<PAGE> 1
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, 2000
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)
----------------------------------------------------
(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, 2000, the Registrant had 22,800,525 shares of Class
A common stock, No Par Value, outstanding and 664,523 shares of Class B common
stock, No Par Value, outstanding.
<PAGE> 2
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Financial Position, September 30,
2000 (Unaudited) and December 31, 1999 3
Consolidated Statements of Operations, Three Months
Ended September 30, 2000 and 1999 (Unaudited) 5
Consolidated Statements of Operations, Nine Months
Ended September 30, 2000 and 1999 (Unaudited) 6
Consolidated Statements of Cash Flows, Nine Months
Ended September 30, 2000 and 1999 (Unaudited) 7
Notes to Consolidated Financial Statements 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS 12
PART II. OTHER INFORMATION 20
</TABLE>
2
<PAGE> 3
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities held-for-investment, at
Amortized cost (fair value $5,619,500
in 2000 and $5,206,260 in 1999) $ 5,585,637 $ 5,594,745
Fixed maturities available-for-sale, at
fair value (amortized cost $161,598,859 in
2000 and $149,839,493 in 1999) 157,869,973 144,214,555
Equity securities, at fair value (cost
$716,293 in 2000 and 1999) 652,129 717,812
Mortgage loans on real estate (net of reserve
of $50,000 in 2000 and 1999) 1,221,141 1,374,204
Policy loans 20,620,244 21,556,344
Other long-term investments 947,501 880,901
------------ ------------
Total investments 186,896,625 174,338,561
Cash 3,767,724 11,149,084
Accrued investment income 1,435,713 1,761,071
Prepaid reinsurance 522,975 --
Reinsurance recoverable 2,582,980 2,183,729
Deferred policy acquisition costs 36,942,644 36,518,037
Other intangible assets 1,779,535 1,982,525
Federal income tax recoverable 664,728 --
Deferred Federal income tax 5,913,642 6,182,764
Cost of insurance acquired 6,602,615 7,186,494
Excess of cost over net assets acquired 7,527,229 8,021,044
Property, plant and equipment 5,633,391 5,071,735
Other assets 1,286,604 1,089,742
------------ ------------
Total assets $261,556,405 $255,484,786
============ ============
</TABLE>
See accompanying notes to consolidated financial statements. (Continued)
3
<PAGE> 4
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Future policy benefit reserves $ 172,029,134 $ 167,413,196
Dividend accumulations 4,715,118 4,854,835
Premium deposits 2,942,751 2,725,016
Policy claims payable 3,850,119 3,591,289
Other policyholders' funds 2,183,754 2,070,950
------------- -------------
Total policy liabilities 185,720,876 180,655,286
Other liabilities 1,208,484 901,636
Commissions payable 790,398 530,928
Federal income tax payable -- 1,129,967
------------- -------------
Total liabilities 187,719,758 183,217,817
STOCKHOLDERS' EQUITY:
Common stock:
Class A, no par value, 50,000,000 shares authorized, 24,880,731 shares
issued and outstanding in 2000 and 1999, including shares in
treasury of 2,080,206 in 2000 and 1999
67,510,026 67,510,026
Class B, no par value, 1,000,000 shares
Authorized, 664,523 shares issued and
Outstanding in 2000 and 1999 584,863 584,863
Retained earnings 11,118,435 10,756,800
Accumulated other comprehensive loss:
Unrealized investment loss, net of tax (2,503,413) (3,711,456)
------------- -------------
76,709,911 75,140,233
Treasury stock, at cost (2,873,264) (2,873,264)
------------- -------------
Total stockholders' equity 73,836,647 72,266,969
------------- -------------
Total liabilities and stockholders' equity $ 261,556,405 $ 255,484,786
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
REVENUES:
Premiums $ 13,677,698 $ 14,941,875
Annuity and universal life considerations 59,385 71,136
Net investment income 3,204,023 2,771,693
Realized gains (losses) (89,561) 13,818
Other income 158,539 148,663
Interest expense -- (369)
------------ ------------
Total revenues 17,010,084 17,946,816
BENEFITS AND EXPENSES:
Insurance benefits paid or provided:
Increase in future policy benefit reserves 2,145,261 528,123
