-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QXjfR9s+4OyEy/nI8tTkQJ3oVKu7O7i+wZFeq56CWNG/j9rf+kkHSidz9iYmyCu/ ItdmWxVbsbqOjDLRHqGuzw== 0000024090-95-000012.txt : 19951206 0000024090-95-000012.hdr.sgml : 19951206 ACCESSION NUMBER: 0000024090-95-000012 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951205 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIZENS INC CENTRAL INDEX KEY: 0000024090 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 840755371 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-13004 FILM NUMBER: 95599195 BUSINESS ADDRESS: STREET 1: P O BOX 149151 CITY: AUSTIN STATE: TX ZIP: 78714 BUSINESS PHONE: 5128377100 MAIL ADDRESS: STREET 1: P O BOX 149151 CITY: AUSTIN STATE: TX ZIP: 78714 FORMER COMPANY: FORMER CONFORMED NAME: CONTINENTAL INVESTORS LIFE INC DATE OF NAME CHANGE: 19881222 10-Q/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/AMENDMENT NO. 1 [X]Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended September 30, 1995 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number: 0-16509 CITIZENS, INC. (Exact name of registrant as specified in its charter) Colorado 84-0755371 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 East Anderson Lane, Austin, Texas 78752 (Address of principal executive offices) (Zip Code) (512) 837-7100 (Registrant's telephone number, including area code) 7801 North Interstate 35, Austin, Texas 78753 (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ]No As of September 30, 1995, Registrant had 19,322,743 shares of Class A common stock, No Par Value, outstanding. CITIZENS, INC. AND SUBSIDIARIES INDEX Page Number Part I. Financial Information Item 1. Financial Statements Balance sheets, September 30, 1995 (Unaudited) 3 and December 31, 1994 Statements of Operations, Nine-Months Ended September 30, 1995 and 1994 (Unaudited) 5 Statements of Operations, Three-Months Ended September 30, 1995 and 1994 (Unaudited) 6 Statements of Cash Flows, Nine-Months Ended September 30, 1995 and 1994 (Unaudited) 7 Statements of Cash Flows, Three-Months Ended September 30, 1995 and 1994 (Unaudited) 9 Notes to Financial Statements 11 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations 19 Part Other Information 27 II. CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1995 and December 31, 1994 (Unaudited) September December 30, 31, 1995 1994 Assets Investments: Fixed maturities held for investment, at amortized cost (market $18,391,619 $18,415,026 $17,289,075in 1995 and $14,846,900 in 1994) Fixed maturities available for sale, at lower of cost or market (cost 83,260,348 56,573,764 $83,363,440 in 1995 and $61,049,170 in 1994 Equity securities, at market (cost $23,329 in 1995 and 1994) 14,702 1,892 Mortgage loans on real estate (net of reserve 1,922,535 2,623,531 of $145,080 in 1995 and 1994) Policy loans 17,651,346 15,220,005 Guaranteed student loans (net of reserve of $10,000 in 1995 and 1994) 267,416 240,243 Other long-term investments 753,644 754,189 Short-term investments 1,903,702 0 Total investments 124,165,312 93,828,650 Cash 3,039,044 4,259,887 Prepaid reinsurance 643,754 0 Reinsurance recoverable 2,295,258 1,680,287 Other receivables 1,224,316 1,592,607 Accrued investment income 1,696,532 1,569,945 Deferred policy acquisition costs 36,473,570 34,537,464 Deferred Federal income taxes 0 1,521,296 Cost of insurance acquired 7,719,145 2,271,866 Excess of cost over net assets 13,984,985 3,344,844 acquired Property, plant and equipment 5,438,712 4,694,022 Other assets 2,622,511 496,736 Total assets $199,336,938 $149,797,604 (Continued) CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1995 and December 31, 1994 (Unaudited) September December 30, 31, 1995 1994 Liabilities and Stockholders' Equity Liabilities: Future policy benefit reserves $119,716,568 $101,754,835 Dividend accumulations 3,336,776 2,899,573 Premium deposits 1,592,337 1,648,697 Policy claims payable 3,542,753 2,149,631 Other policyholders' funds 1,905,827 1,611,908 Total policy liabilities 130,094,261 110,064,644 Other liabilities 2,386,485 1,671,892 Commissions payable 458,894 916,886 Notes payable 786,833 712,373 Federal income tax payable 724,477 1,066,004 Deferred Federal income taxes 2,283,891 0 Amounts held on deposit 194,130 310,432 Total liabilities 136,928,971 114,742,231 Stockholders' Equity: Common stock: Class A, no par value, 50,000,000 shares authorized, 21,521,918 shares issued in 1995 and 1994, including shares in treasury of 2,198,175 in 43,703,466 21,457,303 1995 and 1994 Class B, no par value, 1,000,000 shares authorized, 621,049 shares 283,262 283,262 issued and outstanding in 1995 and 1994 Minority interest 14,202 0 Unrealized loss on investments (70,290) (2,970,597) Retained earnings 20,658,618 18,466,696 64,589,258 37,236,664 Treasury stock, at cost (2,181,291) (2,181,291) Total stockholders' equity 62,407,967 35,055,373 Commitments and contingencies Total liabilities and stockholders' equity $199,336,938 $149,797,604 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Nine-Months Ended September 30, 1995 and 1994 (Unaudited) Nine-months ended September 30, 1995 1994 Revenues: Premiums $32,166,089 $31,417,440 Annuity and Universal Life 90,229 57,459 considerations Net investment income 4,898,497 3,929,841 37,155,615 35,404,740 Other income and expenses: Other income 53,261 80,252 Realized gains (losses) on (94,193) 171,887 investments Interest expense (38,494) (36,323) (79,426) 215,816 Benefits and expenses: Insurance benefits paid or provided: Increase in future policy benefit 7,355,554 8,253,690 reserves Policyholders' dividends 1,780,506 1,704,301 Claims and surrenders 13,791,382 12,710,675 Annuity expenses 494,890 318,178 23,422,332 22,986,844 Commissions 7,558,495 8,598,620 Underwriting, acquisition and 4,413,629 3,593,696 insurance expenses Capitalization of deferred policy (7,919,024) (9,169,198) acquisition costs Amortization of deferred policy 5,982,918 5,143,963 acquisition costs