<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-13004
CITIZENS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-0755371
- ---------------------------------------- ---------------------------------
(State of incorporation) (IRS Employer Identification No.)
400 East Anderson Lane, Austin, Texas 78752
- ---------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 837-7100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Class A Common Stock American Stock Exchange
-------------------- -----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
None
----
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
requirement for the past 90 days. Yes X No .
--- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 1, 2000, aggregate market value of the Class A voting stock held by
non-affiliates of the Registrant was approximately $127,267,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report incorporates certain portions of the definitive proxy
material of the Registrant in respect of its 2000 Annual Meeting of
Shareholders.
Number of shares of common stock outstanding as of March 1, 2000
Class A: 22,800,525
Class B: 664,523
<PAGE> 2
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Citizens, Inc. (Citizens) operates primarily as an insurance
holding company. It was incorporated in 1977. Citizens is the
parent holding company that directly or indirectly owns 100% of
Citizens Insurance Company of America (CICA), Computing
Technology, Inc. (CTI), Insurance Investors, Inc. (III), Funeral
Homes of America (FHA) (formerly Funeral Homes of Louisiana),
Central Investors Life Insurance Company of Illinois (CILIC),
United Security Life Insurance Co. (USLIC), National Security Life
and Accident Insurance Company (NSLIC), First Investors Group,
Inc. (Investors) and Excalibur Insurance Corporation (Excalibur).
Collectively, Citizens and its subsidiaries are referred to herein
as the "Company." Pertinent information relating to Citizens'
subsidiary companies is set forth below:
<TABLE>
<CAPTION>
YEAR STATE OF BUSINESS
SUBSIDIARY INCORPORATED INCORPORATION ACTIVITY
---------- ------------ ------------- --------
<S> <C> <C> <C>
CICA 1968 Colorado Life insurance
NSLIC 1954 Texas Life insurance
USLIC 1967 Mississippi Life insurance
CILIC 1965 Illinois Life insurance
Investors 1996 Illinois Holding company
Excalibur 1996 Illinois Life Insurance
CTI 1986 Colorado Data processing
III 1965 Texas Aircraft transportation
FHA 1989 Louisiana Funeral home
</TABLE>
In June, 1997, CICA acquired American Investment Network, Inc.
(AIN), a life insurance holding company and United Security Life
Insurance Company (USLIC), its wholly-owned subsidiary,
headquartered in Jackson, Mississippi with $7.5 million in assets,
$3.4 million of stockholders' equity, revenues of $3.2 million and
$67 million of life insurance in-force. AIN shareholders received 1
share of Citizens, Inc. Class A Common Stock for each 7.2 shares of
AIN Common Stock owned. Citizens issued approximately 700,000 Class
A shares in connection with the transaction, which was accounted
for as a purchase. Subsequently, AIN was liquidated.
In March, 1997, CICA merged CICA Acquisition, Inc. (a subsidiary
organized for purposes of the transaction) into First American
Investment Corporation (FAIC), which CICA had indirectly owned
approximately 94.5% prior to the transaction. As part of this
merger, CICA acquired the FAIC shares owned by minority investors
at an exchange rate of 0.1111 shares of Class A Common Stock for
each 1 share of FAIC owned by minority investors. Citizens issued
approximately 134,000 shares of Class A Common Stock in this
transaction which was accounted for as a purchase. Subsequently,
FAIC was liquidated.
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<PAGE> 3
To streamline its corporate structure, in June, 1997, American
Liberty Financial Corporation (ALFC), a wholly-owned subsidiary,
was merged into Citizens. American Liberty Life Insurance Company
(ALLIC), a subsidiary of ALFC, merged into CICA.
In November, 1997, Citizens purchased 100% of the issued and
outstanding shares of National Security Life and Accident Insurance
Company (NSLIC) for $1,700,000, consisting of $1,000,000 cash and
96,000 restricted shares of Citizen's Class A Common Stock valued
at $700,000. NSLIC is a Texas-domiciled life and accident and
health insurer with assets of approximately $5 million and revenues
of approximately $5 million.
On September 10, 1998, Citizens entered into an agreement with
First Investors Group, Inc. (Investors) of Springfield, Illinois to
acquire 100% of the outstanding preferred and common shares of
Investors for shares of Citizens' Class A Common stock. Investors
is the parent of Excalibur Insurance Corporation (Excalibur), also
of Springfield, Illinois. The agreement closed on January 26, 1999,
with Citizens issuing approximately 609,000 shares to holders of
Investors preferred and common stock.
Certain statements contained in this Annual Report on Form 10-K are
not statements of historical fact and constitute forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act (the "Act"), including, without limitation, the
italicized statements and the statements specifically identified as
forward-looking statements within this document. In addition,
certain statements in future filings by the Company with the
Securities and Exchange Commission, in press releases, and in oral
and written statements made by or with the approval of the Company
which are not statements of historical fact constitute
forward-looking statements within the meaning of the Act. Examples
of forward-looking statements, include, but are not limited to: (i)
projections of revenues, income or loss, earnings or loss per
share, the payment or non-payment of dividends, capital structure,
and other financial items, (ii) statements of plans and objectives
of the Company or its management or Board of Directors including
those relating to products or services, (iii) statements of future
economic performance and (iv) statements of assumptions underlying
such statements. Words such as "believes", "anticipates",
"expects", "intends", "targeted", "may", "will" and similar
expressions are intended to identify forward-looking statements but
are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties which
may cause actual results to differ materially from those in such
statements. Factors that could cause actual results to differ from
those discussed in the forward-looking statements include, but are
not limited to: (i) the strength of foreign and U.S. economies in
general and the strength of the local economies in which operations
are conducted; (ii) the effects of and changes in trade, monetary
and fiscal policies and laws; (iii) inflation, interest rates,
market and monetary fluctuations and volatility; (iv) the timely
development of and acceptance of new products and services and
perceived overall value of these
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<PAGE> 4
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.
(b) FINANCIAL INFORMATION REGARDING THE INSURANCE BUSINESS
Citizens, through CICA, USLIC, NSLIC, CILIC and Excalibur, operates
principally in two business segments: selling selected lines of
individual life and accident and health (A&H) insurance policies in
domestic markets and individual ordinary life insurance in
international markets. Except for certain insignificant operations,
Citizens has no present intention to engage in any non-insurance
related business. The following tables set forth certain
statistical information on the basis of Generally Accepted
Accounting Principles (GAAP) concerning the operations of the
Company for each of the five years ended December 31, 1999.
TABLE I
The following table sets forth (i) life insurance in-force and (ii)
mean life insurance in-force.
<TABLE>
<CAPTION>
IN-FORCE MEAN LIFE
BEGINNING IN-FORCE INSURANCE
OF YEAR END OF YEAR IN-FORCE
(a)(b) (a)(b) (a)(b)
------------------ ------------------ -------------------
<S> <C> <C> <C>
1999 $ 2,340,744 $ 2,197,844 $ 2,269,294
1998 2,250,197 2,340,744 2,295,471
1997 2,231,017 2,250,197 2,240,607
1996 2,151,955 2,231,017 2,191,486
1995 2,144,709 2,151,955 2,148,332
</TABLE>
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(a) In thousands (000s)
(b) Before ceding reinsurance to reinsurers
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The increases in insurance in-force prior to 1999 as shown above reflect the
volumes of new business written by the Company as well as the impact of
acquisitions. Economic and other market disruptions in the Company's
international markets had a negative impact on the Company's persistency in
1999, contributing to the decline in insurance in-force. Approximately
$96,803,000 of the 1997 increases resulted from the acquisitions of USLIC and
NSLIC.
TABLE II
The following table sets forth (i) the ratio of lapses and surrenders to mean
life insurance in-force and (ii) life reinsurance ceded.
<TABLE>
<CAPTION>
RATIO OF REINSURANCE CEDED
LAPSES AND ------------------------------------------------
SURRENDERS AMOUNT REINSURANCE
LAPSES AND TO MEAN OF PREMIUM
SURRENDERS (a) IN-FORCE REINSURANCE(a) CEDED(b)
--------------------- ----------------- ----------------------- -------------------
<S> <C> <C> <C> <C>
1999 $ 115,018 5.1% $ 278,689 $ 2,549,155
1998 100,906 4.4 306,070 3,368,690
1997 95,684 4.3 318,630 2,257,556
1996 101,860 4.6 296,378 2,511,318
1995 87,273 4.1 290,677 2,241,111
</TABLE>
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(a) In thousands (000s)
(b) Approximately 95 percent of the reinsurance is yearly renewable term
insurance, with the remainder being coinsurance. Premiums reflect both life
and accident and health business.
As described above, the disruption in certain international markets contributed
to the increased lapsation and surrender activity in 1999. The decline in ceded
premium in 1999 is related to the termination of a substantial portion of
NSLIC's major medical business, much of which had been ceded. The increase in
ceded premium in 1998 is due to the cession of a substantial portion of the
major medical accident and health business of NSLIC. The increased lapses and
surrenders during 1996 reflects the inclusion of the ALLIC insurance business.
TABLE III
The following table sets forth information with respect to total insurance
premiums.
<TABLE>
<CAPTION>
ORDINARY ANNUITY & ACCIDENT
LIFE(a) UNIVERSAL LIFE GROUP LIFE & HEALTH(a) TOTAL
-------- -------------- ---------- ------------ -------
<S> <C> <C> <C> <C> <C>
1999 $47,687,414 $ 261,880 $ 484,746 $ 10,886,317 $ 59,320,357
1998 48,801,081 263,994 231,410 9,857,844 59,154,329
1997 49,412,066 366,135 284,632 5,299,783 55,362,616
1996 49,563,720 389,084 309,953 4,040,688 54,303,445
1995 45,120,631 119,335 306,256 698,206 46,244,428
</TABLE>
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(a) After deduction for reinsurance ceded.
New sales of life insurance have remained relatively flat since 1996. The
acquisition of ALLIC in late 1995 mitigated the decline in new life insurance
sales and brought an increase in Accident
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and Health premiums. Much of the 1998 increase in accident and health premiums
relates to the acquisition of USLIC and NSLIC.
TABLE IV
The following table sets forth information relating to the ratio of underwriting
and other expenses to insurance revenues.
<TABLE>
<CAPTION>
COMMISSIONS, UNDERWRITING
AND OPERATING EXPENSES,
POLICY RESERVE INCREASES,
COMMISSIONS, UNDERWRITING POLICYHOLDER BENEFITS AND
AND OPERATING EXPENSES DIVIDENDS TO POLICYHOLDERS
---------------------------- ----------------------------
RATIO TO RATIO TO
INSURANCE INSURANCE INSURANCE
PREMIUMS(a) AMOUNT PREMIUMS AMOUNT PREMIUMS
------------ ------------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C>
1999 $59,320,357 $ 22,563,049 38.0% $ 68,043,243 114.7%
1998 59,154,329 23,580,491 39.9 66,914,063 113.1
1997 55,362,616 18,910,594 34.2 58,865,744 106.3
1996 54,303,445 21,948,637 40.4 59,113,575 108.9
1995 46,244,428 17,375,574 37.6 50,767,435 109.8
</TABLE>
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(a) After premiums ceded to reinsurers.
Prior to 1996, the ratios of expenses to premiums had declined each year since
1989. These declines are the result of three factors: 1) underwriting and
operating expenses have generally not increased at the same rate as premium
income due to the Company's efficient method of operation; 2) sales commissions
as a percentage of total premium income are declining annually as the business
enters renewal stages and commissions are paid at a lower rate than the first
year; and 3) the amount of new insurance written annually represents a smaller
percentage of the Company's total premium income. However, in 1996, with the
addition of ALLIC and the considerable expense associated with its marketing
operation start-up, the ratio reached its highest level since 1993. Following
the merger of ALLIC in 1997, significant reductions in operating expenses were
realized. The 1997 acquisitions of NSLIC and USLIC and their related conversion
expenses as well as increases in accident and health benefits were the primary
reasons for the 1998 and 1999 increase in policyholder benefits and the 1998
increase in commission, underwriting and operating expenses.
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TABLE V
The following table sets forth changes in new life insurance business produced
between participating and nonparticipating policies.
<TABLE>
<CAPTION>
PARTICIPATING NONPARTICIPATING
TOTAL NEW ---------------------- --------------------
BUSINESS(a) AMOUNT(a) PERCENT AMOUNT(a) PERCENT
----------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
1999 $ 287,238 $ 180,800 62.9% $106,438 37.1%
1998 311,331 224,918 71.4 88,835 28.6
1997 286,698 245,547 85.6 41,151 14.4
1996 337,051 294,408 87.3 42,643 12.7
1995 296,811 271,108 91.3 25,703 8.7
</TABLE>
- -----------
(a) In thousands (000s)
The percentage of the new business produced that is participating represented
the majority of new business from 1987 through 1995. The increase in
non-participating business beginning in 1996 results from sales by USLIC and
NSLIC, which sell only non-participating policies and a change in benefits in
the Company's international business, as new or ordinary life products shifted
away from participating to non-participating. The significant change in 1998 and
1999 is due to the volume of credit life business produced by NSLIC that is
non-participating.
TABLE VI
The following table sets forth changes in new life insurance business issued
according to policy types.
<TABLE>
<CAPTION>
WHOLE LIFE
AND ENDOWMENT TERM CREDIT
TOTAL NEW ---------------------- --------------------- -------------------
BUSINESS(a) AMOUNT(a) PERCENT AMOUNT(a) PERCENT AMOUNT(a) PERCENT
---------- --------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1999 $ 287,238 $ 183,726 63.9% $ 43,607 15.2% $59,905 20.9%
1998 311,331 224,918 72.2 51,531 16.6 34,882 11.2
1997 286,698 245,637 85.7 41,062 14.3 0 --
1996 337,051 296,985 88.1 40,066 11.9 0 --
1995 296,811 270,963 91.3 25,848 8.7 0 --
</TABLE>
(a) In thousands (000s)
This table illustrates that virtually all of the new business written prior to
1997 is whole life. The 1997 results reflect a decrease in new life business
during the year which continued through 1999. Most of the 1998 and 1999
increases are due to the credit life business sold by NSLIC. The decline in 1998
and 1999 whole life production relates to the disruption in the Company's
international market.
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TABLE VII
The following table sets forth deferred policy acquisition costs capitalized and
amortized compared to new business life insurance issued.
<TABLE>
<CAPTION>
DEFERRED POLICY
TOTAL NEW ACQUISITION COSTS
BUSINESS -----------------------------------------
ISSUED CAPITALIZED AMORTIZED
--------- ----------------- ---------------
<S> <C> <C> <C>
1999 $ 287,238,000 $ 9,287,457 $ 10,028,806
1998 311,331,000 7,941,829 7,789,513
1997 286,698,000 9,804,022 9,630,705
1996 337,051,000 10,531,222 10,221,917
1995 296,811,000 10,579,704 8,511,876
</TABLE>
The amortization of the capitalized costs has grown as the aggregate deferred
acquisition cost asset has increased. In 1996, the amortization of deferred
acquisition costs increased due to the increase in surrender activity. The
decrease in costs capitalized for 1997 and 1998 reflects the reduction in the
amount of new business produced and lower commission expenses incurred as a
result thereof. In 1996, new business increased; however, the increase in
capitalized costs was not as high due to changes in the commission structure of
the Company. Amortization in 1999 was high due to increased surrender activity.
TABLE VIII
The following table sets forth investment results.
<TABLE>
<CAPTION>
RATIO OF NET
INVESTMENT INCOME
MEAN AMOUNT OF NET INVESTMENT TO MEAN AMOUNT
INVESTED ASSETS(a) INCOME(b) OF INVESTED ASSETS(a)
------------------- -------------- ---------------------
<S> <C> <C> <C>
1999 $ 175,305,342 $ 11,636,940 6.6%
1998 169,461,908 11,279,125 6.7
1997 150,481,414 10,038,736 6.7
1996 134,167,938 9,185,506 6.8
1995 111,926,695 7,026,909 6.3
</TABLE>
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(a) The year 1997 includes assets acquired from NSLIC and USLIC. The year 1996
includes assets acquired from CILIC on March 12, 1996. The year 1995
includes assets acquired from ALLIC on September 14, 1995.
(b) Does not include realized and unrealized gains and losses on investments.
The Company hired an investment advisor in 1995, and this action contributed to
the increased yield in 1996. Significant decreases in yields in the bond market
caused the return on invested assets to drop slightly in 1997 and continued
throughout 1998 and 1999.
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(c) NARRATIVE DESCRIPTION OF BUSINESS
(i) BUSINESS OF CITIZENS
Citizens' principal business is ownership of CICA, Investors
and their affiliates. Additionally, it provides management
services to these companies under management services
agreements. At December 31, 1999, Citizens had approximately
100 full and part-time employees. All intercompany fees and
expenses have been eliminated in the consolidated financial
statements.
(ii) BUSINESS OF CICA
Historically, CICA's revenues have been derived from life
insurance premiums and revenues from investments. CICA is a
Colorado-domiciled life insurance company marketing primarily
ordinary whole-life products on an international basis through
marketing companies. Additionally, it offers specialty
individual accident and health policies to United States
residents. All intercompany fees and expenses have been
eliminated in the consolidated financial statements.
