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, 1999
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, 1999, Registrant had 21,374,357 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 CONSOLIDATED SUBSIDIARIES
INDEX
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial
Position, September 30, 1999
(Unaudited) and December 31, 1998 3
Consolidated Statements of Operations,
Three-Months Ended September 30,
1999 and 1998 (Unaudited) 5
Consolidated Statements of Operations,
Nine-Months Ended September 30, 1999
and 1998 (Unaudited) 6
Consolidated Statements of Cash Flows,
Nine-Months Ended September 30, 1999
and 1998 (Unaudited) 7
Notes to Consolidated Financial
Statements 9
Item 2. Management's Discussion and Analysis
of Financial Conditions and Results
of Operations 12
Part Other Information
II.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
September 30, 1999 and December 31, 1998
(Unaudited)
September December
30,1999 31,1998
Assets
Investments:
Fixed maturities held for investment,
at amortized cost (fair value
$5,426,500 in 1999 and $6,169,000 in
1998) $5,597,802 $5,606,374
Fixed maturities available for sale,
at fair value (amortized cost
$147,520,893 in 1999 and 144,491,429 146,645,842
$141,202,761 in 1998)
Equity securities, at fair value (cost
$716,294 in 1999 and $815,271 in 730,344 862,287
1998)
Mortgage loans on real estate (net of
reserve of $50,000 in 1999 and 1998) 1,398,950 1,560,757
Policy loans 22,004,589 20,996,919
Guaranteed student loans 10,960 4,673
Other long-term investments 694,823 595,271
Total investments 174,928,897 176,272,123
Cash and cash equivalents 11,269,820 10,168,728
Prepaid reinsurance 475,757 -
Reinsurance recoverable 1,868,468 1,755,561
Other receivables 238,572 433,320
Accrued investment income 1,215,943 1,806,065
Deferred policy acquisition costs 35,304,339 37,259,386
Cost of insurance acquired 7,459,959 8,290,853
Excess of cost over net assets
acquired 8,185,691
8,375,799
Other intangible assets 2,059,325 2,289,725
Property, plant and equipment 5,157,110 5,155,088
Federal income tax recoverable 57,349 -
Deferred federal income tax 3,606,974 699,848
Other assets 900,263
877,699
Total assets 252,728,467 253,384,195
See accompanying Notes to Consolidated Financial Statements
(Continued)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED
September 30, 1999 and December 31, 1998
(Unaudited)
September December
30,1999 31,1998
Liabilities and Stockholders' Equity
Liabilities:
Future policy benefit reserves 163,678,545 160,176,329
Dividend accumulations 4,855,773 4,818,915
Premium deposits 2,660,305 2,013,274
Policy claims payable 3,405,615 4,801,548
Other policyholders' funds 2,176,864 1,632,662
Total policy liabilities 176,777,102 173,442,728
Other liabilities 1,357,604 2,067,392
Commissions payable 624,327 833,881
Notes payable - 333,333
Federal income tax payable - 1,534,269
Amounts held on deposit 195,144 268,913
Total liabilities 178,954,177 178,480,516
Stockholders' Equity:
Common stock:
Class A, no par value, 50,000,000
shares authorized, 23,318,179 shares
issued in 1999 and 22,708,910 in
1998, including shares in treasury
of 1,943,822 in 1999 and 1998
56,217,781 52,790,643
Class B, no par value, 1,000,000
shares authorized, 621,049 shares
issued and outstanding in 1999 and
1998 283,262 283,262
Accumulated other comprehensive
income:
Unrealized investment gains (1,990,173) 3,623,464
(losses), net of tax
Retained earnings 21,192,574 20,135,464
75,703,444 76,832,833
Treasury stock, at cost (1,929,154) (1,929,154)
Total stockholders' equity 73,774,290 74,903,679
Total liabilities and stockholders'
equity 252,728,467 253,384,195
See accompanying Notes to Consolidated Financial Statements
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Months Ended September 30, 1999 and 1998
(Unaudited)
Three-months ended
September 30,
1999 1998
Revenues:
Premiums $4,941,875 $15,411,935
Annuity and universal life
considerations 71,136 62,035