Amortization of cost of insurance acquired and excess of cost over net 254,768 308,766 assets acquired 33,713,118 31,462,691 Income before federal income tax $3,363,071 $4,157,865 Federal income tax: Federal income tax expense 1,171,149 861,929 Net Income $2,191,922 $3,295,936 Per Share Amounts: Net income per share of common stock $0.12 $0.20 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three-Months Ended September 30, 1995 and 1994 (Unaudited) Three-months ended September 30, 1995 1994 Revenues: Premiums $11,660,436 $12,119,111 Annuity and Universal Life (14,681) 16,907 considerations Net investment income 1,774,243 1,390,663 13,420,798 13,526,681 Other income and expenses: Other income 43,120 41,752 Realized gains (losses) on (63,851) 36,091 investments Interest expense (11,026) (2,844) (31,757) 74,999 Benefits and expenses: Insurance benefits paid or provided: Increase in future policy benefit 2,395,711 3,531,553 reserves Policyholders' dividends 667,099 641,303 Claims and surrenders 4,797,568 4,339,065 Annuity expenses 275,813 62,314 8,136,191 8,574,235 Commissions 2,307,494 3,522,835 Underwriting, acquisition and 1,514,144 1,495,410 insurance expenses Capitalization of deferred policy (2,421,047) (3,744,416) acquisition costs Amortization of deferred policy 2,112,115 1,863,219 acquisition costs Amortization of cost of insurance acquired and excess of cost over net 78,217 98,831 assets acquired 11,727,114 11,810,114 Income before federal income tax $1,661,927 $1,791,566 Federal income tax: Federal income tax expense 760,661 343,871 Net Income $901,666 $1,447,695 Per Share Amounts: Net income per share of common stock $0.05 $0.09 CONSOLIDATED STATEMENTS OF CASH FLOWS Nine-Months Ended September 30, 1995 and 1994 (Unaudited) Nine-months ended September 30, 1995 1994 Cash flows from operating activities: Net gain $2,191,922 $3,295,936 Adjustments to reconcile net gain to net cash provided by operating activities: Accrued investment income 160,643 46,071 Deferred policy acquisition costs (1,936,106) (4,025,235) Amortization of cost of insurance acquired and excess cost over 254,768 308,766 net assets acquired Prepaid reinsurance (643,754) (700,653) Reinsurance recoverable (614,971) 767,841 Other receivables 591,153 0 Property, plant and equipment (197,444) (458,372) Future policy benefit reserves 7,355,554 8,253,690 Other policy liabilities 568,787 (454,039) Commissions payable and other (13,354) 6,683 liabilities Amounts paid out as trustee (116,302) (198,433) Deferred Federal income tax (33,799) 0 Federal income tax payable (341,527) 593,325 Other, net 125,357 (805,023) Net cash provided (used) by operating activities 7,350,927 5,191,515 Cash flows from investing activities: Maturity of fixed maturities 5,982,417 11,002,250 Sale of fixed maturities available for 22,718,636 13,152,225 sale Purchase of fixed maturities available (35,064,718) (43,695,188) for sale Sale of equity securities 0 174,759 Principal payments on mortgage loans 700,996 845,100 Purchase of mortgage loans 0 (196,300) Net change in guaranteed student loans (27,173) 341,590 Change in other long-term investments 545 67,671 Cash from merger 1,178,600 0 Increase in policy loans (net) (2,231,831) (1,077,704) Net cash provided (used) by investing activities (6,742,528) (19,385,597) (Continued) CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine-Months Ended September 30, 1995 and 1994 (Unaudited) Nine-months ended September 30, 1995 1994 Cash flows from financing activities: Sale of stock $0 $3,226,444 Borrowed funds 175,000 0 Repayment of note payable (100,540) (319,062) Net cash provided (used) by financing activities 74,460 2,907,382 Net increase (decrease) in cash and short- 682,859 (11,286,700) term investments Cash and short term investments at beginning 4,259,887 18,754,060 of period Cash and short term investments at end $4,942,746 $7,467,360 of period CONSOLIDATED STATEMENTS OF CASH FLOWS Three-Months Ended September 30, 1995 and 1994 (Unaudited) Three-months ended September 30, 1995 1994 Cash flows from operating activities: Net gain $901,666 $1,447,695 Adjustments to reconcile net gain to net cash provided by operating activities: Accrued investment income 462,836 305,032 Deferred policy acquisition costs (308,932) (1,881,197) Amortization of cost of insurance acquired and excess cost over 78,217 98,831 net assets acquired Prepaid reinsurance 565,099 295,052 Reinsurance recoverable (603,398) 1,473,262 Other receivables 413,952 0 Property, plant and equipment 448,926 (32,945) Future policy benefit reserves 2,395,711 3,531,553 Other policy liabilities 396,080 (1,073,464) Commissions payable and other 274,066 (139,706) liabilities Amounts paid out as trustee (76,140) (50,187) Federal income tax payable (1,161,858) (322,152) Deferred Federal income tax 510,804 (431,064) Other, net 367,883 (388,792) Net cash provided (used) by operating activities 4,664,912 2,831,918 Cash flows from investing activities: Maturity of fixed maturities 20,871 85,893 Sale of fixed maturities available for 0 0 sale Purchase of fixed maturities available (12,499,332) (2,800,778) for sale Sale of equity securities 0 174,759 Principal payments on mortgage loans 316,660 372,695 Purchase of mortgage loans 0 (196,300) Net change in guaranteed student loans (66,187) 194,961 Change in other long-term investments (313,943) 76,721 Cash from merger 1,178,600 0 Increase in policy loans (net) (1,120,804) (395,188) Net cash provided (used) by investing activities (12,484,135) (2,487,237) (Continued) CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three-Months Ended September 30, 1995 and 1994 (Unaudited) Three-months ended September 30, 1995 1994 Cash flows from financing activities: Sale of stock 0 3,226,444 Borrowed funds 0 0 Repayment of note payable (7,000) (146,182) Net cash provided (used) by financing activities (7,000) 3,080,262 Net increase (decrease) in cash and short- (7,826,223) 3,424,943 term investments