows
- years ended December 31, 1995, 1994 and 1993 48-49
Notes to consolidated financial statements 50-72
Schedules at December 31, 1995 and 1994:
Schedule II - Condensed Financial
Information of Registrant 73-75
Schedules for each of the years in the three-year
period ended December 31, 1995:
Schedule IV - Reinsurance 76
</TABLE>
All other schedules have been omitted as the required information is
inapplicable or the information required is presented in the
financial statements or the notes thereto filed elsewhere herein.
-41-
<PAGE> 42
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Citizens, Inc.:
We have audited the consolidated financial statements of Citizens, Inc. and
subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedules as listed in the accompanying index. These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Citizens, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules,
when considered in relation to the basic consolidated financial statements
taken as a whole, present fairly, in all material respects, the information set
forth therein.
As discussed in Notes 1 and 2 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standard No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
KPMG PEAT MARWICK LLP
Dallas, Texas
March 8, 1996, except as to the third
paragraph of Note 9, which is as of
March 12, 1996
-42-
<PAGE> 43
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
------ ------------- ------------
<S> <C> <C>
Investments (note 2):
Fixed maturities held to maturity,
at amortized cost (market $5,700,000
in 1995 and $14,846,900 in 1994) $ 5,636,785 $ 18,415,026
Fixed maturities available for sale at market,
(cost $97,515,359 in 1995 and
$61,049,170 in 1994) 99,464,551 56,573,764
Equity securities, at market (cost $23,329
in 1995 and 1994) - 1,892
Mortgage loans on real estate (net of reserve
of $145,080 in 1995 and $145,080 in 1994) 1,910,608 2,623,531
Policy loans 18,911,275 15,220,005
Guaranteed student loans (net of reserve of
$10,000 in 1995 and 1994) 333,387 240,243
Other long-term investments 679,436 754,189
Short-term investments 3,088,697 -
------------ ------------
Total investments 130,024,739 93,828,650
Cash 4,160,156 4,259,887
Other receivables 1,219,107 1,592,607
Accrued investment income 2,022,809 1,569,945
Reinsurance recoverable 1,857,900 1,680,287
Deferred policy acquisition costs 36,624,448 34,537,464
Other intangible assets 1,820,325 -
Deferred Federal income tax - 1,521,296
Cost of insurance acquired (note 3) 7,522,827 2,271,866
Excess of cost over net assets acquired 14,045,848 3,344,844
Property, plant and equipment 5,546,075 4,694,022
Other assets 642,013 496,736
------------ ------------
$205,486,247 $149,797,604
============ ============
</TABLE>
-43-
<PAGE> 44
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
------------------------------------ ------------ -------------
<S> <C> <C>
Liabilities:
Future policy benefit reserves (notes 4 and 5):
Life insurance $114,727,748 $ 97,579,380
Annuities 4,261,847 3,408,745
Accident and health 4,337,782 766,710
Dividend accumulations 3,602,706 2,899,573
Premium deposits 1,553,414 1,648,697
Policy claims payable (notes 5 and 10) 3,197,291 2,149,631
Other policyholders' funds 1,945,332 1,611,908
------------ ------------
Total policy liabilities 133,626,120 110,064,644
Other liabilities 2,001,320 1,671,892
Commissions payable 692,578 916,886
Notes payable (note 6) 772,834 712,373
Deferred Federal income tax 2,372,742 -
Federal income tax payable 1,025,106 1,066,004
Minority interest 14,954 -
Amounts held on deposit 267,603 310,432
------------ ------------
Total liabilities 140,773,257 114,742,231
------------ ------------
Stockholders' equity (notes 7, 8, 9, and 11):
Common stock:
Class A, no par value, 50,000,000 shares
authorized, 21,415,872 shares issued
in 1995 and 19,178,515 shares issued
in 1994, including shares in treasury of
2,078,547 in 1995 and 2,198,175
in 1994 44,007,339 21,457,303
Class B, no par value, 1,000,000 shares
authorized, 621,049 shares issued and
outstanding in 1995 and 1994 283,262 283,262
Unrealized investment gain (loss) (note 2) 1,267,747 (2,970,597)
Retained earnings 21,216,908 18,466,696
------------ ------------
66,775,256 37,236,664
Treasury stock, at cost (2,062,266) (2,181,291)
------------ ------------
Total stockholders' equity 64,712,990 35,055,373
------------ ------------
Commitments and contingencies (notes 5, 8,
10 and 11)
$205,486,247 $149,797,604
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-44-
<PAGE> 45
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1993
1995 1994 (AS RESTATED)
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Premiums (notes 5 and 11):
Life insurance $ 45,426,887 $ 43,526,111 $ 37,598,551
Accident and health 698,206 259,250 284,510
Annuity and universal life
considerations 119,335 75,564 106,955
Net investment income (note 2) 7,026,909 5,295,784 4,771,079
------------ ------------ ------------
Total revenues 53,271,337 49,156,709 42,761,095
------------ ------------ ------------
Other income and expense:
Other income 75,062 94,364 80,794
Realized gains (losses) on
investments (note 2) (109,096) (9,356) 2,120,837
Interest expense (107,131) (29,719) (198,719)
------------ ------------ ------------
Total revenues and other income
and expense 53,130,172 49,211,998 44,764,007
------------ ------------ ------------
Benefits and expenses:
Insurance benefits paid or
provided:
Increase in future
policy benefit reserves 11,033,763 11,910,751 10,160,523
Policyholders' dividends 2,422,168 2,381,581 2,418,456
Claims and surrenders (note 5) 19,282,954 16,635,259 14,166,018
Annuity expenses 652,976 373,575 699,455
------------ ------------ ------------
Total insurance benefits
paid or provided 33,391,861 31,301,166 27,444,452
------------ ------------ ------------
Commissions 10,273,173 12,382,372 12,011,822
Other underwriting, acquisition
and insurance expenses 7,102,401 5,079,538 4,331,669
Capitalization of deferred policy
acquisition costs (10,579,704) (13,128,049) (13,472,064)
Amortization of deferred policy
acquisition costs 8,511,876 7,203,593 6,455,401
Amortization of cost of insurance
acquired and excess of cost
over net assets acquired 678,997 606,487 512,619
------------ ------------ ------------
Total benefits and expenses 49,378,604 43,445,107 37,283,899
------------ ------------ ------------
</TABLE>
(Continued)
-45-
<PAGE> 46
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 1994, AND 1993
<TABLE>
<CAPTION>
1993
1995 1994 (AS RESTATED)
---------- ---------- -------------
<S> <C> <C> <C>
Income before Federal income
taxes $3,751,568 $5,766,891 $7,480,108
Federal income tax expense 1,001,356 1,592,333 1,953,715
---------- ---------- ----------
Net income $2,750,212 $4,174,558 $5,526,393
========== ========== ==========
Net income per share
of common stock (note 8) $ .16 $ .25 $ .34
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-46-
<PAGE> 47
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED TOTAL
---------------------- INVESTMENT RETAINED TREASURY STOCKHOLDERS'
CLASS A CLASS B GAINS (LOSSES) EARNINGS STOCK EQUITY
----------- ------- -------------- ---------- ---------- -------------
<C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 $15,985,344 $ 283,262 $ (53,557) $ 8,765,745 $(2,193,666) $22,787,128
Net income (as restated) - - - 5,526,393 - 5,526,393
Unrealized investment losses - - (298,817) - - (298,817)
----------- --------- ---------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1993 15,985,344 283,262 (352,374) 14,292,138 (2,193,666) 28,014,704
Cumulative effect of adoption of
Statement No. 115 at January 1,
1995, net of taxes - - 690,388 - - 690,388
Net income - - - 4,174,558 - 4,174,558
Unrealized investment losses, net - - (3,308,611) - - (3,308,611)
Sale of stock 5,384,334 - - - - 5,384,334
Sale of treasury stock 87,625 - - - 12,375 100,000