Net investment income 2,771,693 2,874,351
Other income 148,663 192,964
Realized gains on investments 13,818 513,594
Interest expense (369) (5,683)
17,946,816 19,049,196
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future policy benefit 528,123 1,944,907
reserves
Policyholders' dividends 825,872 780,337
Claims and surrenders 8,491,343 9,401,832
Annuity expenses 133,841 204,017
9,979,179 12,331,093
Commissions 3,213,661 3,204,024
Underwriting, acquisition and 2,699,213 2,470,486
insurance expenses
Capitalization of deferred policy (1,287,119) (2,227,671)
acquisition costs
Amortization of deferred policy 1,727,805 1,588,026
acquisition costs
Amortization of cost of insurance
acquired and excess of cost over net
assets acquired 484,171 10,121,878
16,816,910 27,487,836
Income (loss) before federal income $1,129, $(8,438,
tax 906 640)
Federal income tax:
Federal income tax expense 239,427 200,870
Net income (loss) $890,479 (8,639,510)
Per Share Amounts:
Basic and diluted earnings (loss) per
share of common stock $0.04 $(0.40)
Weighted average shares outstanding 21,995,406 21,386,137
See accompanying Notes to Consolidated Financial Statements
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine-Months Ended September 30, 1999 and 1998
(Unaudited)
Nine-months ended
September 30,
1999 1998
Revenues:
Premiums $43,334,017 $43,382,121
Annuity and universal life 199,031 192,737
considerations
Net investment income 8,688,924 8,378,415
Other income 500,094 582,961
Realized gains on investments 292,154 1,168,330
Interest expense (20,167) (32,706)
52,994,053 53,671,858
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future policy benefit 3,627,933 5,779,960
reserves
Policyholders' dividends 2,064,233 2,221,872
Claims and surrenders 25,064,170 24,364,150
Annuity expenses 444,202 394,304
31,200,538 32,760,286
Commissions 8,908,294 9,161,577
Underwriting, acquisition and 8,085,531 8,351,083
insurance expenses
Capitalization of deferred policy (4,680,784) (5,641,993)
acquisition costs
Amortization of deferred policy 6,635,831 5,539,667
acquisition costs
Amortization of cost of insurance
acquired and excess of cost over net
assets acquired 1,605,106 11,518,000
51,754,516 61,688,620
Income (loss) before federal income (8,016,
tax 1,239,537 762)
Federal income tax:
Federal income tax expense 182,427 310,308
Net income (loss) $1,057,110 (8,327,070)
Per Share Amounts:
Basic and diluted earnings (loss)
per share of common stock $0.05 $(0.39)
Weighted average shares outstanding 21,939,612 21,386,137
See accompanying Notes to Consolidated Financial Statements
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine-Months Ended September 30, 1999 and 1998
(Unaudited)
Nine-months ended
September 30,
1999 1998
Cash flows from operating
activities:
Net income (loss) $1,057,110 (8,327,070)
Adjustments to reconcile net gain to
net cash provided by operating
activities:
Accrued investment income 624,447 724,934
Realized gains on sale of investments
and other assets
(292,154) (1,168,330)
Deferred policy acquisition costs
1,955,047 (102,326)
Amortization of cost of insurance
acquired, excess cost over net
assets acquired, and other
intangibles
1,605,106 11,860,711
Depreciation 386,698 365,292
Prepaid reinsurance (475,757) (474,955)
Reinsurance recoverable (112,550) (332,248)
Other receivables 433,762 547,270
Deferred Federal income tax (15,253) 515,308
Future policy benefit reserves
3,434,502 5,779,960
Other policy liabilities (168,869) 2,239,308
Commissions payable and other
liabilities (943,059) (806,224)
Amounts paid out as trustee
(73,769) (110,083)
Federal income tax recoverable/payable
(1,591,618) (967,992)
Other, net (127,836) 722,363
Net cash provided by operating
activities 5,695,807 10,465,918
Cash flows from investing
activities:
Maturity of fixed maturities available- 7,384,153 8,473,257
for-sale
Sale of fixed maturities available-for- 354,072 9,148,665
sale
Purchase of fixed maturities available- (12,263,798) (24,902,624)
for-sale
