UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended June 30, 1998
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: 1-13004
CITIZENS, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-0755371
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 East Anderson Lane, Austin, Texas 78752
(Address of principal executive offices) (Zip Code)
(512) 837-7100
(Registrant's telephone number, including area code)
7801 North Interstate 35, Austin, Texas 78753
(Former name, former address and former fiscal year, if changed
since last report.)
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
requirements for the past 90 days.
[X] Yes [ ] No
As of June 30, 1998, Registrant had 20,765,088 shares of
Class A common stock, No Par Value, outstanding and 621,049
shares of Class B common stock, No Par Value, outstanding.
CITIZENS, INC. AND SUBSIDIARIES
INDEX
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Balance sheets, June 30, 1998
(unaudited)and December 31, 1997 3 - 4
Statements of Operations, Three-Months
Ended June 30, 1998 and 1997
(Unaudited) 5
Statements of Operations, Six-Months
Ended June 30, 1998 and 1997 6
(Unaudited)
Statements of Cash Flows, Six-Months
Ended June 30, 1998 and 1997
(Unaudited) 7 - 8
Notes to Financial Statements 9
Item 2. Management's Discussion and Analysis
of Financial Conditions and Results 10-160
of Operations
Part Other Information 17- 18
II.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 31, 1997
(Unaudited) December
June 30, 31,
1998 1997
Assets
Investments:
Fixed maturities held for investment,
at amortized cost (fair value
$5,914,000 in 1998 and $5,704,000 in $5,611,753 $
1997) 5,617,131
Fixed maturities available for sale,
at fair value (cost $129,722,445 in
1998 and $130,621,420 in 1997)
131,190,392 133,021,681
Equity securities, at fair value
(cost in $799,176 in 1998 and
$983,513 in 1997) 827,255 978,391
Mortgage loans on real estate (net of
reserve of $50,000 in 1998 and 1997) 1,844,342 1,287,295
Policy loans 20,717,775 20,466,184
Guaranteed student loans (net of
reserve of $10,000 in 1998 and 1997) 30,561 81,681
Other long-term investments 668,903 899,329
Short-term investments 3,150,000 300,000
Total investments 164,040,981 162,651,692
Cash 8,229,317 6,454,956
Prepaid reinsurance 949,910 -
Reinsurance recoverable 2,092,077 2,069,423
Other receivables 560,277 1,007,878
Accrued investment income 1,893,227 2,010,512
Deferred policy acquisition costs 36,569,751 37,107,070
Cost of insurance acquired 8,916,603 10,639,667
Other intangible assets 2,443,325 2,596,925
Excess of cost over net assets 17,634,079 17,466,123
acquired
Federal income tax receivable 512,256 -
Deferred Federal income tax 999,172 572,430
Property, plant and equipment 5,298,087 5,795,573
Other assets 839,479 1,147,186
Total assets 250,978,541 249,519,435
(Continued)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 31, 1997
(Unaudited) December
June 30, 31,
1998 1997
Liabilities and Stockholders' Equity
Liabilities:
Future policy benefit reserves 155,518,625 152,119,042
Dividend accumulations 4,740,651 4,789,194
Premium deposits 2,023,190 2,010,102
Policy claims payable 4,074,249 3,488,484
Other policyholders' funds 1,999,628 1,873,588
Total policy liabilities 168,356,343 164,280,410
Other liabilities 1,980,674 2,703,346
Commissions payable 774,868 880,811
Notes payable 333,333 937,430
Federal income tax payable - 762,992
Amounts held on deposit 237,057 372,748
Total liabilities 171,682,275 169,937,737
Stockholders' Equity:
Common stock:
Class A, no par value, 50,000,000
shares authorized, 22,708,910 shares
issued in 1998 and 1997, including
shares in treasury of 1,943,822 in
1998
and 1997 52,790,643 52,790,643
Class B, no par value, 1,000,000
shares authorized, 621,049 shares
issued and outstanding in 1998 and
1997 283,262 283,262
Unrealized investment gain 982,918 1,580,790
Retained earnings 27,168,597 26,856,157
81,225,420 81,510,852
Treasury stock, at cost (1,929,154) (1,929,154)
Total stockholders' equity 79,296,266 79,581,698