Policyholders' dividends 836,021 825,872
Claims and surrenders 9,018,323 8,491,343
Annuity expenses 102,853 133,841
------------ ------------
Total insurance benefits paid or provided 12,102,458 9,979,179
Commissions 3,217,551 3,213,661
Other underwriting, acquisition and insurance expenses 2,443,061 2,699,213
Capitalization of deferred policy acquisition costs (2,472,444) (1,287,119)
Amortization of deferred policy acquisition costs 1,952,416 1,727,805
Amortization of cost of insurance acquired, excess of cost over
net assets acquired and other intangibles 388,922 484,171
------------ ------------
Total benefits and expenses 17,631,964 16,816,910
------------ ------------
Income (loss) before Federal income tax $ (621,880) $ 1,129,906
Federal income tax expense (benefit) (335,073) 239,427
------------ ------------
NET INCOME (LOSS) $ (286,807) $ 890,479
============ ============
PER SHARE AMOUNTS:
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE OF
COMMON STOCK $ (0.01) $ 0.04
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 23,465,048 23,445,041
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
REVENUES:
Premiums $ 39,188,573 $ 43,334,017
Annuity and universal life considerations 184,643 199,031
Net investment income 9,257,159 8,688,924
Realized gains (losses) (38,025) 292,154
Other income 464,424 500,094
Interest expense -- (20,167)
------------ ------------
Total revenues 49,056,774 52,994,053
BENEFITS AND EXPENSES:
Insurance benefits paid or provided:
Increase in future policy benefit reserves 4,615,938 3,627,933
Policyholders' dividends 2,129,379 2,064,233
Claims and surrenders 24,359,153 25,064,170
Annuity expenses 416,975 444,202
------------ ------------
Total insurance benefits paid or provided 31,521,445 31,200,538
Commissions 8,822,030 8,908,294
Other underwriting, acquisition and insurance expenses 7,729,985 8,085,531
Capitalization of deferred policy acquisition costs (6,774,815) (4,680,784)
Amortization of deferred policy acquisition costs 6,350,208 6,635,831
Amortization of cost of insurance acquired, excess of cost over
net assets acquired and other intangibles 1,280,684 1,605,106
------------ ------------
Total benefits and expenses 48,929,537 51,754,516
------------ ------------
Income before Federal income tax $ 127,237 $ 1,239,537
Federal income tax expense (benefit) (234,398) 182,427
------------ ------------
NET INCOME $ 361,635 $ 1,057,110
============ ============
PER SHARE AMOUNTS:
BASIC AND DILUTED EARNINGS PER SHARE OF
COMMON STOCK $ 0.02 $ 0.05
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 23,465,048 23,445,041
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 361,635 $ 1,057,110
Adjustments to reconcile net gain to net cash provided by
operating activities, net of assets acquired:
Realized (gains) losses on sale of investments and
other assets 38,025 (292,154)
Net deferred policy acquisition costs (424,607) 1,955,047
Amortization of cost of insurance
acquired, excess cost over
net assets acquired and other intangibles 1,280,684 1,605,106
Depreciation 369,699 386,698
Change in:
Accrued investment income 325,358 624,447
Reinsurance recoverable and prepaid reinsurance (922,226) (588,307)
Future policy benefit reserves 4,615,938 3,434,502
Other policy liabilities 449,652 (168,869)
Deferred federal income tax (353,203) (15,253)
Federal income tax (1,794,695) (1,591,618)
Commissions payable and other liabilities 566,318 (943,059)
Other, net (83,862) 232,157
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES
4,428,716 5,695,807
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of fixed maturities, available-for-sale 7,614,678 354,072
Maturity of fixed maturities, available-for-sale 10,493,445 7,384,153
Purchase of fixed maturities, available-for-sale (30,003,685) (12,263,798)
Sale of equity securities, available-for-sale -- 92,500
Principal payments on mortgage loans 153,063 161,807
Guaranteed student loans funded -- (6,287)
Sale of other long-term investments and property, plant and
equipment 16,930 6,834
Cash and cash equivalents provided by mergers and acquisitions
-- 1,512,255
</TABLE>