Cash and short term investments at beginning 12,768,969 4,042,417 of period Cash and short term investments at end $4,942,746 $7,467,360 of period NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 (Unaudited) (1) Financial Statements The balance sheet for September 30, 1995, the statements of operations for the three- and nine-month periods ended September 30, 1995 and 1994, and the statements of cash flows for the three- and nine-month periods then ended have been prepared by the Company without audit. In the opinion of Management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows at September 30, 1995, and for comparative periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 1994 annual 10-K report filed with the Securities and Exchange Commission. The results of operations for the period ended September 30, 1995 are not necessarily indicative of the operating results for the full year. (2) Merger and Proposed Acquisition and Merger On December 9, 1994, Citizens announced that it had signed definitive written agreements for the acquisition of (i) American Liberty Financial Corporation, a Baton Rouge, Louisiana based life insurance holding company and (ii) Insurance Investors & Holding Co., a Peoria, Illinois based life insurance holding company. The American Liberty agreement provided that following the acquisition by Citizens, American Liberty shareholders will receive 1.10 shares of Citizens' Class A Common Stock for each share of American Liberty Common Stock owned and 2.926 shares of Citizens' Class A Common Stock for each one share of American Liberty Preferred Stock owned. Citizens issued approximately 2.4 million Class A shares in connection with the transaction, which was accounted for as a purchase. The companies will continue to operate in their respective locations under a combined management team with consolidation of computer data processing on the Citizens' system. The Louisiana Department of Insurance approved the transaction on July 15, 1995. A meeting of shareholders of American Liberty was held on September 14, 1995 to consider the transaction, with more than 90% of the American Liberty shareholders approving the merger. The transaction was consummated on September 14, 1995. The Insurance Investors agreement provides that following the acquisition by Citizens, Investors' shareholders will receive one share of Citizens' Class A Common Stock for each eight shares of Investors Common Stock owned. Additionally, Citizens will acquire all shares of Central Investors Life Insurance Company, a subsidiary of Insurance Investors & Holding, not wholly-owned by Insurance Investors, based upon an exchange ratio of one share of Citizens' Class A common stock for each four shares of Central Investors owned. The transaction will involve issuance of approximately 170,000 of Citizens' Class A shares and will also be accounted for as a purchase. The agreement is subject to approval by Investors' shareholders. The Illinois Department of Insurance approved the transaction on March 10, 1995. The following unaudited pro forma condensed balance sheet as of September 30, 1995 reflects the purchase of II by Citizens as if it occurred on September 30, 1995. The unaudited pro forma condensed consolidated income statement for the nine months ended September 30, 1995 reflects the purchase of II as if it had occurred on January 1, 1995. Management's estimate of the impact of applying purchase accounting, as if the acquisition had occurred as described above, is presented below. The unaudited pro forma financial information is not necessarily indicative either of the results of operations that would have occurred had the acquisition been consummated at the beginning of 1995 or of future results of operations of the consolidated entities. Pro-Forma Condensed Consolidated Financial Information (Amounts in thousands) Pro-Forma Consolidated Balance Sheet September 30, 1995 (Unaudited) Historica Purchase l Historic Adjustmen Assets Citizens al ts and Pro-forma Inc. and Insuranc Eliminati Consolidate Subsidiar e ons d ies Investor s Long term $122,261 $1,992 $(9) (a $124,244 Investments ) Short term 1,904 0 0 1,904 Investments Total 124,165 1,992 (9) 126,148 Investments Cash 3,039 356 3,395 Other 4,163 0 4,163 receivables Accrued investment 1,696 32 1,728 income Deferred policy acquisition 36,473 48 (48) (b 36,473191 costs ) Cost of insurance 7,719 0 120 584 (c 7,8397,810 acquired ) Excess of cost over net 13,985 0 59011,081 (d 14,57514,37 assets ) 9 acquired Other assets 8,097 1 0 8,098 Total Assets $199,337 $2,429 $ 653 $202,419 Pro-Forma Consolidated Balance Sheet (continued) September 30, 1995 (Unaudited) Historic Purchase Liabilities and al Histori Adjustment Stockholders' Citizens cal s and Pro-forma Equity Inc. and Insuran Eliminatio Consolida Subsidia ce ns ted ries Investo rs Future policy benefit $119,717 $717 $146 (e $120,580 reserves ) Other policyholder 10,377 358 10,735 liabilities Other 3,764 52 3,816 liabilities Notes payable 787 319 1,106 Deferred tax 2,284 0 2,284 liability Total 136,929 1,446 146 138,521 liabilities Class A common 43,703 819 1,201 (f 45,725 stock ) Class B common 283 47 (47) (f 283 stock ) Minority 14 94 (94) (f 14 interest ) Additional paid- in 0 576 (576) (f 0 capital ) Unrealized loss on (70) (14) 14 (f (70) investments ) Retained 20,659 (530) 20,129 earnings 64,589 992 498 66,079 Treasury stock (2,181) (9) 9 (2,181) Total stockholders' 62,408 983 50793 63,898 equity Total liabilities and $199,337 $2,429 $65312 $202,419 stockholders' equity Explanation of Pro-Forma Adjustments as of September 30, 1995: (a) Adjustment necessary to record acquired fixed maturities at market value. (b) Deferred policy acquisition costs are reflected in the accompanying pro-forma financial statements as follows: Historical Citizens $36,473 Historical II 48 Historical DAC 36,521 Reverse historical II (48) Net DAC $36,473 (cb) Reverse ALFC and II