Total liabilities and stockholders' 250,978,541 249,519,435
equity
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Months Ended June 30, 1998 and 1997
(Unaudited)
Three-months ended June
30,
1998 1997
Revenues:
Premiums $ $
14,549,512 13,079,433
Annuity and Universal life 64,204 94,494
considerations
Net investment income 2,860,802 2,540,886
Other income 72,209 129,835
Realized gains on investments 624,085 77,965
Interest expense (8,431) (3,915)
18,162,381 15,918,698
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future policy benefit 2,323,379 2,238,688
reserves
Policyholders' dividends 751,255 578,440
Claims and surrenders 8,190,825 6,774,584
Annuity expenses 91,715 32,907
11,357,174 9,624,619
Commissions 3,071,337 3,160,795
Underwriting, acquisition and 3,021,246 1,791,488
insurance expenses
Capitalization of deferred policy (1,899,615) (2,695,843)
acquisition costs
Amortization of deferred policy 1,837,627 2,746,983
acquisition costs
Amortization of cost of insurance
acquired and excess of cost over net 502,240 461,734
assets acquired
17,890,009 15,089,776
Income before federal income tax $272,372 $828,922
Federal income tax:
Federal income tax expense 72,516 307,863
Net Income $199,856 $521,059
Per Share Amounts:
Basic and diluted earnings per share
of common stock $0.01 $0.03
Weighted average shares outstanding 21,386,137 20,591,574
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six-Months Ended June 30, 1998 and 1997
(Unaudited)
Six-months ended June 30,
1998 1997
Revenues:
Premiums 27,970,186 24,589,880
Annuity and Universal Life 130,702 198,762
considerations
Net investment income 5,703,433 4,894,712
Other income 190,628 193,812
Realized gains on investments 654,736 195,805
Interest expense (27,023) (14,280)
34,622,662 30,058,691
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future policy benefit 3,835,053 3,665,985
reserves
Policyholders' dividends 1,441,535 1,058,127
Claims and surrenders 14,962,318 13,794,268
Annuity expenses 190,287 218,839
20,429,193 18,737,219
Commissions 5,957,553 5,449,162
Underwriting, acquisition a 5,880,597 4,017,980
insurance expenses
Capitalization of deferred policy (3,414,322) (4,757,932)
acquisition costs
Amortization of deferred policy 3,951,641 5,092,091
acquisition costs
Amortization of cost of insurance
acquired and excess of cost over net 1,396,122 881,905
assets acquired
34,200,784 29,420,425
Income before federal income tax $421,878 $638,266
Federal income tax:
Federal income tax expense 109,438 238,891
Net Income $312,440 $399,375
Per Share Amounts:
Basic and diluted earnings per share
of common stock $0.01 $0.02
Weighted average shares outstanding 21,386,137 20,245,799
(Continued)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six-Months Ended June 30, 1998 and 1997
(Unaudited)
Six-months ended June 30,
1998 1997
Cash flows from operating
activities:
Net gain $312,440 $399,375
Adjustments to reconcile net gain to
net cash provided by operating
activities:
Accrued investment income 117,285 (178,566)
Deferred policy acquisition costs 537,319 334,159
Amortization of cost of insurance
acquired, excess cost over net
assets acquired and other
intangibles 1,708,708 881,905
Prepaid reinsurance (949,910) (1,144,824)
Reinsurance recoverable (22,654) (347,510)
Other receivables 447,601 (519,424)
Property, plant and equipment 497,486 (609,862)
Future policy benefit reserves 3,399,583 7,794,743
Other policy liabilities 676,350 444,599
Commissions payable and other (828,615) (542,500)
liabilities
Amounts received (expended) as trustee (135,691) 56,172
Federal income tax (1,275,248) -
Deferred Federal income tax (118,748) (62,411)
Other, net 227,541 (4,265,930)
Net cash provided by operating
activities 4,593,447 2,239,926
Cash flows from investing
activities:
Maturity of fixed maturities available 5,054,551 6,349,893
for sale
Sale of fixed maturities available for 9,275,952 10,727,026
sale
Purchase of fixed maturities available (13,319,865) (14,965,675)
for sale
Mortgage loans funded (665,000) -