----------- --------- ---------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1994 21,457,303 283,262 (2,970,597) 18,466,696 (2,181,291) 35,055,373
Net income - - - 2,750,212 - 2,750,212
Unrealized investment gains, net - - 4,238,344 - - 4,238,344
Acquisition of ALFC (note 9) 22,246,163 - - - - 22,246,163
Sale of stock 638,980 - - - - 638,980
Stock issuance costs (257,495) - - - - (257,495)
Retire shares held in treasury stock (114,782) - - - 114,782 -
Sale of treasury stock 37,170 - - - 4,243 41,413
----------- --------- ---------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1995 $44,007,339 $ 283,262 $1,267,747 $21,216,908 $(2,062,266) $64,712,990
=========== ========= ========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
-47-
<PAGE> 48
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1993
1995 1994 (AS RESTATED)
----------- ----------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,750,212 $ 4,174,558 $ 5,526,393
Adjustments to reconcile net income to
net cash provided by operating activities,
net of assets acquired:
Realized gains (losses) on sale of
investments and other assets (109,096) 9,356 (2,120,837)
Accrued investment income (131,835) (511,086) (454,000)
Net deferred policy acquisition costs (2,086,984) (5,924,456) (7,016,663)
Amortization of cost of insurance
acquired and excess cost over
net assets acquired 678,997 606,487 512,619
Other receivables 602,662 (1,460,131) 552,769
Future policy benefit reserves 9,929,505 11,910,751 10,160,523
Other policy liabilities 1,527,695 (1,219,297) 1,366,012
Deferred Federal income tax (981,068) (383,195) 275,416
Federal income tax (104,424) (982,197) 892,354
Commissions payable and other liab. (224,308) (154,510) 242,877
Amounts held on deposit (42,829) (124,087) 182,840
Other, net 613,198 2,110,818 221,921
----------- ----------- -----------
Net cash provided by
operating activities 12,421,725 8,053,011 10,342,224
----------- ----------- -----------
Cash flows from investing activities:
Maturity of fixed maturities held to maturity 2,600,000 51,625 -
Sale of fixed maturities available for sale 28,419,387 13,152,225 83,532,049
Maturity of fixed maturities available
for sale - 963,151 7,474,997
Purchase of fixed maturities available
for sale (38,614,148) (40,486,808) (88,980,557)
Sale of equity securities 1,892 174,761 -
Principal payments on mortgage loans 652,819 935,276 1,526,838
Mortgage loans funded (54,875) (340,474) -
Guaranteed student loans funded (272,635) (335,440) (721,963)
Guaranteed student loans sold 179,491 475,796 756,567
Sale of other long-term investments and
property plant and equipment 474,257 331,276 41,152
Cash and short-term investments
provided by merger 1,178,600 - -
Increase in policy loans (net) (3,491,760) (1,214,520) (1,937,838)
Purchase of property, plant and equipment (947,733) (1,237,652) (2,048,024)
----------- ----------- -----------
Net cash used by investing activities (9,874,705) (27,530,784) (356,779)
----------- ----------- -----------
</TABLE>
-48-
<PAGE> 49
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1993
1995 1994 (AS RESTATED)
---------- ----------- -------------
<S> <C> <C> <C>
Cash flows from financing activities:
Additional borrowings on notes payable 60,461 - -
Payments on notes payable - (388,359) (259,377)
Sale of stock 381,485 5,371,959 -
---------- ----------- -----------
Net cash provided (used) by
financing activities 441,946 4,983,600 (259,377)
---------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents 2,988,966 (14,494,173) 9,726,068
---------- ----------- -----------
Cash and cash equivalents at
beginning of year 4,259,887 18,754,060 9,027,992
---------- ----------- -----------
Cash and cash equivalents
at end of year $7,248,853 $ 4,259,887 $18,754,060
========== =========== ===========
Supplemental disclosures of cash flow information:
<CAPTION>
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 53,030 $ 61,304 $ 88,184
========== =========== ===========
Income taxes $2,000,000 $ 2,957,724 $ 785,915
========== =========== ===========
</TABLE>
Supplemental disclosures of non-cash investing and financing activities (see
also Note 9):
<TABLE>
<S> <C> <C> <C>
The Company issued Class A stock
to purchase all of the capital
stock of ALFC. $22,246,163 $ - $ -
=========== =========== ===========
</TABLE>
In conjunction with the acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of tangible assets acquired $ 18,744,097
Fair value of intangible assets acquired 18,574,952
------------
Net assets acquired 37,319,049
Capital stock issued for the capital stock of ALFC (22,246,163)
------------
Liabilities assumed $ 15,072,886
============
</TABLE>
<TABLE>
<S> <C> <C> <C>
Issuance of 4,248 treasury shares
of stock $ 41,413 $ - $ -
========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
-49-
<PAGE> 50
CITIZENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF BUSINESS
The consolidated financial statements include the accounts and
operations of Citizens, Inc. (Citizens), incorporated in the state of
Colorado on November 8, 1977 and its wholly-owned subsidiaries,
Citizens Insurance Company of America (CICA), Computing Technology,
Inc. (CTI), formerly Continental Leasing Company, Insurance Investors,
Inc. (III), and American Liberty Financial Corp. (ALFC). ALFC and its
subsidiaries, American Liberty Life Insurance Company (ALLIC), First
American Investment Corp. (FAIC), American Liberty Securities Corp.
(ALSC), and American Liberty Exploration Company (ALEC) were acquired
by Citizens in September 1995. Citizens and its subsidiaries are
collectively referred to as "the Company." All significant
intercompany accounts and transactions have been eliminated.
Citizens, Inc. is primarily involved in the sale of life insurance
policies through two of its subsidiaries - CICA and ALLIC. CICA sells
ordinary whole-life policies internationally, with approximately 92%
of premium income derived outside the United States. ALLIC issues
life policies primarily as burial insurance and pre-need policies.
Additionally, the ALLIC offers accident and health specified disease,
hospital indemnity, and accidental death policies, as well as
annuities. In 1995, premiums for life, health, and annuities
represented 48%, 48%, and 4% of total premium income, respectively.
(b) INVESTMENTS, OTHER THAN AFFILIATES
Investments are shown on the following basis:
1. Fixed maturities, primarily consisting of bonds which
the Company has the ability and intent to hold to maturity are
considered held for investment and carried at amortized cost.
Fixed maturities which may be sold prior to maturity to support
the Company's investment strategies are considered held as
available for sale and carried at the lower of the aggregate
amortized cost or market value as of the balance sheet date.
2. Equity securities include non-redeemable preferred
stock and are reported at fair market value.
-50-
<PAGE> 51
3. Mortgage loans on real estate, policy loans, and
guaranteed student loans are reported at unpaid principal
balances less an allowance for uncollectible amounts, if any.
4. Other long-term investments consist primarily of real
estate which is reported at cost not to exceed fair market value
net of accumulated depreciation.
5. Short-term investments consist of Treasury Bills with a
maturity of ninety days or less and are carried at cost, which
approximates market.
Unrealized appreciation (depreciation) of equity securities and fixed
maturities held for sale is shown as a separate component of
stockholders' equity, net of tax in 1995 and 1994, and is not included
in the determination of net income.
Costs of investments sold are determined using the specific
identification method. Net realized gains and losses are included in
other income and expenses as incurred.
The Company has assets with a fair value of $7,084,890 at December 31,
1995 on deposit with various state regulatory authorities to fulfill
statutory requirements.
