<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 JUNE 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 June 30, 2000, 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> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Financial Position, June 30,
2000 (Unaudited) and December 31, 1999 3
Consolidated Statements of Operations, Three Months
Ended June 30, 2000 and 1999 (Unaudited) 5
Consolidated Statements of Operations, Six Months
Ended June 30, 2000 and 1999 (Unaudited) 6
Consolidated Statements of Cash Flows, Six Months
Ended June 30, 2000 and 1999 (Unaudited) 7
Notes to Financial Statements 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS 12
PART II. OTHER INFORMATION 19
</TABLE>
2
<PAGE> 3
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
JUNE 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities held-for-investment, at
amortized cost (fair value $5,547,000
in 2000 and $5,206,260 in 1999) $ 5,588,873 $ 5,594,745
Fixed maturities available-for-sale, at
fair value (amortized cost $156,417,484 in
2000 and $149,839,493 in 1999) 150,072,041 144,214,555
Equity securities, at fair value (cost
$716,293 in 2000 and 1999) 644,336 717,812
Mortgage loans on real estate (net of reserve
of $50,000 in 2000 and 1999) 1,301,769 1,374,204
Policy loans 21,356,284 21,556,344
Other long-term investments 933,852 880,901
------------ ------------
Total investments 179,897,155 174,338,561
Cash 5,010,948 11,149,084
Accrued investment income 1,884,684 1,761,071
Prepaid reinsurance 1,045,949 --
Reinsurance recoverable 1,848,364 2,183,729
Deferred policy acquisition costs 36,422,616 36,518,037
Other intangible assets 1,828,925 1,982,525
Deferred federal income tax 7,284,713 6,182,764
Cost of insurance acquired 6,777,542 7,186,494
Excess of cost over net assets acquired 7,691,834 8,021,044
Property, plant and equipment 5,706,627 5,071,735
Other assets 1,695,650 1,089,742
------------ ------------
Total assets $257,095,007 $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
JUNE 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, DECEMBER 31,
2000 1999
------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Future policy benefit reserves $ 169,883,873 $ 167,413,196
Dividend accumulations 4,734,254 4,854,835
Premium deposits 2,817,467 2,725,016
Policy claims payable 2,348,392 3,591,289
Other policyholders' funds 2,069,235 2,070,950
------------- -------------
Total policy liabilities 181,853,221 180,655,286
Other liabilities 1,943,693 901,636
Commissions payable 660,768 530,928
Federal income tax payable 245,942 1,129,967
------------- -------------
Total liabilities 184,703,624 183,217,817
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 11,405,242 10,756,800
Accumulated other comprehensive loss:
Unrealized investment loss, net of tax (4,235,484) (3,711,456)
------------- -------------
75,264,647 75,140,233
Treasury stock, at cost (2,873,264) (2,873,264)
------------- -------------
Total stockholders' equity 72,391,383 72,266,969
------------- -------------
Total liabilities and stockholders' equity $ 257,095,007 $ 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 JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
REVENUES:
Premiums $ 13,134,274 $ 14,857,197
Annuity and universal life considerations 58,831 58,612
Net investment income 3,076,425 2,912,273
Realized gains 40,373 247,136
Other income 158,347 167,914
Interest expense -- (13,965)
------------ ------------
Total revenues 16,468,250 18,229,167
BENEFITS AND EXPENSES:
Insurance benefits paid or provided:
Increase in future policy benefit reserves 1,351,673 1,926,161
Policyholders' dividends 742,687 736,727
Claims and surrenders 7,102,472 8,365,566
Annuity expenses 223,999 176,232
------------ ------------
Total insurance benefits paid or provided 9,420,831 11,204,686
Commissions 2,740,645 2,827,955
Other underwriting, acquisition and insurance expenses 2,783,711 3,038,598
Capitalization of deferred policy acquisition costs (2,196,386) (1,708,445)
Amortization of deferred policy acquisition costs 2,095,386 2,323,924
Amortization of cost of insurance acquired, excess of
cost over net assets acquired and other intangibles 454,437 769,053
------------ ------------
Total benefits and expenses 15,298,624 18,455,771
Income (loss) before Federal income tax $ 1,169,626 $ (226,604)
Federal income tax expense (benefit) 220,512 (115,484)
------------ ------------
NET INCOME (LOSS) $ 949,114 $ (111,120)
============ ============
PER SHARE AMOUNTS:
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE OF
COMMON STOCK $ 0.04 $ (0.01)
============ ============
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
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
REVENUES:
Premiums $ 25,510,875 $ 28,392,142
Annuity and universal life considerations 125,258 127,895
Net investment income 6,053,136 5,917,231
Realized gains 51,536 278,336
Other income 305,885 351,431
Interest expense -- (19,798)
------------ ------------
Total revenues 32,046,690 35,047,237
BENEFITS AND EXPENSES:
Insurance benefits paid or provided:
Increase in future policy benefit reserves 2,470,677 3,099,810
Policyholders' dividends 1,293,358 1,238,361
Claims and surrenders 15,340,830 16,572,827
Annuity expenses 314,122 310,361
------------ ------------
Total insurance benefits paid or provided 19,418,987 21,221,359