During the fiscal year ended December 31, 1999, 93.1% of CICA's
premium income was attributable to life, endowment and term
insurance, 0.5% to individual annuities and 6.4% to accident
and health insurance. During the fiscal year ended December 31,
1998, 93.2% of CICA's premium income was attributable to life,
endowment and term insurance, 0.4% to individual annuities, and
6.4% to accident and health insurance. Of the life policies in
force at December 31, 1999 and 1998, 39.9% and 39.6%, were
nonparticipating and 60.1% and 60.4%, respectively were
participating.
From 1987 to 1997, CICA offered a series of participating whole
life policies designed for international markets. All of the
products were participating. Beginning January 1, 1998, CICA
introduced a new series of policies as a replacement. Ten plans
make up this series and, like those previously sold, are
designed for the international market. They maintain many of
the features of the previous series, and incorporate several
new enhancements, such as terminal illness protection as well
as dismemberment provisions.
Additionally, following the merger with ALLIC, CICA began
offering specialty individual accident and health products as
well as ordinary whole life policies to residents of the United
States. The sale of these products is focused in Oklahoma,
Louisiana and Mississippi.
In 1999 management began developing a domestic ordinary life
sales program and filed such with the regulatory authorities
for approval during the third quarter of 1999. CICA expects to
place a significant emphasis on this program. Management
expects that sales efforts will be commenced on a
state-by-state basis which will target rural areas of the
United States. Management began
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recruiting associates in the State of Texas and expects sales
efforts for the new product to begin in mid-2000.
The CICA underwriting policy requires a medical examination of
applicants for ordinary insurance in excess of certain
prescribed limits. These limits are graduated according to the
age of the applicant and the amount of insurance. Generally,
the maximum amount of ordinary life insurance issued
domestically without a medical examination is $200,000 for ages
0 through 35; $100,000 for ages 36 through 45; $50,000 for ages
46 through 50; $15,000 for ages 51 through 55; and $10,000 for
ages 56 and over. Limits for insuring non-United States
applicants without a medical examination are: $150,000 for ages
0 through 39; $50,000 for ages 40 through 65; and all amounts
over age 65. The accident and health policies sold in the U.S.
have only minimal, field underwriting.
On life policies, CICA's maximum coverage on any one life is
not limited by company policy. However, CICA reinsures the
amount of coverage which is in excess of its retention policy.
See "Business of CICA - Reinsurance." CICA does not accept
substandard risks above Table 6 (generally policyholders who
cannot qualify for standard ordinary insurance because of past
medical history) in exchange for which CICA would charge higher
premiums.
CICA has $25.1 million of insurance in-force on individuals
that are classified as substandard risks, the majority of such
business having been acquired in the purchase of other
companies. Management believes the exposure to loss as a result
of insuring these individuals is minimal, since the premiums
are increased to cover the nature of the risk, additional
reserves are established, and the amount of this insurance
represents approximately 1.0% of the total insurance in-force.
GEOGRAPHICAL DISTRIBUTION OF BUSINESS
The following table sets for CICA's total yearly premium income
by geographic area for the years indicated.
<TABLE>
<CAPTION>
PERCENT OF CICA'S TOTAL PREMIUM INCOME
AREA 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Oklahoma 5.4% 5.5% 6.2%
Texas 2.3% 3.2% 2.7%
Louisiana 1.2% 1.2% 1.5%
Colorado --% --% 1.0%
All Other States 5.6% 6.8% 5.7%
Foreign 85.5% 83.3% 82.9%
</TABLE>
The participating whole life policies accepted by CICA on high
net worth residents of foreign countries have an average face
amount of approximately $70,000 and are marketed primarily to
the top 5% of the population in terms of
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household income. CICA accepts applications for international
insurance policies marketed by several independent firms in
these markets with whom CICA has non-exclusive consulting
contracts. These firms specialize in marketing life insurance
products to citizens of foreign countries. These life products
are specially designed by CICA to be compatible with marketing
methods and commission requirements. The international firms
have many years' experience marketing life insurance products
for CICA. These firms provide recruitment, training and
supervision of their managers and associates in the placement
of dollar-denominated life insurance products; however, all
consultants and associates contract directly with CICA and
receive their compensation from CICA. Accordingly, should the
consulting arrangement between any firm and CICA be canceled
for any reason, CICA believes it could continue suitable
marketing arrangements with the individuals of the consulting
firms without appreciable loss of present and future sales, as
it has done in the past. There is, however, always a risk that
sales could decrease. The contract with the consultants
provides that they have the responsibility for recruiting and
training their sales associates. They are responsible for all
of their overhead costs and bear the expense of contests and
awards. These firms guarantee any debts of marketers and their
associates. In consideration for the services rendered, the
marketing consultants receive a fee on all new policies placed
by them or their associates. See "Business of CICA -
Commissions." The marketing contracts may be terminated for
various causes at any time by mutual consent of the parties or
upon 30 days' notice by either party.
At present, CICA is dependent on the non-U.S. markets for a
large percentage of its new life insurance business. This
subjects CICA to potential risks with regard to the continued
ability to write such business should adverse events occur in
the countries from which CICA receives applications. These
potential risks include lapses of policies if funds that flow
out of such countries were to become restricted. Based on more
than 35 years experience in the marketplace in which CICA
competes, management believes such risks are not material. The
Company maintains no assets outside the U.S. and requires all
premiums to be paid in the U.S. with U.S. dollars via drafts
drawn on banks in the U.S.; therefore, it could lose no funds
from currency devaluation or foreign appropriation. Many of the
inherent risks in foreign countries, such as political
instability, hyper-inflation and economic disruptions tend to
improve rather than hurt CICA's business because it encourages
individuals to convert assets out of local currencies to the
more stable U.S. dollar.
The development of CICA's U.S. market, will, in the opinion of
management, reduce the dependence on foreign markets in the
future. It is expected that the domestic program will take
several years to build sales to a level approximating that sold
internationally.
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MARKETING OPERATIONS
CICA holds licenses to do business in 15 states and accepts
applications from numerous foreign countries. CICA's
operations are conducted on the independent contractor basis,
with a sales force at December 31, 1999 of 1,415 individuals,
615 individuals at December 31, 1998 and 777 individuals at
December 31, 1997. The decrease in marketing consultants in
1998 reflects the loss of former ALLIC sales representatives
described below, while the 1999 increase demonstrates the
emphasis on recruiting placed by management.
COMMISSIONS
CICA's marketing managers are independent contractors,
responsible for their respective expenses, and are compensated
on a percentage of premium basis. Percentage amounts paid to
salesmen on individual term, annuity and accident and health
insurance are substantially less than the levels paid for
individual ordinary life insurance. The marketing managers
receive overriding first year and renewal commissions on
business written by individuals under their supervision and
all marketing expenses related thereto are included in the
above percentages.
RESERVES
CICA establishes actuarial reserves as liabilities to meet
obligations on all outstanding policies. Reserves and deferred
acquisition costs are prepared in conformity with the American
Academy of Actuaries Committee on Financial Reporting
Principles and generally accepted accounting principles. In
determining such reserves CICA used the 1955 to 1960, 1965 to
1970, and 1975 to 1980 Select and Ultimate Mortality Tables
with interest rates at 4% or in a range graded from 9% to 5%
with recent issues reserved at 7% graded to 6 1/2%. Withdrawal
assumptions are based primarily on actual historical
experience. Statutory reserves are used for paid-up life
business. Claims reserves include an amount equal to the
expected benefit to be paid on reported claims in addition to
an estimate of claims that are incurred but not reported,
based on actual historical experience. CICA receives an
independent actuarial certification of its reserves prepared
in accordance with both Generally Accepted Accounting
Principles and Statutory Accounting Practices. The
certifications have noted no deficiencies for the years
presented herein.
REINSURANCE
CICA assumes and cedes insurance with other insurers,
reinsurers and members of various reinsurance pools.
Reinsurance arrangements are utilized to provide greater
diversification of risk and minimize exposure on larger risks.
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<PAGE> 13
(a) INSURANCE CEDED
CICA generally retains $75,000 of risk on any one person. As
of December 31, 1999, the aggregate amount of life insurance
ceded amounted to $259,060,000 or 10.8% of total direct and
assumed life insurance in force, and $278,277,000 or 10.8% in
1998. CICA is contingently liable with respect to ceded
insurance should any reinsurer be unable to meet the
obligations reinsured.
As of December 31, 1999, CICA had in effect automatic
reinsurance agreements that provide for cessions of ordinary
insurance from CICA. Additionally, CICA has reinsurance
treaties in force with several reinsurers of life and accident
and health insurance. These treaties provide for both
automatic and facultative reinsurance of standard and
substandard risks ceded to them by CICA for life, accident and
health and supplemental benefits above CICA's retention limit
on a yearly renewable term, coinsurance or modified
coinsurance basis.
Treaties with Employers Reassurance (ERC) and Businessmen's
Assurance (BMA) historically have been the primary vehicle
utilized by CICA for its international business. The treaties
are structured in such a way as to allow CICA to "self
administer" the cessions on a reduced cost basis. During 1995,
a third carrier was added as a principal reinsurer, Riunione
Adriatica di Sicurta, of Italy (RAS).
The ERC and BMA agreements provide that for risks reinsured in
specified countries, 70% of each risk in excess of CICA's
retention will be ceded to ERC and 30% to BMA. The RAS
agreement provides that on risks reinsured in specified
countries, 100% of the risk in excess of CICA's retention is
ceded to RAS. CICA pays premiums to ERC and BMA on an annual
basis and is responsible for the production of the reporting
monthly and annually to ERC and BMA to allow proper accounting
for the treaties.
The cessions are on a yearly renewable term basis and are
automatic up to $333,333 for ERC, $500,000 for RAS and
$166,667 for BMA at which point the reinsurance is subject to
a facultative review by the reinsurers. At December 31, 1999,
CICA had ceded $150,350,000 in face amount of insurance to
ERC, $25,616,000 to BMA and $74,377,000 to RAS under these
agreements.
RAS is an unauthorized reinsurer in the state of Colorado;
however RAS has agreed to comply with Colorado statutes
regarding such companies. Under these statutes, RAS will
provide a letter of credit, issued by a U.S. bank meeting the
Colorado requirements, equal to any liabilities it incurs
under this agreement. RAS notified CICA in late 1999 that it
is withdrawing from the reinsurance market effective January
1, 2000. As a result, CICA is holding discussions with
possible reinsurers for new international business. The
Company anticipates little difficulty in finding a reinsurer
to replace RAS and does not expect a change in structure or
rates.
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A reinsurance treaty with Connecticut General Life Insurance
Company (CG) covers all of CICA's accidental death insurance
supplementing its life insurance policies. These cessions are
on a yearly renewable term basis and occur automatically if
total accidental death benefits known to CICA are less than
$250,000 or otherwise on a facultative review basis. At
December 31, 1999, CICA had ceded $1.2 billion in face amount
of business to CG under this treaty.
CICA monitors the solvency of its reinsurers to minimize the
risk of loss in the event of a failure by one of the parties.
The primary reinsurers of CICA are large, well capitalized
entities which have no current or prior history of financial
difficulty.
(b) INSURANCE ASSUMED
At December 31, 1999, CICA had in-force reinsurance assumed as
follows:
<TABLE>
<CAPTION>
TYPE OF AMOUNT
BUSINESS IN-FORCE AT
NAME OF COMPANY LOCATION ASSUMED END OF YEAR
-------------------- ---------- ---------- ------------
<S> <C> <C> <C>
Prudential Insurance Newark, Ordinary
Company (Prudential) New Jersey Group Life $273,146,000
</TABLE>
The reinsurance agreement with Prudential provides for CICA to
assume a portion of the insurance under a group insurance
policy issued by Prudential to the Administrator of Veterans'
Affairs. CICA's portion of the total insurance under the
policy is allocated to CICA in accordance with the criteria
established by the Administrator. The agreement continues in
full force and effect at December 31, 1999.
CICA has also entered into a Serviceman's Group Life Insurance
Conversion Pool Agreement with Prudential, under the above
described agreement, whereby CICA assumed a portion of the
risk of Prudential under the group policy due to excess
mortality under the conversion pool agreement resulting from
issuing conversion policies as prescribed for membership in
the conversion pool.
INVESTMENTS
State insurance statutes prescribe the quality and percentage
of the various types of investments which may be made by
insurance companies and generally permit investment in
qualified state, municipal, federal and foreign government
obligations, high quality corporate bonds, preferred and
common stock, real estate and mortgage loans within certain
specified percentages. CICA's invested assets at December 31,
1999 were distributed as follows: fixed maturities - 86.2%,
mortgage loans - 0.8%, policy loans - 12.9% and other
long-term investments - 0.1%. CICA did not foreclose on any
mortgage loans in 1999. All mortgage
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<PAGE> 15
loans are supported by independently appraised real estate.
The investment policy of CICA is consistent with the
provisions of the Colorado Insurance Code.
At December 31, 1999, 81.3% of CICA's investments in fixed
maturities were comprised of U.S. Treasury securities and
obligations of U.S. government corporations and agencies,
including U.S. government guaranteed mortgage-backed
securities, compared to 85.1% at December 31, 1998. Of these
mortgage-backed securities, all were guaranteed by U.S.
government agencies or corporations that are backed by the
full faith and credit of the U.S. government or that bear the
implied full faith and credit of the U.S. government.
REGULATION
CICA is subject to regulation and supervision by the insurance
department of each state or other jurisdiction in which it is
licensed to do business. These departments have broad
administrative powers relating to the granting and revocation
of licenses to transact business, the licensing of marketing
persons, the approval of policy forms, the advertising and
solicitation of insurance, the form and content of mandatory
financial statements, the reserve requirements, and the type
of investments which may be made. CICA is required to file
detailed annual reports with each such insurance department,
and its books and records are subject to examination at any
time. In accordance with state laws and the rules and
practices of the National Association of Insurance
Commissioners, CICA is examined periodically by examiners of
its domiciliary state and by representatives (on an
"association" or "zone" basis) of the other states in which it
is licensed to do business. An examination was concluded in
1998 for the five years ended December 31, 1996, by a public
accounting firm under contract with and supervision by the
Colorado Division of Insurance. CICA is audited annually by an
independent public accounting firm.
Various states, including Colorado, have enacted "Insurance
Holding Company" legislation which requires the registration
and periodic reporting by insurance companies which control,
or are controlled by, other corporations or persons. Under
most of such legislation, control is presumed to exist with
the ownership of ten percent or more of an insurance company's
voting securities. The Company is subject to such regulation
and has registered under such statutes as a member of an
"insurance holding company system." The legislation typically
requires periodic disclosure concerning the transactions
between the registered insurer, the ultimate controlling
party, and all affiliates and subsidiaries of the ultimate
controlling party, and in many instances requires prior
approval of intercorporate transfers of assets (including in
some instances payment of dividends by the insurance
subsidiary) within the holding company system.
Since CICA does not physically conduct business in countries
outside the U.S. but rather accepts applications from overseas
marketers, it is not subject to regulation in countries where
most of its insureds are residents. The prospect of such
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<PAGE> 16
regulation is viewed as remote by management of CICA because
obtaining insurance through application by mail outside of
one's country is a common practice in many foreign countries,
particularly those where CICA's insureds reside.
COMPETITION
The life insurance business is highly competitive, and CICA
competes with a large number of stock and mutual companies.
CICA believes that its premium rates and its policies are
generally competitive with those of other life insurance
companies, many of which are larger than CICA, selling similar
types of insurance.
CICA's international marketing plan stresses making available
dollar-denominated life insurance products available to high
net worth individuals residing in foreign countries and the
sale of individual, whole life and supplemental accident and
health products to United States residents. A large percentage
of CICA's first year and renewal life insurance premium income
during 1998 and 1999 came from the international market. See
"Business of CICA - Geographical Distribution of Business."
Management believes CICA to be a significant competitor in the
international market and attributes its market position to the
expertise of management, the uniqueness of its life insurance
products and competitiveness of its pricing methods.
CICA faces offshore competition from numerous American life
insurance companies that also sell U.S. dollar denominated
policies to non-U.S. citizens, with no one company being
dominant in the market. Some companies may be deemed to have a
competitive advantage due to histories of successful
operations and large agency forces. Management believes that
its experience, combined with the special features of its
unique policies, allows CICA to compete effectively in
pursuing new business.
Management believes that CICA competes indirectly with
non-U.S. companies, particularly with respect to Latin
American companies. CICA, as a U.S. domestic insurer paying
claims in U.S. dollars in the U.S., has a different clientele
and product than foreign-domiciled companies. CICA's product
is usually acquired by persons in the top 5% of income of
their respective countries. The policies sold by foreign
companies are sold broadly and are priced based on the
mortality of the entire populace of the respective geographic
region. Because of the predominance of lower incomes in most
of these countries, the mortality experience tends to be very
high on the average, causing mortality charges which are
considered unreasonable based on the life mortality experience
of the upper five percent of income of the population.
Additionally, the assets that back up the policies issued by
foreign companies are invested in the respective countries,
and thus, are exposed to the inflationary risks
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<PAGE> 17
and economic crises that historically have impacted many
foreign countries. Another reason that CICA experiences an
advantage is that many of its policyholders desire to transfer
capital out of their countries due to the perceived financial
strength and security of the United States by foreigners.
Also, CICA competes indirectly with other U.S. and European
insurers in countries where CICA's insureds reside. CICA's
experience has been that its market niche is in attracting
insureds who want the safety and security of a U.S. domestic
insurer. Management of CICA considers it to be difficult and
speculative to estimate the potential of the foreign market
for U.S. insurers. However, based upon the volume of new
premium generated by CICA that originates from many countries
in Latin America, management believes that CICA receives a
substantial share of such business. However, CICA does not
have market share data to confirm management's belief.