Repayment of mortgage loa ns 107,953 172,815
Sale of equity securities 151,464 -
Net change in guaranteed student loans 51,120 180,339
Cash from merger - 138,138
Change in other long-term investments 230,427 22,099
Increase in policy loans (net) (251,591) (70,930)
Net cash provided by
investing activities
635,011 2,553,705
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six-Months Ended June 30, 1998 and 1997
(Unaudited)
Six-months ended June 30,
1998 1997
Cash flows from financing
activities:
Exercise of stock options - 140,500
Repayment of note payable (604,097) (79,044)
Sale of stock 192,426
-
Net cash provided (used) by financing
activities (604,097) 253,882
Net increase in cash and short-
term investments 4,624,361 5,047,513
Cash and short term investments at
beginning of period 6,754,956 6,285,383
Cash and short term investments at end 11,379,317 $11,332,896
of period
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
(1) Financial Statements
The balance sheet for June 30, 1998, the statements of
operations for the three and six-month periods ended June
30, 1998 and 1997, and the statements of cash flows for
the six-month periods then ended have been prepared by the
Company without audit. In the opinion of management, all
adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial
position, results of operations and changes in cash flows
at June 30, 1998 and for comparative periods presented
have been made.
Certain information and footnote disclosures normally
included in financial statements prepared in accordance
with generally accepted accounting principles have been
omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and
notes thereto included in the Company's December 31, 1997
annual 10-K report filed with the Securities and Exchange
Commission. The results of operations for the period
ended June 30, 1998 are not necessarily indicative of the
operating results for the full year.
(2) Comprehensive Income
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (FAS)
No. 130, "Reporting Comprehensive Income." FAS 130
requires that an entity include in total comprehensive
income certain amounts which were previously recorded
directly to stockholders' equity. For the three and six-
months ended June 30, 1998 the other comprehensive income
amounts included in total comprehensive income consisted
of unrealized gains (losses) on investments in debt and
equity securities of $(676,599) and $(597,872), and for
the same periods in 1997, $1,266,647 and $(122,499),
respectively. Total comprehensive income (loss) for the
three and six-months ended June 30, 1998 was $(476,743)
and $(285,432) and for 1997, $1,787,706 and $276,876,
respectively.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Certain statements contained in this Form 10Q are not statements
of historical fact and constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act (the "Act"), including, without limitation, the italicized
statements and the statements specifically identified as forward-
looking statements within this document. In addition, certain
statements in future filings by the Company with the Securities
and Exchange Commission, in press releases, and in oral and
written statements made by or with the approval of the Company
which are not statements of historical fact constitute forward-
looking statements within the meaning of the Act. Examples of
forward-looking statements, include, but are not limited to: (i)
projections of revenues, income or loss, earnings or loss per
share, the payment or non-payment of dividends, capital
structure, and other financial items, (ii) statements of plans
and objectives of the Company or its management or Board of
Directors including those relating to products or services, (iii)
statements of future economic performance and (iv) statements of
assumptions underlying such statements. Words such as
"believes", "anticipates", "expects", "intends", "targeted",
"may", "will" and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of
identifying such statements.
