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 September 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 September 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, September 30, 1998
(Unaudited) and December 31, 1997 3
Statements of Operations, Three-Months
Ended September 30, 1998 and 1997
(Unaudited) 5
Statements of Operations, Nine-Months
Ended September 30, 1998 and 1997
(Unaudited) 6
Statements of Cash Flows, Nine-Months
Ended September 30, 1998 and 1997
(Unaudited) 7
Notes to Financial Statements 9
Item 2. Management's Discussion and Analysis
of Financial Conditions and Results
of Operations 11
Part Other Information 2017
II.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and December 31, 1997
(Unaudited)
September December
30, 31,
1998 1997
Assets
Investments:
Fixed maturities held for investment, $5,609,564 $5,617,131
at amortized cost (market $6,315,500
in 1998 and $5,704,000 in 1997)
Fixed maturities available for sale,
at fair value (cost $138,104,181 in
1998 and $130,621,420 in 1997)
145,443,176 133,021,681
Equity securities, at fair value (cost
$ 799,175 in 1998 and $983,513 in
1997) 869,335 978,391
Mortgage loans on real estate (net of
reserve of $50,000 in 1998 and 1997)
1,697,154 1,287,295
Policy loans 20,660,327 20,466,184
Guaranteed student loans (net of
reserve of 0 in 1998 and $10,000 in
1997) 6,115 81,681
Other long-term investments 588,574 899,329
Short-term investments 4,225,000
300,000
Total investments 179,099,245 162,651,692
Cash 5,191,275 6,454,956
Prepaid reinsurance 474,955 -
Reinsurance recoverable 2,401,671 2,069,423
Other receivables 460,608 1,007,878
Accrued investment income 1,285,578 2,010,512
Deferred policy acquisition costs 37,209,396 37,107,070
Cost of insurance acquired 8,570,206 10,639,667
Other intangible assets 2,366,525 2,596,925
Excess of cost over net assets 7,905,273
acquired 17,466,123
Federal income tax recoverable 205,000 -
Deferred Federal income tax - 572,430
Property, plant and equipment 5,296,948 5,795,573
Other assets 1,029,046
1,147,186
Total assets 251,495,726 249,519,435
(Continued)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and December 31, 1997
(Unaudited)
September December
30, 31,
1998 1997
Liabilities and Stockholders' Equity
Liabilities:
Future policy benefit reserves 157,899,002 152,119,042
Dividend accumulations 4,757,142 4,789,194
Premium deposits 1,963,194 2,010,102
Policy claims payable 5,584,241 3,488,484
Other policyholders' funds 2,096,099 1,873,588
Total policy liabilities 172,299,678 164,280,410
Other liabilities 1,927,698 2,703,346
Commissions payable 850,235 880,811
Notes payable 333,333 937,430
Federal income tax payable - 762,992
Deferred Federal income tax 1,239,280 -
Amounts held on deposit 262,665 372,748
Total liabilities 176,912,889 169,937,7
37
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
Accumulated other comprehensive income
4,908,999 1,580,790
Retained earnings 18,529,087 26,856,157
76,511,991 81,510,852
Treasury stock, at cost (1,929,154) (1,929,154)
Total stockholders' equity 74,582,837 79,581,698
Commitments and contingencies
Total liabilities and stockholders'
equity 251,495,726 249,519,435
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Months Ended September 30, 1998 and 1997
(Unaudited)
Three-months ended
September 30,
1998 1997
Revenues:
Premiums 15,411,935 15,423,872
Annuity and Universal life 62,035 90,425
considerations
Net investment income 2,949,012 2,672,981
Other income 118,303 296,584
Realized gains (losses) on 513,594 (292,029)
investments
Interest expense (5,683) (19,162)
19,049,196 18,172,671
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future policy benefit 1,944,907 2,865,160
reserves
Policyholders' dividends 780,337 1,203,584
Claims and surrenders 9,401,832 6,978,631
Annuity expenses 204,017 104,400
12,331,093 11,151,775
Commissions 3,204,024 3,317,928
Underwriting, acquisition and 2,470,486 2,265,672
insurance expenses
Capitalization of deferred policy (2,227,671) (2,709,440)