(c) PREMIUM REVENUE AND RELATED EXPENSES
Premiums on life and accident and health policies are reported as
earned when due or, for short duration contracts, over the contract
periods. Benefits and expenses are associated with earned premiums so
as to result in recognition of profits over the estimated life of the
contracts. This matching is accomplished by means of provisions for
future benefits and the capitalization and amortization of deferred
policy acquisition costs.
Annuities are accounted for in a manner consistent with accounting for
interest bearing financial instruments. Premium receipts are not
reported as revenues but rather as deposits to annuity contracts.
(d) DEFERRED POLICY ACQUISITION COSTS AND COST OF INSURANCE ACQUIRED
Acquisition costs, consisting of commissions and policy issuance and
underwriting expenses which relate to and vary with, the production of
new business are deferred. These deferred policy acquisition costs
are amortized primarily over the estimated premium paying period of
the related policies in proportion to the ratio of the annual premium
recognized to the total premium revenue anticipated using the same
assumptions as were used in computing liabilities for future policy
benefits.
The Company uses the factor method to determine the amount of costs to
be capitalized and the ending asset balance. During 1994, the factors
used to determine costs capitalized were modified to more accurately
reflect the costs attributable to
-51-
<PAGE> 52
each issue year. The capitalized costs and amortized costs for each
year presented have been reclassified to reflect this factor revision.
This reclassification did not change the ending asset balance for any
year nor did it change the net impact on earnings in any year. The
method followed in computing deferred policy acquisition costs limits
the amount of such deferred cost to their estimated realizable value.
The value of insurance acquired in the Company's various acquisitions,
which is included in cost of insurance acquired in the accompanying
consolidated financial statements, was determined based on the present
value of future profits discounted at a risk rate of return. The cost
of insurance acquired is being amortized over 30 years in proportion
to the profit over the lives of the related policies.
(e) POLICY LIABILITIES AND ACCRUALS
Future policy benefit reserves have been computed by the net level
premium method with assumptions as to investment yields, dividends on
participating business, mortality and withdrawals based upon the
Company's and industry experience, which provide for possible
unfavorable deviation (see note 4).
Annuity benefits are carried at accumulated contract values based on
premiums paid by participants, annuity rates of return ranging from
2.5% to 7% (primarily at 5.5%) and annuity withdrawals.
Premium deposits accrue interest at rates ranging from 3.5% to 8.25%
per annum. Premiums are credited to income when due and accrued
interest is credited annually to the deposit account.
Policy and contract claims are based on case-basis estimates for
reported claims, and on estimates, based on experience, for incurred
but unreported claims and loss expenses.
(f) EXCESS OF COST OVER NET ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS
The excess of cost over the fair value of net assets acquired in the
merger with Equities International Life Insurance Co., the 1992
acquisition of the net assets of First Centennial Corporation (FCC),
and the 1995 acquisition of American Liberty Financial Corp. are
amortized on a straight-line basis over 20 years.
Other intangible assets, primarily the value of state licenses, are
amortized on a straight-line basis over 10 years.
(g) PARTICIPATING POLICIES
At December 31, 1995 and 1994, participating business approximated 91%
and 92%, respectively, of life insurance in force and premium income.
The amount of dividends to be paid is determined annually by the Board
of Directors.
-52-
<PAGE> 53
(h) EARNINGS PER SHARE
Earnings per share have been computed using the weighted average
number of shares of common stock outstanding during each period. The
effects of outstanding stock options and warrants have not been
included in the calculations because they are either not material or
are antidilutive. The weighted average shares outstanding for the
years ended December 31, 1995, 1994 and 1993 were 17,668,047,
16,882,164 and 16,672,514, respectively.
(i) INCOME TAXES
For the three months ended December 31, 1995, the Company will file
three income tax returns, one which includes ALFC and all direct
non-life subsidiaries, one which includes FAIC and subsidiaries, and
one life return for ALLIC. For the year ended December 31, 1995, the
Company will file two income tax returns, one which includes Citizens,
Inc., the parent, and all direct non-life subsidiaries except those
related to ALFC, and one life return for CICA.
Deferred tax asset and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
(j) ACCOUNTING PRONOUNCEMENTS
In May 1993, the FASB issued Statement 115 "Accounting for Certain
Investments in Debt and Equity Securities" ("Statement 115").
Statement 115 requires the classification of debt and equity
securities as held to maturity, trading or available for sale based on
established criteria. Held to maturity debt securities will be
carried at amortized cost while trading and available for sale
securities will be carried at fair value. Unrealized holding gains
and losses for trading securities will be included in earnings.
Unrealized holding gains or losses for available for sale securities
will be included as a component of equity on a net of tax basis. The
Company adopted Statement 115 on January 1, 1994. The impact on the
consolidated stockholders' equity due to the implementation was
$690,388 relating to the unrealized gains on the available for sale
portfolio, net of tax expense.
In October 1994, the FASB issued Statement 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial
Instruments." Statement 119 requires disclosures about amounts,
nature, and terms of derivative financial instruments not subject to
the reporting provisions of Statement 105, "Disclosure of
-53-
<PAGE> 54
Information about Financial Instruments with Off-Balance Sheet Risk
and Financial Instruments with Concentrations of Credit Risk." The
disclosure provisions of Statement 119 require all entities to
distinguish between financial instruments held or issued for trading
purposes and financial instruments held or issued for purposes other
than trading. The Company does not utilize derivative instruments in
its business activities and has applied the reporting provisions of
Statement 119 in these financial statements.
In March 1995, the FASB issued Statement 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of." Statement 121 established accounting standards for the
recognition and measurement of impairment on long-lived assets,
certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain intangibles
to be disposed of. This statement does not apply to long-lived assets
such as deferred policy acquisition costs and deferred tax assets.
Statement 121 is effective for fiscal years beginning after December
15, 1995. The Company does not expect Statement 121 to have a
material impact on its financial statements.
(k) CASH EQUIVALENTS
The Company considers as cash equivalents all securities whose
duration does not exceed three months at the date of acquisition.
These securities are reflected as short-term investments in the
accompanying consolidated financial statements.
(l) RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 and 1993 amounts.
(m) DEPRECIATION
Depreciation is calculated on a straight line basis using estimated
useful lives ranging from 3 to 10 years. Leasehold improvements are
depreciated over the estimated life of 30 years.
(n) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
-54-
<PAGE> 55
(2) INVESTMENTS
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary is charged to earnings resulting in the establishment of a
new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when
earned. Realized gains and losses for securities classified as
available-for-sale and held-to-maturity are included in earnings and
are derived using the specific identification method for determining
the cost of securities sold.
The amortized cost and estimated market values of investments in debt
securities as of December 31, 1995 and 1994, respectively, are as
follows:
<TABLE>
<CAPTION>
1995
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<C> <C> <C> <C> <C>
Fixed maturities held for investment:
US Treasury securities $ 5,636,785 $ 63,215 $ - $ 5,700,000
----------- ---------- ---------- -----------
Total 5,636,785 63,215 - 5,700,000
=========== ========== ========== ===========
Fixed maturities available for sale:
US Treasury securities and
obligations of US government
corporations and agencies 81,852,720 1,702,738 (171,686) 83,383,772
US Government guaranteed
mortgage-backed securities 2,302,082 - (43) 2,302,039
Public Utilities 5,146,972 111,606 (66,978) 5,191,600
Debt securities issued by States
of the United States and political
subdivisions of the States 290,418 17,582 - 308,000
Debt securities issued by
foreign governments 400,398 30,091 (2,489) 428,000
Corporate securities 7,522,769 368,746 (40,375) 7,851,140
----------- ---------- ---------- -----------
Total $97,515,359 $2,230,763 $ (281,571) $99,464,551
=========== ========== ========== ===========
</TABLE>
-55-
<PAGE> 56
<TABLE>
<CAPTION>
1994
-----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Fixed maturities held for investment:
US Treasury securities and
obligations of US government
corporations and agencies $18,192,415 $ 0 $3,552,415 $14,640,000
Public Utilities 111,265 0 9,665 101,600
Corporate securities 111,346 0 6,046 105,300
----------- ---------- ---------- -----------
Total $18,415,026 $ 0 $3,568,126 $ 4,846,900
=========== ========== ========== ===========
Fixed maturities available for sale:
US Treasury securities and
obligations of US government
corporations and agencies $56,214,724 $ 67,569 $4,489,231 $51,793,062
US Government guaranteed
mortgage backed securities 4,834,446 229,312 283,056 4,780,702
----------- ---------- ---------- -----------
Equity securities
Preferred stock: 23,227 0 21,437 1,892
----------- ---------- ---------- -----------
Total $61,072,399 $ 296,881 $4,793,724 $56,575,656
=========== ========== ========== ===========
</TABLE>
Concurrent with the adoption of the implementation guidance related to
Statement 115, "A Guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities" issued by the
Financial Accounting Standards Board, the Company reclassified certain
investments from the held to maturity category to available for sale. The
amortized cost of securities transferred was $12,778,241 and the unrealized
gain/loss on the date of transfer amounted to $145,937, net of taxes.