Sale of equity securities 92,500 154,548
Net change in mortgage loans 161,807 (409,859)
Net change in guaranteed student loans
(6,287) 85,566
Sale of other long-term investments
and property plant equipment
6,834 933,225
See accompanying Notes to Consolidated Financial Statements
(Continued)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine-Months Ended September 30, 1999 and 1998
(Unaudited)
Nine-months ended
September 30,
1999 1998
Cash from acquisition $1,512,255 $ -
Purchase of other long-term
investments and property plant and
equipment (495,248) (489,137)
Increase in policy loans (net) (1,007,670) (194,143)
Net cash (used) by
investing activities (4,261,382) (7,200,502)
Cash flows from financing
activities:
Repayment of note payable (333,333) (604,097)
Net cash (used) by financing
activities (333,333) (604,097)
Net increase in cash and cash
equivalents 1,101,092 2,661,319
Cash and cash equivalents at beginning
of period 10,168,728 6,754,956
Cash and cash equivalents at end of
period 11,269,820 9,416,275
Supplemental Disclosure of Non-Cash Investing and Financing
Activities:
In 1999, the Company issued 609,269 Class A stock to purchase all
of the capital stock of First Investors Group, Inc. (First
Investors). In conjunction with the acquisition, liabilities
were assumed as follows:
Fair value of tangible 3,170,802
assets acquired
Fair value of intangible 353,703
assets acquired
Net assets acquired 3,524,505
Capital stock issued (3,427,138)
Liabilities assumed 97,367
See accompanying Notes to Consolidated Financial Statements
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
(1) Financial Statements
The statement of financial position as of September 30, 1999,
the statements of operations for the three and nine-month
periods ended September 30, 1999 and 1998, and the statements
of cash flows for the nine-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 as of and for the period ended September 30, 1999 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 ("GAAP") 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, 1998 annual 10-K report
filed with the Securities and Exchange Commission. The
results of operations for the period ended September 30, 1999
are not necessarily indicative of the operating results for
the full year.
(2) 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 whereby Citizens would acquire 100% of the
outstanding shares of Investors for shares of Citizens Class
A Common stock. Investors is the parent of Excalibur
Insurance Corporation (Excalibur), also of Springfield,
Illinois.
Pursuant to the terms of the Agreement, which was approved by
Investors' shareholders and regulatory authorities, Citizens
issued one share of Citizens Class A Common stock for each
6.6836 shares of Investors common and preferred stock issued
and outstanding. The transaction closed on January 26, 1999.
Citizens issued 609,269 shares of its Class A Common stock to
consummate the transaction, which was accounted for as a
purchase.
(3) Segment Information
The Company has two reportable segments identified by
geographic area: International Business and Domestic
Business. International Business consisting of ordinary
whole-life business is sold throughout Central and South
America. 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.
Domestic Business consisting of traditional life and burial
insurance, pre-need policies, accident and health specified
disease, hospital indemnity and accidental death policies is
sold throughout the Southern U.S.
The accounting policies of the segments are in accordance
with GAAP and are the same as those used in preparing
unaudited financial statements. The Company evaluates
performance based on GAAP net income (loss) before federal
income taxes for its two reportable segments.
Geographic Areas - The following summary represents financial
data of the Company's continuing operations based on their
location for the nine-months ended September 30, 1999 and
1998.