Forward-looking statements involve risks and uncertainties which
may cause actual results to differ materially from those in such
statements. Factors that could cause actual results to differ
from those discussed in the forward-looking statements include,
but are not limited to: (i) the strength of foreign and U.S.
economies in general and the strength of the local economies in
which operations are conducted; (ii) the effects of and changes
in trade, monetary and fiscal policies and laws; (iii)
inflation, interest rates, market and monetary fluctuations and
volatility; (iv) the timely development and acceptance of new
products and services and perceived overall value of these
products and services by existing and potential customers; (v)
changes in consumer spending, borrowing and saving habits; (vi)
concentrations of business from persons residing in third world
countries; (vii) acquisitions; (viii) the persistency of
existing and future insurance policies sold by the Company and
its subsidiaries; (ix) the dependence of the Company on its
Chairman of the Board; (x) the ability to control expenses; (xi)
the effect of changes in laws and regulations (including laws and
regulations concerning insurance) with which the Company and its
subsidiaries must comply, (xii) the effect of changes in
accounting policies and practices, as may be adopted by the
regulatory agencies as well as the Financial Accounting Standards
Board, (xiii) changes in the Company's organization and
compensation plans; (xiv) the costs and effects of litigation
and of unexpected or adverse outcomes in such litigation; and
(xv) the success of the Company at managing the risks involved
in the foregoing.
Such forward-looking statements speak only as of the date on
which such statements are made, and the Company undertakes no
obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is
made to reflect the occurrence of unanticipated events.
Six-months ended June 30, 1998 and 1997
Net income for the six-months ended June 30, 1998 was $312,440
compared to $399,375 for the same period in 1997. Revenues
increased to $34,622,6629,763,884, an increase of 15.2% over the
first six months of 1997 when revenues were $30,058,691. The
increase in revenues was driven by a 13.7% increase in premium
income and an 16.5% increase in investment income. Higher
expenses associated with the conversion of the two companies
acquired in 1997, coupled with increased claim activity, fueled
the decrease in earnings.
Premium income for the first six months of 1998 was $27,970,186
compared to $24,589,880 for the same period in 1997. Production
of new premiums by the agents of Citizens Insurance Company of
America (CICA) was higher during the first quarter of 1998 than
in the previous year, but slowed somewhat in the second quarter.
Management introduced a new line of ordinary whole life products
during January 1998 which will, in the opinion of management,
have considerable impact on new production once the marketing
force has been trained in the sale of the new products.
Additionally, the premiums of United Security Life Insurance
Company (USLIC) and National Security Life and Accident Insurance
Co. (NSLIC), both acquired in 1997, are included in the 1998
results, contributing $2,059,000 and $1,842,000, respectively.
Net investment income increased 16.5% in the first half of 1998
compared to the same period in 1997. Net investment income for
the six months ended June 30, 1998 was $5,703,433 compared to
$4,894,712 in 1997. This increase reflects the earnings on the
growth in the Company's asset base that is occurring, as well as
the earnings on assets of USLIC and NSLIC. A shift in investment
strategy implemented in 1996 to shift away from U.S. Treasury
instruments to government guaranteed mortgage backed securities
and agency issues will, in the opinion of management, continue to
offer greater return with a minimum amount of additional risk.
Claims and surrenders expense increased to $14,962,318 at June
30, 1998 from $13,794,268 for the same period in 1997. Death
claims decreased slightly to $2,287,873 in 1998 from $2,392,182
in 1997. Surrender expense decreased to $6,662,466 from
$7,453,385. Management constantly monitors this activity to
insure that the Company's persistency is holding at levels equal
to or above assumptions. The decrease in the first half of 1998
is, in management's opinion, a result of a slowdown of lapsation
of the American Liberty block of business following the
acquisition and subsequent merger of said Company, as well as a
re-emphasis on conservation on the part of CICA's sales force.
Coupons and endowments decreased to $2,358,256 in 1998 from
$2,453,164 in 1997. The endowment benefits, a significant
component of the Company's Ultra Expansion and Millennia 2000
international life insurance products, are factored into the
premium much like dividends and therefore, the amount does not
pose a threat to future profitability. Management expects to see
further increases in this category in the future. Accident and
Health benefits were $3,143,944 in 1998, compared to $984,886 in
1997. This increase is directly related to the USLIC and NSLIC
blocks of business which consist of large amounts of scheduled
benefit daily indemnity policies and were not included in the
first half of 1997 due to the date of their respective
acquisitions. The remaining components of claims and expenses,
consisting of supplemental contracts and payments of dividends
and endowments previously earned and held at interest, amounted
to $509,779 in 1998, compared to $510,651 in 1997.