The amortized cost and fair value of fixed maturities at December 31, 1995,
by contractual maturity are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
-56-
<PAGE> 57
FIXED MATURITIES HELD FOR INVESTMENT
------------------------------------
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST MARKET VALUE
---------- ------------
<S> <C> <C>
Due after ten years $5,636,785 $5,700,000
---------- ----------
$5,636,785 $5,700,000
========== ==========
</TABLE>
FIXED MATURITIES AVAILABLE FOR SALE
-----------------------------------
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST MARKET VALUE
----------- ------------
<S> <C> <C>
Due in one year or less $ 5,852,944 $5,806,661
Due after one year through
five years 36,360,037 37,065,062
Due after five years
through ten years 21,681,765 22,307,450
Due after ten years 31,318,722 31,923,339
----------- -----------
94,934,753 97,162,512
US Government guaranteed
mortgage-backed securities 2,302,082 2,302,039
----------- -----------
Totals $97,515,539 $99,464,551
=========== ===========
</TABLE>
The Company had no investments in any one entity which exceeded 0.5% of
stockholders' equity at December 31, 1995 other than investments guaranteed
by the U.S. Government.
The Company's investment in mortgage loans is concentrated 44% in Colorado,
41% in Texas and 15% in other states as of December 31, 1995.
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Investment income on:
Fixed maturities $5,208,785 $4,045,481 $3,635,469
Equity securities 15,823 - 2,099
Mortgage loans on real estate 195,321 242,331 367,342
Policy loans 1,478,333 1,001,939 943,373
Short-term investments 106,872 123,119 81,712
Other 900,341 795,352 413,552
---------- ---------- ----------
7,905,475 6,208,222 5,443,547
----------
Investment expenses 878,566 912,438 672,468
---------- ---------- ----------
Net investment income $7,026,909 $5,295,784 $4,771,079
========== ========== ==========
</TABLE>
-57-
<PAGE> 58
Equity securities of $0, mortgage loans of $30,665, and other long-term
assets of $448,763 held by the Company as of December 31, 1995, did not
produce income during the preceding 12 months.
Proceeds from available for sale securities in 1995, 1994 and 1993 were
$29,132,810, $13,152,225 and $83,532,049, respectively. Gross realized
gains and losses on such sales were $346,370 and $426,841, respectively,
for the year ended December 31, 1995, and $645,912 and $420,119,
respectively, for the year ended December 31, 1994, and $2,737,133 and
$250,471, respectively, for the year ended December 31, 1993. Realized
and unrealized gains (losses) on investments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1995 1994 1993
--------- --------- ----------
<S> <C> <C> <C>
Realized gains (losses):
Fixed maturities $ (80,471) $ 281,052 $2,443,730
Equity securities 0 (67,309) 0
Other (28,625) (223,099) (322,893)
--------- -------- ----------
Net realized gains (losses) on
investments (109,096) (9,356) 2,120,837
========= ======== ==========
</TABLE>
(3) COST OF INSURANCE ACQUIRED
Cost of insurance acquired is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1995 1994 1993
---------- ----------- ----------
<S> <C> <C> <C>
Balance at beginning of period $2,271,866 $2,692,389 $3,065,986
Purchase of ALFC 5,562,574 - -
Interest 171,541 198,121 270,334
Amortization (483,154) (618,644) (643,931)
Balance at end of period ---------- ---------- ----------
$7,522,827 $2,271,866 $2,692,389
========== ========== ==========
</TABLE>
Accretion of interest on cost of insurance acquired is calculated based on
the rates of interest used in setting the related policy reserves. These
rates range from 6.5% to 8.5%.
Estimated amortization in each of the next five years is as follows.
Actual future amortization will differ from these estimates due to
variances from estimated future withdrawal assumptions.
<TABLE>
<S> <C>
1996 $1,038,782
1997 1,228,661
1998 884,738
1999 959,980
2000 705,989
Thereafter 5,067,326
</TABLE>
-58-
<PAGE> 59
(4) FUTURE POLICY BENEFIT RESERVES
In applying purchase accounting to the future policy benefit reserves
acquired through mergers prior to American Liberty, the Company calculated
future policy benefits using reasonable assumptions as of the date of each
merger. Future policy benefits calculated under these assumptions
approximate 20.4% of such reserves reflected in the December 31, 1995
consolidated balance sheet.
In applying purchase accounting to the American Liberty policy benefit
reserves acquired in 1995, the Company revalued policy benefit reserves to
reflect the Company's reserve assumptions with regard to interest rates,
lapse rates and surrenders. These reserves approximate 12.7% of total
future policy benefit reserves in the consolidated balance sheet as of
December 31, 1995. The remaining future policy benefits are calculated
using reasonable assumptions at the date of issue.
Various assumptions used to determine the future policy benefit reserves
include the following: a) valuation interest rates from 4-9%; b) the
mortality assumptions are from the 1955-60, 1965-70 and 1975-80 Select and
Ultimate mortality tables, and c) withdrawals are based primarily on actual
historical termination rates.
(5) REINSURANCE
CICA cedes all risks generally in excess of $75,000 per insured to other
companies through yearly renewable term insurance or coinsurance contracts.
ALLIC cedes life risk in excess of $32,000 per insured to other companies
through yearly renewable term insurance or coinsurance contracts. In
addition, ALLIC reinsures all accidental death policies through a
coinsurance arrangement whereby 90% of the benefit risk is assumed by the
reinsurer. Risks are reinsured with other companies to permit the recovery
of a portion of any direct losses. The Company remains contingently liable
to the extent that the reinsuring companies cannot meet their obligations
under these reinsurance treaties.
At December 31, 1995 and 1994, life insurance in force aggregating
approximately $285,001,000 and $384,794,000, respectively, was assumed and
$290,677,000 and $285,104,000, respectively, was ceded to other insurance
companies out of a total in force of approximately $2,151,955,000 and
$2,144,709,000, respectively. Premiums assumed were approximately
$306,000, $541,000, and $1,106,000 in the years ended December 31, 1995,
1994 and 1993, respectively. Premiums ceded were approximately $2,380,000,
$2,310,000, and $1,939,000 in the years ended December 31, 1995, 1994 and
1993, respectively. Claims and surrenders assumed were approximately
$286,000, $530,000 and $1,083,000 and claims and surrenders ceded were
approximately $377,000, $928,000 and $994,000 in the years ended December
31, 1995, 1994 and 1993, respectively.