acquisition costs
Amortization of deferred policy 1,588,026 1,756,304
acquisition costs
Amortization of cost of insurance
acquired and excess of cost over net 10,121,878 485,453
assets acquired
27,487,836 16,267,692
Income (loss) before federal income (8,438,640) 1,904,979
tax
Federal income tax:
Federal income tax expense 200,870 543,363
Net Income (Loss) (8,639,510) $1,361,616
Per Share Amounts:
Basic and diluted earnings (loss) per
share of common stock $(0.40) $0.07
Weighted average shares outstanding 21,386,137 21,212,623
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine-Months Ended September 30, 1998 and 1997
(Unaudited)
Nine-months ended
September 30,
1998 1997
Revenues:
Premiums $43,382,121 $40,013,752
Annuity and Universal life 192,737 289,187
considerations
Net investment income 8,652,445 7,567,693
Other income 308,931 490,396
Realized gains (losses) on 1,168,330 (96,224)
investments
Interest expense (32,706) (33,442)
53,671,858 48,231,362
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future policy benefit 5,779,960 6,531,145
reserves
Policyholders' dividends 2,221,872 2,261,711
Claims and surrenders 24,364,150 20,772,899
Annuity expenses 394,304 323,239
32,760,286 29,888,994
Commissions 9,161,577 8,767,090
Underwriting, acquisition and 8,351,083 6,283,652
insurance expenses
Capitalization of deferred policy (5,641,993) (7,467,372)
acquisition costs
Amortization of deferred policy 5,539,667 6,848,395
acquisition costs
Amortization of cost of insurance
acquired and excess of cost over net
assets acquired 11,518,000 1,367,358
61,688,620 45,688,117
Income (loss) before federal income (8,016,762) 2,543,245
tax
Federal income tax:
Federal income tax expense 310,308 782,254
Net Income (Loss) (8,327,070) 1,760,991
Per Share Amounts:
Basic and diluted earnings (loss)
per share of common stock $(0.39) $0.09
Weighted average shares outstanding 21,386,137 20,983,373
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine-Months Ended September 30, 1998 and 1997
(Unaudited)
Nine-months ended
September 30,
1998 1997
Cash flows from operating
activities:
Net income (loss) (8,327,070) $1,760,991
Adjustments to reconcile net gain to
net cash provided by operating
activities:
Accrued investment income 724,934 434,410
Deferred policy acquisition costs (102,326) (953,136)
Amortization of cost of insurance
acquired, excess cost over net
assets acquired, and other
intangibles
11,860,711 741,880
Prepaid reinsurance (474,955) (572,412)
Reinsurance recoverable (332,248) (159,416)
Other receivables 547,270 342,379
Property, plant and equipment 498,625 186,693
Future policy benefit reserves 5,779,960 1,019,402
Other policy liabilities 2,239,308 448,174
Commissions payable and other (806,224) 452,049
liabilities
Amounts received (paid out) as trustee (110,083) 50,135
Federal income tax recoverable (205,000) -
Federal income tax payable (762,992) -
Deferred Federal income tax 515,308 754,673
Other, net (485,967) 1,072,717
Net cash provided by operating
activities 10,599,251 5,578,539
Cash flows from investing
activities:
Maturity of fixed maturities 8,473,257 225,000
Sale of fixed maturities available for 9,148,665 2,300,076
sale
Purchase of fixed maturities available (24,902,624) (14,024,225)
for sale
Sale of equity securities 154,548 -
Net change in mortgage loans (409,859) 148,415
Net change in guaranteed student loans 85,566 11,232
Change in other long-term investments 310,755 5,205
Increase in policy loans (net) (194,1 396,384
43)
Net cash (used) by
investing activities
(7,333,835) (10,937,913)
(Continued)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine-Months Ended September 30, 1998 and 1997
(Unaudited)
Nine-months ended
September 30,
1998 1997
Cash flows from financing
activities:
Repayment of note payable (604,097) (13,431)
Net cash (used) by financing
activities (604,097) (13,431)
Net increase (decrease) in cash and
short- 2,661,319 (5,372,805)
term investments
Cash and short term investments at