Commission expense increased to $5,957,553 from $5,449,162. The
increase reflects the execution of an agreement with Worldwide
Professional Associates, Inc. to manage the Company's
international marketing operations in exchange for an overriding
commission, as well as commissions relating to USLIC and NSLIC
that were not included in the prior year. This agreement is
expected to generate expense savings in future years by
converting fixed home office marketing expenses to variable
commission expenses. Deferred policy acquisition costs
capitalized in 1998 were $3,414,322 compared to $4,757,932 in the
prior year. Amortization of these costs was $3,951,641 for the
first half of 1998 compared to $5,092,091 for 1997.
Underwriting, acquisition and insurance expenses increased from
$4,017,980 in the first half of 1997 to $5,880,597. The increase
is primarily attributable to the absorption of the operating
expenses of USLIC and NSLIC. Management believes that through
economies of scale which can be achieved in the future after
conversion of systems of these companies that additional expense
reductions can be made. The 1997 results includes a one-time
charge of approximately $400,000 as the result of the acquisition
of a 5.52% interest in First American Investment Corporation, a
94.48% subsidiary of American Liberty. The operations of USLIC
were combined with those of CICA in April, 1998, and USLIC's
Mississippi office was closed. Management expects to see
significant cost savings beginning in late 1998 as a result.
Similarly, the operations of NSLIC are expected to be combined in
October, 1998, with cost reductions appearing in the first
quarter of 1999.
Amortization of cost of insurance acquired and excess of cost
over net assets acquired increased to $1,396,122 in 1998 from
$881,905 in 1997. The increase is attributable to the
amortization of excess of cost over net assets acquired and cost
of insurance recorded on the acquisitions of USLIC, NSLIC and
American Liberty. Because of the slowdown in sales activity on
the part of the agency operations previously associated with
American Liberty, management is monitoring the excess of cost
over net assets acquired associated with the acquisition of this
company. Should future production levels be less than
anticipated, the Company could face a charge-off ranging from to
$2,000,000 to $8,000,000 associated with such decline.
Management is monitoring this recoverability. At December 31,
1997, the excess of cost over net assets acquired on the
Company's balance sheet was recoverable within the period of
amortization. Production from these agents began to recover in
late 1997; however, due to the nature of their market, management
believes it will be the third quarter of 1998 before significant
levels of production are obtained from these agents. Management
believes that in the event any such amount proved unrecoverable,
a charge in the appropriate period will be booked.
Three-months ended June 30, 1998 and 1997
Net income of $199,856 was earned for the three-months ended June
30, 1998 compared to $521,059 for the same period in 1997.
Revenues increased 14.4% to $18,162,3819,763,884 over the first
three months of 1997 when revenues were $15,918,698. The
increase in revenues was driven by an 11.2% increase in premium
income and a 12.6% increase in investment income, as well as more
than $624,000 in capital gains. Increased expenses associated
with the conversion of the two companies acquired in 1997 and
higher claims offset the increased revenues and contributed to
the lower earnings.
Premium income for the second three months of 1998 was
$14,549,512 compared to $13,079,433 for the same period in 1997.
Management introduced a new line of ordinary whole life products
to the international market during January 1998 which will, in
the opinion of management, have considerable impact on new
production once the marketing force has been trained in the sale
of the new products. The premiums of USLIC and NSLIC, both
acquired in 1997, are included in the 1998 results, and are the
primary reason for the increase.
Net investment income increased 12.6% in the second quarter of
1998 compared to the same period in 1997. Net investment income
for the three months ended June 30, 1998 was $2,860,802 compared
to $2,540,886 in 1997. This increase reflects the earnings on
the growth in the Company's asset base that is occurring, as well
as the earnings on assets of USLIC and NSLIC.