See accompanying notes to consolidated financial statements. (Continued)
7
<PAGE> 8
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Change in policy loans, net $ 936,100 $ (1,007,670)
Purchase of other long-term investments and property, plant and
equipment (1,020,607) (495,248)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (11,810,076) (4,261,382)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable -- (333,333)
------------ ------------
NET CASH USED BY FINANCING ACTIVITIES -- (333,333)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (7,381,360) 1,101,092
Cash and cash equivalents at beginning of period 11,149,084 10,168,728
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,767,724 $ 11,269,820
============ ============
SUPPLEMENTAL - CASH PAID DURING THE PERIOD FOR:
Interest $ -- $ 20,167
============ ============
Income taxes $ 1,913,500 $ 1,810,000
============ ============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company issued Class A stock to purchase all the capital stock of First
Investors Group, Inc. in 1999. In conjunction with the acquisitions, cash and
cash equivalents were provided by mergers and acquisitions as follows:
<TABLE>
<S> <C>
Fair value of capital stock issued $ 3,427,138
Fair value of tangible assets acquired
Excluding cash and cash equivalents (1,658,547)
Fair value of intangible assets acquired (353,703)
Liabilities assumed 97,367
--------------
Cash and cash equivalents provided by
Mergers and acquisitions $ 1,512,255
==============
Issuance of 609,269 Class A shares $ 3,427,138
==============
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 9
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
(1) FINANCIAL STATEMENTS
The interim consolidated financial statements include the accounts and
operations of Citizens, Inc. (Citizens), incorporated in the state of
Colorado on November 8, 1977, and its wholly-owned subsidiaries,
Citizens Insurance Company of America (CICA), Computing Technology,
Inc. (CTI), Funeral Homes of America, Inc. (FHA), Insurance Investors,
Inc. (III), National Security Life and Accident Insurance Company
(NSLIC), United Security Life Insurance Company (USLIC), Central
Investors Life Insurance Company of Illinois (CILIC), First Investors
Group, Inc. (Investors) and Excalibur Insurance Corporation
(Excalibur). Citizens and its consolidated subsidiaries are
collectively referred to as "the Company."
On June 6, 2000, the Texas Department of Insurance approved the merger
of NSLIC with and into CICA. CICA owned 100% of the shares of NSLIC
prior to the transaction. On October 16, 2000, the Mississippi
Department of Insurance approved the merger of USLIC with and into
CICA. CICA owned 100% of the shares of USLIC prior to the transaction.
The consolidated statement of financial position for September 30,
2000, the consolidated statements of operations for the three- and
nine-month periods ended September 30, 2000 and 1999, and the
consolidated 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 at September 30, 2000
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,
1999 annual 10-K report filed with the Securities and Exchange
Commission. The results of operations for the period ended September
30, 2000 are not necessarily indicative of the operating results for
the full year.
(2) ACQUISITION
On September 15, 1998, Citizens announced that a definitive agreement
had been reached between Citizens and Investors 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.
9
<PAGE> 10
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. This
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. The excess of cost over net assets
acquired amounted to $353,703 and is being amortized over 10 years.
(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 and other regions around the world. 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 and 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 described in the
summary of significant accounting policies. The Company evaluates
performance based on GAAP 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, 2000 and 1999.