beginning 6,754,956 11,332,896
of period
Cash and short term investments at end
of period $9,416,275 $5,960,091
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
(1) Financial Statements
The balance sheet as of September 30, 1998, the statements of
operations for the three and nine-month periods ended
September 30, 1998 and 1997, and the statements of cash flows
for the nine-month periods then ended have been prepared by
the Company and are audited. 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
September 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 September 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 nine-months ended September 30,
1998 the other comprehensive income amounts included in total
comprehensive income consisted of unrealized gains on
investments in debt and equity securities of $3,926,081 and
$3,328,209, and for the same periods in 1997, $1,906,577 and
$1,784,078 respectively. Total comprehensive income (loss)
for the three and nine-months ended September 30, 1998 was
$(4,713,429) and $(4,998,861) and for 1997, $3,667,568 and
$3,154,694, respectively.
(3) Pending Acquisition
On September 15, 1998 Citizens, Inc. ("Citizens") announced
that a definitive agreement had been reached between Citizens
and First Investors Group, Inc. ("Investors") of Springfield,
Illinois wherein Citizens will acquire 100% of the outstanding
shares of Investors for shares of Citizens Class A Common
stock. The Citizens Class A Common stock will be offered
through a prospectus. Investors is the parent of Excalibur
Insurance Corporation, also of Springfield, Illinois
("Excalibur"), and has consolidated assets of approximately
$3.2 million, annual revenues of $201,000 and capital of $3.1
million as of June 1998. These balances are unaudited.
Pursuant to the terms of the Agreement, which is subject to
approval by Investors' shareholders, Citizens will issue one
share of Citizens Class A Common stock for each 6.6836 shares
of Investors common and preferred stock issued and
outstanding. Citizens expects to issue approximately 610,000
shares of its Class A Common stock to consummate the
transaction. The Illinois Department of Insurance approved
the transaction on October 13, 1998. Shareholder approval is
expected during the fourth quarter of 1998.
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.
On October 28, 1996, Citizens announced that it had signed
definitive written agreements for the acquisition of American
Investment Network, Inc. ("American Investment"), a Jackson,
Mississippi, based life insurance holding company and parent of
United Security Life Insurance Company ("United") with $7.5
million in assets, $3.4 million of stockholders' equity, revenues
of $3.2 million and $67 million of life insurance in force.
Approximately 700,000 Class A shares were issued in connection
with the transaction, which was accounted for as a purchase. The
transaction closed on June 19, 1997.
On August 13, 1997, Citizens signed a definitive agreement to
acquire 100% of the outstanding shares of National Security Life
and Accident Insurance Company ("NSL") of Arlington, Texas for
$1.7 million in cash and restricted stock. The transaction closed
in November, 1997.
On September 15, 1998 Citizens and First Investors Group, Inc.
("Investors") of Springfield, Illinois reached an agreement
wherein Citizens will acquire 100% of the outstanding shares of
Investors for shares of Citizens Class A Common stock. Investors
is the parent of Excalibur Insurance Corporation, also of
Springfield, Illinois ("Excalibur"), and has consolidated assets
of approximately $3.2 million, annual revenues of $201,000 and
capital of $3.1 million as of June 1998. These balances are
unaudited.
Pursuant to the terms of the Agreement, which is subject to
approval by Investors' shareholders, Citizens will issue one
share of Citizens Class A Common stock for each 6.6836 shares of
Investors common and preferred stock issued and outstanding.