1999 1998
Revenues
U.S. Domestic $15,382,743
$15,118,124
International 37,611,310 38,553,734
Total Revenues $52,994,053 $53,671,858
The following summary represents revenues and pretax income
from continuing operations and identifiable assets for the
Company's reportable segments as of and for the nine-month
periods September 30, 1999 and 1998, is as follows:
Nine-months ended September
30 1999 1998
Revenue, excluding net
investment income and
realized gain (loss) on
investments:
Domestic 12,775,779 12,351,838
International 31,237,196 31,499,245
Total consolidated
revenue
$ 44,012, $43,851,083
975
Net investment income:
Domestic 2,522,160 2,360,006
International 6,166,764 6,018,409
Total consolidated net
investment income
8,688,924 8,378,415
Amortization expense:
Domestic 2,392,122 4,804,751
International 5,848,815 12,252,916
Total consolidated
amortization expense
8,240,937 17,057,667
Realized gain (loss) on
investments:
Domestic 84,804 329,092
International 207,350 839,238
Total consolidated
realized gain (loss) on
investments
292,154 1,168,330
Income (loss) before
federal income tax:
Domestic 359,804 (2,258,137)
International 879,733 (5,758,625)
Total consolidated income
(loss) before federal
income taxes
1,239,537 (8,016,762)
Assets:
Domestic 79,862,196 80,069,406
International 172,866,271 173,314,789
Total 252,728,467 253,384,195
(4) Accumulated Other Comprehensive Income (Loss)
For the three and nine-months ended September 30, 1999, the
other comprehensive loss amounts included in total
comprehensive loss consisted of unrealized losses on
investments in debt and equity securities of $(1,182,633) and
$(5,613,637), net of tax, and for the same periods in 1998,
gains of $3,926,081 and $3,328,209, respectively. Total
comprehensive loss for the three and nine-months ended
September 30, 1999, was $(292,154) and $(4,556,526), and for
1998, $(4,713,429) and $(4,998,861), 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.
Nine-months ended September 30, 1999 and 1998
Net income of $1,057,110, or $0.05 per share was earned for the
nine-months ended September 30, 1999 compared to a net loss of
$8,327,070, or $0.39 per share for the same period in 1998. The
significant increase in earnings was primarily related to the
write-off of $9.5 million of excess of cost over net assets
acquired ("goodwill") during the third quarter of 1998.
Additionally, increased investment income, coupled with a smaller
increase in policy reserves and the achievement of expense
reductions, contributed to the 1999 earnings.
The 1998 write-off was related to goodwill recorded in the 1995
acquisition of American Liberty Financial Corporation ("American
Liberty") and was caused by a decline in production from agents
formerly associated with American Liberty during 1998.
Subsequent to the acquisition, management implemented 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 order to ascertain the recoverability of the goodwill balance,
the Company performed an analysis of the relevant 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 $9.5 million which was
charged to earnings for the period ended September 30, 1998.
Management's estimate of future production has been reevaluated
based upon the sales activity, the size of the active agency
force, and the anticipated future production to be achieved in
subsequent years. Management has continued to monitor production
associated with these products. During 1998, management was
successful in reviving production from some of the largest
producers of American Liberty. During 1999, the assumed
production levels have been met.
Revenues decreased to $52,994,053 in 1999 compared to the first
nine-months of 1998 when revenues were $53,671,858. The decrease
in revenues was related to a 75.0% decrease in realized gains on
investments which were $292,154 for the nine months ended
September 30, 1999 compared to $1,168,330 for the same period in
1998.
Premium income for the first nine-months of 1999 was $43,334,017
compared to $43,382,121 for the same period in 1998. There was a
significant increase in group dental business sold by the agents
of United Security Life Insurance Company ("USLIC") from July
1998 through March 1999. This new business did not fully offset
a decrease in the Company's core book of ordinary life business
resulting from the continued turmoil in Latin America caused by
economic downturns in several countries, as well as increased
competition from several U.S. companies entering the market.
Management introduced a new line of ordinary life products in
late 1998 and had anticipated growth in new international sales;
however, due to the above-described conditions, such expected
growth has not materialized as rapidly as expected. During the
first nine months of 1999, management has intensified its
recruiting and training efforts in Latin America, as well as
other parts of the world and management believes such efforts
will prove successful in the long-term in restoring sales to
historical levels. Additionally, management has been developing
a domestic ordinary life sales program during 1999 and began to
file such with regulatory authorities for approval during the
third quarter. This program, targeting rural areas of the United
States, is expected to be a major market for the Company in
future years. Management expects to begin sales and recruiting
efforts in the State of Texas with this new product in early
2000.
Net investment income increased 3.7% in the first nine-months of
1999 to $8,688,924 compared to $8,378,415 in 1998. This increase
reflects a higher yield on invested assets as interest rates have
risen. Management has maintained a greater level of liquidity
over the past two quarters of 1999 so as to be in a position to
take advantage of increases in yield available in the bond
market.