<TABLE>
<CAPTION>
REVENUES 2000 1999
----------- -----------
<S> <C> <C>
U.S. Domestic $10,905,828 $15,382,887
International 38,150,946 37,611,166
----------- -----------
Total Revenues $49,056,774 $52,994,053
=========== ===========
</TABLE>
The following summary, representing revenues, amortization expense and
pre-tax income from continuing operations and identifiable assets for
the Company's reportable segments as of and for the nine months ended
September 30, 2000 and 1999, is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30 2000 1999
------------------------------ ------------ ------------
<S> <C> <C>
Revenue, excluding net investment income and realized gain on
investments:
Domestic $ 8,856,319 $ 12,775,898
International 30,981,321 31,237,077
------------ ------------
Total consolidated revenue, excluding net investment income and
realized gain on investments $ 39,837,640 $ 44,012,975
============ ============
Net investment income:
Domestic $ 2,057,962 $ 2,522,184
International 7,199,197 6,166,740
------------ ------------
Total consolidated net investment income $ 9,257,159 $ 8,688,924
============ ============
</TABLE>
10
<PAGE> 11
<TABLE>
<S> <C> <C>
Amortization expense:
Domestic $ 1,710,752 $ 2,425,550
International 5,920,140 5,815,387
------------ ------------
Total consolidated amortization expense $ 7,630,892 $ 8,240,937
============ ============
Realized gain (loss) on investments:
Domestic $ (8,453) $ 84,805
International (29,572) 207,349
------------ ------------
Total consolidated realized gain (loss) $ (38,025) $ 292,154
============ ============
Income (loss) before federal income tax:
Domestic $ (270,949) $ 322,304
International 398,186 917,233
------------ ------------
Total consolidated income before
Federal income tax $ 127,237 $ 1,239,537
============ ============
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Assets:
Domestic $ 93,637,193 $ 94,273,886
International 167,919,212 161,210,900
------------------ -----------------
Total $ 261,556,405 $ 255,484,786
------------------ -----------------
</TABLE>
(4) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
For the three and nine months ended September 30, 2000, the other comprehensive
income (loss) amounts included in total comprehensive income consisted of
unrealized gains on investments in fixed maturities and equity securities
available-for-sale of $1,732,071 and $1,208,043, net of tax, and for the same
period in 1999, unrealized losses of $(1,182,634) and $(5,613,637),
respectively. Total comprehensive income (loss) for the three and nine months
ended September 30, 2000, was $1,445,264 and $1,569,678 and for 1999 $(292,155)
and $(4,556,527), respectively.
(5) EARNINGS PER SHARE
Basic and diluted earnings per share have been computed using the weighted
average number of shares of common stock outstanding during each period. The
weighted average shares outstanding for both the three and nine months ended was
23,465,048 for 2000 and 23,445,041 for 1999. The per share amounts have been
adjusted retroactively for all periods presented to reflect the change in
capital structure resulting from a 7% stock dividend declared on November 2,
1999, payable on December 31, 1999 to holders of record as of December 1, 1999.
The stock dividend resulted in the issuance of 1,763,805 Class A shares
(including 136,091 shares in treasury) and 43,474 Class B shares.
11
<PAGE> 12
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Certain statements contained in this Form 10-Q 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 that 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.
12
<PAGE> 13
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Net income for the nine months ended September 30, 2000 was $361,635, or $0.02
per share, compared to net income of $1,057,110, or $0.05 per share, for the
same period in 1999. Revenues decreased 7.4% in 2000 to $49,056,774 compared to
the first nine months of 1999 when revenues were $52,994,053. The decrease in
revenues was driven by a 35.3% decrease in accident and health premiums as a
result of the termination of the Company's book of individual major medical and
group dental business. Increases in life claims and policy reserves also
contributed to the decline in earnings.
Premium income for the first nine months of 2000 was $39,188,573 compared to
$43,334,017 for the same period in 1999. The decrease is attributable to the
$3,019,295 decrease in accident and health premiums which were $5,531,127 for
the nine months ended September 30, 2000 compared to $8,550,422 for the same
period in 1999. During the second half of 1998, the Company began to experience
a significant increase in the volume of accident and health claims created by
high early utilization by holders of one of its subsidiaries, United Security
Life Insurance Company's ("USLIC"), group dental certificates. As a result of
the substantial increase in the volume of claims plus an increase in the
accident and health loss ratio, management moved to cancel a large portion of
the existing blocks of USLIC's group dental business and the major medical
business of National Security Life and Accident Insurance Company's ("NSLIC")
during the third quarter of 1999 in order to curtail both claims and operating
expenses. NSLIC was acquired in November 1997 and had written individual major
medical coverages. This action will result in a decrease of approximately $3.8
million of annual accident and health premium income in 2000 and $5.3 million of
annual accident and health premium income in 2001; 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. Because of
the increases in the loss ratio, management implemented significant rate
increases beginning in April 2000 on several of the supplemental accident and
health products which are non-cancelable. These increases became effective on
policy anniversaries, many of which were in the third quarter and fourth quarter
of 2000.