Citizens expects to issue approximately 610,000 shares of its
Class A Common stock to consummate the transaction. The Illinois
Department of Insurance approved the transaction on October 13,
1998. Shareholder approval is expected during the fourth quarter
of 1998.
Nine-months ended September 30, 1998 and 1997
A net loss of $8,327,070, or $0.39 per share was incurred for the
nine-months ended September 30, 1998 compared to earnings of
$1,760,991, or $.09 per share for the same period in 1997. The
significant decline in earnings related to the write-off of $9.5
million of excess of cost over net assets acquired ("goodwill")
during the third quarter of 1998. The write-off was related to
the goodwill recorded in the 1995 acquisition of American Liberty
Financial Corporation and was caused by a decline in production
from agents formerly associated with American Liberty.
Subsequent to the acquisition, management was forced to implement
a 50% reduction in the amount of commission paid to these agents.
The commission reductions were necessary to preserve the
profitability of the accident and health business written by
these agents which was negatively impacted by changes in state
laws that established minimum claims ratios that severely limited
profit margins, as well as a mandated change in interest rates
used to compute reserves on this business. In addition, as a
result of the merger of American Liberty into CICA during 1997,
it was necessary to receive policy approval by CICA in each of
the states in which the policies were sold resulting in limited
production during the primary marketing period. During 1997, the
Company experienced what was believed to be a temporary decline
in production as a result of the reduced commission structure and
the pending policy approvals.
Management has continued to monitor production associated with
these products, for which the primary marketing efforts occur
during the months of June through September, due to the nature of
the policies sold. As a result of obtaining the necessary policy
approvals and increased sales efforts during 1998, management was
successful in reviving production from some of the largest
producers of American Liberty. However, management's estimate of
future production has been reevaluated based upon the sales
activity of the products sold during the three month period ended
September, 1998, the size of the active agency force, and the
anticipated future production to the achieved in subsequent
years.
In order to ascertain the recoverability of the goodwill balance
the Company has continued to perform an analysis of the gross
cash flows based upon estimated production, net of policy
acquisition costs, policyholder benefits and other general
expenses. As a result of this analysis, it was determined that
the production of future business did not support goodwill of
approximately $9.5 million which was charged to earnings for the
period ended September 30, 1998.
Revenues increased to $53,671,858 compared to the first nine-
months of 1997 when revenues were $48,231,362. The increase in
revenues was driven by an 8.2% increase in premiums and a 14.3%
increase in investment income.
Premium income for the first nine-months of 1998 was $43,382,121
compared to $40,013,752 for the same period in 1997. Production
of new premiums by Citizens Insurance Company of America ("CICA")
during the first nine months of 1998 slightly trailed the
previous year. During the past several years, management had not
promoted new sales and recruiting so as to emphasize the growth
of capital through the profitability of CICA on a statutory
accounting basis. Additionally, in January, 1998 an entire new
line of products was introduced to the Company's marketing
consultants. These products, called the Millennia 2000 series,
include a portfolio of ten new products to replace the Ultra
Expansion series that has been sold since mid 1987. The new
products continue to offer participating ordinary whole life
insurance with new features such as terminal illness benefits,
and an increased focus on providing retirement income. The
Millennia products also retain the assignment of benefit
provisions that have proven popular with the Company's clients
over the past several years. These new programs will, in the
opinion of management, have considerable impact on new production
once they are assimilated by the marketing force. Premium income
was negatively impacted during 1997 due to the merger of American
Liberty Life Insurance Company, acquired in 1995, into CICA and
the conversion of the administrative functions previously
performed by American Liberty in Baton Rouge, Louisiana which
were transferred to Austin, Texas in late 1996. American Liberty
was merged into CICA in June, 1997. The field force of United,
acquired in mid-1997, was expected to produce approximately $2
million of new premium for the entire year 1998. Due to the
acquisition date, only three months of premiums were included in
1997's activity. The majority of premium written through United
is individual "specialty" accident and health business.