CICA intends to initiate a new domestic marketing thrust
during 2000 focusing on the sale of individual ordinary life
insurance products to residents of rural communities. This
program will be initiated through one state at a time.
Management believes this market is significantly ignored by
the majority of U.S. insurers. Competition from many U.S.
companies is significantly greater in the domestic market,
particularly as banking institutions enter the insurance
market due to the passage of the Graham Leach Bliley Act in
1999.
In CICA's block of accident and health insurance (6.4% of
total premium income), it is in competition with many
insurance companies as well as with voluntary and
government-sponsored plans for meeting hospitalization and
medical expenses such as Blue Cross/Blue Shield, "Medicare"
and "Medicaid." Future expansion of such programs or the
establishment of additional government health programs could
adversely affect the future of accident and health insurance
on CICA's books, most of which has been acquired in the
acquisition of other companies.
FEDERAL INCOME TAXATION
CICA is a "small company" as that term is defined in the
Internal Revenue Code (the "Code"), section 806. As such, CICA
qualified for a special small company deduction (presently
equal to 60% of "tentative life insurance company taxable
income") which serves to decrease significantly the amount of
tax which might otherwise have to be paid.
The Revenue Reconciliation Act of 1990 revised the method in
which insurance companies claim deductions for policy
acquisition costs. Previously, insurance companies were
allowed to deduct actual policy acquisition costs as they were
incurred. Beginning in 1990, policy acquisition costs are
determined as a percentage of annual net premiums and are then
deductible on a straight-line basis over a ten-year period
rather than treated as an immediate deduction. This change in
treatment for acquisition costs has had a significant impact
on CICA's taxable
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<PAGE> 18
income due to the relatively large amounts of such deferrals
caused by the increases in new business.
CICA files a consolidated Federal income tax return with
Citizens and its subsidiaries.
(iii) BUSINESS OF NSLIC
NSLIC was acquired in November, 1997. Domiciled in Arlington,
Texas, NSLIC's revenues have historically been derived from
revenues generated by the sale of ordinary whole life
insurance, individual supplemental and major medical health
insurance, credit insurance and investment income. All
intercompany fees and expenses have been eliminated in the
consolidated financial statements.
During the year ended December 31, 1999, 7.3% of premium
revenue was attributable to life, endowment and term
insurance; 24.9% to credit insurance; and 67.8% to accident
and health insurance. All of the life insurance in force is
non-participating.
Prior to the acquisition by Citizens, NSLIC's sales efforts
centered on a major medical supplemental hospitalization
policy and the credit business. The credit business is sold
primarily through furniture stores in Texas. As a result, the
average contract size is relatively small, and the average
duration is approximately two years.
NSLIC's block of business consists of large amounts of
scheduled daily indemnity policies and major medical coverage.
During the second half of 1998, NSLIC began to experience an
increase in the volume of claims. As a result of the
substantial increase in the volume of claims plus an increase
in the accident and health loss ratio, in 1999 management
canceled a large portion of these existing blocks of major
medical business in order to curtail both claims and
operational expenses. This action will result in a decrease of
annual premium income of $1.6 million. However, due to the
claims experience as well as the overhead necessary to
administer such management believes that the action will
enhance near and long-term profitability.
In December, 1999, CICA filed a Plan and Agreement of Merger
with the Insurance Departments of Texas and Colorado whereby
NSLIC would be merged with and into CICA. The effective date
of the Plan for accounting purposes is January 1, 2000.
GEOGRAPHICAL DISTRIBUTION OF BUSINESS
For the year ended December 31, 1999, 96.5% of NSLIC's total
premium income was derived from residents of Texas; and 2.0%
from Louisiana residents. For 1998, 97.3% of total premium
income was derived from residents of Texas and 2.6% from
Louisiana residents.
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<PAGE> 19
MARKETING OPERATIONS
NSLIC holds licenses to do business in three states - Texas,
Oklahoma and Louisiana. NSLIC's operations are conducted
through independent contractors, with a sales force of 76
representatives at December 31, 1999 and 142 at December 31,
1998.
RESERVES
NSLIC establishes actuarial reserves as liabilities to meet
obligations on all outstanding policies. Reserves and deferred
acquisition costs are prepared in conformity with the American
Academy of Actuaries Committee on Financial Reporting
Principles and generally accepted accounting principles.
Claims reserves include an amount equal to the expected
benefit to be paid on reported claims in addition to an
estimate of claims that are incurred but not reported, based
on actual historical experience. NSLIC receives an independent
actuarial review of its reserves. The independent actuaries
have noted no deficiencies for the years presented herein.
REINSURANCE
NSLIC cedes insurance with other insurers, reinsurers and
members of various reinsurance pools. Reinsurance arrangements
are utilized to provide greater diversification of risk and
minimize exposure on larger risks.
INSURANCE CEDED
As of December 31, 1999, NSLIC had in effect automatic
reinsurance agreements that provide for cessions of ordinary
insurance. Additionally, NSLIC has reinsurance treaties in
force with several reinsurers of life and accident and health
insurance. These treaties provide for both automatic and
facultative reinsurance of standard and substandard risks for
life, accident and health and supplemental benefits above
NSLIC's retention limit on a yearly renewable term basis.
NSLIC generally retains $20,000 of risk on any one person. A
treaty with Life Reinsurance Corporation of America has
historically been the primary vehicle utilized by NSLIC for
its life business and a treaty with Reliastar is in effect on
NSLIC's accident and health business. As of December 31, 1999,
the aggregate amount of life insurance ceded amounted to
$891,000 or 2.0% of total direct life insurance in force.
Additionally, NSLIC ceded $154,000 of accident and health
premium (approximately 4.9% of total A&H premium). NSLIC is
contingently liable with respect to ceded insurance should any
reinsurer be unable to meet the obligations reinsured.
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<PAGE> 20
NSLIC monitors the solvency of its reinsurers to minimize the
risk of loss in the event of a failure by one of the parties.
The primary reinsurers are large, well capitalized entities
which have no current or prior history of financial
difficulty.
INVESTMENTS
State insurance statutes prescribe the quality and percentage
of the various types of investments which may be made by
insurance companies and generally permit investment in
qualified state, municipal, federal and foreign government
obligations, high quality corporate bonds, preferred and
common stock, real estate and mortgage loans by certain
specified percentages. NSLIC's invested assets at December 31,
1999 were distributed as follows: fixed maturities - 99.8% and
policy loans - 0.2%.
REGULATION
NSLIC is subject to regulation and supervision by the
insurance department of each state or other jurisdiction in
which it is licensed to do business. These departments have
broad administrative powers relating to the granting and
revocation of licenses to transact business, the licensing of
marketing persons, the approval of policy forms, the
advertising and solicitation of insurance, the form and
content of mandatory financial statements, the reserve
requirements, and the type of investments which may be made.
NSLIC is required to file detailed annual reports with each
such insurance department, and its books and records are
subject to examination at any time. In accordance with state
laws and the rules and practices of the National Association
of Insurance Commissioners, NSLIC is examined periodically by
examiners of its domiciliary state and by representatives (on
an "association" or "zone" basis) of the other states in which
it is licensed to do business. NSLIC's most recent examination
which was completed during 1999, was for the three years ended
December 31, 1997, by the Texas Department of Insurance. NSLIC
is audited annually by an independent public accounting firm.
Various states, including Texas, have enacted "Insurance
Holding Company" legislation which requires the registration
and periodic reporting by insurance companies which control,
or are controlled by, other corporations or persons. Under
most of such legislation, control is presumed to exist with
the ownership of ten percent or more of an insurance company's
voting securities. NSLIC is subject to such regulation and has
registered under such statutes as a member of an "insurance
holding company system." The legislation typically requires
periodic disclosure concerning the transactions between the
registered insurer, the ultimate controlling party, and all
affiliates and subsidiaries of the ultimate controlling party,
and in many instances requires prior approval of
intercorporate transfers of assets (including in some
instances payment of dividends by the insurance subsidiary)
within the holding company system.
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<PAGE> 21
COMPETITION
The life insurance business is highly competitive, and NSLIC
competes with a large number of stock and mutual companies.
NSLIC believes that its premium rates and its policies are
generally competitive with those of other life insurance
companies, many of which are larger than NSLIC, selling
similar types of insurance. In NSLIC's block of accident and
health insurance, it is in competition with many life
insurance companies as well as with voluntary and
government-sponsored plans for meeting hospitalization and
medical expenses such as Blue Cross/Blue Shield, "Medicare"
and "Medicaid." Future expansion of such programs or the
establishment of additional government health programs could
adversely affect the future of accident and health insurance
on NSLIC's books.
(iv) BUSINESS OF USLIC
USLIC is a Mississippi-domiciled life and accident and health
insurer offering whole life products and specialty accident
and health products to residents of the Southeastern United
States. USLIC is licensed in the states of Alabama, Arizona,
Arkansas, Georgia, Indiana, Louisiana, Mississippi, New
Mexico, Oklahoma, Tennessee and Texas. In February 2000, CICA
filed a merger plan with regulatory authorities in Mississippi
and Colorado, wherein USLIC would merge with and into CICA.
All intercompany fees and expenses were eliminated in the
consolidated financial statements.
USLIC's in force block of business has consisted of large
amounts of scheduled daily indemnity policies, major medical
coverage and group dental business. In 1998 and early 1999,
USLIC added approximately $3 million in premiums of new group
dental business. During the second half of 1998, USLIC began
to experience a significant increase in the volume of claims,
which resulted from the high early utilization by holders of
the dental certificates. As a result of the substantial
increase in the volume of claims plus an increase in the
accident and health loss ratio, in 1999 management canceled a
large portion of the existing blocks of group dental business
in order to curtail both claims and operation expenses.
Approximately 60% of the group dental business was terminated
prior to January 1, 2000 and management expects the remaining
dental business to terminate by December 31, 2000, the
earliest date allowed by contract for termination. This action
will result in a decrease in annual premium income of $3
million; however, due to the claims experience as well as the
overhead necessary to administer such, management believes
that the action will enhance near and long-term profitability.
As of December 31, 1999, USLIC had $27,492,000 of life
insurance in force, of which $16,534,000 was reinsured and
$10,958,000 retained. The maximum retention by USLIC on any
one life for life insurance policies is $20,000. All of the
accidental death benefit coverage is reinsured.
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Since 1994, USLIC has emphasized several supplementary health
insurance products, i.e., cancer, hospital indemnity,
outpatient sickness, catastrophic illness, emergency accident,
intensive care, disability income and Medicare supplement
policies. Premiums are employer paid or paid through payroll
deduction. USLIC issues only through Table 4 (100% extra
mortality) on its primary life policy to improve the mortality
and potential profitability on that product line. The
substandard risks are those that by reason of health,
occupation or avocation fall outside the normal anticipated
mortality levels of the general population as developed by the
actuarial sciences. All of its accidental death risk is
reinsured. USLIC also has a reinsurance agreement on its
cancer policy which limits its exposure to $35,000 in any
calendar year on any one claim. Additionally, various other
health products are reinsured to minimize risk.
USLIC's selling efforts are not usually concentrated on any
one economic, occupational, hazard or age group. The marketing
territory is Alabama, Arkansas, Louisiana, Mississippi,
Oklahoma, Tennessee and Texas.
Policies are sold by direct licensed representatives and
licensed general agents. None of these agents has underwriting
authority. The commissions paid are believed by management to
be competitive with commissions paid by other life insurance
companies in the states in which USLIC is licensed to operate.
USLIC is aware that there is considerable competition for
obtaining qualified agents and that it competes with
well-established insurance companies for agents to sell its
policies. USLIC also recruits agents from among persons who
are not now engaged in the selling of life and accident and
health insurance, and USLIC trains such agents. USLIC
presently has approximately 200 licensed agents. The agents
recruited and licensed by USLIC hold licenses with other
companies and possibly could sell other companies' policies
that are similar in some respects to USLIC's policies. This
arrangement is common with companies that recruit and license
general agents.
From 1997 through 1999, virtually all sales were supplemental
accident and health or group dental products. For 1999, 12.0%
premium income was from life policies and 88.0% from accident
and health policies, and in 1998, 12.5% of premium income was
from life products, and 87.5% from accident and health.
INVESTMENTS
USLIC invests and reinvests certain of its reserves and other
funds. The investments of USLIC are limited as to type and
amount by the Mississippi insurance laws which are designed to
insure prudent investment policies.
The investment of capital, paid-in and operating surplus and
other funds of insurers organized under the laws of the State
of Mississippi is specified by the Mississippi Insurance Code.
These statutes include general and specific limitations on
investments, records of investments and other matters. The
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<PAGE> 23
Mississippi insurance law regulating investments and other
aspects of the management of insurance companies is designed
primarily for the protection of policyholders rather than
investors.
The administration of USLIC's investment portfolio is handled
by the same outside investment manager as CICA's, with all
trades approved by a committee of the Board of Directors. The
guidelines used require that bonds, both government and
corporate, are of high quality and comprise a majority of the
investment portfolio. The assets selected are intended to
mature in accordance with the average maturity of the
insurance products and to provide the cash flow for USLIC to
meet its policyholder obligations. The type, quality and mix
will enable USLIC to compete in the life insurance marketplace
and to provide appropriate interest margins.
REINSURANCE
As is customary among insurance companies, USLIC will reinsure
with other companies portions of the life insurance risks it
will underwrite. The primary purpose of reinsurance agreements
is to enable an insurance company to reduce the amount of its
risk on any particular policy and, by reinsuring the amount
exceeding the maximum amount the insurance company is willing
to retain, to write policies in amounts larger than it could
without such agreements. Even though a portion of the risk may
be reinsured, USLIC will remain liable to perform all
obligations imposed by the policies issued by it and is liable
if its reinsurer should be unable to meet its obligation under
the reinsurance agreements. USLIC's general policy is to
reinsure business with insurance companies with an A.M. Best
and Company rating of "A" or better.
USLIC's life reinsurance is being ceded through automatic and
facultative treaties with two unaffiliated insurance
companies, Businessmen's Assurance Company, Kansas City,
Missouri, and Optimum Reinsurance Co., Dallas, Texas. At
December 31, 1999, USLIC had ceded to BMA, $7,834,000 in face
amount, and $8,700,000 to Optimum Re. It is the practice of
USLIC to reinsure all accidental death benefit risks that are
written. USLIC has a reinsurance agreement with Reliastar
Financial Corporation, Minneapolis, Minnesota, providing
coverage of claims in excess of various amounts on several of
its accident and health policies. Approximately $336,000 in
premiums were ceded under this treaty in 1999.
RESERVES
USLIC has established actuarially computed reserves as
liabilities to meet its policy obligations. These reserves are
the amounts which, with additions from premiums to be received
and with interest on such reserves, compounded annually at
certain assumed rates, are calculated to be sufficient
according to accepted actuarial principles to meet policy
obligations as they mature. The various actuarial factors are
determined from mortality tables and interest rates in effect
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<PAGE> 24
when the policies are issued. The reserves to be included in
statutory filings will be valued on a basis that meets the
requirements of the law in Mississippi. USLIC receives an
independent actuarial certification of its reserves prepared
in accordance with both GAAP and Statutory accounting
practices.
REGULATION
Mississippi insurance laws and regulations generally govern
the accounting practices and prescribe the procedures and
forms for financial reports of insurance companies prepared on
a Statutory accounting basis and filed with the Mississippi
Insurance Department. Reports prepared in accordance with the
prescribed or permitted statutory accounting practices are
primarily intended to insure the ability of an insurance
company to meet its obligations to policyholders and do not
necessarily reflect going concern value. Balance sheets
prepared in accordance with statutory accounting practices are
designed primarily to reflect the financial position of
insurance companies from the standpoint of solvency. Certain
of the prescribed or permitted accounting practices differ in
some respects from generally accepted accounting principles
followed by other business enterprises in determining
financial position and results of operations.
The insurance laws of the State of Mississippi also provide
that a life insurance company will be assessed a lower premium
tax if up to 25% of the company's investments are in
Mississippi securities. The management of USLIC has invested
its assets in a manner to incur the lower tax rate.
In common with other insurance companies operating in
Mississippi, USLIC is subject to the regulation and
supervision of the Mississippi Insurance Commissioner. After
making application for admission and receiving proper license,
USLIC may operate in other states and, at that time, will be
subject to regulation and supervision in any other state where
it may be permitted to transact business. Such regulation is
primarily for the benefit and protection of insurance
policyholders rather than shareholders of insurance companies.
Broad administrative powers are possessed by the Mississippi
Department of Insurance and other supervising agencies.
Although the powers differ from state to state, in general
they include authority to grant and revoke licenses to
transact business, to be an agent, to supervise premium rates,
to approve the form of insurance contracts, to supervise the
form of financial statements filed with such agency, to
regulate capital requirements, to regulate insurable interest
on one life and to require the filing of detailed annual
reports. USLIC's business and accounts are subject to
examination by the Mississippi Department of Insurance which
conducted an examination in 1997 for the three years ended
December 31, 1996.
(v) BUSINESS OF CILIC
CILIC is an Illinois domiciled life insurer admitted to do
business in four states. Dormant for several years, CILIC
services a closed block of life insurance
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policies. At December 31, 1999, CILIC had assets of $2.8
million and annual revenues of $195,000. All intercompany fees
and expenses have been eliminated in the consolidated
financial statements.