Production of new life insurance premiums by the agents of Citizens Insurance
Company of America ("CICA") was higher during the first nine months of 2000 than
in the previous year. In addition, management began developing a domestic
ordinary life sales program during 1999 and received regulatory approval of the
product and related sales material in Texas during April of 2000. Management
began recruiting efforts for associates in the State of Texas for the new
product in mid-2000 and sales began late during second quarter 2000. This
program, targeting rural areas of the United States, is expected to provide a
new entre into the domestic life market for the Company in future years. The
Company intends to expand sales effort beyond Texas to other states in which
CICA is licensed. Because sales efforts have just begun, management is unable to
predict the success of this new program.
Net investment income increased 6.5% in the first nine months of 2000 compared
to the same period in 1999. Investment income for the nine months ended
September 30, 2000 was $9,257,159 compared to $8,688,924 in 1999. This increase
reflects an increase in the Company's asset base and investment in higher
yielding instruments. Management terminated the Company's outside investment
advisor effective March 31, 2000. The Company feels that it can
13
<PAGE> 14
more effectively achieve its investment objectives by overseeing the investment
activities in-house. The increased returns related to more aggressive management
of the Company's excess cash balances and a shift in the mix of the portfolio to
place less emphasis on government guaranteed mortgage pass-through instruments
and more investments in callable instruments issued by U.S. government agencies.
Claims and surrenders expense decreased from $25,064,170 for the nine months
ended September 30, 1999 to $24,359,153 for the same period in 2000. Death
claims increased 22.7% from $3,851,125 in 1999 to $4,726,708 in 2000 due to
increased claim volumes and average claim amounts. After significant review of
the incurred claims, Management does not believe the increase reflects a
negative trend on the mortality of the Company's life business, but rather an
aberration in the historical experience. Surrender expense increased to
$11,138,094 in 2000 from $10,465,936 in 1999. An extended economic downturn in
several international markets has negatively impacted the Company's persistency
over the past few years. Management believes its products are competitive and
that persistency will return to historical levels over the next few years.
Coupons and endowments decreased slightly to $3,523,688 in 2000 from $3,603,523
in 1999. Accident and health benefits were $4,279,922 in 2000, compared to
$6,206,073 in 1999. This decrease in accident and health benefits is directly
related to the cancellation of the USLIC and NSLIC blocks of business discussed
above. Management believes that claims on the Company's accident and health
business will continue to decrease as year-end approaches, although since the
last terminations are effective December 31, 2000, Management believes it will
be the second quarter of 2001 before a more significant decrease will occur.
The remaining components of claims and surrenders, consisting of supplemental
contracts and payments of dividends and endowments previously earned and held at
interest, amounted to $690,741 in 2000, compared to $937,513 in 1999.
Deferred policy acquisition costs capitalized in 2000 were $6,774,815 compared
to $4,680,784 in the previous year. Increased production of life business during
the first nine months of 2000 was the primary reason for the increase.
Amortization of these costs was $6,350,208 for the first three quarters of 2000
compared to $6,635,831 for 1999.
Underwriting, acquisition and insurance expenses decreased from $8,085,531 for
the nine months ended September 30, 1999 to $7,729,985 for the same period in
2000, a decrease of 4.4%. The decrease is attributed to the economies of scale
being achieved through refinements of the administration of the business of
USLIC and NSLIC that is outweighing the start-up costs of the domestic marketing
program and the expenses associated with the administration of accident and
health business. Management expects to achieve continued expense reductions over
the next twelve months as the book of accident and health business continues to
diminish. Several steps were taken during the first quarter of 2000 to achieve
additional reductions through the elimination of outside consultants, including
the Company's outside investment managers, which are expected to result in
annual expense savings of approximately $200,000 for 2000, and approximately
$500,000 in 2001. Additionally, the consolidation of several subsidiaries during
the year 2000 will, in the opinion of management, afford increased economies of
scale.