Commissions 5,604,479 5,694,633
Other underwriting, acquisition and insurance expenses 5,286,924 5,386,318
Capitalization of deferred policy acquisition costs (4,302,371) (3,393,665)
Amortization of deferred policy acquisition costs 4,397,792 4,908,026
Amortization of cost of insurance acquired, excess of
cost over net assets acquired and other intangibles 891,762 1,120,935
------------ ------------
Total benefits and expenses 31,297,573 34,937,606
Income before Federal income tax $ 749,117 $ 109,631
Federal income tax expense (benefit) 100,675 (57,000)
------------ ------------
NET INCOME $ 648,442 $ 166,631
============ ============
PER SHARE AMOUNTS:
BASIC AND DILUTED EARNINGS PER SHARE OF
COMMON STOCK $ 0.03 $ 0.01
============ ============
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
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 648,442 $ 166,631
Adjustments to reconcile net gain to net cash provided
by operating activities, net of assets acquired:
Realized gains on sale of investments and other assets (51,536) (278,336)
Net deferred policy acquisition costs 95,421 1,514,361
Amortization of cost of insurance
acquired, excess cost over
net assets acquired and other intangibles 891,762 1,120,935
Depreciation 257,579 257,465
Change in:
Accrued investment income (123,613) 56,123
Reinsurance recoverable and prepaid
reinsurance (710,584) (1,125,926)
Future policy benefit reserves 2,470,677 2,884,650
Other policy liabilities (1,272,742) 175,740
Deferred federal income tax (831,990) (15,253)
Federal income tax (884,025) (1,854,509)
Commissions payable and other liabilities 1,171,897 (794,546)
Other, net (536,646) 333,411
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,124,642 2,440,745
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of fixed maturities, available-for-sale 2,644,749 268,090
Maturity of fixed maturities, available-for-sale 4,581,592 4,790,070
Purchase of fixed maturities, available-for-sale (13,816,192) (2,350,906)
Sale of equity securities, available-for-sale -- 92,500
Principal payments on mortgage loans 72,435 123,079
Guaranteed student loans funded -- (6,423)
Sale of other long-term investments and property,
plant and equipment 18,751 4,212
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
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Change in policy loans, net $ 200,060 $ (700,184)
Purchase of other long-term investments and property,
plant and equipment (964,173) (364,855)
------------ ------------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES (7,262,778) 3,367,838
------------
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 (6,138,136) 5,475,250
Cash and cash equivalents at beginning of period 11,149,084 10,168,728
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,010,948 $ 15,643,978
============ ============
SUPPLEMENTAL - CASH PAID DURING THE PERIOD FOR:
Interest $ -- $ 13,965
============ ============
Income taxes $ 1,816,695 $ 1,747,465
============ ============
</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 acquisition, 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
JUNE 30, 2000
(UNAUDITED)
(1) FINANCIAL STATEMENTS
The statement of financial position for June 30, 2000, the
statements of operations for the three- and six-month periods ended
June 30, 2000 and 1999, and the statements of cash flows for the
six-month periods then ended have been prepared by the Company
without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present
fairly the financial position, results of operations and changes in
cash flows at June 30, 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
June 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 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. 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 be paid
9
<PAGE> 10
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 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 six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
REVENUES 2000 1999
------------ ------------
<S> <C> <C>
U.S. Domestic $ 7,475,805 $ 10,657,435
International 24,570,885 24,389,802
------------ ------------
Total Revenues $ 32,046,690 $ 35,047,237
============ ============
</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 six
months ended June 30, 2000 and 1999, is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30 2000 1999
------------------------ ------------ ------------
<S> <C> <C>
Revenue, excluding net investment income and
realized gain on investments:
Domestic $ 6,051,716 $ 8,773,439
International 19,890,302 20,078,231
------------ ------------
Total consolidated revenue, excluding net investment
income and realized gain on investments $ 25,942,018 $ 28,851,670
============ ============
Net investment income:
Domestic $ 1,412,067 $ 1,799,357
International 4,641,069 4,117,874
------------ ------------
Total consolidated net investment income $ 6,053,136 $ 5,917,231
============ ============
Amortization expense:
Domestic $ 1,250,080 $ 2,122,902
International 4,039,474 3,906,059
------------ ------------
Total consolidated amortization expense $ 5,289,554 $ 6,028,961
============ ============
Realized gain on investments:
Domestic $ 12,022 $ 84,639
International 39,514 193,697
------------ ------------
Total consolidated realized gain $ 51,536 $ 278,336
