-----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, UHvwaWhG5gH+3Ehh5j35FaUwQEuFD/OcPmPMa8WMklhAqbfVnqvv3mq5AyBo+3ol LwXIEQ6qO3/+fQBM8wkFjg== 0000024090-96-000008.txt : 19961118 0000024090-96-000008.hdr.sgml : 19961118 ACCESSION NUMBER: 0000024090-96-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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 SEC ACT: 1934 Act SEC FILE NUMBER: 001-13004 FILM NUMBER: 96663382 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 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X]Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended September 30, 1996 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, 1996, Registrant had 19,572,614 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, 1996 (unaudited) 3 and December 30, 1995 Statements of Operations, Three-Months Ended September 30, 1996 and 1995 (Unaudited) 5 Statements of Operations, Nine-Months Ended September 30, 1996 and 1995 (Unaudited) 6 Statements of Cash Flows, Three-Months Ended September 30, 1996 and 1995 (Unaudited) 7 Statements of Cash Flows, Nine-Months Ended September 30, 1996 and 1995 (Unaudited) 9 Notes to Financial Statements 11 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations 13 Part Other Information 19 II. CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1996 and December 31, 1995 (Unaudited) September December 31, 30, 1995 1996 Assets Investments: Fixed maturities held for investment, at amortized cost (market $5,038,500 in 1996 and $5,700,000 in 1995) $5,629,637 $ 5,636,785 Fixed maturities available for sale, at lower of cost or market (cost $103,896,968 in 1996 and $97,515,359 in 1995) 104,372,404 99,464,551 Equity securities, at market (cost $89,580 in 1996 and $23,329 in 1995) 66,252 - Mortgage loans on real estate (net of reserve 1,777,175 1,910,608 of $145,080 in 1996 and 1995) Policy loans 20,085,373 18,911,275 Guaranteed student loans (net of reserve of $10,000 in 1996 and 1995) 290,519 333,387 Other long-term investments 535,084 679,436 Short-term investments 1,475,000 3,088,697 Total investments 134,231,444 130,024,739 Cash 7,869,692 4,160,156 Prepaid reinsurance 582,915 - Reinsurance recoverable 2,039,732 1,857,900 Other receivables 573,018 1,219,107 Accrued investment income 1,404,529 2,022,809 Deferred policy acquisition costs 36,624,955 36,624,448 Cost of insurance acquired 7,245,448 7,522,827 Other intangible assets 1,680,300 1,820,325 Excess of cost over net assets acquired 15,147,044 14,045,848 Property, plant and equipment 5,618,141 5,546,075 Other assets 1,174,880 642,013 Total assets $214,192,098 $205,486,247 (Continued) CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1996 and December 31, 1995 (Unaudited) September December 31, 30,1996 1995 Liabilities and Stockholders' Equity Liabilities: Future policy benefit reserves $130,873,733 $123,327,377 Dividend accumulations 3,931,803 3,602,706 Premium deposits 2,628,928 1,553,414 Policy claims payable 3,534,764 3,197,291 Other policyholders' funds 2,023,573 1,945,332 Total policy liabilities 142,992,801 133,626,120 Other liabilities 1,625,387 2,001,320 Commissions payable 742,292 692,578 Notes payable 499,667 772,834 Federal income tax payable 0 1,025,106 Deferred Federal income taxes 1,351,079 2,372,742 Minority interest 14,954 14,954 Amounts held on deposit 205,686 267,603 Total liabilities 147,431,866 140,773,257 Stockholders' Equity: Common stock: Class A, no par value, 50,000,000 shares authorized, 21,651,161 shares issued in 1996 and 19,178,515 in 1995, including shares in treasury of 2,078,547 in 1996 and 2,198,175 in 1995 45,713,495 44,007,339 Class B, no par value, 1,000,000 shares authorized, 621,049 shares issued and outstanding in 1996 and 1995 283,262 283,262 Unrealized gain (loss) on investments 296,835 1,267,747 Retained earnings 22,528,906 21,216,908 68,822,498 66,775,256 Treasury stock, at cost (2,062,266) (2,062,266) Total stockholders' equity 66,760,232 64,712,990 Commitments and contingencies Total liabilities and stockholders' $214,192,098 $205,486,247 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three-Months Ended September 30, 1996 and 1995 (Unaudited) Three-months ended September 30, 1996 1995 Revenues: Premiums $14,619,278 $11,661,236 