The Company filed plans of merger with regulatory authorities in Texas and
Mississippi in January 2000 to merge NSLIC and USLIC with and into CICA, their
parent. The Texas Department of Insurance approved the merger of NSLIC into CICA
on June 6, 2000. The
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<PAGE> 15
Mississippi Department of Insurance approved the merger of USLIC into CICA on
October 16, 2000.
Amortization of cost of insurance acquired, excess of cost over net assets
acquired ("goodwill") and other intangible assets decreased to $1,280,684 in
2000 from $1,605,106 in 1999. The decrease in amortization is related to a
decrease in the amortization of cost of insurance acquired as several of the
companies previously purchased closed books of business are lapsing at slower
rates during 2000. Should production by the former agents of American Liberty
Life Insurance Company, acquired in 1995, now representing CICA, fall below
assumed levels, write-offs of the American Liberty goodwill beyond the third
quarter 1998 write-off of $9.5 million could result. Management is monitoring
this production in 2000 and expects to meet the targeted production levels.
There remains approximately $2.8 million of goodwill related to American Liberty
at September 30, 2000.
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Net loss for the three months ended September 30, 2000 was $286,807, or $(0.01)
per share, compared to net income of $890,479, or $0.04 per share, for the same
period in 1999. Revenues decreased 5.2% during the third quarter of 2000 to
$17,010,084 compared to the third quarter of 1999 when revenues were
$17,946,816. The decrease in revenues was driven by a 29.6% decrease in accident
and health premiums as a result of the termination of the Company's book of
individual major medical and group dental business. Claims on said business also
declined slightly, but not at the same rate as premiums. Increases in life
claims and policy reserves also contributed to the decline in third quarter
earnings.
Premium income for the third quarter of 2000 was $13,677,698 compared to
$14,941,875 for the same period in 1999. The decrease is attributable to the
$724,890 decrease in accident and health premiums which were $1,724,763 for the
three months ended September 30, 2000 compared to $2,449,653 for the same period
in 1999. During the second half of 1998, the Company began to experience a
significant increase in the volume of accident and health claims created by high
early utilization by holders of one of its subsidiaries, United Security Life
Insurance Company's ("USLIC"), group dental certificates. As a result of the
substantial increase in the volume of claims plus an increase in the accident
and health loss ratio, management moved to cancel a large portion of the
existing blocks of USLIC's group dental business and the major medical business
of National Security Life and Accident Insurance Company's ("NSLIC") during the
third quarter of 1999 in order to curtail both claims and operating expenses.
NSLIC was acquired in November 1997 and had written individual major medical
coverages. This action will result in a decrease of approximately $3.8 million
of annual accident and health premium income in 2000 and $5.3 million of annual
accident and health premium income in 2001; 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. Because of
the increases in the loss ratio, management implemented significant rate
increases beginning in April 2000 on several of the supplemental accident and
health products which are non-cancelable. These increases became effective on
policy anniversaries, many of which were in the third quarter and fourth quarter
of 2000.
15
<PAGE> 16
Production of new life insurance premiums by the agents of CICA was higher
during the third quarter of 2000 than in the previous year. In addition,
management began developing a domestic ordinary life sales program during 1999
and received regulatory approval of the product and related sales material in
Texas during April of 2000. Management began recruiting efforts for associates
in the State of Texas for the new product in mid-2000 and sales began late
during second quarter 2000. This program, targeting rural areas of the United
States, is expected to provide a new entre into the domestic life market for the
Company in future years. The Company intends to expand sales efforts beyond
Texas to other states in which CICA is licensed.
Net investment income increased 15.6% during the three months ended September
30, 2000 compared to the same period in 1999. Investment income for the three
months ended September 30, 2000 was $3,204,023 compared to $2,771,693 in 1999.
This increase reflects an increase in the Company's asset base and investments
in higher yielding instruments. Management terminated the Company's outside
investment advisor effective March 31, 2000. The Company feels that it can more
effectively achieve its investment objectives by overseeing the investment
activities in-house. The increased returns relate to more aggressive management
of the Company's excess cash balances and a shift in the mix of the portfolio to
place less emphasis on government guaranteed mortgage pass-through instruments
and more investment in callable instruments issued by U.S. government agencies.