Claims and surrenders increased from $24,364,150 for the nine
months ended September 30, 1998 to $25,064,170 for the same
period in 1999, an increase of 2.9%. Death claims decreased from
$3,905,119 in 1998 to $3,851,125 in 1999. Surrender expense
increased to $10,465,936 in 1999 from $10,288,525 in 1998.
Coupons and endowments decreased slightly to $3,603,523 in 1999
from $3,719,023 in 1998. Accident and Health benefits increased
18.2% in the first nine months of 1999 compared to the same
period in 1998. Such benefits for the nine months ended
September 30, 1999 were $6,206,073 compared to $5,252,303 in
1998. This increase is directly related to the USLIC and
National Security Life and Accident Insurance Company ("NSLIC")
blocks of business which consist of large amounts of scheduled
benefit daily indemnity policies, major medical coverages, and
group dental business. During the second half of 1998, the
Company began to experience a significant increase in the volume
of claims, which resulted in a processing backlog. The backlog
was created by the high early utilization by holders of the
dental certificates, and although processing delays resulted, all
such pending items were considered in the establishment of claim
reserves. During the fourth quarter of 1998, management
increased the number of individuals processing claims from
approximately 13 to 30 and the backlog has been significantly
reduced during the first nine months of 1999. As a result of the
substantial increase in the volume of claims plus an increase in
the accident and health loss ratio, management has moved to
cancel a large portion of these existing blocks of group dental
and major medical business in order to curtail both claims and
operation expenses. Most of the terminations will be effective
prior to January 1, 2000. This action will result in the loss of
approximately $5 million of annual premium income; however, due
to the claims experience as well as the overhead necessary to
administer such, management believes this action will enhance
near and long-term profitability.
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 $937,513 in
1999, compared to $1,199,180 in 1998.
The increase in future policy benefit reserves decreased from
$5,779,960 in 1998 to $3,627,933 in 1999. This 37.2% decrease is
related to the termination of the USLIC and NSLIC blocks of group
accident and health insurance and the corresponding decrease in
exposure as policyholders' coverage is cancelled.
Commission expense for the first nine months of 1999 was
$8,908,294 compared to $9,161,577 for the same period in 1998.
The decrease reflects the decline in the production of new
premiums by the agents of Citizens Insurance Company of America
("CICA") during 1999 as well as the above-described termination
of business. Although group accident and health business
produced by USLIC increased through March, this business carries
a relatively low commission.
Deferred policy acquisition costs capitalized in 1998 were
$5,641,993 compared to $4,680,784 in the current year.
Amortization of these costs was $6,635,831 through the third
quarter of 1999 compared to $5,539,667 for 1998. The increased
amortization results from increases in the surrender activity.
Underwriting, acquisition and insurance expenses decreased from
$8,351,083 through the first nine months of 1998 to $8,085,531 in
1999, a reduction of 3.2%. This decrease can be attributed to
the economies of scale being achieved after the consolidation of
the administration of the business of USLIC and NSLIC, although
such decrease was partially offset by the additional staff used
to administer the claims volume. Management believes that
significant expense reduction will be achieved beginning in the
second quarter of 2000 as the dental and major medical blocks
significantly decrease, permitting staff reductions.
Amortization of excess of cost of insurance acquired and excess
of cost over net assets acquired was $1,605,106 through September
30, 1999 compared to $11,518,000 for the same period in 1998.
The reason for the decrease was the charge incurred in the third
quarter of 1998. Management does not anticipate future write-
offs of such goodwill; however, recoverability is being monitored
on a quarterly basis. As was mentioned above, the Company has
met the 1999 production levels necessary to preserve the
recoverability. There remains approximately $3.0 million of
goodwill relating to the American Liberty acquisition on the
Company's books.
Three-months ended September 30, 1999 and 1998
Net income of $890,479 or $0.04 per share was earned for the
three-months ended September 30, 1999 compared to a net loss of
$8,639,510 or $0.40 per share for the same period in 1998. The
write-off of $9.5 million of goodwill during third quarter 1998
was the primary reason for the loss in the previous year.