policy acquisition costs at March 31, 1995 and eEstablish cost of insurance acquired. Cost of insurance acquired represents the estimated present value of future profits in the acquired business This amount was calculated as the difference between II's historical future policy benefit reserves and the estimated gross premium reserve at September 30, 1995. The gross premium reserve was estimated assuming a level interest yield of 7%. Life mortality was based on appropriate multiples of the 1965-70 Select and Ultimate and the Ultimate Intercompany Table and withdrawals based on Linton B and BB tables as deemed appropriate based on individual life plan experience. Accident and health morbidity was based on multiples of 1974 Cancer tables, Stroke/Heart Attack Indemnity Table, 1985 NAIC Cancer Tables and published claim costs and withdrawals based on Linton C and CC Tables as deemed appropriate based on individual health plan experience. Cost of insurance acquired is being amortized in proportion to the profit over the lives of the respective policies. Cost of insurance acquired is presented in the accompanying pro-forma financial statements as follows: Historical Citizens $7,719 II cost of insurance 120 capitalized Pro-forma cost of insurance $7,839 acquired (dc) Excess of cost over net assets acquired was calculated as follows: (in thousands) II Acquisition of common stock 1,530 Estimated fair value of net assets (940) acquired Excess of cost (purchase price) over 590 net assets acquired (ed) Revaluation of policy benefit reserves to reflect Company reserve assumption with regard to interest rates, lapse rates and surrenders. (fe) Eliminate II capital, minority interest, and retained earnings and record the cost of net assets acquired as increased capital of the Company due to the issuance of additional Class A common shares. Pro-Forma Consolidated Statement of Operations For the Nine Months Ended September 30, 1995 (Unaudited) Historica Purchase l Historical Adjustment Citizens Insurance s and Pro-forma Inc. and Investors Eliminatio Consolidate Subsidiar ns d ies Revenues: Premiums $32,166 $46 $32,212 Net investment 4,898 91 4,989 income Other 91 5 0 96 Total revenues 37,155 142 0 37,217 Benefits and Expenses Policy benefits 23,422 69 23,491 Commissions 7,559 0 7,559 Capitalization (7,919) 0 (7,919) of DAC Amortization of 5,983 4 (4) (a 5,983 DAC ) Amortization of cost 255 0 1 (b 254 of insurance b) acquired Amortization of excess of cost over 93 0 22 ( 115 net assets c) acquired Other expenses 4,320 121 0 4,441 Total benefits and 33,713 194 18 33,925 expenses Income before $3,363 $(52) $(18) $3,292 taxes Net income per $0.17 share (d) Explanation of Pro-Forma statement of Operations for the Nine- Month Period Ended September 30, 1995: (a) Amortization and capitalization of deferred policy acquisition costs are reflected in the accompanying pro- forma statement of operations as follows: (in thousands) Capitalizat Amortizati ion on Historical Citizens (7,919) 5,983 Historical II 0 4 Total Historical (7,919) 5,987 Reverse Historical II 0 (4) Capitalization of Post- (0) 0 Purchase Net Pro-Forma adjustment (0) (4) Net (7,919) 5,983 (bb) Amortization of cost of insurance acquired is presented in the accompanying pro-forma statement of operations as follows: Historical Citizens $78,00 0 Interest accrued @ 7% (8) Amortization of II cost 51 of insurance 1 Net Pro-Forma 50 adjustment 3 Pro-forma amortization $78,503 Estimated amortization of cost of insurance acquired assuming a purchase date of January 1, 1995 is $503, $560, $621, $686, and $159 for each year, respectively, in the five year period ending December 31, 1999. (c) Excess of cost over net assets acquired is being amortized over a 20-year period. Such amortization, reflected in the accompanying pro-forma statement of operations is $22,000. (d) Calculated using estimated common shares outstanding of 19,433,080. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS On September 14, 1995, the Company consummated the acquisition of American Liberty Financial Corporation that had been pending since December, 1994. Citizens issued approximately 2.4 million Class A shares for all of the shares of American Liberty. The transaction had a significant effect on assets, liabilities and capital as is discussed below, however, since it was accounted for as a purchase, had no material effect on operating results or income since the transaction was consummated so near the end of the quarter. Nine-months ended September 30, 1995 and 1994 Net income for the nine-months ended September 30, 1995 was $1,290,256 or $.12 per share, compared to $3,295,936 or $.20 per share for the same period in 1994. Revenues increased to $37,155,6159,763,884, an increase of 4.9% over the first nine months of 1994 when revenues were $35,404,740. The primary reasons for the lower earnings in 1995 were reduced levels of capital gains coupled with increases in operating expenses as a result of recent growth in the Company, along with higher death benefits during the period. Operating income (income before capital gains and federal income taxes) was $3,457,264 for the first nine months of 1995, compared to $3,985,978 for the same period in 1994. Premium income for the first nine months of 1995 was $32,166,089 compared to $31,417,440 for the same period in 1994. This 2.4 percent increase is substantially less than the Company has experienced in recent years, however, Management believes two factors contributed to the slowdown in growth: 1) a sales convention for top producers was held in August, pulling the top 150 producers out of their respective countries for several weeks during one of the historically busiest periods of the year, and 2) economic disruptions in Argentina during 1995, one of the largest producing countries. Management expects to see a stronger increase in the production of new premium during the fourth quarter, however expects production