Additionally, no revenues of NSL are included in 1997's results
due to the date of acquisition. NSL is currently producing
credit life and credit accident and health insurance, as well as
administering a block of major medical and specialty accident and
health policies.
Net investment income increased 14.3% in the first nine-months of
1998 compared to 14.9% during the same period in 1997. Net
investment income for the nine-months ended September 30, 1998
was $8,652,445 compared to $7,567,693 in 1997. This increase
reflects the earnings on the growth in the Company's asset base
that is occurring.
Claims and surrenders expense was $24,364,150 at September 30,
1998 to $20,772,899 for the same period in 1997. Death claims
were $3,905,119 in 1998 and $3,331,080 in 1997. The increase is
attributable to the inclusion of NSL in 1998's results. Death
claims on NSL policies were $302,754 for the first nine months of
1998. Surrender expense decreased to $10,748,161 at September 30
1998 from $10,784,581 for the same period in 1997. Management
constantly monitors this activity to insure that the Company's
persistency is holding at levels equal to or above assumptions.
Coupons and endowments decreased slightly to $3,719,023 in 1998
from $3,870,832 in 1997. The endowment benefits are factored
into the premium much like dividends and therefore, the increase
does not pose a threat to future profitability. Accident and
Health benefits were $5,252,303 in 1998, compared to $1,936,896
in 1997. This increase is directly related to the NSL and United
blocks of business which consist of a large block of scheduled
benefit daily indemnity policies. Management is monitoring the
claims activity on these respective blocks of business and plans
to implement rate increases where such increases are justified
and permitted to offset this increase in claims. 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 $739,544 in 1998,
compared to $849,510 in 1997.
Commission expense increased to $9,161,577 compared to
$8,767,090. The level reflects the additional commissions
associated with NSL and United. Additionally, the agreement with
Worldwide Professional Associates, Inc. ("WPA") described below
contributed to the increase. Deferred policy acquisition costs
capitalized in 1998 were $5,641,993 compared to $7,467,372 in the
prior year. The decline is related to the lower level of new
sales by CICA during the year and the fact that the majority of
sales by United and NSL are accident and health products with
lower commissions and thus lower capitalized expenses.
Amortization of these costs was $5,539,667 through the third
quarter of 1998 compared to $6,848,395 for 1997.
Underwriting, acquisition and insurance expenses increased to
$8,351,083 from $6,283,652 in 1997. A one-time charge of
approximately $400,000 was incurred during the first quarter of
1997 as the result of the acquisition of a 5.52% interest in
First American Investment Corporation, a 94.48% subsidiary of
American Liberty. Management believes such acquisition, which
entailed the issuance of 133,212 shares of the Company's Class A
shares previously held in treasury, will prove to be of
significant benefit to the Company in the long term. The removal
of First American allowed the merger of American Liberty and CICA
to proceed as well as remedying an unhappy block of minority
holders of First American who were left without a market for
their First American shares as the result of an intrastate
offering that was only marginally successful. Management expects
to achieve significant reductions in expenses due to the
execution of an agreement with WPA, an international marketing
company, in mid-1997 to manage the Company's international sales
activities in exchange for an overriding commission on new sales.
As a result of this agreement, the Company will eliminate
approximately $900,000 of fixed overhead on an annual basis, in
exchange for the variable cost of the commission override. The
increases in 1998 are related to the operations of United and
NSL. United's operations were combined with CICA's in late
April, 1998 and those of NSL in October, 1998. Management
believes it will be late in the fourth quarter of 1998 to early
1999 before expected expense reductions associated with the
combination of the administrative functions will be achieved.