(vi) BUSINESS OF INVESTORS
Investors is an Illinois holding company that owns Excalibur.
Investors became a wholly-owned subsidiary of Citizens on
January 26, 1999. All intercompany fees and expenses have been
eliminated in the consolidated financial statements.
(vii) BUSINESS OF EXCALIBUR
Excalibur is an Illinois-domiciled life insurer. It services a
small block of ordinary life insurance. Excalibur is 100%
owned by Investors which became a wholly-owned subsidiary of
Citizens on January 26, 1999. At December 31, 1999, Excalibur
had assets of $3.5 million and annual revenues of $225,000.
All intercompany fees and expenses have been eliminated in the
consolidated financial statements.
(viii) BUSINESS OF CTI
CTI is a wholly-owned subsidiary of CICA and engages in the
business of providing data processing services and acquisition
and leasing of furniture and equipment for its parent as well
as data processing services and software to other companies.
Pursuant to an Information Systems Management and Services
Contract dated October 1, 1991, and subsequently amended, CTI
provides data processing services to the Company for a fixed
fee of $85,000 per month. As of and for the year ended
December 31, 1999, CTI's total assets were $920,000 and
revenues were $1,058,000. All intercompany fees and expenses
have been eliminated in the consolidated financial statements.
(iv) BUSINESS OF III
In August, 1993, Citizens sold the stock of III to CICA for
its book value. III provides aviation services to the Company.
As of and for the year ended December 31, 1999, III's total
assets were $1,119,000 and revenues were $205,000. All
intercompany fees and expenses have been eliminated in the
consolidated financial statements.
(x) BUSINESS OF FHA
Formed in 1989, FHA, formerly Funeral Homes of Louisiana, owns
and operates a funeral home in Baker, Louisiana. Constructed
in 1992, the operation of the Baker Funeral Home constitutes
the primary business function of FHA. At December 31, 1999,
FHA had total assets of $560,000 and total annual revenues of
$472,000. All intercompany fees and expenses have been
eliminated in the consolidated financial statements.
25
<PAGE> 26
ITEM 2. DESCRIPTION OF PROPERTIES
CICA owns its principal office in Austin, Texas, consisting of
an 80,000 square foot office building. Approximately 45,000
square feet is occupied by CICA and its affiliates with the
remainder of the building being leased. At December 31, 1999,
the occupancy rate of the property was 100%.
Through the acquisition of American Liberty Financial
Corporation described above, the Company also owns a 6,324
square foot funeral home in Baker, Louisiana with a total cost
of $473,000. This facility is owned and operated by a
subsidiary, FHA.
ITEM 3. LEGAL PROCEEDINGS
In March 1999, the Company was served with a summons regarding
an action entitled Berdeaux Living Trust v. First Investors
Group, Inc., Donald L. Dennis, H. Marie Dennis, Winona Drewes
and Citizens, Inc. in U.S. District Court, Southern District
of Illinois. The complaint alleged that the defendants
defrauded the plaintiffs and other persons who were preferred
shareholders of Investors in connection with an acquisition of
Investors completed by the Company in early 1999. In the
acquisition, the Company issued approximately 610,000 shares
of its Class A Common Stock to shareholders of Investors
pursuant to a registration statement declared effective in
December 1998. The plaintiffs sought class action
certification on behalf of the approximately 1,860 persons who
were preferred shareholders of Investors. Damages were alleged
based upon alleged violations of Section 10(b) of the
Securities Exchange Act of 1934 and the Illinois securities
laws as well as under Illinois common law fraud and against
the defendants other than the Company, for breach of fiduciary
duty. The Company moved to dismiss the complaint on procedural
and substantive grounds, and on October 22, 1999, the U.S.
District Court dismissed the complaint without prejudice.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders of Citizens during
the fourth calendar quarter of 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Citizens' Class A common stock is traded on the American Stock
Exchange (AMEX) under the symbol CIA. The high and low prices
per share as supplied by the Amex Monthly Statistical Report
are as follows.
26
<PAGE> 27
<TABLE>
<CAPTION>
1999 1998
--------------------------- -----------------------
QUARTER ENDED HIGH LOW HIGH LOW
----------------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
March 31 $ 5.69 $ 2.78 $ 6.81 $ 5.69
June 30 6.06 5.25 6.44 6.00
September 30 6.00 5.38 6.09 5.56
December 31 7.13 5.75 6.00 5.25
</TABLE>
As of December 31, 1999, the approximate number of record
owners of Citizens' Class A common stock was 16,300.
Management estimates the number of beneficial owners to be
approximately 56,000.
On November 2, 1999, the Company's Board of Directors
declared a 7% stock dividend, payable on December 31, 1999 to
holders of record as of December 1, 1999. The dividend
resulted in the issuance of 1,763,805 Class A shares
(including 136,091 shares in treasury) and 43,474 Class B
shares.
Citizens has not paid cash dividends in any of the past four
years and does not intend to pay such in the immediate
future. For restrictions on the present and future ability to
pay dividends, see Note 6 of the "Notes to Consolidated
Financial Statements."
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth, in summary form, selective data
of the Company. This data, which is not covered in the report
of the independent auditors, should be read in conjunction
with the consolidated financial statements and notes which
are included elsewhere herein (amounts in thousands except
per share amounts). The per share amounts have been adjusted
retroactively for all periods presented to reflect the change
in capital structure resulting from a 7% common stock
dividend paid on December 31, 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(IN THOUSANDS EXCEPT PER SHARE DATA)
----------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
NET OPERATING REVENUES $ 71,877 $ 72,685 $ 65,027 $ 63,822 $ 53,130
NET INCOME (LOSS) $ 1,271 $ (6,721) $ 3,426 $ 2,214 $ 2,750
NET INCOME (LOSS) PER SHARE $ .05 $ (.29) $ .15 $ .10 $ .15
TOTAL ASSETS $ 255,485 $ 253,384 $ 249,519 $ 218,277 $ 209,308
NOTES PAYABLE $ 0 $ 333 $ 937 $ 489 $ 773
TOTAL LIABILITIES $ 183,218 $ 178,480 $ 169,938 $ 151,394 $ 144,595
TOTAL STOCKHOLDERS' EQUITY $ 72,267 $ 74,904 $ 79,581 $ 66,883 $ 64,713
BOOK VALUE PER SHARE $ 3.09 $ 3.28 $ 3.56 $ 3.09 $ 3.42
</TABLE>
See Part I (b) - Financial information regarding the insurance business
and Item 7 - Management's Discussion and Analysis.
27
<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net income of $1,271,072 or $.05 per share was earned during
1999, compared to a net loss of $6,720,693 or $0.29 per share
for the year ended December 31, 1998 and net income of
$3,425,523 or $.15 per share in 1997.
A non-recurring charge of $9.5 million recorded in the third
quarter of 1998 related to the non-recoverability of a portion
of the excess of cost over net assets acquired ("goodwill") on
the Company's books caused the 1998 loss. The writedown was
related to the goodwill recorded in the 1995 acquisition of
American Liberty Financial Corporation (ALFC) and was caused
by a decline in new production from insurance agents formerly
associated with American Liberty. Subsequent to the
acquisition, management implemented a 50% reduction in the
amount of commission paid to these agents. The commission
reductions were necessary to preserve the profitability of the
accident and health business which was negatively impacted by
changes in state laws that established minimum claims ratios
that severely limited profit margins, as well as mandated
change in interest rates used to compute reserves on this
business.
In order to ascertain the recoverability of the goodwill
balance, the Company performed an analysis of the relevant
cash flows based upon estimated production, net of policy
acquisition costs, policyholder benefits and other general
expenses. As a result of this analysis, it was determined that
the production of future business did not support goodwill of
$9.5 million which was charged to earnings during third
quarter 1998. Management's estimate of future production was
re-evaluated based upon sales activity, the size of the active
agency force, and the anticipated future production to be
achieved in subsequent years. Management has continued to
monitor production associated with these products. During
1998, management was successful in reviving production from
some of the largest producers of American Liberty. During
1999, the assumed production levels were met. Should
production fall below such estimates, additional write-offs
could be necessary. Approximately $3 million of goodwill
related to ALFC remains.
Decreases in acquisition related expenses associated with
American Liberty and economies of scale created by the
combination of companies contributed to the increase in 1997
income.
Total revenues for the year ended December 31, 1999 were
$71,877,058 compared to $72,684,915 in 1998, a decrease of
1.1%. In 1997 revenues were $65,027,298. The decrease in 1999
revenues was related to a 80.7% decrease in realized gains on
investments which were $310,890 for 1999 compared to
$1,614,388 in 1998. The inclusion of the revenues from USLIC
and NSLIC for the entire year was the primary reason for the
increase during 1998. Decreased writing of new business by
CICA in the international market and by ALLIC domestically was
offset by the premium revenues of USLIC and NSLIC, which
28
<PAGE> 29
contributed to the increase in revenue in 1998. Additionally,
only six months of revenues of USLIC and only one month of
NSLIC's revenues are included in the 1997 results.
Premium income was $59,320,357 in 1999, a 0.3% increase
compared to $59,154,329 of premium income in 1998. The 1998
amounts were a 6.8% increase over the previous year when
premium income totaled $55,362,616. There was a significant
increase in group dental business sold by the agents of USLIC
from July 1998 through March 1999. However, during third
quarter 1999, a large portion of the existing blocks of
USLIC's group dental and NSLIC's major medical were cancelled.
The 1999 cancellation of these blocks coupled with decreased
writing of new business by CICA in the international market
contributed to the small increase of premium income during
1999. Additionally, during 1999 there was a decrease in the
Company's core book of ordinary life business resulting from
the continued turmoil in Latin America caused by economic
downturns in several countries, as well as increased
competition from several U.S. companies entering the market.
The comparison of 1998 to 1997 premium income is effected by
USLIC and NSLIC not being included for the entire year 1997.
In January, 1998, CICA introduced a new line of international
products known as the Millennia 2000 series; however, in 1998
and 1999, CICA's international sales were hampered due to the
contraction of several Latin American economies, as well as
competition from new local companies, many of whom are
subsidiaries of large U.S. insurers. Management believes the
products are desirable and competitive and expects future sale
of the Millennia products to increase.
In addition, management began developing a domestic ordinary
life sales program during 1999 and filed such with Texas
regulatory authorities for approval during the third quarter
of 1999. This program, targeting rural areas of the United
States, is expected to be a major market for the Company in
future years. Management began recruiting efforts for
associates in the State of Texas for the new product in early
2000.
The products previously sold by ALLIC in the United States
were not available following the merger of ALLIC into CICA
until late in 1997 because of delays in obtaining requisite
approval from state insurance regulatory authorities.
Management has been successful in returning the largest
producing marketing organization of the former ALLIC agents
(now representing CICA) to production and saw continuing
increases in new production in 1999, compared to amounts seen
in 1997 and 1998. Due to increases in claims, however,
management anticipates implementing significant rate increases
on several of these products during 2000. Because of these
increases, it is uncertain whether increased production can be
maintained.
29
<PAGE> 30
During 1998, management discontinued selling the major medical
products that NSLIC's prior management had begun to introduce
in 1997. Management believes that the level of surplus and
asset size of NSLIC are not sufficient to support the
potential volatility that is inherent in such types of
business. As previously discussed, management terminated the
majority of such business in 1999. NSLIC's marketing efforts
are now focused solely on the expansion of existing credit
life and credit accident and health business.
Net investment income increased 3.2% during 1999 to
$11,636,940 from $11,279,125 during 1998. The 1998 results
were up 12.4% compared to the $10,038,736 earned in 1997. The
1999 and 1998 results reflect the continuing expansion of the
Company's asset base as well as the actions taken in previous
years to change the mix and duration of the Company's invested
assets. Overall, the duration decreased slightly from
approximately 5.19 years in 1998 to 5.05 years in 1999.
The yields available in the bond market during the past few
years are not of a level to increase the return on the
Company's invested assets without exposing the portfolio to
undue risk. Management hired the investment advisory firm of
Asset Allocation and Management, Inc. of Chicago ("AAM"),
Illinois in late 1995 to manage the Company's fixed maturity
portfolio. During 1996, a nominal reconfiguration was begun.
In lieu of purchasing U.S. Treasury instruments, the Company
began to purchase U.S. Government guaranteed mortgage
pass-through securities. This program continued throughout
1999. Management expects to continue this strategy throughout
2000 as opportunities present themselves.
Overall policyholder dividends decreased to $2,843,681 in
1999, down 6.0% over 1998 when such benefits were $3,025,746.
The 1998 amounts represented an increase of 8.8% compared to
$2,782,215 in 1997. The 1997 growth is primarily due to the
acquisition of USLIC, which increased that year's expense by
approximately $397,000. Virtually all CICA's policies that
have been sold since 1989 are participating. Participating
policies represent a large majority (59.1%) of the Company's
business in-force, although the percentage of participating
business has declined from approximately 91% due to the
acquisitions in recent years. Additionally, due to the
disruption in the Latin American markets mentioned above and
the lower than usual persistency in that market, the growth in
overall dividends has been slowed as policies lapse before the
dividend amount can grow. Management expects continued growth
in this item due to the fact that CICA will continue to focus
on participating products internationally, subject to
persistency and future sales.
Claims and surrenders increased to $34,747,480 in 1999, an
increase of 10.0% over 1998 when such benefits were
$31,592,740. In 1997 claims and surrenders were $27,852,907.
The increase in benefits in 1998 can be attributed to the
inclusion of NSLIC and USLIC for an entire year. Increases in
accident and
30
<PAGE> 31
health benefits attributable to the respective blocks of
business of these companies created most of the 1999 increase.
Death benefits decreased to $5,135,808 in 1999, down from
$5,150,647 in 1998, and $4,475,083 in 1997. The 1998 increase
can be traced directly to the inclusion of NSLIC and USLIC for
an entire year. During 1998, claims on NSLIC were $421,801,
while claims from USLIC were $35,570. The small decrease in
such claims in 1999 does not appear to be due to any trend.
Additionally, the pre-need and burial policies formerly sold
by ALLIC were marketed to an older clientele and as such,
higher claims are anticipated and factored into the product.
The Company has historically adhered to a strict underwriting
policy which requires complete medical examinations on all
applicants who are foreign residents, except children,
regardless of age or face amount of the policy applied for.
For 1996 and future years, management initiated a change to
more selective medical examinations in conjunction with dry
spot blood tests and extensive medical questions on the
application in order to lower the cost of new business without
sacrificing necessary information for the underwriter.
Additionally, X-rays and electrocardiograms are required
depending on age and face amount of the policy. On all
policies of $150,000 or more, inspection reports are required
which detail the background resources and lifestyle of the
applicant. The Company has developed numerous contacts
throughout Latin America with which its underwriters can
validate information contained in the application, medical or
inspection report.
Accident and Health benefits grew to $8,468,124 in 1999 from
$5,912,411 in 1998. Such claims were $2,948,257 in 1997. The
increase reflects the growing block of accident and health
premium on the Company's books, and more specifically the
inclusion of NSLIC and USLIC. Claims on USLIC's A&H benefits
in 1999 were $3,681,264, while NSLIC's were $2,270,718. In
1998, claims on USLIC's A&H benefits were $2,513,680, while
NSLIC's were $1,653,367. In 1997, the addition of USLIC and
NSLIC contributed approximately $740,000 to the benefit
amounts. During the second half of 1998, the Company began to
experience a significant increase in the volume of claims. The
increase was created by the high early utilization by holders
of the USLIC 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 has moved to
cancel a large portion of these existing blocks of group
dental and major medical business in order to curtail both
claims and operating expenses. Most of the terminations were
effective prior to January 1, 2000. This action will result in
a decrease of approximately $3.8 million of annual premium
income in 2000 and $5.3 million of annual 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.
Endowment benefits decreased from $5,258,881 in 1997 to
$5,027,937 in 1998. In 1999, such expenses increased slightly
to $5,048,973. Beginning in late 1990,
31
<PAGE> 32
Citizens introduced a new series of plans called "Ultra
Expansion Plus" which carried an immediate endowment benefit
of an amount elected by the policyowner. This endowment is
factored into the premium of the policy and is paid annually.
The decline in 1998 and slight increase in 1999 reflect the
decline in production of new business over the last three
years.
In 1999, policy surrenders increased 3.0% to $14,920,985.
Policy surrenders were $14,481,335 in 1998, compared to
$14,322,593 in 1997. The relative stability in 1999, 1998 and
1997 is, in the opinion of management, the result of a
campaign begun in mid-1997 to inform policyowners about the
benefits of their policies.
Other claim expenses amounted to $1,173,590 in 1999,
$1,020,410 in 1998 and $848,093 in 1997. These expenses are
comprised of supplemental contract benefits, interest on
policy funds and assorted other miscellaneous policy benefits.
During 1999, commissions decreased to $12,234,053 from
$12,501,426 in 1998. In 1997, commission expense was
$11,918,192. The decrease reflects above-mentioned termination
of business. Although group accident and health business
produced by USLIC increased through March 1999, this business
carries a relatively low commission. The majority of such
amounts paid relates to first year commissions which were
$7,938,818, $8,169,835, and $8,120,748 in 1999, 1998, and
1997, respectively. The increased proportion in new sales of
accident and health and credit business contributed to the
overall decline in first year commissions.