for the year to be less than that produced in 1994. During 1994, approximately $11.8 million of new premium was written and during 1995, Management had expected this production to reach $12.5 million. Currently, Management expects 1995 production to be $10.5 to $11.5 million. Management does not believe the slowing down of new business from some of the Latin markets is long term in nature, but rather a cyclical occurrence that will run its course in the near term. Net investment income increased 24.7% in the first nine months of 1995 compared to the same period in 1994. Net investment income for the nine months ended September 30, 1995 was $4,898,497 compared to $3,929,841 in 1994. This increase reflects the earnings on the growth in the Company's asset base that is occurring, as well as the higher yields that have been available in the bond market during the past year. Additionally, the $5.4 million of new capital raised in the latter half of 1994 via a Reg. S. offering is generating additional earnings. Overall investment return in recent years has been hampered because the growth in the Company's asset base has occurred during a period of relatively low investment returns. Future policy benefit reserves increased by $7,355,554 in 1995, compared to $8,253,690 in the first nine months of 1994. Increased surrender activity during the year has slowed the rate at which reserves have increased, however Management does not believe this increase poses any long term problems for the Company.. Claims and surrenders expense increased from $12,710,675 at September 30, 1994 to $13,791,382 for the same period in 1995. Death claims declined from $2,705,717 in 1994 to $2,252,068 in 1995. The claims level experienced in 1994 was substantially higher than the previous year. Experience during 1995 more closely matches the historical levels of claims seen by the Company. Management expects some increase in this category as a result of the growing block of business in force. Surrender expense increased from $6,266,254 to $7,571,262, as increases in the older, domestic block of business owned by the Company contributed to the rise in expense. Management constantly monitors this activity to insure that the Company's persistency is holding at levels equal to or above assumptions. Thus far, the Company's persistency has exceeded the assumed levels. To illustrate the Company's persistency, when creating its products Citizens generally uses Linton Table B, an actuarial table that is considered to be the industry standard for persistency. Through 1994, the Company's first year persistency was at 99.4%, compared to 79.9% for Linton. Second year persistency was 88.8% for Citizens compared to 70.1% for Linton; third year was 81.1% compared to 62.9%; fourth year was 70.9% compared to 57.2%; and fifth year was 60.9% compared to 52.4% for Linton. Annuity benefits grew to $494,890 in 1995 from $318,178 in 1994, primarily as the result of reductions made by the Company in the interest rate credited to such products. Coupons and endowments increased to $3,332,423 in 1995 from $3,144,406 in 1994. Although this item increased 5.9% in 1995, Management is not concerned by the increase. The endowment benefits are factored into the premium much like dividends and therefore, the increase does not pose a threat to future profitability. Management expects to see further increases in this category in the future. Commission expense decreased to $7,558,495 from $8,598,620. This decrease relates to the lower levels of production described above. Deferred policy acquisition costs capitalized in 1995 were $7,919,024 compared to $9,169,198 in the prior year. The lower levels of capitalization relate to the slowdown in production and commission expense described above as well as the lower levels of interest that are currently prevalent.. Amortization of these costs was $5,143,963 for the first nine months of 1994 compared to $5,982,918 for 1995. The increase in amortization relates to the larger block of capitalized costs being written off, as well as the higher level of surrender activity incurred during 1995. Underwriting, acquisition and insurance expenses increased 22.8% for the first nine months of 1995 compared to the same period in 1994, reaching $4,413,629 from $3,593,696. The increase is primarily attributable to the absorption of the marketing management function previously performed by Savoy, part of which is offset by a reduced level of commission expense on first year business, as well as costs associated with expanding the Company's management group. Realized gains on investments for the first nine months of 1994 were $171,887, compared to losses of $94,193 in the current year. The gains realized in the first half of 1994 occurred because management felt that yields on the long Treasury bonds were going into an interim period of growth. As a result, Management decided to liquidate a portion of the Company's long-term Treasury holdings in an attempt to reinvest at higher rates, as well as to convert a portion of the interest earnings on such instruments to immediate cash in the form of capital gains which could be reinvested along with the principal to further enhance return. During the first quarter of 1995, Management opted to maintain the level of return available rather than to effect capital gains that became available as the yield on long term bonds fell more than 1/2%. Three-months ended September 30, 1995 and 1994 Net income for the three-months ended September 30, 1995 was $901,666 compared to $929,361 for the same period in 1994. Revenues increased to $13,420,7989,763,884, an decrease of 1% over the same three months of 1994 when revenues were $13,526,681. The primary reasons for the lower quarterly earnings were decreases in premium income and lower levels of capital gains. Premium income for the third quarter of 1995 was $11,660,436 compared to $12,119,111 for the same period in 1994. This 3.8 