Amounts paid or deemed to have been paid for reinsurance contracts are
recorded as reinsurance receivables. The cost of reinsurance related to
long duration contracts is accounted for over the life of the underlying
reinsured policies using assumptions consistent with those used to account
for the underlying policies.
-59-
<PAGE> 60
(6) NOTES PAYABLE
Notes payable as of December 31, 1995 and 1994 consist of:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Note payable to bank, 7%, dated
June 20, 1988, payable in nine
annual installments of $66,667
beginning June 30, 1989, with
remainder due June 30, 1998. $533,334 $600,000
Note payable to bank, prime (8.75%
at December 31, 1995) dated May 24,
1995, payable in monthly
installments of $3,000 plus
interest beginning June 30, 1995 64,500 --
Note payable to individual, 6%,
dated April 27, 1995, with
principal and interest payable at
maturity, April 26, 1996. 175,000 --
Note payable to bank, prime (8.75%
at December 31, 1994) dated June
30, 1992, payable in monthly
installments of $3,506 plus
interest beginning July 30, 1992. -- 105,191
Other obligations -- 7,182
-------- --------
$772,834 $712,373
======== ========
</TABLE>
The first note payable to bank is secured by two life insurance policies
and proceeds from the surplus debenture between CICA and Citizens, Inc.
The second note payable to bank is secured by computer equipment.
The note payable to individual is an unsecured note.
(7) STOCKHOLDERS' EQUITY AND RESTRICTIONS
The two classes of stock of Citizens are equal in all respects, except (a)
the Class B common stock elects a simple majority of the Board of Directors
of Citizens and the Class A common stock elects the remaining directors;
and (b) each Class A share receives twice the cash dividends paid on a per
share basis to the Class B common stock.
Approximately $14,857,000 of consolidated stockholders' equity at December
31, 1995 represented net assets of the Company's insurance subsidiaries
that are restricted as to their distribution to the Company. In addition,
the Company's insurance subsidiaries are required to maintain a minimum
total statutory capital and surplus of $4,915,000. The net assets of the
Company's insurance subsidiaries available for transfer to the parent
company are limited to the amounts that the insurance subsidiary's net
assets, as determined in accordance with statutory accounting practices,
exceed minimum statutory capital
-60-
<PAGE> 61
requirements; however, payments of such amounts as dividends may be subject
to approval by regulatory authorities.
Citizens Life Insurance Company and American Liberty Life Insurance Company
have calculated their risk based capital (RBC) in accordance with the
National Association of Insurance Commissioners' Model Rule and the RBC
rules as adopted by their state of domicile, Colorado and Louisiana,
respectively. The RBC as calculated exceeded levels requiring company or
regulatory action.
(8) STOCK OPTIONS
During 1989, the Company entered into an agreement granting Stephen B.
Booke, a financial public relations consultant providing services to the
Company, the right and option to purchase 100,000 shares of Class A no par
common stock of the Company at $2.50 per share, the fair market value of
the common stock at the date of the agreement. Such option is for
authorized but unissued shares at the date of the agreement. The option
which would have expired on February 8, 1994 was extended for an additional
30 months during 1993. As a result, the Company recognized compensation
expense of $425,000 in 1993 which represents the amount the market value at
the date of extension exceeded the option price. The 10-K originally filed
by the Company did not reflect this expense, therefore, the 1993 financial
statements have been restated to reflect the compensation expense described
above. This restatement resulted net of tax in a decrease in net income
and net income per share of $280,500 and $.01 per share, respectively.
Transfer of this option is limited by the agreement. As of December 31,
1995, no options had been exercised.
(9) ACQUISITION AND PROPOSED ACQUISITION AND MERGER
On December 9, 1994, Citizens announced that it had signed definitive
written agreements for the acquisition of (i) American Liberty Financial
Corporation, a Baton Rouge, Louisiana based life insurance holding company
and (ii) Insurance Investors & Holding Co., a Peoria, Illinois based life
insurance holding company.
The American Liberty agreement provided that following the acquisition by
Citizens, American Liberty shareholders would receive 1.10 shares of
Citizens' Class A Common Stock for each share of American Liberty Common
Stock owned and 2.926 shares of Citizens' Class A Common Stock for each one
share of American Liberty Preferred Stock owned. Citizens issued
approximately 2.3 million Class A shares in connection with the
transaction, which was accounted for as a purchase. The companies will
continue to operate in their respective locations under a combined
management team with consolidation of computer data processing on the
Citizens' system. The transaction was consummated on September 14, 1995.
The Insurance Investors agreement provides that following the acquisition
by Citizens, Investors' shareholders will receive one share of Citizens'
Class A Common Stock for each eight shares of Investors Common Stock owned.
Additionally, Citizens will acquire all
-61-
<PAGE> 62
shares of Central Investors Life Insurance Company, a subsidiary of
Insurance Investors & Holding, not wholly-owned by Insurance Investors,
based upon an exchange ratio of one share of Citizens' Class A common stock
for each four shares of Central Investors owned. The transaction will
involve issuance of approximately 170,000 of Citizens' Class A shares and
will also be accounted for as a purchase. The transaction was consummated
on March 12, 1996.
The following unaudited pro-forma condensed balance sheet as of December
31, 1995 reflects the purchase of Insurance Investors by Citizens as if it
occurred on December 31, 1995. The unaudited pro-forma condensed
consolidated income statement for the twelve months ended December 31, 1995
reflects the purchase of Insurance Investors as if it occurred on January
1, 1995.
Management's estimate of the impact of applying purchase accounting, as if
the acquisition had occurred as described above, is presented below. The
unaudited pro forma financial information is not necessarily indicative
either of the results of operations that would have occurred had the
acquisition been consummated at the beginning of 1995 or of future results
of operations of the consolidated entities.
-62-
<PAGE> 63
PRO-FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS)
PRO-FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORIC PURCHASE
CITIZENS INC. HISTORICAL ADJUSTMENTS
AND INSURANCE AND PRO-FORMA
ASSETS SUBSIDIARIES INVESTORS ELIMINATIONS CONSOLIDATED
------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Long term Investments $126,937 2,279 10 (a) 129,226
Short term Investments 3,088 3,088
-------- ----- --- -------
Total Investments 130,025 2,279 10 132,314
Cash 4,160 72 4,232
Other receivables 1,219 1,219
Accrued investment
income 2,023 37 2,060
Deferred policy
acquisition costs 36,624 47 (47)(b) 36,624
Cost of insurance
acquired 7,523 120 (c) 7,643
Other intangible assets 1,820 1,820
Excess of cost over net
assets acquired 14,046 477 (d) 14,523
Other assets 8,046 6 8,052
-------- ----- --- -------
Total Assets $205,486 2,441 560 208,487
======== ===== === =======
</TABLE>
-63-
<PAGE> 64
PRO-FORMA CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORIC PURCHASE
CITIZENS INC. HISTORICAL ADJUSTMENTS
LIABILITIES AND AND INSURANCE AND PRO-FORMA
STOCKHOLDERS' EQUITY SUBSIDIARIES INVESTORS ELIMINATIONS CONSOLIDATED
- -------------------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Future policy benefit
reserves $123,327 735 148 (e) 124,210
Other policyholder
liabilities 10,299 354 10,653
Other liabilities 3,986 59 4,045
Notes payable 773 319 1,092
Deferred tax liability 2,273 2,373
Minority interest 15 94 (94)(f) 15
-------- ----- ----- -------
Total liabilities 140,773 1,560 56 142,389
Class A common stock 44,007 819 1,135 (f) 45,961
Class B common stock 283 47 (47)(f) 283
Additional Paid-in
capital - 576 (576)(f) -
Unrealized gain on
investments 1,268 15 (15)(f) 1,268
Retained earnings 21,217 (568) 20,649
------- ----- ----- -------
66,775 889 497 68,161
Treasury stock (2,062) (9) 9 (2,062)
------- ----- ----- -------
Total stockholders'
equity 64,713 880 506 66,099
------- ----- ----- -------
Total liabilities
and stockholders'
equity $205,486 2,441 560 208,487
======== ===== ===== =======
</TABLE>
-64-
<PAGE> 65
EXPLANATION OF BALANCE SHEET PRO-FORMA ADJUSTMENTS:
(a) Adjustment necessary to record acquired fixed maturities at market
value.