Claims and surrenders expense increased to $8,190,825 at June 30,
1998 from $6,774,584 for the same period in 1997. Death claims
increased slightly to $1,373,492 in 1998 from $1,016,779 in 1997.
Surrender expense decreased to $3,318,783 from $3,608,154.
Management constantly monitors this activity to insure that the
Company's persistency is holding at levels equal to or above
assumptions. The decrease in the first half of 1998 is, in
management's opinion, a result of the slowdown of lapsation of
the American Liberty block of business following the acquisition
and subsequent merger of said Company, as well as a re-emphasis
on conservation on the part of CICA's sales force. Coupons and
endowments decreased to $1,224,365 in 1998 from $1,360,206 in
1997. The endowment benefits, a significant component of the
Company's Ultra Expansion and Millennia 2000 international life
insurance products, are factored into the premium much like
dividends and therefore, the amount does not pose a threat to
future profitability. Management expects to see further
increases in this category in the future. Accident and Health
benefits were $2,001,908 in 1998, compared to $494,287 in 1997.
This increase is directly related to the USLIC and NSLIC blocks
of business which consist of large amounts of scheduled benefit
daily indemnity policies and were not included in the first half
of 1997 due to the date of their respective acquisitions.
Additionally, claims increased approximately $450,000 in the
second quarter of 1998 due to the settlement of three lawsuits.
The remaining components of claims and expenses, consisting of
supplemental contracts and payments of dividends and endowments
previously earned and held at interest, amounted to $272,277 in
1998, compared to $295,158 in 1997.
Commission expense decreased to $3,071,337 from $3,160,795. The
decrease reflects a slowdown in CICA's sales during the quarter,
which caused overall commissions for 1998 to drop despite the
inclusion of NSLIC and USLIC.
Underwriting, acquisition and insurance expenses increased from
$1,791,488 in the second quarter of 1997 to $3,021,246. The
increase is primarily attributable to the absorption of the
operating expenses of USLIC and NSLIC and the cost of data
processing conversions of each company. Management believes that
through economies of scale which can be achieved in the future
after conversion of systems of these companies, additional
expense reductions can be made. The operations of USLIC were
combined with those of CICA in April, 1998, and USLIC's
Mississippi office was closed. Management expects to see
significant cost savings beginning in late 1998 as a result.
Similarly, the operations of NSLIC are expected to be combined in
October, 1998, with cost reductions appearing in the first
quarter of 1999.
Amortization of cost of insurance acquired and excess of cost
over net assets acquired increased to $502,240 in 1998 from
$461,734 in 1997. The increase is attributable to the
amortization of excess of cost over net assets acquired and cost
of insurance recorded on the acquisitions of USLIC, NSLIC and
American Liberty. Because of the slowdown in sales activity on
the part of the agency operations previously associated with
American Liberty, management is monitoring the excess of cost
over net assets acquired associated with the acquisition of this
company. Should future production levels be less than
anticipated, the potential exists that the Company could face a
charge-off ranging from $2,000,000 to $8,000,000 associated with
such decline. Management believes that should such amount proved
unrecoverable, a charge in the appropriate period will be booked.
Liquidity and Capital Resources
Stockholders' equity declined to $79,296,266 at June 30, 1998
from $79,581,698 at December 31, 1997. The comparative decline in
net income coupled with a decrease in the fair value of the
Company's bond portfolio contributed to the decrease in
stockholders' equity.
Invested assets grew to $164,040,981 in 1998 from $162,651,692 at
December 31, 1997. At December 31, 1997, 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 fair value.