Decreases in claims and policy reserves were the factors
contributing to the improved profits in 1999.
Revenues decreased by $1,102,380 to $17,946,816 compared to 1998
when revenues were $19,049,196. The decrease in revenues was
primarily related to a $470,060 decrease in premium income, a
$102,658 decrease in net investment income, and a $499,776
decrease in realized gains on investments.
Premium income for the third quarter of 1999 was $14,941,875,
compared to $15,411,935 in 1998. Production from USLIC and NSLIC
began to decline with management's announcement of cancellation
of the domestic group dental and individual major medical
business and offset the writing of new international business by
CICA, which began to increase in the quarter.
Investment income decreased to $2,771,693 in 1999 from $2,874,351
in 1998. The decrease relates to a slight decline in the
investment asset base of the Company as maturing funds were not
completely reinvested and were liquidated to pay some USLIC and
NSLIC group accident and health insurance claims.
Death benefits decreased from $1,617,246 in 1998 to $1,362,783 in
1999. Surrenders decreased 2.5% in the third quarter of 1999
compared to the same period in 1998. Surrender expense for the
three months ended September 30, 1999 was $3,533,945 compared to
$3,626,059 in 1998. Coupons and endowments decreased to
$1,270,006 in 1999 from $1,360,767 in 1998. The endowment
benefits, a significant component of the Company's international
life insurance products, are factored into the premium much like
dividends and therefore, the amount does not pose a threat to
future profitability.
Accident and Health benefits were $1,871,557 in 1999, compared to
$2,108,359 in 1998. These expenses can be attributed to the
USLIC and NSLIC blocks of business, which consist of large
amounts of individual major medical and group dental business.
In order to slow the growth of such benefits, management began
terminating all major medical and group accident and health
insurance during third quarter 1999.
The remaining components of claims and surrenders, consisting of
matured endowments, supplemental contracts and payments of
dividends and endowments previously earned and held at interest,
amounted to $453,052 in 1999, compared to $689,401 in 1998.
The increase in future policy benefit reserves decreased from
$1,944,907 in 1998 to $528,123 in 1999. This 72.9% decrease is
related to the termination of the USLIC and NSLIC blocks of group
accident and health insurance and the corresponding decrease in
exposure.
Commission expense increased slightly to $3,213,661 from
$3,204,024. The increase reflects a higher commission paid on
the growing NSLIC block of business of credit life and credit
accident and health insurance.
Underwriting, acquisition and insurance expenses increased
slightly to $2,699,213 in the third quarter of 1999 from
$2,470,486 in 1998. The increase is related to the staff
additions necessitated by the claims backlog discussed above.
Amortization of cost of insurance acquired and excess of cost
over net assets acquired decreased from $10,121,878 in 1998 to
$484,171 in 1999. The decrease is attributable to the write-off
of $9.5 million of goodwill during third quarter 1998.
Liquidity and Capital Resources
Stockholders' equity decreased to $73,744,290 at September 30,
1999 from $74,903,679 at December 31, 1998. The decrease was
attributable to unrealized gains declining by $5,613,637 during
the nine-months ended September 30, 1999 resulting in an
unrealized loss of $1,990,173, net of tax, at September 30, 1999.
Declines in the market value of the Company's bond portfolio
caused by higher market interest rates caused the change in
unrealized gains (losses), net of tax.
Invested assets decreased to $174,928,897 in 1999 from
$176,272,123 at December 31, 1998. The 1.4% decrease in fixed
maturities available-for-sale more than offset the 4.8% increase
in policy loans. At September 30, 1999 and December 31, 1998,
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 1999; however, because of
continued uncertainty regarding long-term interest rates,
management cannot rule out sales during 1999. Fixed maturities
held to maturity, amounting to $5,597,802 consist primarily of
U.S. Treasury securities. Management has the intent and believes
the Company has the ability to hold the securities to maturity.