Underwriting, acquisition and insurance expenses decreased to
$10,328,996 in 1999 compared to $11,079,065 in 1998 and
$6,992,402 in 1997. Approximately $2.5 million of the increase
in 1998 relates to the inclusion of NSLIC and USLIC for the
entire year. Additionally, because of the increased claims
volume mentioned above, management was forced to significantly
increase staff size in 1998 and 1999 and thus overhead on a
temporary basis. Due to the consolidation of ALLIC's
operations with CICA, management was able to achieve
significant reductions in expenses through economies of scale
which were reflected in the 1997 results.
In order to convert a majority of CICA's marketing overhead
from fixed to variable, management contracted in early 1997
with an independent international marketing company to serve
as managing agent for the Company's international marketing
activities. This firm receives an overriding commission on all
new business sold internationally in exchange for the
absorption of all marketing, management and promotion
activities. By taking such actions, management believes a
significant amount of fixed overhead has been converted to a
variable expense. Management has utilized firms such as this
in previous periods with great success at obtaining increases
in sales and expense reductions.
32
<PAGE> 33
Capitalized deferred policy acquisition costs were $9,287,457
in 1999, $7,941,829 in 1998, and $9,804,022 in 1997. The
increase in 1999 reflects increased fourth quarter sales of a
twenty-year endowment policy. The drop in 1998 reflects the
sale of accident and health products described above which
carry lower levels of commission and thus capitalization.
Amortization of these costs was $9,236,020 $7,789,513 and
$9,630,705, respectively in 1999, 1998 and 1997.
Amortization of cost of insurance acquired, excess of cost
over net assets acquired and other intangibles increased in
1999 to $2,120,017 from $2,100,433 in 1998. In 1997, such
amortization was $2,305,127. As discussed above, management
wrote off $9.5 million of the goodwill associated with the
acquisition of American Liberty during the third quarter of
1998. Should production by the former agents of American
Liberty, now representing CICA, not meet expected amounts due
to the rate increases described above, additional write-offs
could result. There remains approximately $3 million of
goodwill related to American Liberty.
LIQUIDITY AND CAPITAL RESOURCES
Stockholders' equity decreased to $72,266,969 at December 31,
1999 from $74,903,679 in 1998. The decrease was attributable
to unrealized gains declining by $7,334,920 during 1999
resulting in an unrealized loss of $3,711,456, net of tax at
December 31, 1999. Declines in the market value of the
Company's bond portfolio caused by lower bond prices resulted
in the change in unrealized gains (losses), net of tax.
Invested assets decreased to $174,338,561 in 1999 from
$176,272,123 in 1998, a decrease of 1.1%. A 1.7% decrease in
fixed maturities available-for-sale more than offset the 2.7%
increase in policy loans. At December 31, 1999 and 1998, fixed
maturities have been categorized into two classifications:
fixed maturities held-to-maturity, which are valued at
amortized cost, and fixed maturities available-for-sale which
are valued at fair market. The Company did not plan to make
material dispositions of fixed maturities during 1999;
however, because of continued uncertainty regarding long-term
interest rates, management cannot rule out sales during 2000.
Fixed maturities held to maturity, amounting to $5,594,745 at
December 31, 1999 consist of U.S. Treasury securities.
Management has the intent and believes the Company has the
ability to hold the securities to maturity.
At December 31, 1999, decreases in interest rates of 100, 200
and 300 basis points, respectively, would result in increases
in market values of approximately $385,000, $6,646,000 and
$13,800,000, respectively. Conversely, increases in rates of
100, 200 and 300 basis points would generate decreases in
market values of $10,981,000, $20,232,000 and $26,096,000,
respectively. Additionally, at December 31, 1998, decreases in
interest rates of 100, 200 and 300 basis points, respectively,
would result in increases in market values of approximately
$12,402,000, $19,666,000 and $23,588,000, respectively.
Conversely, increases
33
<PAGE> 34
in rates of 100, 200 and 300 basis points would generate
losses of $1,041,000, $7,484,000 and $13,738,000,
respectively.
Policy loans comprise 12.4% of invested assets at December 31,
1999 compared to 11.9% at December 31, 1998. 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 of Texas, were significantly in excess of Federal Deposit
Insurance Corporation (FDIC) coverage at December 31, 1999 and
1998. Management monitors the solvency of all financial
institutions in which it has funds to minimize the exposure
for loss. At December 31, 1999, management does not believe
the Company is at significant 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 1,821,332 shares of Citizens Class A common stock
at December 31, 1999 and 1998. Statutory accounting practices
prescribed by the National Association of Insurance
Commissioners (NAIC) and the State of Colorado require that
the Company carry its investment at market value reduced by
the percentage ownership of Citizens by CICA, limited to 2% of
admitted assets. As of December 31, 1999 and 1998, the Company
valued the shares in accordance with prescribed Statutory
Accounting Practices. In the Citizens' consolidated financial
statements, this stock is shown as treasury stock.
The NAIC has established minimum capital requirements in the
form of Risk-Based Capital ("RBC"). Risk-based capital factors
the type of business written by a company, the quality of its
assets, and various other factors into account to develop a
minimum level of capital called "authorized control level
risk-based capital" and compares this level to an adjusted
statutory capital that includes capital and surplus as
reported under Statutory Accounting Principles, plus certain
investment reserves. Should the ratio of adjusted statutory
capital to control level risk-based capital fall below 200%, a
series of actions by the Company would begin. At December 31,
1999, CICA, NSLIC, USLIC, CILIC and Excalibur 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.
The work was
34
<PAGE> 35
performed with existing staff and the associated costs were
expensed as incurred until completion.
All critical suppliers or customers (external relationships)
resolved their own third party Year 2000 issues and were 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 that SFAS No. 133
and SFAS No. 137 will have a significant effect on the
financial position, results of operations or liquidity of the
Company.
35
<PAGE> 36
ITEM 8. FINANCIAL STATEMENTS
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
Independent auditors' report 41
Consolidated statements of financial position at
December 31, 1999 and 1998 42-43
Consolidated statements of operations
- years ended December 31, 1999, 1998 and 1997 44-45
Consolidated statements of stockholders' equity and comprehensive
Income (loss)- years ended December 31, 1999, 1998 and 1997 46
Consolidated statements of cash flows
- years ended December 31, 1999, 1998 and 1997 47-49
Notes to consolidated financial statements 50-70
Schedules at December 31, 1999 and 1998:
Schedule II - Condensed Financial
Information of Registrant 71-73
Schedules for each of the years in the three-year
Period ended December 31, 1999:
Schedule IV - Reinsurance 74
</TABLE>
All other schedules have been omitted as the required information is
inapplicable or the information required is presented in the financial
statements or the notes thereto filed elsewhere herein.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the 24 months preceding the date of the audited financial
statements of Citizens included herein, there has been no change of
accountants made by Citizens, nor has it reported on Form 8-K any
disagreements between the Company and its independent accountants.
36
<PAGE> 37
PART III
Items 10, 11, 12, and 13 of this Report incorporate by reference the information
in the Company's definitive proxy material under the headings "Stock and
Principal Stockholders," "Control of the Company," "Election of Directors,"
"Executive Officers," "Executive Officer and Director Compensation" and "Certain
Reports" to be filed with the Securities and Exchange Commission within 120 days
after December 31, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 AND 2
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The financial statements and schedules listed on the following
index to financial statements and financial statement schedules
are filed as part of this Form 10-K.
(a) 3 EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
<S> <C> <C>
(1) Underwriting Agreement N/A
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession (e)
(3) 3.1 Articles of Incorporation; as amended (d)
3.2 Bylaws (d)
(4) Instruments defining the rights of security holders, including indentures N/A
(5) Opinion re: Legality N/A
(6) (Removed and Reserved) N/A
(7) (Removed and Reserved) N/A
(8) Opinion re: Tax Matters N/A
(9) Voting Trust Agreement N/A
(10) Material Contracts
10.1 Automatic Yearly Renewable term (NR) Life Reinsurance
Agreement between Citizens Insurance Company of America
and The Centennial Life Insurance Company dated March 1,
1982 (a)
10.2 Stock Purchase Agreement between Citizens Insurance
Company of America and Citizens, Inc. (a)
</TABLE>
37
<PAGE> 38
<TABLE>
<S> <C> <C>
10.3 Plan and Agreement of Merger and Exchange by and among
Insurance Investors & Holding Co., Central Investors
Life Insurance Company of Illinois, Citizens, Inc. and
Citizens Acquisition, Inc. (g)
10.4 Self-Administered Automatic Reinsurance Agreement -
Citizens Insurance Company of America and Riunione
Adriatica di Sicurta, S.p.A. (h)
10.5 Plan and Agreement of Exchange dated October 28, 1996
between Citizens, Inc. and American Investment Network,
Inc. (h)
10.6 Agreement and Plan of Merger dated October 31, 1996
between Citizens Insurance Company of America, CICA
Acquisition, Inc., and First American Investment
Corporation (h)
10.7 Plan and Agreement of Merger dated November 22, 1996
between Citizens, Inc. and American Liberty Financial
Corporation, as amended (i)
10.8 Plan and Agreement of Merger dated November 22, 1996
between Citizens Insurance Company of America and
American Liberty Life Insurance Company, as amended (i)
10.9 Bulk Accidental Death Benefit Reinsurance Agreement
between Connecticut General Life Insurance Company and
Citizens Insurance Company of America, as amended (i)
10.10 Plan and Agreement of Exchange dated October 28, 1996
between American Investment Network, Inc., United
Security Life Insurance Co., Inc. and Citizens Insurance
Company of America (j)
10.11 Stock Purchase Agreement dated November 20, 1997 between
Jansen Enterprises, Inc. and Citizens, Inc. (j)
10.12 Plan and Agreement of Merger dated September 10, 1998
between First Investors Group, Inc., Citizens, Inc., and
Excalibur Acquisition, Inc. (k)
(11) Statement re: Computation of per share earnings N/A
(12) Statement re: Computation of ratios N/A
(13) Annual report to security holders, Form 10-Q or quarterly report to N/A
security holders
(14) (Removed and Reserved) N/A
(15) Letter re: Unaudited interim financial statements N/A
(16) Letter re: Change in certifying accountant N/A
(17) Letter re: Director resignation N/A
</TABLE>
38
<PAGE> 39
<TABLE>
<S> <C> <C>
(18) Letter re: Change in accounting principles N/A
(19) Report furnished to security holders N/A
(20) Other documents or statements to security holders N/A
(21) Subsidiaries of the registrant Filed
Herewith
(22) Published report regarding matters submitted to a vote of security
holders N/A
(23) Consents of expert and counsel Filed
Herewith
(24) Power of Attorney See
signature
page
(25) Statement of eligibility of trustee N/A
(26) Invitations for competitive bids N/A
(27) Financial Data Schedule Filed
Herewith
(28) (Removed and Reserved) N/A
(99) Additional Exhibits N/A
</TABLE>
- ----------
(a) Filed as a part of the Amendment No. 1 to Registration Statement on Form
S-4, SEC File No. 33--4753, filed on or about June 19, 1992.
(b) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1991 and incorporated herein by
reference.
(c) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1992 and incorporated herein by
reference.
(d) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated herein by
reference.
(e) Filed with or referenced in the Registrant's Current Report on Form 8-K
dated December 9, 1994 and incorporated herein by reference.
(f) Filed as a part of the Registration Statement on Form S-4, SEC File No.
33--59039, filed on or about May 2, 1995.
(g) Filed as a part of the Registration Statement on Form S-4, SEC File No.
33--63275, filed on or about October 6, 1995.
(h) Filed as a part of the Registration Statement on Form S-4, SEC File No.
333--16163, filed on or about November 14, 1996.
(i) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996 and incorporated herein by
reference.
(j) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997 and incorporated herein by
reference.
(k) Filed as a part of the Registration Statement on Form S-4, SEC File No.
333--67091, on or about November 10, 1998.
(b) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed by Citizens during the fourth quarter of 1999.
39
<PAGE> 40
CITIZENS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
Independent auditors' report 41
Consolidated statements of financial position at
December 31, 1999 and 1998 42-43
Consolidated statements of operations
- years ended December 31, 1999, 1998 and 1997 44-45
Consolidated statements of stockholders' equity and comprehensive
income (loss)- years ended December 31, 1999, 1998 and 1997 46
Consolidated statements of cash flows
- years ended December 31, 1999, 1998 and 1997 47-49
Notes to consolidated financial statements 50-70
Schedules at December 31, 1999 and 1998:
Schedule II - Condensed Financial
Information of Registrant 71-73
Schedules for each of the years in the three-year period ended December 31,
1999:
Schedule IV - Reinsurance 74
</TABLE>
All other schedules have been omitted as the required information is
inapplicable or the information required is presented in the financial
statements or the notes thereto filed elsewhere herein.