(b) Deferred policy acquisition costs are reflected in the accompanying
pro-forma financial statements as follows:
<TABLE>
<S> <C>
Historical Citizens $36,624
Historical II 47
--
Historical DAC 36,671
Reverse historical II (47)
-------
Net DAC $36,624
=======
</TABLE>
(c) Reverse II policy acquisition costs at December 31, 1995 and establish
cost of insurance acquired. Cost of insurance acquired represents the
estimated present value of future profits in the acquired business. This
amount was calculated as the difference between II's historical future
policy benefit reserves and the estimated gross premium reserve at December
31, 1995. The gross premium reserve was estimated assuming a level
interest yield of 7%. Life mortality was based on appropriate multiples of
the 1965-70 Select and Ultimate and the Ultimate Intercompany Table and
withdrawals based on Linton B and BB tables as deemed appropriate based on
individual life plan experience. Accident and health morbidity was based on
multiples of 1974 Cancer tables, Stroke/Heart Attack Indemnity Table, 1985
NAIC Cancer Tables and published claim costs and withdrawals based on
Linton C and CC Tables as deemed appropriate based on individual health
plan experience. Cost of insurance acquired is being amortized in
proportion to the profit over the lives of the respective policies.
Cost of insurance acquired is presented in the accompanying pro-forma
financial statements as follows:
<TABLE>
<S> <C>
Historical Citizens $7,523
II cost of insurance capitalized 120
------
Total $7,643
======
</TABLE>
-65-
<PAGE> 66
(d) Excess of cost over net assets acquired was calculated as follows:
(in thousands)
<TABLE>
<S> <C>
Acquisition of common stock 1,496
Estimated fair value of net assets acquired (1,019)
------
Excess of cost (purchase price) over net assets acquired 477
======
</TABLE>
(e) Revaluation of policy benefit reserves to reflect Company reserve
assumptions
with regard to interest rates, lapse rates and surrenders.
(f) Eliminate II capital, minority interest, and retained earnings and
record the cost of net assets acquired as increased capital of the Company
due to the issuance of additional Class A common shares.
-66-
<PAGE> 67
PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PURCHASE
CITIZENS INC. HISTORICAL ADJUSTMENTS
AND INSURANCE AND PRO-FORMA
SUBSIDIARIES INVESTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Premiums $ 46,244 52 46,296
Net investment income 7,027 126 7,153
Other (141) 14 (128)
-------- --- -------
Total revenues 53,130 192 53,321
Benefits and Expenses
Policy benefits 33,392 173 33,565
Commissions 10,273 10,273
Capitalization of DAC (10,580) (10,580)
Amortization of DAC 8,512 5 (5)(a) 8,512
Amortization of cost of insurance
acquired 312 1 (b) 313
Amortization of other intangibles 46 46
Amortization of excess of cost
over net assets acquired 321 23 (c) 344
Other expenses 7,102 104 7,206
-------- --- --- -------
Total benefits and expenses 49,378 282 19 49,679
-------- --- --- -------
Income before taxes $ 3,752 (90) (19) 3,642
======== === === =======
Net income per share (d) 0.20
====
</TABLE>
-67-
<PAGE> 68
EXPLANATION OF STATEMENT OF OPERATIONS PRO-FORMA ADJUSTMENTS:
(a) Amortization and capitalization of deferred policy acquisition costs
are reflected in the accompanying pro-forma statement of operations as
follows: (in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
CAPITALIZATION AMORTIZATION
--------------- ------------
Historical Citizens (10,580) 8,512
Historical II 0 4
-------- ------
Total Historical (10,580) 8,516
Reverse Historical II (0) (4)
-------- -----
Net (10,580) 8,512
======= =====
</TABLE>
(b) Amortization of cost of insurance acquired is presented in the
accompanying pro-forma statement of operations as follows:
<TABLE>
<S> <C>
Historical Citizens $311,613
Interest accrued @ 7% (22)
Amortization of II cost of insurance 525
--------
Net Pro-forma adjustment 503
--------
Pro-forma amortization $312,116
========
</TABLE>
Estimated amortization of cost of insurance acquired assuming a
purchase date of January 1, 1995 is $503, $560, $621, $686, and
$759 for each year, respectively, in the five year period ending
December 31, 1999.
(c) Excess of cost over net assets acquired is being amortized over a
20-year period. Such amortization, reflected in the accompanying
pro-forma statement of operations is $23,000.
(d) Calculated using estimated common shares outstanding of 17,839,047.
-68-
<PAGE> 69
(10) CONTINGENCIES
The Company is a party to various legal proceedings incidental to its
business. Contingent liabilities that might arise from litigation are not
considered material in relation to the financial position of the Company.
Reserves for claims payable are based on the expected claim amount to be
paid after a case by case review of the facts and circumstances relating to
each claim. A contingency exists with regard to these reserves until such
time as the claims are adjudicated and paid.
(11) INTERNATIONAL SALES
A significant portion of the Company's business is derived through sales in
Latin America. Approximately 66%, 77% and 87% of premiums recorded in the
1995, 1994, and 1993 consolidated statements of operations, respectively,
represent policies sold to residents of Central and South America. Sales
in Argentina and Columbia represented approximately 40% and 19% of reported
premiums in 1995, 49% and 23% in 1994, and 43% and 23% in 1993,
respectively. The Company has no assets, offices or employees outside of
the United States of America (U.S.) and requires that all transactions be
in U.S. dollars paid in the U.S.
The Company contracted with Negocios Savoy, S.A. ("Savoy"), a Panamanian
Corporation, as the marketing manager for its international marketing
operations prior to September, 1993. On September 1, 1993, the Company and
Savoy mutually agreed to terminate the contract. Several International
managers previously under contract with the Company assumed the role
previously managed by Savoy. The international manager contract defines
the commissions structure and other requirements of the relationship,
including the responsibility of an international manager for all of its
expenses and the subagents' debit balances.
(12) INCOME TAXES
A reconciliation of Federal income tax expense computed by applying the
Federal income tax rate of 35% in 1995 and 34% in 1994 and 1993 to income
before Federal income tax expense for the years ended December 31, 1995,
1994 and 1993 follows:
-69-
<PAGE> 70
<TABLE>
<CAPTION>
1993
1995 1994 (AS RESTATED)
----------- ----------- ------------
<S> <C> <C> <C>
Computed normal tax expense $1,313,049 $1,960,743 $2,543,237
Small life insurance company deduction (423,084) (437,489) (446,313)
Change in valuation allowance (62,355) - -
Decrease in beginning of the year
balance of the valuation allowance
for deferred tax assets - - (286,422)
Amortization of excess of costs over
net assets acquired 109,041 63,228 47,267
Other 64,705 5,850 95,946
---------- ---------- ----------
Federal income tax expense $1,001,356 $1,592,332 $1,953,715
========== ========== ==========
</TABLE>
Income tax expense for the years ended December 31, 1995, 1994 and 1993
consists of:
<TABLE>
<CAPTION>
1993
1995 1994 (AS RESTATED)
---------- ---------- -------------
<S> <C> <C> <C>
Current $1,982,424 $1,975,527 $1,678,269
Deferred (981,068) (383,195) 275,446
---------- ---------- ----------
$1,001,356 $1,592,332 $1,953,715
========== ========== ==========
</TABLE>
For the years ended December 31, 1995, 1994 and 1993, a valuation allowance
of $62,355, $0, and $286,428, respectively, are included as a component of
deferred income tax expense.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1995 and 1994 are presented below.