Claims and surrenders expense increased from $8,491,343 for the three months
ended September 30, 1999 to $9,018,323 for the same period in 2000. Death claims
increased from $1,402,783 in 1999 to $2,371,646 in 2000 due to increased volumes
and average claim amounts. After significant review of the incurred claims,
Management does not believe the increase reflects a negative trend on the
mortality of the Company's life business, but rather an aberration in the
historical experience. Surrender expense increased slightly from $3,533,945 in
1999 to $3,596,304 in 2000. An extended economic downturn in several
international markets has negatively impacted the Company's persistency over the
past few years. Management believes its products are competitive and that
persistency will return to historical levels over the next few years. Coupons
and endowments decreased slightly from $1,270,006 in 1999 to $1,227,726 in 2000.
Accident and health benefits were $1,601,894 in 2000, compared to $1,871,557 in
1999. This decrease in accident and health benefits is directly related to the
cancellation of the USLIC and NSLIC blocks of business discussed above.
Management believes that claims on the Company's accident and health business
will continue to decrease as year-end approaches, although since the last
terminations are effective December 31, 2000, Management believes it will be the
second quarter of 2001 before a more significant decrease will occur.
The remaining components of claims and surrenders, consisting of supplemental
contracts and payments of dividends and endowments previously earned and held at
interest, amounted to $220,753 in 2000, compared to $413,052 in 1999.
Deferred policy acquisition costs capitalized for the three months ended
September 30, 2000 were $2,472,444 compared to $1,287,119 in the previous year.
Increased production of life business during the third quarter of 2000 was the
primary reason for the increase. Amortization of these costs was $1,952,416 for
the third quarter of 2000 compared to $1,727,805 for 1999.
Underwriting, acquisition and insurance expenses decreased from $2,699,213 in
the third quarter of 1999 to $2,443,061 in 2000, a decrease of 9.5%. The
decrease is attributed to the economies
16
<PAGE> 17
of scale being achieved through refinements of the administration of the
business of USLIC and NSLIC that is outweighing the start-up costs of the
domestic marketing program and the expenses associated with the administration
of accident and health business. Management expects to achieve continued expense
reductions over the next twelve months as the book of accident and health
business continues to diminish. Additionally, several steps were taken during
the first quarter of 2000 to achieve additional reductions through the
elimination of outside consultants, including the Company's outside investment
managers, which are expected to result in annual expense savings of
approximately $200,000 for 2000, and approximately $500,000 in 2001.
Additionally, the consolidation of several subsidiaries during the year 2000
will, in the opinion of management, afford increased economies of scale.
The Company filed plans of merger with regulatory authorities in Texas and
Mississippi in January 2000 to merge NSLIC and USLIC with and into CICA, their
parent. The Texas Department of Insurance approved the merger of NSLIC into CICA
on June 6, 2000. The Mississippi Department of Insurance approved the merger of
USLIC into CICA on October 16, 2000.
Amortization of cost of insurance acquired, excess of cost over net assets
acquired ("goodwill") and other intangible assets decreased from $484,171 in
1999 to $388,922 in 2000. The decrease in amortization is related to a decrease
in the amortization of cost of insurance acquired as several of the companies'
previously purchased closed books of business are lapsing at slower rates during
2000. Should production by the former agents of American Liberty Life Insurance
Company, acquired in 1995, now representing CICA, fall below assumed levels,
additional write-offs of the American Liberty goodwill beyond the third quarter
1998 write-off of $9.5 million could result. Management is monitoring this
production in 2000 and expects to meet the targeted production levels. There
remains approximately $2.8 million of goodwill related to American Liberty at
September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Stockholders' equity increased to $73,836,647 at September 30, 2000 from
$72,266,969 at December 31, 1999. The increase was attributable to a net income
of $361,635 for the nine months ended September 30, 2000 and decreased
unrealized losses, net of tax of $1,208,043 during the nine months ended
September 30, 2000. Increases in the market value of the Company's
available-for-sale bond and stock portfolio during 2000 resulted in a decrease
in unrealized losses, net of tax.