40
<PAGE> 41
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Citizens, Inc.:
We have audited the consolidated financial statements of Citizens, Inc. and
consolidated subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedules as listed in the accompanying index. These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Citizens, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
KPMG LLP
Dallas, Texas
March 10, 2000
41
<PAGE> 42
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------ ---- ----
<S> <C> <C>
Investments:
Fixed maturities held-to-maturity, at amortized cost $ 5,594,745 $ 5,606,374
Fixed maturities available-for-sale, at fair value 144,214,555 146,645,842
Equity securities available-for-sale, at fair value 717,812 862,287
Mortgage loans on real estate 1,374,204 1,560,757
Policy loans 21,556,344 20,996,919
Other long-term investments 880,901 599,944
------------- -------------
Total investments 174,338,561 176,272,123
Cash and cash equivalents 11,149,084 10,168,728
Accrued investment income 1,761,071 1,806,065
Reinsurance recoverable 2,183,729 1,755,561
Deferred policy acquisition costs 36,518,037 37,259,386
Other intangible assets 1,982,525 2,289,725
Deferred federal income tax 6,182,764 699,848
Cost of insurance acquired 7,186,494 8,290,853
Excess of cost over net assets acquired 8,021,044 8,375,799
Property, plant and equipment 5,071,735 5,155,088
Other assets 1,089,742 1,311,019
------------- -------------
Total assets $ 255,484,786 $ 253,384,195
============= =============
(Continued)
</TABLE>
42
<PAGE> 43
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------------------------------------ ---- ----
<S> <C> <C>
Liabilities:
Future policy benefit reserves:
Life insurance $ 154,352,032 $ 147,170,436
Annuities 4,023,827 3,675,937
Accident and health 9,037,337 9,329,956
Dividend accumulations 4,854,835 4,818,915
Premium deposits 2,725,016 2,013,274
Policy claims payable 3,591,289 4,801,548
Other policyholders' funds 2,070,950 1,632,662
------------- -------------
Total policy liabilities 180,655,286 173,442,728
Other liabilities 901,636 2,669,638
Commissions payable 530,928 833,881
Federal income tax payable 1,129,967 1,534,269
------------- -------------
Total liabilities 183,217,817 178,480,516
------------- -------------
Stockholders' equity:
Common stock:
Class A, no par value, 50,000,000 shares authorized, 24,880,731 shares
issued in 1999 and 22,643,748 in 1998, including shares in
treasury of
2,080,206 in 1999 and 1,944,115 in 1998 67,510,026 52,790,643
Class B, no par value, 1,000,000 shares
authorized, 664,523 shares issued and
outstanding in 1999 and 621,049 in 1998 584,863 283,262
Retained earnings 10,756,800 20,135,464
Accumulated other comprehensive income:
Unrealized investment gain (loss), net of tax (3,711,456) 3,623,464
------------- -------------
75,140,233 76,832,833
Treasury stock, at cost (2,873,264) (1,929,154)
------------- -------------
Total stockholders' equity 72,266,969 74,903,679
------------- -------------
$ 255,484,786 $ 253,384,195
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE> 44
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Premiums:
Life insurance $ 48,172,160 $ 49,032,491 $ 49,696,698
Accident and health 10,886,317 9,857,844 5,299,783
Annuity and universal life
considerations 261,880 263,994 366,135
Net investment income 11,636,940 11,279,125 10,038,736
Realized gains (losses) 310,890 1,614,388 (320,125)
Other income 667,320 664,084 23,945
Interest expense (58,449) (27,011) (77,874)
------------- ------------- -------------
Total revenues 71,877,058 72,684,915 65,027,298
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future
policy benefit reserves 7,371,214 8,279,056 8,958,166
Policyholders' dividends 2,843,681 3,025,746 2,782,215
Claims and surrenders 34,747,480 31,592,740 27,852,907
Annuity expenses 517,819 436,030 361,862
------------- ------------- -------------
Total insurance
benefits paid or provided 45,480,194 43,333,572 39,955,150
Commissions 12,234,053 12,501,426 11,918,192
Other underwriting, acquisition
and insurance expenses 10,328,996 11,079,065 6,992,402
Capitalization of deferred policy
acquisition costs (9,287,457) (7,941,829) (9,804,022)
Amortization of deferred policy
acquisition costs 10,028,806 7,789,513 9,630,705
Amortization of cost of insurance
acquired, excess of cost
over net assets acquired
and other intangibles 2,120,017 11,600,433 2,305,127
------------- ------------- -------------
Total benefits and expenses 70,904,609 78,362,180 60,997,554
------------- ------------- -------------
(Continued)
</TABLE>
44
<PAGE> 45
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income (loss) before Federal income
tax $ 972,449 $ (5,677,265) $ 4,029,744
Federal income tax expense (benefit) (298,623) 1,043,428 604,221
------------ ------------ ------------
Net income (loss) $ 1,271,072 $ (6,720,693) $ 3,425,523
============ ============ ============
Basic and diluted earnings (loss)
per share of common stock $ .05 $ (.29) $ .15
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE> 46
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER TOTAL
---------------------------- RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
CLASS A CLASS B EARNINGS INCOME STOCK EQUITY
------------ ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 $ 45,941,552 $ 283,262 $ 23,430,634 $ (710,166) $ (2,062,266) $ 66,883,016
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive income:
Net income -- -- 3,425,523 -- -- 3,425,523
Unrealized investment gains, net -- -- -- 2,290,956 -- 2,290,956
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive income -- 3,425,523 2,290,956 -- 5,716,479
Acquisition of minority interest
in FAIC 932,584 -- -- -- 133,112 1,065,696
Acquisition of AIN 5,320,895 -- -- -- -- 5,320,895
Acquisition of NSLIC 700,000 -- -- -- -- 700,000
Stock options exercised 130,500 -- -- -- -- 130,500
Stock issuance costs (234,888) -- -- -- -- (234,888)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1997 $ 52,790,643 $ 283,262 $ 26,856,157 $ 1,580,790 $ (1,929,154) $ 79,581,698
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive loss:
Net loss -- -- (6,720,693) -- -- (6,720,693)
Unrealized investment gains, net -- -- -- 2,042,674 -- 2,042,674
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive loss -- -- (6,720,693) 2,042,674 -- (4,678,019)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1998 $ 52,790,643 $ 283,262 $ 20,135,464 $ 3,623,464 $ (1,929,154) $ 74,903,679
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive loss:
Net income -- -- 1,271,072 -- -- 1,271,072
Unrealized investment loses, net -- -- -- (7,334,920) -- (7,334,920)
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive loss -- -- 1,271,072 (7,334,920) -- (6,063,848)
Acquisition of Investors 3,427,138 -- -- -- -- 3,427,138
Stock dividend 11,292,245 301,601 (10,649,736) -- (944,110) --
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1999 $ 67,510,026 $ 584,863 $ 10,756,800 $ (3,711,456) $ (2,873,264) $ 72,266,969
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE> 47
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,271,072 $ (6,720,693) $ 3,425,523
Adjustments to reconcile net income to
net cash provided by operating activities,
net of assets acquired:
Realized (gains) losses on sale of
Investments and other assets
(310,890) (1,614,388) 320,125
Accrued investment income 79,319 204,447 (236,828)
Net deferred policy acquisition costs 741,349 (152,316) (173,317)
Amortization of cost of insurance
acquired and excess cost over
net assets acquired and other
intangibles 2,120,017 11,600,433 2,305,127
Depreciation 510,755 493,691 507,829
Change in:
Reinsurance recoverable (427,811) 313,862 (295,882)
Future policy benefit reserves 7,169,153 8,057,287 9,511,158
Other policy liabilities (25,336) 1,105,031 (291,121)
Deferred federal income tax (1,704,321) (1,477,949) (1,008,907)
Federal income tax (404,302) 771,277 1,120,600
Commissions payable and other liabilities (1,763,567) (682,884) (569,763)
Other, net 376,787 1,237,829 (687,210)
------------ ------------ ------------
Net cash provided by operating activities 7,632,225 13,135,627 13,927,334
------------ ------------ ------------
Cash flows from investing activities:
Sale of fixed maturities, available-for-sale 1,630,775 28,476,347 19,967,749
Maturity of fixed maturities, available-for-sale 10,260,075 688,037 3,596,134
Purchase of fixed maturities, available-for-sale (18,742,695) (39,392,056) (36,553,342)
Sale of equity securities, available-for-sale 92,500 151,923 619,277
Purchase of equity securities -- -- (511,231)
Principal payments on mortgage loans 186,553 391,538 510,561
Mortgage loans funded -- (665,000) (125,334)
Guaranteed student loans funded (6,287) (32,338) (60,131)
Guaranteed student loans sold 10,960 119,346 277,133
Sale of other long-term investments and
property, plant and equipment 13,799 2,702,877 21,291
(Continued)
</TABLE>
47
<PAGE> 48
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash and cash equivalents provided by (used by)
mergers and acquisitions $ 1,512,255 -- (165,710)
Increase in policy loans, net (559,425) (530,735) (638,141)
Purchase of other long-term investments and property, plant
and equipment (717,046) (1,027,697) (197,286)
------------- ------------- -------------
Net cash used by investing activities (6,318,536) (9,117,758) (13,259,030)
------------- ------------- -------------
Cash flows from financing activities:
Payments on notes payable (333,333) (604,097) (94,343)
Sale of stock, net -- -- (104,388)
------------- ------------- -------------
Net cash used by financing activities (333,333) (604,097) (198,731)
------------- ------------- -------------
Net increase in cash and cash equivalents 980,356 3,413,772 469,573
------------- ------------- -------------
Cash and cash equivalents at beginning of year 10,168,728 6,754,956 6,285,383
------------- ------------- -------------
Cash and cash equivalents at end of year 11,149,084 10,168,728 6,754,956
============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Supplemental: 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 43,810 $ 41,650 $ 77,874
------------- ------------- =============
Income taxes $ 1,810,000 $ 1,750,100 $ 800,000
============= ============= =============
</TABLE>
48
<PAGE> 49
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Supplemental disclosures of non-cash investing and financing activities:
The Company issued Class A stock and cash to purchase all of the capital stock
of Investors in 1999 and AIN, NSLIC, and the minority ownership in FAIC in 1997.
In conjunction with the acquisitions, cash and cash equivalents were provided by
(used in) mergers and acquisitions as follows:
<TABLE>
<CAPTION>
1999 1997
---- ----
<S> <C> <C>
Fair value of capital stock issued $ 3,427,138 $ 7,086,591
Fair value of tangible assets acquired
excluding cash and cash equivalents (1,658,547) (8,892,535)
Fair value of intangible assets acquired (353,703) (6,795,488)
Liabilities assumed 97,367 8,435,722
------------ ------------
Cash and cash equivalents provided by
(used in) mergers and acquisitions $ 1,512,255 $ (165,710)
============ ============
Issuance of 609,269 Class A shares in
1999 and 795,957 Class A and
134,125 treasury shares in 1997 $ 3,427,138 $ 7,086,591
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE> 50
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF BUSINESS
The 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."
American Liberty Financial Corporation (ALFC) and its
subsidiaries, American Liberty Life Insurance Company (ALLIC),
First American Investment Corp. (FAIC), and American Liberty
Exploration Company (ALEC) were acquired by Citizens in September
1995. Effective January 1, 1997, ALFC was merged into Citizens and
ALLIC was merged into CICA. American Investment Network (AIN),
which was acquired in June 1997, owned USLIC. During 1998, AIN was
liquidated into CICA. Insurance Investors and Holding Company
(IIH), which was acquired in March 1996 owned CILIC. During 1998,
IIH was liquidated and merged into CICA. The merger of NSLIC and
USLIC into CICA was pending at December 31, 1999.
Citizens provides life and health insurance policies through five
of its subsidiaries - CICA, USLIC, NSLIC, CILIC and Excalibur.
CICA sells ordinary whole-life policies internationally, burial
insurance, pre-need policies, accident and health specified
disease, hospital indemnity and accidental death policies,
throughout the southern United States. USLIC and NSLIC sell
participating whole-life policies and specialty individual
accident and health policies. Excalibur sells life insurance
business throughout the State of Illinois.
CILIC does not actively market insurance policies, but does
administer an in-force block of life insurance.
III provides aviation transportation to the Company. CTI provides
data processing systems and services to the Company. FHA is a
funeral home operator.
50
<PAGE> 51
(b) BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company
and its wholly-owned subsidiaries have been prepared in conformity
with generally accepted accounting principles (GAAP). All
significant intercompany accounts and transactions have been
eliminated.
(c) INVESTMENTS, OTHER THAN AFFILIATES
Fixed maturities, consist primarily of bonds, which the Company
has the ability and intent to hold to maturity, and are carried at
amortized cost. Fixed maturities, which may be sold prior to
maturity to support the Company's investment strategies, are
considered held as available-for-sale and carried at fair value as
of the balance sheet date. Equity securities include
non-redeemable preferred stock and are reported at fair value.
Unrealized appreciation (depreciation) of equity securities and
fixed maturities held as available-for-sale are shown as a
separate component of stockholders' equity, net of tax, and is a
separate component of comprehensive income.
Mortgage loans on real estate, policy loans, and guaranteed
student loans are reported at unpaid principal balances less an
allowance for uncollectible amounts. Mortgage loans have an
allowance for uncollectible amounts of $50,000 at December 31,
1999 and 1998 which was estimated by the Company based upon
historical amounts that proved uncollectible.
Other long-term investments consist primarily of real estate which
is recorded at the lower of fair value, minus estimated costs to
sell, or cost. If the fair value of the real estate minus
estimated costs to sell is less than cost, a valuation allowance
is provided for the deficiency. Increases in the valuation
allowance are charged to income.
A decline in the fair value of any available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary is charged to earnings resulting in the establishment of
a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of
the related security as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when
earned. Realized gains and losses for securities classified as
available-for-sale and held-to-maturity are included in earnings
and are derived using the specific identification method for
determining the cost of securities sold.
Policy loans and other investments are primarily reported at cost.
51
<PAGE> 52
The Company has assets with a fair value of $9,261,668 at December
31, 1999 and $8,745,400 at December 31, 1998 on deposit with
various state regulatory authorities to fulfill statutory
requirements.
(d) PREMIUM REVENUE AND RELATED EXPENSES
Premiums on life and accident and health policies are reported as
earned when due or, for short duration contracts, over the
contract periods. Benefits and expenses are associated with earned
premiums so as to result in recognition of profits over the
estimated life of the contracts. This matching is accomplished by
means of provisions for future benefits and the capitalization and
amortization of deferred policy acquisition costs.
Annuities are accounted for in a manner consistent with accounting
for interest bearing financial instruments. Premium receipts are
not reported as revenues but rather as deposit liabilities to
annuity contracts.
(e) DEFERRED POLICY ACQUISITION COSTS AND COST OF INSURANCE ACQUIRED
Acquisition costs, consisting of commissions and policy issuance,
underwriting and agency expenses which relate to and vary with the
production of new business, are deferred. These deferred policy
acquisition costs are amortized primarily over the estimated
premium paying period of the related policies in proportion to the
ratio of the annual premium recognized to the total premium
revenue anticipated using the same assumptions as were used in
computing liabilities for future policy benefits.
The Company uses the factor method to determine the amount of
costs to be capitalized and the ending asset balance. This method
limits the amount of deferred cost to their estimated realizable
value.
The value of insurance acquired in the Company's various
acquisitions, which is included in cost of insurance acquired in
the accompanying consolidated financial statements, was determined
based on the present value of future profits discounted at a risk
rate of return. The cost of insurance acquired is being amortized
over the anticipated premium paying period of the related
policies.
(f) POLICY LIABILITIES AND ACCRUALS
Future policy benefit reserves have been computed by the net level
premium method with assumptions as to investment yields, dividends
on participating business, mortality and withdrawals based upon
the Company's and industry experience, which provide for possible
unfavorable deviation.
Annuity benefits are carried at accumulated contract values based
on premiums paid by participants, annuity rates of return ranging
from 3.0% to 7.0% (primarily at 4.0% to 5.5%) and annuity
withdrawals.
52
<PAGE> 53
Premium deposits accrue interest at rates ranging from 3.5% to
8.25% per annum. Cost of insurance is included in premium when
collected and interest is credited annually to the deposit
account.
Policy and contract claims are based on case-basis estimates for
reported claims, and on estimates, based on experience, for
incurred but unreported claims and loss expenses.
(g) EXCESS OF COST OVER NET ASSETS ACQUIRED AND OTHER INTANGIBLE
ASSETS
The excess of cost over the fair value of net assets acquired in
mergers and acquisitions is amortized on a straight-line basis
ranging from 5 to 20 years. Other intangible assets, primarily the
value of state licenses, are amortized on a straight-line basis
ranging from 10 to 20 years.
The Company continually monitors long-lived assets and certain
intangible assets, such as excess of cost over net assets acquired
and cost of insurance acquired, for impairment. An impairment loss
is recorded in the period in which the carrying value of the
assets exceeds the fair value or expected future cash flows. Any
amounts deemed to be impaired are charged, in the period in which
such impairment was determined, as an expense against earnings.
(h) PARTICIPATING POLICIES
At both December 31, 1999 and 1998, participating business
approximated 59%, of life insurance in-force and premium income.
The amount of dividends to be paid is determined annually by the
Board of Directors.
(i) 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
the years ended December 31, 1999, 1998 and 1997 were 23,418,610,
22,883,167 and 22,329,745, respectively. 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.
(j) INCOME TAXES
For the year ended December 31, 1999, the Company plans to file
six separate tax returns as follows: 1) Citizens, Inc., CICA and
all direct non-life subsidiaries, 2) Investors, 3) Excalibur, 4)
USLIC, 5) NSLIC and 6) CILIC.
53
<PAGE> 54
For the year ended December 31, 1998, the Company filed six
separate tax returns as follows: 1) Citizens, Inc., CICA and all
direct non-life subsidiaries, 2) Investors, 3) Excalibur, 4)
USLIC, 5) NSLIC and 6) CILIC.
For the year ended December 31, 1997, the Company filed four
separate tax returns as follows: 1) Citizens, Inc., CICA, and all
direct non-life subsidiaries, 2) USLIC, 3) NSLIC, and 4) CILIC.
Deferred tax asset and liabilities are recognized for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(k) ACCOUNTING PRONOUNCEMENTS
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.
54
<PAGE> 55
(l) CASH EQUIVALENTS
The Company considers as cash equivalents all securities whose
duration does not exceed ninety days at the date of acquisition.
(m) DEPRECIATION
Depreciation is calculated on a straight line basis using
estimated useful lives ranging from 3 to 10 years. Leasehold
improvements are depreciated over the estimated life of 30 years.
(n) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
(o) RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997
amounts to conform with the 1999 presentation.
(2) INVESTMENTS
The cost, gross unrealized gains and losses and fair value of
investments of fixed maturities and equity securities
available-for-sale, as of December 31, 1999 and 1998, are as
follows:
55
<PAGE> 56
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Fixed maturities held-to-maturity:
US Treasury securities $ 5,594,745 $ -- $ 388,495 $ 5,206,250
============ ========== ========== ============
Fixed maturities available-for-sale:
US Treasury securities and
obligations of US government
corporations and agencies 43,573,934 139,888 1,435,222 42,278,600
Public utilities 2,258,495 745 182,048 2,077,192
Debt securities issued by States
of the United States and political
subdivisions of the States 5,847,282 35,582 129,039 5,753,825
Corporate securities 22,243,158 228,217 551,430 21,919,945
Mortgage-backed securities 75,916,624 62,503 3,794,134 72,184,993
------------- ---------- ---------- ------------
Total fixed maturities
available-for-sale $149,839,493 $ 466,935 $6,091,873 $144,214,555
============ ========== ========== ============
Total equity securities
available-for-sale $ 716,293 $ 50,994 $ 49,475 $ 717,812
============ ========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ----------- ---------- ------------
<S> <C> <C> <C> <C>
Fixed maturities held-to-maturity:
US Treasury securities $ 5,606,374 $ 562,626 $ -- 6,169,000
============ =========== =========== ============
Fixed maturities available-for-sale:
US Treasury securities and
obligations of US government
corporations and agencies 44,081,875 1,821,645 65,070 45,838,450
Public utilities 2,944,282 67,591 16,245 2,995,628
Debt securities issued by States
of the United States and political
subdivisions of the States 5,506,803 290,026 2,829 5,794,000
Corporate securities 14,540,959 928,747 31,986 15,437,720
Mortgage-backed securities 74,128,842 2,577,863 126,661 76,580,044
------------ ----------- ---------- ------------
Total fixed maturities
available-for-sale $141,202,761 $ 5,685,872 $ 242,791 $146,645,842
============ =========== ========== ============
Total equity securities
available-for-sale $ 815,271 $ 76,572 $ 29,556 $ 862,287
============ =========== ========== ============
</TABLE>
56
<PAGE> 57
The amortized cost and fair value of fixed maturities at December 31,
1999, by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment
penalties.
FIXED MATURITIES HELD-TO-MATURITY
<TABLE>
<CAPTION>
AMORTIZED
COST FAIR VALUE
---------- ----------
<S> <C> <C>
Due after ten years $5,594,745 $5,206,250
========== ==========
</TABLE>
FIXED MATURITIES AVAILABLE-FOR-SALE
<TABLE>
<CAPTION>
AMORTIZED
COST FAIR VALUE
---------- ------------
<S> <C> <C>
Due in one year or less $ 3,484,657 $ 3,483,754
Due after one year through five years 14,088,187 13,888,191
Due after five years through ten years 20,466,425 19,949,605
Due after ten years 35,883,600 34,708,012
------------ ------------
73,922,869 72,029,562
Mortgage-backed securities 75,916,624 72,184,993
------------ ------------
Totals $149,839,493 $144,214,555
============ ============
</TABLE>
The Company had no investments in any one entity which exceeded 10% of
stockholders' equity at December 31, 1999 other than investments
guaranteed by the U.S. Government.
The Company's investment in mortgage loans is concentrated 29% in
Colorado, 43% in Texas, and 28% in Mississippi as of December 31, 1999.