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
Deferred tax assets:
Future policy benefit reserves $10,804,429 $ 9,930,982
Net operating loss carryforwards 498,248 89,249
Investments, available for sale - 1,528,927
Other 1,007,634 418,240
----------- -----------
Total gross deferred tax assets 12,310,311 11,967,398
Less valuation allowance 440,134 -
----------- -----------
Net deferred tax assets 11,870,177 11,967,398
----------- -----------
Deferred tax liabilities:
Deferred policy acquisition costs 9,315,657 9,392,481
Cost of insurance acquired 2,557,761 772,434
Investments available for sale 757,423 -
Other 1,612,080 281,187
----------- -----------
Total gross deferred tax liabilities 14,242,921 10,446,102
----------- -----------
Net deferred tax asset (liability) $(2,372,742) $ 1,521,297
=========== ===========
</TABLE>
-70-
<PAGE> 71
The Company and its subsidiaries have net operating losses at December 31,
1995 available to offset future taxable income of approximately $4,300,000
for Federal income tax and $227,000 for Federal alternative minimum tax
purposes which expire through 2008. The net operating loss carryforward is
subject to limitations under Section 382 of the Internal Revenue Code.
At December 31, 1995, the Company had accumulated approximately $2,315,000
in its "policyholders' surplus account." This is a special memorandum tax
account into which certain amounts not previously taxed, under prior tax
laws, were accumulated. No new additions will be made to this account.
Federal income taxes will become payable thereon at the then current tax
rate (a) when and if distributions to the shareholder, other than stock
dividends and other limited exceptions, are made in excess of the
accumulated previously taxed income; or (b) when a company ceases to be a
life insurance company as defined by the Internal Revenue Code and such
termination is not due to another life insurance company acquiring its
assets in a nontaxable transaction. The Company does not anticipate any
transactions that would cause any part of this amount to become taxable.
However, should the balance at December 31, 1995 become taxable, the tax
computed at present rates would be approximately $810,000.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following information relates to estimated fair values of the Company's
financial instruments as of December 31, 1995.
Fair values for fixed maturities and equity securities were obtained from
the National Association of Insurance Commissioners' valuation
designations, independent brokers, and published valuation guides. At
December 31, 1995, the fair value of bonds are $9,997,219 and $11,196,459,
respectively.
Mortgage loans are secured principally by residential properties. Weighted
average interest rate for these loans as of December 31, 1995, was
approximately 9.4% with maturities ranging from one to fifteen years.
Management believes that reported amounts approximate fair value.
Student loans are guaranteed by the government. Weighted average interest
rate for these loans as of December 31, 1995, was approximately 8.3%.
Management believes that the reported amounts approximate fair value as
these loans are sold as soon as possible.
Policy loans have a weighted average interest rate of 7.6% as of December
31, 1995 and 1994 and have no specified maturity dates. The aggregate
market value of policy loans approximates the carrying value reflected on
the consolidated balance sheet. These loans typically carry an interest
rate that is tied to the crediting rate applied to the related policy and
contract reserves. Policy loans are an integral part of the life insurance
policies which the Company has in force and cannot be valued separately.
-71-
<PAGE> 72
For cash, certificates of deposit, short-term investments, accrued
investment income, premiums and other considerations deferred and
uncollected, amounts recoverable from reinsurers, other assets, federal
income tax payable, dividends payable, and other liabilities, the carrying
amounts approximate fair value because of the short maturity of such
financial instruments.
(14) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table contains selected unaudited consolidated financial data
for each quarter.
<TABLE>
<CAPTION>
1995
--------------------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $16,115,722 $13,420,798 $12,872,679 $10,862,138
Expenses 15,659,326 11,727,114 11,488,128 10,497,876
Other (61,739) (31,757) (19,262) (28,407)
Net income 564,449 901,266 1,017,773 272,883
Net income per share .03 .05 .06 .02
1994
--------------------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
Revenues $13,752,088 $13,526,681 $12,114,056 $ 9,763,884
Expenses 11,982,416 11,810,114 10,461,651 9,190,926
Other (160,527) 74,999 (358,273) 499,090
Net income 878,741 1,447,695 929,361 918,761
Net income per share 0.03 0.09 0.06 0.06
1993
--------------------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
Revenues $13,568,969 $11,038,464 $ 9,725,014 $ 8,428,649
Expenses 11,622,467 9,613,840 8,504,857 7,424,860
Other 338,960 1,346,395 255,299 62,258
Net income 1,649,289 1,631,497 1,336,178 909,429
Net income per share 0.10 0.10 0.08 0.06
</TABLE>
-72-
<PAGE> 73
SCHEDULE II
CITIZENS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Assets
- ------
Investment in subsidiaries 63,481,741 $33,125,422
Accrued investment income 24,346 26,589
Real estate 287,979 442,148
Cash 884,241 972,320
Notes receivable(1) 673,953 726,028
Other assets 680,502 642,040
----------- -----------
$66,032,762 $35,934,547
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Notes payable $ 533,333 $ 607,182
Accrued expense and other 786,439 271,992
----------- -----------
$ 1,319,772 $ 879,174
Stockholders' equity:
Common stock:
Class A $44,007,339 $21,457,303
Class B 283,262 283,262
Retained earnings 21,216,908 18,466,696
Unrealized investment gain (loss) of
securities held by subsidiaries, net 1,267,747 (2,970,597)
Treasury stock (2,062,266) (2,181,291)
----------- -----------
64,712,990 35,055,373
----------- -----------
$66,032,762 $35,934,547
=========== ===========
</TABLE>
- ----------
(1) Eliminated in consolidation.
See accompanying independent auditor's report.
-73-
<PAGE> 74
SCHEDULE II, CONTINUED
CITIZENS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994 AND 1993
<TABLE>
<CAPTION>
1993
1995 1994 (AS RESTATED)
------------ ----------- -------------
<S> <C> <C> <C>
Revenues:
Management service fees (1) $ 8,068,030 $ 6,749,976 $ 5,316,157
Investment income (1) 118,103 131,933 161,036
Other 11,551 7,691 417
Capital (gain) loss (1,573) (147,691) -
----------- ----------- -----------
8,196,111 6,741,909 5,477,610
----------- ----------- -----------
Expenses:
General 7,713,980 $ 6,189,677 $ 5,416,683
Interest 42,113 20,583 106,403
Taxes 327,815 263,917 (134,835)
----------- ----------- -----------
$ 8,082,335 $ 6,326,486 $ 5,388,251
----------- ----------- -----------
Income (loss) before equity in income
of unconsolidated subsidiaries 115,349 563,114 89,359
Equity in income of unconsolidated
subsidiaries 2,634,863 3,611,444 5,437,034
----------- ----------- -----------
Net income $ 2,750,212 $ 4,174,558 $ 5,526,393
=========== =========== ===========
</TABLE>
- ----------
(1) Eliminated in consolidation.
See accompanying independent auditor's report.