percent decrease is the result of the slowdown in the volume of new business written by the Company during the quarter due to uncertainties about the economies in certain Latin American countries, principally Argentina, as well as the Company's annual sales convention which brought 150 of the top agents from Latin America to the U.S. in August since that month is one of the Company's largest production months. Net investment income increased 27.6% in the third quarter of 1995 compared to the same period in 1994. Net investment income for the three months ended September 30, 1995 was $1,774,243 compared to $1,390,663 in 1994. This increase reflects the earnings on the growth in the Company's asset base that is occurring, as well as the higher yields that have been available in the bond market during the past year. Future policy benefit reserves increased by $2,395,711 in 1995, compared to $3,531,553 in the third quarter of 1994 primarily as the result of the slowdown in production described above. Claims and surrenders expense increased from $4,339,065 at September 30, 1994 to $4,797,568 for the same period in 1995. Increases in surrender and annuity benefits were the primary reason for the increase during the quarter. Commission expense decreased to $2,307,494 from $3,522,835. The slower increases in the production of new policies as well as modifications in who bears the expenses for marketing made in recent years are the reasons for the decline. Deferred policy acquisition costs capitalized in 1995 were $2,421,047 compared to $3,744,416 in the prior year. Amortization of these costs was $2,112,115 for the second quarter of 1994 compared to $1,863,219 for 1995. Underwriting, acquisition and insurance expenses increased slightly for the third quarter of 1995 compared to the same period in 1994, reaching $1,514,144 from $1,495,410. The increase is primarily attributable to the absorption of the marketing management function previously performed by Savoy, part of which is offset by a reduced level of commission expense on first year business, as well as costs associated with expanding the Company's management group. Liquidity and Capital Resources Stockholders' equity increased 78.1% during 1995 to $62,407,967 from $35,055,373 at December 31, 1994. The consummation of the American Liberty merger for shares of the Company's Class A Common Stock, as well as an improvement in the market value of the Company's available for sale fixed maturity portfolio contributed to the increase. The American Liberty transaction boosted capital by $22.2 million. On October 27, 1994, Citizens completed the offering of 916,375 shares of its Class A Common Stock under an exemption from registration under the Securities Act of 1933. The offering was made under Regulation S, which provides that shares which are offered outside of the United States to non-United States persons pursuant to certain specific guidelines may be resold in the United States by persons who are not an issuer, underwriter or dealer following a certain period after the close of the offering period. The offering price was $7.00 per share. The closing market price of the Class A common shares on the date of the offering commencement was $7.75 per share (as reported by the American Stock Exchange). The Company had succeeded in placing 916,375 shares, generating gross proceeds of more than $6.4 million, and net proceeds of approximately $5.4 million. Management was pleased with the amount of capital generated through the offering; however, it believes that the offering period was too short in light of the manner in which business is typically transacted overseas. Because of the success of the offering in the limited time period, Management initiated a second such offering which commenced on May 1, 1995. The new offering comprises up to 3,500,000 Class A shares and will run over a period of 30 months, ending October 31, 1997, or when 3,500,000 shares have been purchased. The initial offering price is $7.50 per share, with the shares being offered in units of 50 shares each. Each overseas policyowner of Citizens Insurance Company of America is being offered the opportunity to purchase up to 100 units. The price of the shares escalates every six months during the offering period, reaching $8.50 per share during the final period. As of September 30, 1995, only a negligible amount of shares had been placed. Management does not expect to see significant activity in conjunction with this offering until the fourth quarter of 1995.. Invested assets grew to $124,165,312 at September 30, 1995 from $93,828,650 at December 31, 1994, an increase of 32.3% The American Liberty transaction boosted such assets by approximately $17 million. At September 30, 1995 and December 31, 1994, 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 market. The Company does not have a plan to make material dispositions of fixed maturities during 1995; however, because of continued uncertainty regarding long-term interest rates, Management cannot rule out additional sales during 1995. Fixed maturities held to maturity, amounting to $18,391,619 at September 30, 1995 and $18,415,026 at December 31, 1994 consist primarily of U.S. Treasury securities. Management has the intent and believes the Company has the ability to hold the securities to maturity. The Company's mortgage loan portfolio, which constitutes 1.5% of invested assets at September 30, 1995, has historically been composed of small residential loans in Texas. The 1992 acquisition of FCC added a block of mortgages to the portfolio. During 1994, in conjunction with the sale of certain parcels of real estate owned by the Company approximately $340,000 in new mortgage loans were made. At December 31, 1994, approximately 38.9% of the Company's mortgage portfolio (1 % of invested assets) consisted of commercial mortgages with an average balance of $66,381. The remaining residential mortgages have an average balance of $27,839. At September 30, 1995, one mortgage, in the principal amount of $30,665 was in default. Management believes that in the event of foreclosure there is more than adequate collateralization on the loan, to avoid exposure to loss. One mortgage with a balance of approximately $106,000 was foreclosed during the second quarter of 1995. Management does not expect to incur a significant loss on the disposal of the real estate. Management has established a reserve of $145,080 (approximately 5% of the mortgage portfolio's balance) to cover potential unforeseen losses in the Company's mortgage portfolio. Policy loans comprise 14.2% of invested assets at September 30, 1995 and 16.2% at December 31, 1994. 