In order to monitor the market risk associated with the Company's
investment policy, management measures the sensitivity of the
portfolio to instantaneous interest rate changes. At December
31, 1998, decreases in interest rates of 100, 200 and 300 basis
points, respectively, would result in increases in market values
of approximately $12,402,000, $19,666,000 and $23,588,000,
respectively. Conversely, increases in rates of 100, 200 and 300
basis points would generate losses of $1,041,000, $7,484,000 and
$13,738,000, respectively. Under either interest rate scenario,
the portfolio carries positive convexity. At September 30, 1999,
decreases of 100, 200 and 300 basis points, respectively, would
result in increases in market values of $3,928,000, $10,849,000
and $18,060,000, respectively. Increases in rates of 100, 200
and 300 basis points would generate losses of $9,811,000,
$16,226,000 and $22,219,000, respectively.
The Company's mortgage loan portfolio, which constitutes 0.8% of
invested assets at December 31, 1998 and September 30, 1999, has
historically been composed of small residential loans in Texas.
Management has established a reserve of $50,000 at September 30,
1999 and December 31, 1998 (approximately 3.5% of the mortgage
portfolio's balance) to cover potential losses in the Company's
mortgage portfolio.
Policy loans comprise 12.6% of invested assets at September 30,
1999. 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, Chase
Bank, Texas, were significantly in excess of Federal Deposit
Insurance Corporation ("FDIC") coverage at September 30, 1999 and
December 31, 1998. Management monitors the solvency of all
financial institutions in which it has funds to minimize the
exposure for loss. At September 30, 1999, management does not
believe the Company is at significant risk for such a loss.
During 1999, 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 purchased an 80,000 square foot
office building in Austin, Texas to serve as its primary office.
The Company relocated to the building in September 1993. The
Company occupies approximately 45,000 square feet of space in the
building, which is 100% leased. This building will, in the
opinion of management, provide adequate space for the Company's
operations for many years.
CICA owned 1,822,332 shares of Citizens Class A common stock at
September 30, 1999 and December 31, 1998. 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, 1999 and December 31, 1998, 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.
At September 30, 1999 and December 31, 1998, CICA had outstanding
a surplus debenture payable to Citizens for $266,667 and
$333,333, respectively. For statutory accounting purposes, this
debenture is a component of CICA's surplus, while for GAAP it is
eliminated in consolidation. Citizens has historically
recognized a liability for its related obligation to a bank in a
like amount; however, in April 1999, Citizens paid off the
corresponding note to Chase Bank.
On November 2, 1999, the Company's Board of Directors approved a
7% stock dividend payable on December 31, 1999. As a result of
the issuance of shares, the Company expects to transfer
approximately $10 million from retained earnings to capital
reflecting the market value of the shares issued.
The National Association of Insurance Commissioners
("NAIC")National 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 Practices, 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, 1998, CICA and Central Investors
Life Insurance Company of Illinois ("CILIC") were well above
required minimum levels. NSLIC and USLIC fell below the 200%
level as reported on their December 31, 1998 Annual Statement to
insurance regulatory authorities. Management immediately made
capital contributions to both companies to raise them above the
minimum levels. Further evaluation of the estimate of claims
reserves indicated provisions for pending claims for NSLIC were
overstated. Management amended the 1998 statutory financial
statements of NSLIC to increase surplus by approximately
$1,000,000, as a result of the overstatement, bringing the
Company well above the 200% level of RBC.
Information Systems and the Year 2000
Company personnel have been actively planning, identifying and
resolving year 2000 issues for more than a year. These
activities have continued throughout 1999 with parallel testing
and final remediation actions that concluded in August, 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
Electronic Systems Department ("ESD") staff have identified and
addressed the "worst case" scenario for a year 2000 impact.
The overall expenditure for addressing year 2000 issues is
minimal because all planning, remediation and testing have been,
and will continue to be, performed with existing staff during
normal business hours.
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.
The Company believes it has addressed its Year 2000 concerns, and
developed contingency and recovery plans aimed at insuring the
continuity of critical business functions before, on and after
December 31, 1999. The Year 2000 contingency plans will be
reviewed periodically throughout 1999 and revised as needed. The
Company believes its Year 2000 contingency plan, coupled with
existing "disaster recovery" and "business resumption" plans,
minimize the impact Year 2000 issues may have on the
organization.