-74-
<PAGE> 75
SCHEDULE II, CONTINUED
CITIZENS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1993
1995 1994 (AS RESTATED)
------------ ----------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,750,212 $ 4,174,558 $ 5,526,393
Adjustments to reconcile net loss to
net cash used by operating activities:
Realized gains on sales of investments - 313,796 -
Depreciation - 36,214 32,487
Equity in net income of unconsolidated
subsidiaries (3,871,812) (3,784,819) (5,420,150)
Accrued expenses and other liabilities 512,568 (290,422) 1,504
Amounts withheld as trustee 1,879 53,549 -
Accrued investment income 2,243 1,900 3,004
Other, net 2,951 (243,866) 351,152
----------- ----------- -----------
Net cash provided (used) by operating
activities (601,959) 260,910 494,390
----------- ----------- -----------
Cash flows from investing activities:
Capital contribution to subsidiary - (5,200,000) -
Sale of equity securities - 174,761 -
Payments on notes receivable 52,075 51,022 88,775
Cash acquired in acquisition - - -
(Purchase) sale of real estate 154,169 216,168 17,387
----------- ----------- -----------
Net cash provided (used) by investing
activities 206,244 (4,758,049) 106,162
----------- ----------- -----------
Cash flows from financing activities:
Sale of common stock, net 381,485 5,371,959 -
Payment on notes payable (73,849) (343,746) (219,836)
Net cash provided (used) by financing
activities 307,636 5,028,213 (219,836)
----------- ----------- -----------
Net increase (decrease) in cash (88,079) 531,074 380,716
Cash at beginning of year 972,320 441,246 60,530
----------- ----------- -----------
Cash at end of year $ 884,241 $ 972,320 $ 441,246
=========== =========== ===========
</TABLE>
See accompanying independent auditor's report.
-75-
<PAGE> 76
SCHEDULE IV
CITIZENS, INC. AND SUBSIDIARIES
REINSURANCE
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
CEDED ASSUMED PERCENTAGE
GROSS TO OTHER FROM OTHER NET OF AMOUNT
AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET
-------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Life insurance in force $1,866,954,000 $290,677,000 $285,001,000 $1,861,278,000 15.3%
Premiums
Life insurance 47,361,742 2,241,111 306,256 45,426,887 0.7%
Accident and health
insurance 698,206 0 0 698,206 --
-------------- ------------ ------------ --------------
Total premiums $ 48,059,948 2,241,111 306,256 46,125,093 0.7%
============== ============ ============ ==============
Year ended December 31, 1994:
Life insurance in force $1,759,915,000 $285,104,000 $384,794,000 $1,859,605,000 20.7%
Premiums:
Life insurance 45,294,285 2,309,544 541,370 43,526,111 1.2%
Accident and health
insurance 259,378 128 0 259,250 --
-------------- ------------ ------------ --------------
Total premiums $ 45,553,663 2,309,672 541,370 43,785,361 1.2%
============== ============ ============= ==============
Year ended December 31, 1993:
Life insurance in force $1,567,840,000 $303,727,000 $462,775,000 $1,726,888,000 26.8%
Premiums:
Life insurance 38,431,240 1,939,279 1,106,590 37,598,551 2.9%
Accident and health
insurance 284,656 146 0 284,510 --
-------------- ------------ ------------ --------------
Total premiums $ 38,715,896 $ 1,939,425 $ 1,106,590 $ 37,883,061 2.9%
============== ============ ============ ==============
</TABLE>
See accompanying independent auditor's report.
-76-
<PAGE> 77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized.
CITIZENS, INC.
Date: March 28, 1996 By /s/ Mark A. Oliver
-----------------------------------------
Mark A. Oliver, Executive Vice President,
Chief Financial Officer and Secretary/
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Each individual whose signature appears below hereby designates and appoints
Harold E. Riley and Mark A. Oliver, and each of them, as such person's true and
lawful attorney's-in-fact and agents (the "Attorneys-in-Fact") with full power
of substitution and resubstitution, for each person and in such person's name,
place, and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Annual Report on Form 10-K, which
amendments may make such changes in this Annual Report on Form 10-K as either
Attorney-in-Fact deems appropriate and to file therewith, with the Securities
and Exchange Commission, granting unto such Attorneys-in-Fact and each of them,
full power and authority to do and perform each and every act and think
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that such Attorneys-in-Fact or either of them, in
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
<TABLE>
<S> <C>
/s/ Randall H. Riley /s/ Harold E. Riley
- ------------------------- -----------------------------------
Randall H. Riley, Director Harold E. Riley, Chairman of the
Board and Director
/s/ Ralph M. Smith /s/ Joe R. Reneau
- ------------------------- -----------------------------------
Ralph M. Smith, Director Joe R. Reneau, Director
/s/ Flay F. Baugh /s/ Timothy T. Timmerman
- ------------------------- -----------------------------------
Flay F. Baugh, Director Timothy T. Timmerman, Director
/s/ Steve Shelton
- ------------------------- -----------------------------------
Rick D. Riley, Director Steve Shelton, Director
/s/ T. Roby Dollar
- -------------------------
T. Roby Dollar, Director
</TABLE>
-77-
<PAGE> 78
INDEX TO EXHIBITS
<TABLE>
EXHIBIT PAGE
-------- ----
<S> <C>
Exhibit 21 79
Exhibit 23 80
Exhibit 27 81
</TABLE>
-78-
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
STATE OF PERCENTAGE
COMPANY NAME INCORPORATION TAX I.D. OWNERSHIP
------------ ------------- ---------- ------------
<S> <C> <C> <C>
Citizens Insurance Company of America Colorado 84-0583103 100% Direct
Insurance Investors, Inc. Texas 74-1458561 100% Indirect
Continental Investors Life
Insurance Company Alabama 63-0514221 90% Indirect
Industrial Benefits, Inc. Texas 76-0159854 100% Indirect
Computing Technology, Inc. Colorado 84-1037266 100% Indirect
American Liberty Financial Corp. Louisiana 72-0810778 100% Direct
American Liberty Life Insurance Company Louisiana 72-0826521 100% Indirect
American Liberty Securities Corporation Louisiana 72-0917077 100% Indirect
American Liberty Exploration Corporation Louisiana 72-0895903 100% Indirect
American Liberty Exploration Corporation, 1981-1 Louisiana 72-0914867 100% Indirect
American Liberty Exploration Corporation, 1982-1 Louisiana 72-0928484 100% Indirect
First American Investment Corporation Louisiana 72-1018531 94.48% Indirect
Funeral Homes of Louisiana, Inc. Louisiana 72-1148400 94.48% Indirect
Funeral Homes of America, Inc. Louisiana 72-1248626 94.48% Indirect
</TABLE>
-79-
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Citizens, Inc.:
We consent to incorporation by reference in the registration statement on Form
S-3 of Citizens, Inc. of our report dated March 8, 1996, relating to the
consolidated balance sheets of Citizens, Inc. and subsidiaries as of December
31, 1995 and 1994, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1995, and all related schedules, which report appears
in the December 31, 1995 annual report on Form 10-K of Citizens, Inc. Our
report refers to the adoption by the Company of the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Dallas, Texas
March 27, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 5,636,785
<DEBT-MARKET-VALUE> 99,464,551
<EQUITIES> 0
<MORTGAGE> 1,910,608
<REAL-ESTATE> 679,436
<TOTAL-INVEST> 130,024,739
<CASH> 4,160,156
<RECOVER-REINSURE> 1,857,900
<DEFERRED-ACQUISITION> 36,624,448
<TOTAL-ASSETS> 205,486,247
<POLICY-LOSSES> 123,327,377
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 8,353,411
<POLICY-HOLDER-FUNDS> 1,945,332
<NOTES-PAYABLE> 772,834
0
0
<COMMON> 44,290,601
<OTHER-SE> 20,422,389
<TOTAL-LIABILITY-AND-EQUITY> 205,486,247
46,125,093
<INVESTMENT-INCOME> 7,026,909
<INVESTMENT-GAINS> (109,096)
<OTHER-INCOME> 75,062
<BENEFITS> 33,391,861
<UNDERWRITING-AMORTIZATION> 9,190,873
<UNDERWRITING-OTHER> 6,795,870
<INCOME-PRETAX> 3,751,568
<INCOME-TAX> 1,001,356
<INCOME-CONTINUING> 2,750,212
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,750,212
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