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 depositories, Texas Commerce Bank Austin, Texas and Frost Bank, N.A., Austin, Texas, were significantly in excess of Federal Deposit Insurance Corporation (FDIC) coverage at December 31, 1994 and September 30, 1995. Management monitors the solvency of all financial institutions in which it has funds to minimize the exposure for loss. Management does not believe the Company is at risk for such a loss. During 1995, the Company has utilized short-term Treasury Bills as a cash management tool to minimize excess cash balances and enhance return. Investments in real estate comprise a very small portion of the Company's invested assets (0.1%). The properties owned by the Company were predominantly acquired in the acquisition of HERMAR's assets and consist of small tracts used for light retail or light industrial purposes. No single tract accounts for as much as 0.1% of the Company's invested assets and virtually all are revenue-producing holdings. The Company has not established loss reserves on real estate because Management believes the Company has no significant exposure to loss on its holdings. During 1994, the bulk of the real estate acquired from HERMAR was sold to the parties leasing the properties. As part of the transaction, CICA provided mortgage financing on the transactions totaling approximately $340,000; however, down payments of 15-20% were made in each case. One parcel of real estate acquired in 1991 and still owned at September 30, 1995, was the site of a previous underground fuel line leak. The previous owner, having previously initiated action to abate the leak, had contracted with an environmental consulting firm to supervise and coordinate the remediation of any contamination at the site. Following the acquisition in 1991, the Company continued the remediation efforts. During 1994, all remediation efforts at the site were discontinued with the permission of the Texas Natural Resource Conservation Commission (TNRCC). Management believes it probable that any remaining costs of remediation will be paid by the TNRCC through a reimbursement program administered by that agency for such sites. In the event the TNRCC limits the amount of such reimbursement due to a charge being "unreasonable," the Company's contracts with its environmental consultants provide for a like reduction in amounts due said contractor. Additionally, these contracts require the consultants to bear the financial burden of any expenditures for remediation until such items are reimbursed by the TNRCC. Management is not aware of any remaining costs related to the remediation. There is no pending or threatened legal action by state agencies, area governments or citizenry relating to the leak; therefore, the Company has not established reserves for the leak. In February 1992, the Company paid cash for an 80,000 square foot office building in Austin, Texas to serve as its primary office. This building will, in the opinion of Management, provide adequate space for the Company's operations for many years. Renovation and remodeling of the property began in the third quarter of 1992 and the Company relocated to the building in September, 1993. The Company occupies approximately 27,000 square feet of space in the building. The Company's former office property, consisting of approximately 13,000 square feet in Austin, with a carrying value of $158,000, was listed for sale during 1994 for $1.5 million. In February, 1995, a lease- purchase agreement was reached with a third party on the former office property. The lease, a three year agreement on a triple- net basis, provides that the party can purchase the building during the first 18 months of the lease for $850,000 cash, with no lease payments applying to the purchase price. The phrase "triple net" means that the lessee is responsible for the payment of maintenance, taxes and insurance on the property. As of November 14, 1995, the lessee had not notified the Company of its intentions with regard to the purchase option. Management does not expect the lease to have a material effect on the Company's earnings or financial position. The Company intends to account for the lease as an operating lease. Should the lessee exercise the purchase option, which is a cash purchase option, the Company would record a gain of approximately $650,000. CICA owned 2,075,685 shares of Citizens Class A common stock at September 30, 1995 and December 31, 1994. For statutory accounting purposes, CICA received written approval from the Colorado Insurance Department to carry its investment in Citizens at 50% of the fair market value limited to 8% of admitted assets, ($9,989,000 at September 30, 1995) which differs from prescribed statutory accounting practices. Statutory accounting practices prescribed by Colorado require that the Company carry its investment at market value reduced by the percentage ownership of the Parent by CICA, limited to 2% of admitted assets. As of December 31, 1994, that permitted transaction increased statutory surplus by $4,711,023 over what it would have been had prescribed accounting practice been followed. In the Citizens' consolidated financial statements, this stock is shown