The Company does not have a plan to make material dispositions of
fixed maturities during 1998; however, because of continued
uncertainty regarding long-term interest rates, management cannot
rule out sales during 1998. Fixed maturities held to maturity,
amounting to $5,611,753, 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 1.1% of
invested assets at June 30, 1998, has historically been composed
of small residential loans in Texas. At December 31, 1997 and
June 30, 1998, one mortgage loan was in default with an
outstanding principal balance of $31,000. Management has
established a reserve of $50,000 at June 30, 1998 and December
31, 1997 (approximately 3% of the mortgage portfolio's balance)
to cover potential unforeseen losses in the Company's mortgage
portfolio. Two mortgages totaling $665,000 were made during 1998
relating to sales of real estate owned by the Company.
Policy loans comprise 12.6% of invested assets at June 30, 1998
and December 31, 1997. These loans, which are secured by the
underlying policy values, have yields ranging from 5% to 10% 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, Chase
Bank, Austin, Texas, were significantly in excess of Federal
Deposit Insurance Corporation (FDIC) coverage at June 30, 1998
and December 31, 1997. Management monitors the solvency of all
financial institutions in which it has funds to minimize the
exposure for loss. At June 30, 1998, management does not believe
the Company is at risk for such a loss. During 1998, the Company
has utilized highly-rated commercial paper as a cash management
tool 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. The
Company relocated to the building in September 1993. The Company
occupies approximately 38,000 square feet of space in the
building, which is 100% leased.
The Company's former office property, consisting of approximately
13,000 square feet in Austin, with a carrying value of $104,000
was leased to a third party on a triple-net basis for three years
during 1995. At June 30, 1998, this property was under a sales
contract for $850,000 which closed in July, 1998. The Company
will record a gain of approximately $700,000 on the transaction
in the third quarter.
CICA owned 1,821,332 shares of Citizens Class A common stock at
June 30, 1998 and December 31, 1997. Statutory accounting
practices prescribed by the National Association of Insurance
Commissioners and the State of 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 June 30, 1998 and December 31, 1997, the Company valued the
shares in accordance with prescribed statutory accounting
practices. In the Citizens' consolidated financial statements,
this stock is shown as treasury stock.
A subsidiary of CICA sold certain fixed assets in the second
quarter of 1998 for over $1 million, generating a profit of
approximately $500,000.
CICA had outstanding at June 30, 1998 a $333,333 ($400,000 at
December 31, 1997) 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 NAICNational Association of Insurance Commissioners ("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 the Company
would begin. At December 31, 1997, CICA, NSLIC, USLIC and CILIC
were well above required minimum levels.
Information Systems and the Year 2000
The inability of computers, software and other equipment
utilizing microprocessors to recognize and properly process data
fields containing a two-digit year is generally referred to as
the Year 2000 compliance issue. As the year 2000 approaches,
such systems may be unable to accurately process certain date-
based or date-sensitive information.
The Company is in the process of identifying all significant
applications that will require modification to ensure Year 2000
compliance. Internal resources will be used as necessary to make
the required modifications and to test and verify Year 2000
compliance. Due to the nature of the programming of the
Company's core processing systems, such date oriented issues are
not a problem since the dates are stored as the number of days
since the year 1900, rather than as a two-digit field.
Accordingly, a significant part of the Company's efforts to
ensure Year 2000 compliance will be to obtain assurances from
vendors that timely upgrades will be made available to make third
party software Year 2000 compliant. Additionally, the Company
will contact companies with whom it does business and upon whose
systems the Company may indirectly rely, to obtain assurances
that such systems will be timely modified. The Company
anticipates that it will complete this process in early 1999,
leaving adequate time to assess and resolve any significant
remaining issues. The cost of Year 2000 compliance is not
expected to be material to the Company's financial position or
results of operations in any one year.
Financial Accounting Standards
In February 1997, the FASB issued Statement 128 "Earnings per
Share" ("Statement 128"). Statement 128 establishes the
standards for computing and presenting earnings per share
("EPS"). This statement replaces the presentation of primary EPS
with a presentation of basic EPS and requires dual presentation
of basic and diluted EPS. Statement 128 is effective for fiscal
years ending after December 15, 1997. Implementation did not
have a material impact on the Company's earnings per share.