============ ============
Income (loss) before federal income tax:
Domestic $ (100,192) $ 242,821
International 849,309 (133,190)
------------ ------------
Total consolidated income before
Federal income tax $ 749,117 $ 109,631
============ ============
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
---------------- -----------------
<S> <C> <C>
Assets:
Domestic $ 95,142,539 $ 94,273,886
International 161,952,468 161,210,900
---------------- -----------------
Total $ 257,095,007 $ 255,484,786
---------------- -----------------
</TABLE>
(4) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
For the three and six months ended June 30, 2000, the other comprehensive income
(loss) amounts included in total comprehensive income consisted of unrealized
gains (losses) on investments in fixed maturities and equity securities
available-for-sale of $1,330,955 and $(524,028), net of tax, and for the same
period in 1999, unrealized losses of $(2,206,160) and $(4,431,003),
respectively. Total comprehensive income (loss) for the three and six months
ended June 30, 2000, was $2,280,069 and $124,414 and for 1999 $(2,317,280) and
$(4,264,372), 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 six 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
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Net income for the six months ended June 30, 2000 was $648,442, or $0.03 per
share, compared to net income of $166,631, or $0.01 per share, for the same
period in 1999. Revenues decreased 8.6% in 2000 to $32,046,690 compared to the
first six months of 1999 when revenues were $35,047,237. The decrease in
revenues was driven by a 37.6% 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.
Premium income for the first six months of 2000 was $25,510,875 compared to
$28,392,142 for the same period in 1999. The decrease is attributable to the
$2,294,405 decrease in accident and health premiums which were $3,806,364 for
the six months ended June 30, 2000 compared to $6,100,769 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 the United Security Life Insurance Company's
("USLIC"), group dental certificates. USLIC was acquired in 1997. 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 effective in April 2000 on several of the supplemental accident and
health products which are non-cancelable.
Production of new life insurance premiums by the agents of Citizens Insurance
Company of America ("CICA") was higher during the first half 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 entree
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 2.3% in the first six months of 2000 compared to
the same period in 1999. Net investment income for the six months ended June 30,
2000 was $6,053,136 compared to $5,917,231 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 more effectively achieve
its investment objectives by overseeing the investment activities in-house.
13
<PAGE> 14
Claims and surrenders expense decreased from $16,572,827 at June 30, 1999 to
$15,340,830 for the same period in 2000. Death claims decreased slightly from
$2,488,342 in 1999 to $2,355,062 in 2000. Surrender expense increased to
$7,541,790 in 2000 from $6,931,991 in 1999. An extended economic downturn in
several international markets has negatively impacted the Company's persistency
over the past two years. Management believes its products are competitive and
that persistency will return to historical levels over the next few years.
Coupons and endowments decreased to $2,295,962 in 2000 from $2,333,517 in 1999.
Accident and health benefits were $2,678,028 in 2000, compared to $4,334,516 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.
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 $469,988 in 2000, compared to $484,461 in 1999.
Deferred policy acquisition costs capitalized in 2000 were $4,302,371 compared
to $3,393,665 in the previous year. Increased production of life business during
the first half of 2000 was the primary reason for the increase. Amortization of
these costs was $4,397,792 for the first six months of 2000 compared to
$4,908,026 for 1999.
Underwriting, acquisition and insurance expenses decreased from $5,386,318 in
the second quarter of 1999 to $5,286,924 in 2000, a decrease of 1.8%. 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 will 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. Approval from the State of Mississippi is expected in late 2000
to consolidate USLIC into CICA.
Amortization of cost of insurance acquired, excess of cost over net assets
acquired ("goodwill") and other intangible assets decreased to $891,762 in 2000
from $1,120,935 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 lapse over time. 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 $2.9
million of goodwill related to American Liberty at June 30, 2000.
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<PAGE> 15
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Net income for the three months ended June 30, 2000 was $949,114, or $0.04 per
share, compared to net loss of $111,120, or $(0.01) per share, for the same
period in 1999. Revenues decreased 9.7% during the second quarter of 2000 to
$16,468,250 compared to the second quarter of 1999 when revenues were
$18,229,167. The decrease in revenues was driven by a 41.0% 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.