Amortization of excess of cost over net assets acquired and cost
of insurance acquired was $11,518,000 through September 30, 1998
compared to $1,367,358 for the same period in 1997. The reason
for the increase has been discussed above. The charge was
incurred in the third quarter of 1998 when the actual sales
activity of the former American Liberty agents could be
reasonably estimated. Management does not anticipate future
write-offs of such goodwill; however, recoverability is being
monitored on a quarterly basis. There remains approximately $3.5
million of goodwill relating to the American Liberty acquisition
on the Company's books.
Three-months ended September 30, 1998 and 1997
A net loss of $8,639,510 or $0.40 per share was incurred for the
three-months ended September 30, 1998 compared to a gain of
$1,361,616 or $0.07 per share for the same period in 1997. Total
revenues for the quarter were $19,049,196, compared to
$18,172,671 for the same period in 1997. The write off of
goodwill during the quarter was the primary reason for the
decline in earnings.
Premium income for the quarter was $15,411,935, compared to
$15,423,872 in 1997. Production from United and NSL offset
declines in the writing of new business by CICA.
Investment income increased to $2,949,012 from $2,672,981. The
increase relates to the growing asset base of the Company.
Policy benefits increased from $11,151,775 in 1997 to $12,331,093
in the current year. Increases in accident and health benefits
were the primary reason for the increase. The results of NSL are
included in 1998's results but are not in 1997 due to the date of
the acquisition..
Commissions decreased to $3,204,024 from $3,317,928. The decline
in new business from CICA was the primary cause.
Expenses increased in the quarter to $2,470,486 compared to
$2,265,672 for the same period in 1997. The inclusion of the
expenses of NSL for the quarter was the primary reason for the
increase.
The amortization of goodwill and cost of insurance was
$10,121,878 in 1998 compared to $485,453 in 1997. The reason for
the write-off is discussed in detail above.
Liquidity and Capital Resources
Stockholders' equity declined to $74,582,837 at September 30,
1998 from $79,581,698 at December 31, 1997. The loss from
operations offset by an increase in the fair value of the
Company's bond portfolio contributed to the decrease in
stockholders' equity.
Invested assets grew to $179,099,245 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 $5,609,564, consist 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 1.0% of
invested assets at September 30, 1998, has historically been
composed of small residential loans in Texas. At December 31,
1997 and September 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 September 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 funded
during 1998 relating to sales of real estate owned by the
Company.
Policy loans comprise 11.5% of invested assets at September 30,
1998 (12.6% at 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 September 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 September 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..
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. This property was sold in July, 1998 for $850,000,
with the Company recording 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 September 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.
CICA had outstanding at September 30, 1998 and December 31, 1997,
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 and 1996, CICA, United, NSL
and CILIC were above required minimum levels.
Litigation
On September 22, 1997, Citizens 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
believed that these rulings are significantly in error and filed
a motion for appeal. On August 19, 1998, the Louisiana Second
Circuit Court of Appeals vacated the class action certification
by the trial court, and the case was remanded for further
proceedings consistent with the decision of the Court of Appeals.
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 alleged
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 alleged 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 Citizens' principal subsidiary, CICA, ALLIC was a separate
subsidiary of Citizens since its acquisition in September 1995.
In October, all claims were settled for $75,000.
Information Systems and the Year 2000
Company management has been actively involved in life and health
insurance software development since the 1960's. The Company
continues to develop and maintain its core information systems
with a professional staff of program designers, analysts and
programmers through its wholly-owned subsidiary Computing
Technology, Inc. While its Electronic Systems Department ("ESD")
staff has varied in size over the past eighteen years, it has
always operated with a high degree of efficiency. Eight is the
maximum number employed at any one time and currently there are
six full-time employees working in the department with a former
department manager working in the Company's corporate offices.