Major categories of net investment income are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Investment income on:
Fixed maturities $ 9,795,297 $ 9,070,636 $ 8,086,920
Equity securities 52,252 61,623 37,042
Mortgage loans on real estate 121,818 145,325 140,629
Policy loans 1,571,863 1,492,733 1,425,301
Long-term investments 829,599 900,276 890,064
Other 451,411 616,958 463,938
----------- ----------- -----------
12,822,240 12,287,551 11,043,894
Investment expenses (1,185,300) (1,008,426) (1,005,158)
----------- ----------- -----------
Net investment income $11,636,940 $11,279,125 $10,038,736
=========== =========== ===========
</TABLE>
57
<PAGE> 58
Equity securities of $26,386 as of December 31, 1999, did not produce income
during the preceding 12 months.
Proceeds and gross realized gains (losses) from sales and maturities of fixed
maturities available-for-sale for 1999, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Proceeds $11,890,850 $29,164,384 $23,563,883
=========== =========== ===========
Gross realized gains $ 344,002 $ 452,105 $ 373,557
=========== =========== ===========
Gross realized (losses) $ (36,325) $ (45,268) $ (178,296)
=========== =========== ===========
</TABLE>
Proceeds and gross realized gains (losses) from sales of equity securities
available-for-sale for 1999, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Proceeds $ 92,500 $ 151,923 $ 619,277
======== ========= ==========
Gross realized gains $ -- $ -- $ 1,973
======== ========= ==========
Gross realized (losses) $ (6,477) $ (16,319) $ (482,792)
======== ========= ==========
</TABLE>
Realized gains (losses) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Realized gains (losses):
Fixed maturities $ 307,677 $ 406,837 $ 195,261
Equity securities (6,477) (16,319) (480,819)
Other 9,690 1,223,870 (34,567)
--------- --------- ---------
Net realized gains (losses) $ 310,890 $1,614,388 $(320,125)
========= ========== =========
</TABLE>
(3) COST OF INSURANCE ACQUIRED AND EXCESS OF COST OVER NET ASSETS ACQUIRED
Cost of insurance acquired is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $ 8,290,853 $10,639,667 $ 7,219,594
Increase (decrease) related to
Acquisitions 50,000 (877,904) 4,253,354
Interest 625,251 797,975 541,470
Amortization (1,779,610) (2,268,885) (1,374,751)
----------- ----------- -----------
Balance at end of period $ 7,186,494 $ 8,290,853 $10,639,667
----------- =========== ===========
</TABLE>
Accretion of interest on cost of insurance acquired is calculated based
on the rates of interest used in setting the related policy reserves.
These rates range from 6.5% to 8.5%.
58
<PAGE> 59
Estimated amortization in each of the next five years is as follows.
These amounts are equal to the carrying value due and exclude interest
accretion at rates ranging from 6.5% to 8.5%. Actual future amortization
will differ from these estimates due to variances from estimated future
withdrawal assumptions.
<TABLE>
<S> <C>
2000 $1,400,928
2001 1,074,991
2002 963,973
2003 858,682
2004 791,139
Thereafter 2,096,781
</TABLE>
Excess of cost over net assets acquired is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
ACCUMULATED
GROSS AMORTIZATION NET
----- -------------- ---
<S> <C> <C> <C>
Balance at January 1, 1997 18,239,505 (1,483,072) 16,756,433
Increase related to acquisitions 1,939,837 -- 1,939,837
Amortization -- (1,230,147) (1,230,147)
------------ ------------ ------------
Balance at December 31, 1997 20,179,342 (2,713,219) 17,466,123
Increase related to acquisitions 852,498 -- 852,498
Impairment loss (9,500,000) -- (9,500,000)
Amortization -- (442,822) (442,822)
------------ ------------ ------------
Balance at December 31, 1998 11,531,840 (3,156,041) 8,375,799
Increase related to acquisitions 303,703 -- 303,703
Amortization -- (658,458) (658,458)
------------ ------------ ------------
Balance at December 31, 1999 $ 11,835,543 $ (3,814,499) $ 8,021,044
============ ============ ============
</TABLE>
During 1998, the Company recognized an impairment loss in the amount of
$9,500,000 relating to the goodwill recorded in the 1995 acquisition of
ALLIC. The impairment loss was the result of a decline in production from
agents formerly associated with ALLIC.
The acquisition of NSLIC was consummated on November 20, 1997, therefore
the balance of cost of insurance acquired as of December 31, 1997 was
management's estimate based on the information available as of December
31, 1997. The Company revised its estimate related to this acquisition in
1998, which resulted in a reallocation of the purchase price.
(4) POLICY LIABILITIES
Various assumptions used to determine the future policy benefit reserves
include the following: a) valuation interest rates from 4 to 9%, b)
mortality assumptions are from the 1955 to 1960, 1965 to 1970, and 1975
to 1980 Select and Ultimate mortality tables and c) withdrawals are based
primarily on actual historical termination rates.
59
<PAGE> 60
The following table presents information on changes in the liability for
accident and health policy and contract claims for the years ended
December 31,1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Policy and contract claims payable at January 1 $ 2,390,618 $ 2,083,591
Add claims incurred, related to:
Current year 8,673,369 7,442,563
Prior years 12,849 (1,281,597)
----------- -----------
8,686,218 6,160,966
Deduct claims paid, related to:
Current year 5,450,160 5,295,960
Prior years 3,617,532 557,979
----------- -----------
9,067,692 5,853,939
----------- -----------
Policy and contract claims payable, December 31 $ 2,009,144 2,390,618
=========== ===========
</TABLE>
The development of prior year claim reserves reflects normal changes in
actuarial estimates.
(5) REINSURANCE
In the normal course of business, the Company reinsures portions of
certain policies that it underwrites to limit disproportionate risks. The
Company retains varying amounts of individual insurance up to a maximum
retention of $75,000 on any life. On health policies there are varying
retention limits ranging from $25,000 to $35,000 depending on the product
with some of the supplemental hospital and surgical policies reinsured on
a quota share basis. The Company's share of risk on the quota share
reinsurance ranges from 25% to 50%. The Company remains contingently
liable to the extent that the reinsuring companies cannot meet their
obligations under these reinsurance treaties.
Assumed and ceded reinsurance activity for 1999 and 1998 is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Aggregate assumed life insurance in force $ 273,146,000 $ 333,719,000
============== ==============
Aggregate ceded life insurance in force $ (278,689,000) $ (306,070,000)
============== ==============
Total life insurance in force $2,192,301,000 $2,340,744,000
============== ==============
</TABLE>
Premiums and claims and surrenders assumed and ceded for the years
ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Premiums assumed $ 484,746 $ 231,410 $ 284,632
=========== =========== ===========
Premiums ceded $(2,549,155) $(3,368,690) $(2,257,556)
=========== =========== ===========
Claims and surrenders assumed $ 481,899 $ 234,037 $ 269,000
============ =========== ===========
Claims and surrenders ceded $(1,762,195) $(1,690,643) $ (976,000)
=========== =========== ===========
</TABLE>
60
<PAGE> 61
Amounts paid or deemed to have been paid for reinsurance contracts are
recorded as reinsurance receivables. The cost of reinsurance related to
long duration contracts is accounted for over the life of the underlying
reinsured policies using assumptions consistent with those used to
account for the underlying policies.
(6) STOCKHOLDERS' EQUITY AND RESTRICTIONS
The two classes of stock of Citizens are equal in all respects, except
(a) each Class A share receives twice the cash dividends paid on a per
share basis to the Class B common stock; and (b) the Class B common stock
elects a simple majority of the Board of Directors of Citizens and the
Class A common stock elects the remaining directors.
Generally, the net assets of the insurance subsidiaries available for
transfer to Citizens are limited to the greater of the subsidiary net
gain from operations during the preceding year or 10% of the subsidiary
net statutory surplus as of the end of the preceding year as determined
in accordance with accounting practices prescribed or permitted by
insurance regulatory authorities. Payments of dividends in excess of such
amounts would generally require approval by the regulatory authorities.
Based upon statutory net gain from operations and surplus of the
individual insurance companies as of and for the year ended December 31,
1999 approximately $5,057,661 of dividends could be paid to Citizens
without prior regulatory approval.
CICA, USLIC, NSLIC, CILIC and Excalibur have calculated their risk based
capital (RBC) in accordance with the National Association of Insurance
Commissioners' Model Rule and the RBC rules as adopted by their
respective state of domicile. The RBC as calculated for CICA, USLIC,
NSLIC, CILIC and Excalibur exceeded levels requiring company or
regulatory action.
(7) STOCK OPTIONS
During 1989, the Company entered into an agreement granting a financial
public relations consultant providing services to the Company the right
and option to purchase 100,000 shares of Class A no par common stock of
the Company at $2.50 per share, the fair market value of the common stock
at the date of the agreement. The option, which would have expired on
February 8, 1994, was extended for an additional 36 months during 1993.
During 1996, options to purchase 41,500 shares were exercised. During
1997, 52,200 shares were issued in conjunction with the exercise of this
option. The remaining option on 6,300 shares expired in 1997.
(8) MERGERS AND ACQUISITIONS
During March 1997, the Company acquired the remaining 5.2% minority
interest in FAIC, a 94.8% subsidiary of ALFC. The Company issued 134,125
shares of the Company's Class A stock to consummate this transaction. The
excess of cost over net assets acquired amounted to $1,065,696 (of which
$399,353 was written off concurrent with the
61
<PAGE> 62
acquisition) and is being amortized over 10 years. Effective January 1,
1997, AFLC was merged into Citizens and FAIC was merged into CICA.
On October 28, 1996, CICA announced that it had signed definitive written
agreements for the acquisition of AIN, a Jackson, Mississippi, based life
insurance holding company and its wholly-owned subsidiary USLIC with $7.5
million in assets, $3.4 million of stockholders' equity, revenues of $3.2
million and $67 million of life insurance in-force. The AIN agreement
provided that following the acquisition by CICA, AIN shareholders would
receive 1 share of Citizens, Inc. Class A Common Stock for each 7.2
shares of AIN Common Stock owned. The Company issued approximately
700,000 Class A shares in connection with the transaction, which was
accounted for as a purchase and was consummated on June 19, 1997. The
excess of cost over net assets acquired amounted to $875,000 and is being
amortized over 20 years. During 1998, AIN was liquidated and USLIC was
merged into CICA.
On August 13, 1997, Citizens signed a definitive agreement to acquire
100% of the outstanding shares of NSLIC of Arlington, Texas for $1.7
million in cash and restricted stock. The transaction, which was
accounted for as a purchase, was consummated on November 20, 1997. The
excess of cost over net assets acquired amounted to $625,567 and is being
amortized over 10 years. In conjunction with the acquisition, the Company
and two executives of NSLIC executed employment agreements which require
the executives to provide services to the Company for 42 months. The
employees will be compensated $8,333 a month for the first twelve months
escalating to $12,500 a month for the remaining thirty months.
The pro-forma unaudited results of operations for the year ended December
31, 1997, assuming the purchase of AIN, NSLIC and the minority ownership
in FAIC, had been consummated at the beginning of fiscal 1997, are
presented below. Adjustments have been made for amortization of amounts
assigned to the fair value of historical assets. It is assumed in the
pro-forma basic earnings per share calculations that the shares issued in
connection with the acquisitions were outstanding from the beginning of
the period presented (stated in thousands other than per share amounts).
<TABLE>
<CAPTION>
1997
----
<S> <C>
Revenue $ 70,931
Net income 3,037
Basic earnings per share $ .14
</TABLE>
The IIH agreement closed on March 12, 1996 and provided that Investors'
shareholders would receive one share of Citizens' Class A Common Stock
for each eight shares of Central Investors Common Stock owned.
Additionally, Citizens acquired all shares of CILIC (a 94% owned
subsidiary of Investors) not already owned by Investors, based upon an
exchange ratio of one share of Citizens' Class A common stock for each
four shares of Central Investors owned. The acquisition of these two
companies involved the issuance of approximately 171,000 of Citizens'
Class A shares which was accounted for as a purchase. The excess of cost
over net assets acquired amounted to $419,878 and is being amortized
62
<PAGE> 63
over 5 years. During 1998, IIH was liquidated and CILIC became a
wholly-owned subsidiary of CICA.
On September 15, 1998, Citizens announced that a definitive agreement had
been reached between Citizens and 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, also of Springfield, Illinois. Pursuant to the terms
of the Agreement, which was approved by Investors' shareholders and
regulatory authorities, Citizens issued one share of Citizens Class A
Common stock for each 6.6836 shares of Investors common and preferred
stock issued and outstanding. The transaction closed on January 26, 1999.
Citizens issued 609,269 shares of its Class A Common stock to consummate
the transaction, which was accounted for as a purchase. The excess of
cost over net assets acquired amounted to $303,703 and is being amortized
over 10 years.
In December, 1999, CICA filed a Plan and Agreement of Merger with the
Insurance Departments of Texas and Colorado whereby NSLIC would be merged
with and into CICA. The effective date of the Plan for accounting
purposes is January 1, 2000. Additionally, in February, 2000, CICA filed
a merger plan with regulatory authorities in Mississippi and Colorado,
wherein USLIC would merge with and into CICA.
(9) CONTINGENCIES
The Company is a party to various legal proceedings incidental to its
business. The Company has been named as a defendant in various legal
actions seeking payments for claims denied by the Company and other
monetary damages. In the opinion of management and its legal counsel, the
ultimate liability, if any, resulting from any contingent liabilities
that might arise from litigation are not considered material in relation
to the financial position or results of operations of the Company.
Reserves for claims payable are based on the expected claim amount to be
paid after a case by case review of the facts and circumstances relating
to each claim. A contingency exists with regard to these reserves until
such time as the claims are adjudicated and paid.
(10) SEGMENT INFORMATION
The Company has two reportable segments identified by geographic area:
International Business and Domestic Business. International Business
consisting of ordinary whole-life business is sold throughout Central and
South America. The Company has no assets, offices or employees outside of
the United States of America (U.S.) and requires that all transactions be
in U.S. dollars paid in the U.S. Domestic Business consisting of
traditional life and burial insurance, pre-need policies, accident and
health specified disease, hospital indemnity and accidental death
policies are 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.
63
<PAGE> 64
Geographic Areas - The following summary represents financial data of the
Company's continuing operations based on their location.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES
U.S. $19,844,710 $20,674,694 $14,066,801
Non-U.S. 52,032,348 52,010,221 50,960,497
----------- ----------- -----------
Total Revenues $71,877,058 $72,684,915 $65,027,298
=========== =========== ===========
</TABLE>
64
<PAGE> 65
The following summary represents revenues and pretax income from continuing
operations and identifiable assets for the Company's reportable segments as of
and for the years ended December 31, 1999, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenue, excluding net investment income and
realized gain (loss) on investments
Domestic $ 16,546,005 $ 17,007,228 $ 11,964,457
International 43,383,223 42,784,174 43,344,230
----------------- -------------- -------------
Total consolidated revenue $ 59,929,228 $ 59,791,402 $ 55,308,687
================= ============== =============
Net investment income:
Domestic 3,212,871 3,208,265 2,171,594
International 8,424,069 8,070,860 7,867,142
---------------- -------------- -------------
Total consolidated net investment
Income $ 11,636,940 $ 11,279,125 $ 10,038,736
================ ============== =============
Amortization expense:
Domestic 1,766,439 12,177,194 2,513,452
International 10,382,384 7,212,752 9,422,380
----------------- -------------- -------------
Total consolidated amortization
Expense $ 12,148,823 $ 19,389,946 $ 11,935,832
================= ============== =============
Realized gain (loss) on investments
Domestic 85,834 459,201 (69,250)
International 225,056 1,155,187 (250,875)
----------------- -------------- -------------
Total consolidated realized gain
(loss) on investments $ 310,890 $ 1,614,388 $ (320,125)
================= ============== =============
Income (loss) before federal
income tax:
Domestic 67,571 (7,767,586) 2,523,163
International 904,878 2,090,321 1,506,581
----------------- -------------- -------------
Total consolidated net income (loss)
before federal income taxes $ 972,449 $ (5,677,265) $ 4,029,744
================= ============== =============
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998
---- ----
<S> <C> <C>
Assets:
Domestic 94,273,886 80,069,406
International 161,210,900 173,314,789
----------- --------------
Total $ 255,484,786 $ 253,384,195
================= ==============
</TABLE>
65
<PAGE> 66
(11) INCOME TAXES
A reconciliation of Federal income tax expense computed by applying the
federal income tax rate of 34% to income before Federal income tax expense
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Computed normal tax expense (benefit) $ 330,633 $ (1,930,270) $ 1,370,113
Small life insurance company deduction (597,755) (447,690) (441,356)
Change in valuation allowance (173,350) (24,479) (575,147)
Amortization of excess of costs over
net assets acquired 223,876 3,444,038 481,728
Other (82,027) 1,829 (231,117)
------------ ------------ ------------
Federal income tax expense (benefit) $ (298,623) $ 1,043,428 $ 604,221
============ ============ ============
</TABLE>
Income tax expense (benefit) for the years ended December 31, 1999, 1998
and 1997 consists of:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current $ 1,405,698 $ 2,521,377 $ 1,613,128
Deferred (1,704,321) (1,477,949) (1,008,907)
------------ ------------ ------------
$ (298,623) $ 1,043,428 $ 604,221
============ ============ ============
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1999 and
1998 are presented below.