Premium income for the second quarter of 2000 was $13,134,274 compared to
$14,857,197 for the same period in 1999. The decrease is attributable to the
$1,348,653 decrease in accident and health premiums which were $1,939,466 for
the three months ended June 30, 2000 compared to $3,288,119 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 the United Security Life Insurance Company's
("USLIC"), group dental certificates (USLIC was acquired in 1997). 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 effective in April 2000 on several of the supplemental accident and
health products which are non-cancelable.
Production of new life insurance premiums by the agents of CICA was higher
during the second 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 5.6% during the three months ended June 30, 2000
compared to the same period in 1999. Net investment income for the three months
ended June 30, 2000 was $3,076,425 compared to $2,912,273 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.
Claims and surrenders expense decreased from $8,365,566 for the three months
ended June 30, 1999 to $7,102,472 for the same period in 2000. Death claims
decreased from $1,137,966 in
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<PAGE> 16
1999 to $890,920 in 2000. Surrender expense decreased from $3,750,212 in 1999 to
$3,489,350 in 2000. An extended economic downturn in several international
markets has negatively impacted the Company's persistency over the past two
years. Management believes its products are competitive and that persistency
will return to historical levels over the next few years. Coupons and endowments
increased slightly from $1,167,861 in 1999 to $1,175,353 in 2000. Accident and
health benefits were $1,312,757 in 2000, compared to $2,027,737 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.
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 $234,092 in 2000, compared to $281,790 in 1999.
Deferred policy acquisition costs capitalized for the three months ended June
30, 2000 were $2,196,386 compared to $1,708,445 in the previous year. Increased
production of life business during the second quarter of 2000 was the primary
reason for the increase. Amortization of these costs was $2,095,386 for the
second quarter of 2000 compared to $2,323,924 for 1999.
Underwriting, acquisition and insurance expenses decreased from $3,038,598 in
the second quarter of 1999 to $2,783,711 in 2000, a decrease of 8.4%. 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.
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 will 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. Approval from the State of Mississippi is expected in late 2000
to consolidate USLIC into CICA.
Amortization of cost of insurance acquired, excess of cost over net assets
acquired ("goodwill") and other intangible assets decreased from $769,053 in
1999 to $454,437 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 lapse over time. 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 $2.9
million of goodwill related to American Liberty at June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Stockholders' equity increased to $72,391,383 at June 30, 2000 from $72,266,969
at December 31, 1999. The increase was attributable to net income of $648,442
for the six months ended June
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<PAGE> 17
30, 2000 being in excess of increased unrealized losses, net of tax of $524,028
during the six months ended June 30, 2000. Declines in the market value of the
Company's available-for-sale bond and stock portfolio resulted in the change in
unrealized losses, net of tax.
Invested assets increased 3.2% from $174,338,561 at December 31, 1999 to
$179,897,155 at June 30, 2000. At June 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 83.4% and 3.1%,
respectively, of invested assets at June 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 $5,588,873, consist primarily of U.S. Treasury securities. Management has the
intent and believes the Company has the ability to hold the securities to
maturity.
The Company's mortgage loan portfolio, which constitutes 0.7% and 0.8%,
respectively, of invested assets at June 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 11.9% of invested assets at June 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 June 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 June 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 highly-rated commercial paper 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 June 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 June 30, 2000 and December 31, 1999, the Company 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
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<PAGE> 18
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 June
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.
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 by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," is effective January 1, 2001.
Management does not believe SFAS No. 133 and SFAS No. 137 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, other than disclosed in the Notes to the Financial
Statements or Management's Discussion and Analysis of Financial
Condition and Results of Operations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
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 Company has filed a plan of merger with regulatory
authorities in the State of Mississippi to merge United
Security Life Insurance Company into CICA. Approval is
expected in the fourth quarter of 2000.
b.) The Company's Annual meeting of stockholders was held on
Tuesday, June 6, 2000. Prior to the meeting, Messrs. James C.
Mott and T. Roby Dollar declined to stand for re-election to
the Company's Board of Directors due to their retirement. The
following individuals were elected to the Board: Class A: Dr.
E. Dean Gage, Steven F. Shelton, Ralph M. Smith, Th.D. and
Timothy T. Timmerman. Class B: Harold E. Riley, Mark A.
Oliver, Joe R. Reneau, M.D., Rick D. Riley and Dr. Richard C.
Scott.
c.) On July 8, 2000, Mark A. Thornton was named Vice President and
Chief Counsel of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
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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: August 11, 2000
20
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
27 Financial Data Schedule
</TABLE>