Financial Accounting Standards
In December 1997, the American Association of Certified Public
Accountants ("AICPA") issued Statement of Position ("SOP") 97-3.
SOP 97-3 provides: 1) guidance for determining when an entity
should recognize a liability for guaranty fund and other
insurance-related assessments, 2) guidance on how to measure a
liability, 3) guidance on when an asset may be recognized for a
portion or all of the assessment liability or paid assessment
that can be recovered through premium tax offsets or policy
surcharges, and 4) requirements for disclosure of certain
information. This SOP is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company does
not anticipate implementation of SOP 97-3 to have a material
impact on the Company's consolidated financial statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal
Use." This SOP provides guidance for determining whether costs
of software developed or obtained for internal use should be
capitalized or expensed when incurred. In the past, the Company
has expensed such costs as they were incurred. This SOP is also
effective for fiscal years beginning after December 15, 1998.
The Company does not anticipate implementation of SOP 98-1 to
have a material impact on the Company's consolidated financial
statements.
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Statement No. 133 establishes
accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and
for hedging activities. The Company does not anticipate
implementation of Statement No. 133 to have a material impact on
the Company's consolidated financial statements.
In June 1999, the FASB issued Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." Statement No. 137
defers the effective date Statement No. 133 for one year.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In March 1999, the Company was served with a summons
regarding an action entitled Berdeaux Living Trust v.
First Investors Group, Inc., Donald L. Dennis, H. Marie
Dennis, Winona Drewes and Citizens, Inc. in U.S. District
Court, Southern District of Illinois. The complaint
alleged that the defendants defrauded the plaintiffs and
other persons who were preferred shareholders of First
Investors Group, Inc. in connection with an acquisition
of First Investors completed by the Company in early
1999. In the acquisition, the Company issued
approximately 610,000 shares of its Class A Common Stock
to shareholders of First Investors pursuant to a
registration statement declared effective by the
Securities and Exchange Commission in December 1998. The
plaintiffs sought class action certification on behalf of
approximately 1,860 persons who were preferred
shareholders of First Investors. Damages were alleged
based upon alleged violations of Section 10(b) of the
Securities Exchange Act of 1934 and the Illinois
securities laws as well as under Illinois common law
fraud and against the defendants other than the Company,
for breach of fiduciary duty. The Company prepared an
answer which vigorously denied the allegations, on
October 22, 1999, the District Court dismissed the
complaint without prejudice.
Item 2 Changes in Securities
On November 2, 1999, the Company's Board of Directors
declared a 7% stock dividend, payable on December 31,
1999 to holders of record as of December 1, 1999.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
The Company's Annual Meeting of Stockholders has been set
for June 6, 2000 at 10:00 A.M. The record date for the
meeting is April 20, 2000.
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
By: /s/ Jeffrey J. Wood
Jeffrey J. Wood, CPA
Executive Vice President,
Secretary/Treasurer and CFO
Date: November 9, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 5597802
<DEBT-MARKET-VALUE> 144491429
<EQUITIES> 730344
<MORTGAGE> 1398950
<REAL-ESTATE> 694823
<TOTAL-INVEST> 174928897
<CASH> 11269820
<RECOVER-REINSURE> 2344225
<DEFERRED-ACQUISITION> 35304339
<TOTAL-ASSETS> 252728467
<POLICY-LOSSES> 163678545
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 3405615
<POLICY-HOLDER-FUNDS> 9692942
<NOTES-PAYABLE> 0
0
0
<COMMON> 56501043
<OTHER-SE> (1990173)
<TOTAL-LIABILITY-AND-EQUITY> 252728467
43533048
<INVESTMENT-INCOME> 8688924
<INVESTMENT-GAINS> 292154
<OTHER-INCOME> 500094
<BENEFITS> 31200538
<UNDERWRITING-AMORTIZATION> 3560153
<UNDERWRITING-OTHER> 16993825
<INCOME-PRETAX> 1239537
<INCOME-TAX> 182427
<INCOME-CONTINUING> 1057110
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 107110
<EPS-BASIC> .05
<EPS-DILUTED> .05
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