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Future policy benefit reserves $ 15,182,304 $ 14,568,354
Net operating loss carryforwards and alternative
minimum tax credits 904,717 589,233
Investments available for sale 1,911,962 --
Other 715,649 1,109,691
------------ ------------
Total gross deferred tax assets 18,714,632 16,267,278
Less valuation allowance -- 173,350
------------ ------------
Net deferred tax assets $ 18,714,632 $ 16,093,928
------------ ------------
Deferred tax liabilities:
Deferred policy acquisition costs
and cost of insurance acquired $ 11,526,363 $ 12,388,415
Depreciation 97,902 97,920
Investments available for sale -- 1,866,633
Other 907,603 1,041,112
------------ ------------
Total gross deferred tax liabilities 12,531,868 15,394,080
------------ ------------
Net deferred tax asset $ 6,182,764 $ 699,848
============ ============
</TABLE>
66
<PAGE> 67
During 1999 and 1998, the Company released the valuation allowance
associated with NSLIC and ALFC net operating losses, respectively, as these
losses can be utilized in the future by the Company and CICA.
The Company and its subsidiaries have net operating losses at December 31,
1999 available to offset future taxable income of approximately $2,662,000
for Federal income tax substantially all of which expire through 2014. A
portion of the net operating loss carryforward is subject to limitations
under Section 382 of the Internal Revenue Code.
At December 31, 1999, the Company had accumulated approximately $3,291,000
in its "policyholders' surplus account." This is a special memorandum tax
account into which certain amounts not previously taxed, under prior tax
laws, were accumulated. No new additions will be made to this account.
Federal income taxes will become payable thereon at the then current tax
rate (a) when and if distributions to the shareholder, other than stock
dividends and other limited exceptions, are made in excess of the
accumulated previously taxed income; or (b) when a company ceases to be a
life insurance company as defined by the Internal Revenue Code and such
termination is not due to another life insurance company acquiring its
assets in a nontaxable transaction. The Company does not anticipate any
transactions that would cause any part of this amount to become taxable.
However, should the balance at December 31, 1999 become taxable, the tax
computed at present rates would be approximately $1,119,000.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimates of fair values are made at a specific point in time, based on
relevant market prices and information about the financial instrument. The
estimated fair values of financial instruments presented below are not
necessarily indicative of the amounts the Company might realize in actual
market transactions. The carrying amount and fair value for the financial
assets and liabilities on the consolidated balance sheets at each year-end
were:
<TABLE>
<CAPTION>
1999 1998
------------------------------ ------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Fixed maturities $149,809,300 $149,420,805 $152,252,216 $152,814,842
Equity securities 717,812 717,812 862,287 862,287
Cash and cash
equivalents 11,149,084 11,149,084 10,168,728 10,168,728
Mortgage Loans 1,374,204 1,374,204 1,560,757 1,560,757
Financial Liabilities:
Annuities 4,023,827 4,023,827 3,675,937 3,675,937
</TABLE>
67
<PAGE> 68
Fair values for fixed income securities and equity securities are based on
quoted market prices. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
assumptions, including the discount rate and estimates of future cash
flows.
Mortgage loans are secured principally by residential properties. Weighted
average interest rate for these loans as of December 31, 1999, was
approximately 8.7% with maturities ranging from one to fifteen years.
Management believes that reported amounts approximate fair value.
The carrying value and fair values for the Company's liabilities under
annuity contract policies are the same as the interest rates credited to
these products and are periodically adjusted by the Company to reflect
market conditions. The fair value of liabilities under all insurance
contracts are taken into consideration in the overall management of
interest rate risk, which minimizes exposure to changing interest rates
through the matching of investment maturities with amounts due under
insurance contracts.
Policy loans have a weighted average interest rate of 7.2% as of December
31, 1999 and 1998 and have no specified maturity dates. The aggregate fair
value of policy loans approximates the carrying value reflected on the
consolidated balance sheet. These loans typically carry an interest rate
that is tied to the crediting rate applied to the related policy and
contract reserves. Policy loans are an integral part of the life insurance
policies which the Company has in force and cannot be valued separately.
For cash, accrued investment income, amounts recoverable from reinsurers,
other assets, federal income tax payable and receivable, dividend
accumulations, commissions payable, amounts held on deposit, and other
liabilities, the carrying amounts approximate fair value because of the
short maturity of such financial instruments.
(13) OTHER COMPREHENSIVE INCOME (LOSS)
The changes in the components of other comprehensive income (loss) are
reported net of income taxes of 34% for the periods indicated as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------------ ------------ ------------
<S> <C> <C> <C>
Unrealized loss on securities:
Unrealized holding loss
arising during the period $(10,812,316) $ 3,676,186 $ (7,136,130)
Less: reclassification adjustment for
gains included in net income (301,200) 102,410 (198,790)
------------ ------------ ------------
Other comprehensive loss $(11,113,516) $ 3,778,596 $ (7,334,920)
============ ============ ============
</TABLE>
68
<PAGE> 69
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------------ ------------ ------------
<S> <C> <C> <C>
Unrealized gain on securities:
Unrealized holding gain
arising during the period $ 3,485,479 $ (1,185,063) $ 2,300,416
Add: reclassification adjustment for
losses included in net income (390,518) 132,776 (257,742)
------------ ------------ ------------
Other comprehensive income $ 3,094,961 $ (1,052,287) $ 2,042,674
============ ============ ============
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------------ ------------ ------------
<S> <C> <C> <C>
Unrealized gain on securities:
Unrealized holding (loss)
arising during the period $ 3,185,587 $ (1,083,099) $ 2,102,488
Add: reclassification adjustment for
losses included in net income 285,558 (97,090) 188,468
------------ ------------ ------------
Other comprehensive income $ 3,471,145 $ (1,180,189) $ 2,290,956
============ ============ ============
</TABLE>
(14) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table contains selected unaudited consolidated financial data
for each quarter.
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 18,883,005 $ 17,946,816 $ 18,229,167 $ 16,818,070
Expenses 19,150,093 16,816,910 18,455,771 16,481,835
Federal income tax expense 481,050 (239,427) 115,484 (58,484)
(benefit)
Net income (loss) 213,962 890,479 (111,120) 277,751
Basic and diluted earnings
per share .01 .04 (.01) .01
</TABLE>
69
<PAGE> 70
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenues $ 19,013,057 $ 19,049,196 $ 18,162,381 $ 16,460,281
Expenses 16,673,560 27,487,836 17,890,009 16,310,775
Federal income tax expense
(benefit) (733,120) (200,870) (72,516) (36,922)
Net income 1,606,377 (8,639,510) 199,856 112,584
Basic and diluted earnings
per share .07 (.38) .01 .01
<CAPTION>
1997
----------------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenues $ 16,795,936 $ 18,172,671 $ 15,918,698 $ 14,139,993
Expenses 15,309,437 16,267,692 15,089,776 14,330,649
Federal income tax expense
(benefit) 178,033 (543,363) (307,863) 68,972
Net income 1,664,532 1,361,616 521,059 (121,684)
Basic and diluted earnings
per share .07 .06 .03 (.01)
</TABLE>
(15) YEAR 2000 ISSUES (UNAUDITED)
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 able to interact with the
Company. The Company encountered no loss of data or functionality related
to the Year 2000.
70
<PAGE> 71
SCHEDULE II
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Assets
Investment in subsidiaries 68,043,909 71,163,025
Accrued investment income 14,410 14,410
Real estate 741,834 464,962
Cash 1,667,050 1,789,608
Notes receivable (1) 266,667 333,333
Other assets 1,701,898 1,536,456
------------ ------------
$ 72,435,768 $ 75,301,794
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Notes payable $ -- $ 333,333
Accrued expense and other 168,799 64,782
------------ ------------
$ 168,799 $ 398,115
Stockholders' equity:
Common stock:
Class A $ 67,510,026 $ 52,790,643
Class B 584,863 283,262
Retained earnings 10,756,800 20,135,464
Accumulated other comprehensive income:
Unrealized investment gain (loss) of
securities held by subsidiaries, net (3,711,456) 3,623,464
Treasury stock (2,873,264) (1,929,154)
------------ ------------
72,266,969 74,903,679
------------ ------------
$ 72,435,768 $ 75,301,794
============ ============
</TABLE>
(1) Eliminated in consolidation.
See accompanying independent auditors' report.
71
<PAGE> 72
SCHEDULE II, CONTINUED
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Management service fees (1) $ 13,333,733 $ 13,033,492 $ 10,462,052
Investment income (1) 79,872 79,882 125,746
Other 6,437 4,425 82,668
Realized gain (loss) (7,281) -- --
------------ ------------ ------------
13,412,761 13,117,799 10,670,466
------------ ------------ ------------
Expenses:
General 12,126,181 12,019,676 9,516,881
Interest 18,537 27,011 30,186
Taxes 812,896 533,098 323,635
------------ ------------ ------------
$ 12,957,614 $ 12,579,785 $ 9,870,702
------------ ------------ ------------
Income before equity in income of unconsolidated
subsidiaries 455,147 538,014 799,764
Equity in income (loss) of unconsolidated
subsidiaries 815,925 (7,258,707) 2,625,759
------------ ------------ ------------
Net income (loss) $ 1,271,072 $ (6,720,693) $ 3,425,523
============ ============ ============
</TABLE>
(1) Eliminated in consolidation.
See accompanying independent auditors' report.
72
<PAGE> 73
SCHEDULE II, CONTINUED
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,271,072 $ (6,720,693) $ 3,425,523
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Realized losses on sales 7,281 -- --
Equity in net (income) loss of unconsolidated
subsidiaries (815,925) 7,258,707 (2,625,759)
Accrued expenses and other liabilities 104,018 (11,777) (105,565)
Accrued investment income -- 2,844 2,835
Other assets (138,184) 536,295 (246,993)
------------ ------------ ------------
Net cash provided by operating activities 428,262 1,065,376 450,041
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of NSLIC -- -- (1,000,000)
Capital contribution to subsidiaries -- -- (374,000)
Cash provided by merger -- -- 540,450
Payments on notes receivable 66,666 66,667 69,198
Investment in real estate (284,153) (28,675) (79,948)
------------ ------------ ------------
Net cash provided (used) by investing
activities (217,487) 37,992 (844,300)
------------ ------------ ------------
Cash flows from financing activities:
Sale of common stock, net -- -- (104,388)
Payment on notes payable (333,333) (66,667) (66,667)
------------ ------------ ------------
Net cash used by financing activities (333,333) (66,667) (171,055)
------------ ------------ ------------
Net increase (decrease) in cash (122,558) 1,036,701 (565,314)
Cash at beginning of year 1,789,608 752,907 1,318,221
------------ ------------ ------------
Cash at end of year $ 1,667,050 $ 1,789,608 $ 752,907
============ ============ ============
</TABLE>
See accompanying independent auditors' report.
73
<PAGE> 74
SCHEDULE IV
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
REINSURANCE
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
CEDED ASSUMED PERCENTAGE
GROSS TO OTHER FROM OTHER NET OF AMOUNT
AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET
--------------- ---------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Life insurance in-force $ 2,197,844,000 $ 278,689,000 $ 273,146,000 $ 2,192,301,000 12.5%
=============== ================ =============== ===============
Premiums:
Life insurance 49,654,207 1,966,793 484,746 48,172,160 1.0%
Accident and health insurance 11,458,679 572,362 -- 10,886,317 --
--------------- ---------------- --------------- ---------------
Total premiums $ 61,112,886 2,539,155 484,746 59,058,477 .8%
=============== ================ =============== ===============
Year ended December 31, 1998:
Life insurance in-force $ 2,340,744,000 $ 306,070,000 $ 333,719,000 $ 2,368,393,000 14.1%
=============== ================ =============== ===============
Premiums:
Life insurance 50,569,111 1,768,030 231,410 49,032,491 .5%
Accident and health insurance 11,458,504 1,600,660 -- 9,857,844 --
--------------- ---------------- --------------- ---------------
Total premiums $ 62,027,615 3,368,690 231,410 58,890,335 .4%
=============== ================ =============== ===============
Year ended December 31, 1997:
Life insurance in-force $ 2,250,197,000 $ 318,630,000 $ 334,953,000 $ 2,266,520,000 14.8%
=============== ================ =============== ===============
Premiums:
Life insurance 51,364,382 1,952,316 284,632 49,696,698 .6%
Accident and health insurance 5,605,023 305,240 0 5,299,783 --
--------------- ---------------- --------------- ---------------
Total premiums $ 56,969,405 2,257,556 284,632 54,996,481 .5%
=============== ================ =============== ===============
</TABLE>
See accompanying independent auditors' report.
74
<PAGE> 75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized.
CITIZENS, INC.
Date: March 14, 2000 By: /s/ MARK A. OLIVER
------------------------------------------------
Mark A. Oliver, President
By: /s/ JEFFREY J. WOOD
------------------------------------------------
Jeffrey J. Wood, Executive Vice President, Chief
Financial Officer and Secretary / Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Each individual whose signature appears below hereby designates and appoints
Harold E. Riley and Mark A. Oliver, and each of them, as such person's true and
lawful attorney's-in-fact and agents (the "Attorneys-in-Fact") with full power
of substitution and resubstitution, for each person and in such person's name,
place, and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Annual Report on Form 10-K, which
amendments may make such changes in this Annual Report on Form 10-K as either
Attorney-in-Fact deems appropriate and to file therewith, with the Securities
and Exchange Commission, granting unto such Attorneys-in-Fact and each of them,
full power and authority to do and perform each and every act and think
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that such Attorneys-in-Fact or either of them, in
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
<TABLE>
<S> <C>
/s/ MARK A. OLIVER /s/ HAROLD E. RILEY
- ---------------------------------- ---------------------------------------
Mark A. Oliver, Director Harold E. Riley, Chairman of the
Board and Director
/s/ RALPH M. SMITH
- ---------------------------------- ---------------------------------------
Ralph M. Smith, Director Joe R. Reneau, Director
/s/ JAMES C. MOTT /s/ TIMOTHY T. TIMMERMAN
- ---------------------------------- ---------------------------------------
James C. Mott, Director Timothy T. Timmerman, Director
/s/ RICK D. RILEY /s/ STEVE SHELTON
- ---------------------------------- ---------------------------------------
Rick D. Riley, Director Steve Shelton, Director
/s/ T. ROBY DOLLAR
- ----------------------------------
T. Roby Dollar, Director
</TABLE>
75
<PAGE> 76
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
- -------- -----
<S> <C>
Exhibit 21 77
Exhibit 23 78
Exhibit 27 79
</TABLE>
76
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
STATE OF PERCENTAGE
COMPANY NAME INCORPORATION TAX I.D. OWNERSHIP
------------ ------------- -------- ----------
<S> <C> <C> <C>
Citizens Insurance Company of America Colorado 84-0583103 100% Direct
Insurance Investors, Inc. Texas 74-1458561 100% Indirect
Industrial Benefits, Inc. Texas 76-0159854 100% Indirect
Computing Technology, Inc. Colorado 84-1037266 100% Indirect
American Liberty Exploration Corporation Louisiana 72-0895903 100% Indirect
American Liberty Exploration
Corporation, 1981-1 Louisiana 72-0914867 100% Indirect
American Liberty Exploration
Corporation, 1982-1 Louisiana 72-0928484 100% Indirect
Funeral Homes of America, Inc. Louisiana 72-1148400 100% Indirect
United Security Life Insurance Company Mississippi 64-0442514 100% Indirect
National Security Life and Accident
Insurance Co. Texas 75-0947122 100% Indirect
First Investors Group, Inc. Illinois 37-1252577 100% Direct
Excalibur Insurance Corporation Illinois 37-1357477 100% Direct
Central Investors Life Insurance Company
of Illinois Illinois 37-0862705 100% Indirect
</TABLE>
77
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Citizens, Inc.:
We consent to incorporation by reference in the registration statement on Form
S-3 (No. 033-77698) of Citizens, Inc. of our report dated March 10, 2000,
relating to the consolidated balance sheets of Citizens, Inc. and subsidiaries
as of December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity and comprehensive income (loss), and cash flows
for each of the years in the three-year period ended December 31, 1999, and all
related schedules, which report appears in the December 31, 1999 annual report
on Form 10-K of Citizens, Inc.
KPMG LLP
Dallas, Texas
March 10, 2000
78
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000024090
<NAME> CITIZENS, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 5,594,745
<DEBT-MARKET-VALUE> 144,214,555
<EQUITIES> 717,812
<MORTGAGE> 1,374,204
<REAL-ESTATE> 880,901
<TOTAL-INVEST> 174,338,561
<CASH> 11,149,084
<RECOVER-REINSURE> 2,183,729
<DEFERRED-ACQUISITION> 36,518,037
<TOTAL-ASSETS> 255,484,786
<POLICY-LOSSES> 167,413,196
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 3,591,289
<POLICY-HOLDER-FUNDS> 9,650,801
<NOTES-PAYABLE> 0
0
0
<COMMON> 68,094,889
<OTHER-SE> 4,172,080
<TOTAL-LIABILITY-AND-EQUITY> 255,484,786
59,320,357
<INVESTMENT-INCOME> 11,636,940
<INVESTMENT-GAINS> 310,890
<OTHER-INCOME> 608,871
<BENEFITS> 45,480,194
<UNDERWRITING-AMORTIZATION> 741,349
<UNDERWRITING-OTHER> 24,683,066
<INCOME-PRETAX> 972,449
<INCOME-TAX> (298,623)
<INCOME-CONTINUING> 1,271,072
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,271,072
<EPS-BASIC> 0.05
<EPS-DILUTED> 0.05
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