as treasury stock. CICA had outstanding at December 31, 1994, a $600,000 surplus debenture ($533,333 at September 30, 1995) payable to Citizens. For statutory accounting purposes, this debenture is a component of surplus, while for GAAP it is eliminated in consolidation. Citizens has recognized a liability for its related obligation to a bank in a like amount. The National Association of Insurance Commissioners ("NAIC") established new 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 insurance regulators begins. At December 31, 1994 and 1993, CICA's ratios were 560.6% and 421.5%, respectively, well above minimum levels. Financial Accounting Standards In February 1992, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Statement 109 requires a change from the deferred method of accounting for income taxes of APB Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement 109, 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. Under Statement 109, 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. The Company adopted Statement 109 in 1993 and applied the provisions of Statement 109 retroactively to January 1, 1991 In December 1990, the FASB issued Statement 106, "Employers' Accounting for Post Retirement Benefits Other than Pensions", ("Statement 106"). Statement 106 establishes accounting standards for employers' accounting for, primarily, post retirement health care benefits. The statement was effective for fiscal years beginning after December 15, 1992. Since the Company currently pays no such benefits, implementation had no impact on the results of operations of the Company. In December 1992, the FASB issued Statement 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" ("Statement 113"). Statement 113 eliminated the net reporting of reinsurance amounts in the balance sheet previously required by Statement 60 "Accounting by Insurance Enterprises." Statement 113 also provides accounting guidance for ceding enterprises as well as disclosure requirements and guidance on assessing transfer of risk in reinsurance contracts. Furthermore, it precludes immediate recognition of gains related to reinsurance contracts unless the ceding enterprises liability to its policyholders is extinguished. The Company adopted Statement 113 in the first quarter of 1993. There was no impact on the consolidated financial statements due to implementation of the risk transfer provisions. In May 1993, the FASB issued Statement 114, "Accounting by Creditors for Impairment of a Loan" ("Statement 114"). Statement 114 requires impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Statement 114 is effective for years beginning after December 15, 1994. The Company does not expect Statement 114 to have a material impact on its financial statements. Also in 1993, the FASB issued Statement 115, "Accounting for Certain Investments in Debt and Equity Securities" ("Statement 115"). Statement 115 requires the classification of debt and equity securities as held to maturity, trading or available for sale based on established criteria. Trading securities are bought and held principally for the purpose of selling them in the near term. The Company had no investment securities classified as trading at January 1, 1994, December 31, 1994 or September 30, 1995. Held-to-maturity securities are those in which the Company has the ability and intent to hold the security until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized. Transfers of securities between categories are recorded at fair value at the date of transfer. Unrealized holding gains and losses are recognized in earnings for transfers into trading securities. Unrealized holding gains or losses associated with transfers of securities from held-to-maturity to available-for- sale are recorded as a separate component of stockholders' equity. The unrealized holding gains or losses included in the separate component of equity for securities transferred from available-for-sale to held-to-maturity are maintained and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistent with the amortization or accretion of premium or discount on the associated security. A decline in the market 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. The Company adopted Statement 115 at January 1, 1994. The impact on the consolidated stockholders' equity due to the implementation was $690,388 relating to the unrealized gains on the available-for-sale portfolio, net of deferred tax. PART II. OTHER INFORMATION Item 1. Legal Proceedings None. Item 2 Changes in Securities None, other than disclosed in the Notes to the Financial Statements or Management's Discussion and Analysis of Financial Condition and Results of Operations. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information Effective November 15, 1995, the Company entered into an agreement with Asset Allocation and Management of Chicago, Illinois to act as an Investment Advisor to the Company and its subsidiaries on a non-discretionary basis. The agreement is terminable upon thirty days written notice. The pending acquisition of Insurance Investors and Holding Co. is awaiting clearance of a Registration Statement on Form S-4 prior to conducting a stockholders' meeting to consider the transaction. Management expects to obtain such clearance during November and hopes to consummate the transaction during 1995. Item 6. Exhibits and Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CITIZENS, INC. By: /s/ Mark A. Oliver Mark A. Oliver, FLMI Executive Vice President Secretary / Treasurer Chief Financial Officer Date: May 15, 1995December 5, 1995 EX-27 2
7 9-MOS DEC-31-1995 SEP-30-1995 83260348 18391619 0 14702 1922535 753644 124165312 3039044 2295258 36473570 199336938 119716568 0 8471866 1905827 786833 43986728 0 0 0 199336937 32166089 4898497 (94193) 104996 23422332 (1936106) 12226892 3363071 1171149 2191922 0 0 0 2191922 .07 0.07 0 0 0 0 0 0 0
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