During the past fifteen years, the Company has undertaken
numerous major systems projects, including but not limited to,
development of interactive, simulated-real-time transaction
collection and user inquiry programs, conversion from
CSC/Continuum's Life/70 to in-house developed core processing
systems, transition from a Harris minicomputer to a Wang VS,
transition from an IBM plug-compatible mainframe to a Wang VS and
conversion of at least seven life and health insurance company
operations to its systems. During 1998, Company personnel have
successfully completed conversion of two insurance company
operations, namely United Security Life Insurance Company and
National Security Life and Accident Insurance Company, from non-
compliant UNIX and IBM systems to systems designed and operated
by Citizens. ESD management believes year 2000 issues will
continue to be addressed as a top priority until the Company can
certify its systems are Year 2000 compliant. The effort needed
to complete the task can be effected with existing staff within
the next 180 days, thus leaving ample time to assess and resolve
any significant remaining issues.
Although prior to this writing, the Company has not published a
formal plan for addressing year 2000 issues, Company personnel
have been actively planning, identifying and resolving year 2000
issues for more than a year. These activities are expected to
continue through the balance of 1998 with parallel testing and
final remediation actions concluding within the first 90 days of
1999.
In the late 1980's, the Company began developing software to
routinely audit its data bases and its source code. These
internal audit tools run daily and provide perpetual balancing of
the Company's policy and agency master files to its general
ledger. The source code audit tool has been an instrumental key
to identifying system code that may need year 2000 remediation.
By using this automated "bloodhound" combined with visual review
of record and screen layouts/documentation, the Company's ESD
staff have identified the "worst case" scenario for a year 2000
impact.
The year 2000 issues that will impact the Company are expected to
be minimal due to the basic design criteria utilized throughout
the development of these systems. The Company has used a
month/year code historically to store, sort, manipulate and
process dates. For this reason, the Company's business
continuance will be minimally impacted by its failure to complete
its remediation plan. The Company expects that failure to
implement year 2000 plans will be disruptive to its normal
operations, but no more so than any other software deficiency
that may exist. With the amount of remediation that has already
taken place and the amount we anticipate will occur within the
next 90 days, Company management is quite confident that adverse
year 2000 issues will be non-existent.
The overall expenditure for addressing year 2000 issues is not
known. However, the fact that all planning, remediation and
testing have been, and will continue to be, performed with
existing staff during normal business hours (8:00 a.m. - 5:00
p.m., Monday - Friday), the financial impact upon the Company is
negligible.
The Company utilizes a Wang VS 7160 for providing core processing
and on-line support in conjunction with a local-area-network
(LAN) based upon CISCO 5500 and 2900 intelligent switching
components. The Company's Mitel telephone system was replaced
during 1998 with a Mitel 2000 Light, nodal, fiber-optic system
which is year 2000 compliant.
Wang has certified the 7.53.00 operating system to be year 2000
compliant and the Company successfully completed installation and
testing of this system in July, 1998. The Company uses
Microsoft's WFW 3.11 and NT Server 3.51 (SP5), for its LAN, both
of which are certified by Microsoft to be year 2000 compliant.
The Company uses Word 6.0, EXCEL 5.0, and Notes 3.3 as
applications on the LAN which are certified to be compliant
except for the Notes product which is not compliant, but is
reported to have no loss of data or functionality. However, only
the Wang system is mission-critical with the in-house developed
code for Host Daily Cycle systems being considered a part
thereof.
As for electronic data exchanges, the Company interacts with
Chase Bank, Rudd and Wisdom, Dataplex, PCS Health Systems and
certain reinsurance companies. The Chase Bank relationship is
the only third-party interface that could be considered mission-
critical and it can be circumvented (in less than one man-hour)
by using paper drafts instead of electronic transactions should
the Company find such to be desirable. Other vendor interfaces
can be circumvented with hard-copy reporting should an electronic
interface become untenable for some reason.
Financial Accounting Standards
In February 1997, the Financial Accounting Standards Board
("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
See Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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
None.
Item 6. Exhibits and Reports on Form 8-K
Current Report dated August 19, 1998 regarding successful
appeal of Class Action Certification of pending
litigation.
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: November 14, 1998
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