In June 1997, the FASB issued Statement 130 "Reporting
Comprehensive Income" ("Statement 130"). Statement 130
establishes the standards for reporting and display of
comprehensive income and its components in a full set of general-
purpose financial statements. Statement 130 is effective for
fiscal periods beginning after December 15, 1997. The Company
does not believe that this statement will have an impact on
future operations or liquidity.
Also in June, 1997, Statement 131, "Disclosures about Segments of
an Enterprise and Related Information," was issued by the
Financial Accounting Standards Board. This Statement requires
that companies disclose segment data on the basis that is used
internally by management for evaluating segment performance and
allocating resources to segments. This Statement requires that a
company report a measure of segment profit or loss, certain
specific revenue and expense items, and segment assets. It also
requires various reconciliation's of total segment information to
amounts in the consolidated financial statements. The Company's
current definition of its business segments, significant lines of
business (life and health products), will be expanded to
significant lines of business by geographic location of
policyholder (international and domestic). The footnote
disclosure requirements of SFAS No. 131 are effective for fiscal
years beginning after December 15, 1997.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On September 22, 1997, the Company was notified that
class action certification was granted September 15, 1997
to plaintiffs in a lawsuit (Dwain Kirkham et al. v.
American Liberty Life Insurance Company et al., No.
25,954, 2nd Judicial District, Jackson Parish, Louisiana)
filed against American Liberty Life Insurance Company
(ALLIC) on August 19, 1996 and against Citizens, Inc. on
December 20, 1996 (collectively "Defendants"). In the
same ruling, Defendants' motion for summary judgment and
exception of prescription (statute of limitations) were
denied. Defendants believe that these rulings are
significantly in error. Defendants will appeal these
rulings, during which time, the trial court proceedings
will be stayed. Defendants intend to vigorously defend
against these claims.
The lawsuit was filed by four individuals who purchased
from ALLIC, prior to August 1, 1986, life insurance
policies on their children and grandchildren. In the
complaint, plaintiffs allege that the insurance policies
were fraudulently misrepresented to be "retirement" and
"insured savings" plans in which, after six or seven
years, additional premiums would be unnecessary and
monthly retirement income would be generated for
plaintiffs. Plaintiffs also allege other causes of
action including breach of contract and are seeking
rescission, unspecified damages, interest and attorneys'
fees. Prior to the class certification ruling,
rescission of the insurance policies purchased by the
four plaintiffs would have resulted in a total payment of
$31,000 (including 33% for contingent attorneys fees).
The activities described in plaintiffs' complaint
allegedly occurred over 10 years ago with respect to
certain types of insurance policies sold by an
independent general agent. Prior to its recent merger
into the Company's principal subsidiary, Citizens
Insurance Company of America, ALLIC was a separate
subsidiary of the Company since its acquisition in
September 1995.
As part of the acquisition, not all historical records of
ALLIC were loaded on the computer system currently used.
Further, no officers or managers of ALLIC are currently
employed by the Company or any of its affiliates. Due to
the unexpected nature of this ruling, the historical
records have not been examined to determine the potential
magnitude of these claims in the event of class action
certification. Management will be examining ALLIC's
historical records to determine if such an estimate can
be developed.
Item 2. Changes in Securities
None, other than disclosed in the Notes to the Financial
Statements or Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
The Annual meeting of stockholders was held on Tuesday,
June 2, 1998, at 10:00 a.m. at the Company's executive
offices. The record date for the meeting was April 15,
1998. Elected to the Company's Board of Directors were:
Class A Class B
James C. Mott Harold E. Riley, Chairman
Steven F. Shelton T. Roby Dollar
Ralph M. Smith, Th.D. Mark A. Oliver
Timothy T. Timmerman Joe R. Reneau, M.D.
Rick D. Riley
Item 6. Exhibits and Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CITIZENS, INC.
By:/s/ Mark A. Oliver_____
Mark A. Oliver, FLMI
President
Date: August 14, 1998
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