Invested assets increased 7.2% from $174,338,561 at December 31, 1999 to
$186,896,625 at September 30, 2000. At September 30, 2000 and December 31, 1999,
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. Fixed maturities
available-for-sale and fixed maturities held-to-maturity are 84.5% and 3.0%,
respectively, of invested assets at September 30, 2000. The Company does not
have a plan to make material dispositions of fixed maturities during 2000;
however, because of continued uncertainty regarding long-term interest rates,
management cannot rule out sales during 2000. Fixed maturities held-to-maturity,
amounting to $5,585,637, consist primarily of U.S. Treasury securities.
Management has the intent and believes the Company has the ability to hold the
securities to maturity.
17
<PAGE> 18
The Company's mortgage loan portfolio, which constitutes 0.7% and 0.8%,
respectively, of invested assets at September 30, 2000 and December 31, 1999,
has historically been composed of small residential loans in Texas. Management
has established a reserve of $50,000 at June 30, 2000 and December 31, 1999
(approximately 4% of the mortgage portfolio's balance) to cover potential
unforeseen losses in the Company's mortgage portfolio.
Policy loans comprise 11.0% of invested assets at September 30, 2000. 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, Austin,
Texas, were significantly in excess of Federal Deposit Insurance Corporation
(FDIC) coverage at September 30, 2000 and December 31, 1999. Management monitors
the solvency of all financial institutions in which it has funds to minimize the
exposure for loss. At September 30, 2000, management does not believe the
Company is at risk for such a loss. During 2000, the Company intends to utilize
short-term Treasury Bills and callable bonds of government agencies as cash
management tools to minimize excess cash balances and enhance return.
CICA owned 1,948,826 shares of Citizens Class A common stock at September 30,
2000 and December 31, 1999. Statutory accounting practices prescribed by
Colorado require that the Company carry its investment at market value reduced
by the percentage ownership of Citizens by CICA, limited to 2% of admitted
assets. As of September 30, 2000 and December 31, 1999, CICA valued the shares
in accordance with prescribed statutory accounting practices. In the Company's
consolidated financial statements, this stock is included in treasury stock.
The National Association of Insurance Commissioners 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, 1999 and September 30, 2000, all life insurance
subsidiaries were above required minimum levels.
INFORMATION SYSTEMS AND THE YEAR 2000
The Company successfully addressed the impact of the Year 2000 on its systems,
procedures, customers and business processes. There was no adverse impact on any
Company operations for the calendar change from 1999 to 2000.
The Company used internal resources to modify, replace and test the Year 2000
modifications. The total cost for the project was negligible, was performed with
existing staff and the associated costs were expensed as incurred.
All critical suppliers or customers (external relationships) resolved their own
third party Year 2000 issues and were all able to interact with the Company. The
Company encountered no loss of data or functionality related to the Year 2000.
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<PAGE> 19
FINANCIAL ACCOUNTING STANDARDS
In December 1997, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 97-3 "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments." 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 adopted SOP 97-3 during
1999. Implementation did not have a material impact on the Company's 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 adopted SOP 98-1 during
1999. Implementation did not have a material impact on the Company's financial
statements.
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" as amended, is effective January
1, 2001. Management does not believe SFAS No. 133, as amended, will have a
significant effect on the financial position, results of operations or liquidity
of the Company.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
a.) The Texas Department of Insurance approved the merger of
National Security Life and Accident Insurance Company into
Citizens Insurance Company of America ("CICA") on June 6,
2000.
The Mississippi Department of Insurance approved the merger of
United Security Life Insurance Company into CICA on October
16, 2000.
b.) On October 31, 2000, Rick Denson Riley was named Vice Chairman
and Chief Executive Officer of the Company. He previously
served the Company as Vice Chairman.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
27 Financial Data Schedule
a.) Current Report on Form 8-K dated October 31, 2000 regarding
the naming of Rick D. Riley as Chief Executive Officer.
20
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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 13, 2000
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE
NUMBER DESCRIPTION
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<S> <C>
27 Financial Data Schedule
</TABLE>