Annuity and Universal Life 179,468 (14,681) considerations Net investment income 2,177,548 1,774,243 16,976,294 13,420,798 Other income and expenses: Other income 53,495 43,120 Realized gains (losses) on investments 80,667 (63,851) Interest expense (14,100) (11,026) 120,062 (31,757) Benefits and expenses: Insurance benefits paid or provided: Increase in future policy benefit reserves 2,541,236 2,395,711 Policyholders' dividends 629,079 667,099 Claims and surrenders 7,319,704 4,797,568 Annuity expenses 168,791 275,813 10,658,810 8,136,191 Commissions 3,182,045 2,307,494 Underwriting, acquisition and insurance expenses 1,973,659 1,514,144 Capitalization of deferred policy acquisition costs (2,558,902) (2,421,047) Amortization of deferred policy acquisition costs 2,784,806 2,112,115 Amortization of cost of insurance acquired, excess of cost over net assets acquired and other intangibles 92,434 78,217 16,132,852 11,727,114 Income before federal income tax $963,504 $1,661,927 Federal income tax: Federal income tax expense 317,969 760,661 Net Income $645,535 $901,266 Per Share Amounts: Net income per share of common stock $0.03 $0.05 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Nine-Months Ended September 30, 1996 and 1995 (Unaudited) Nine-months ended September 30, 1996 1995 Revenues: Premiums $39,301,429 $32,166,889 Annuity and Universal Life considerations 272,703 90,229 Net investment income 6,582,091 4,898,497 46,156,223 37,155,615 Other income and expenses: Other income 89,573 53,261 Realized gains (losses) on 93,376 (94,193) investments Interest expense (43,004) (38,494) 139,945 (79,426) Benefits and expenses: Insurance benefits paid or provided: Increase in future policy benefit reserves 6,549,858 7,355,554 Policyholders' dividends 1,733,240 1,780,506 Claims and surrenders 19,283,265 13,791,382 Annuity expenses 597,466 494,890 28,163,829 23,422,332 Commissions 8,630,952 7,558,495 Underwriting, acquisition and insurance expenses 6,374,934 4,413,629 Capitalization of deferred policy (7,526,271) (7,919,024) Amortization of deferred policy acquisition costs 7,525,764 5,982,918 Amortization of cost of insurance acquired, excess of cost over net 858,709 254,768 assets acquired and other intangibles 44,027,917 33,713,118 Income before federal income tax $2,268,251 $3,363,071 Federal income tax: Federal income tax expense 956,253 1,171,149 Net Income $1,311,998 $2,191,922 Per Share Amounts: Net income per share of common stock $0.07 $0.12 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three-Months Ended September 30, 1996 and 1995 (Unaudited) Three-months ended September 30, 1996 1995 Cash flows from operating activities: Net gain $645,535 $901,266 Adjustments to reconcile net gain to net cash provided by operating activities: Accrued investment income 514,659 462,836 Deferred policy acquisition costs 225,904 (308,932) Amortization of cost of insurance acquired, excess cost over net assets acquired and other intangible assets 92,434 78,217 Prepaid reinsurance 582,211 565,099 Reinsurance recoverable (100,152) (603,398) Other receivables 162,012 413,952 Property, plant and equipment 78,028 448,926 Future policy benefit reserves 2,541,236 2,395,711 Other policy liabilities 244,704 396,080 Commissions payable and other liabilities 415,767 274,066 Amounts paid out as trustee (38,234) (76,140) Federal income tax payable 0 (1,161,858) Deferred Federal income tax payable 904,605 510,804 Other, net (615,095) 368,283 Net cash provided (used) by operating activities 5,653,614 4,664,912 Cash flows from investing activities: Maturity of fixed maturities 1,672,058 20,871 Sale of fixed maturities available for sale 3,042,929 - Purchase of fixed maturities available for sale (8,507,482) (12,499,332) Net change in mortgage loans (31,036) 316,660 Net change in guaranteed student loans (42,640) (66,187) Change in other long-term investments 106,861 (313,943) Cash from merger - 1,178,600 Increase in policy loans (net) (226,748) (1,120,804) Net cash provided (used) by operating activities (3,986,058) (12,484,135) CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three-Months Ended September 30, 1996 and 1995 (Unaudited) Three-months ended September 30, 1996 1995 Cash flows from financing activities: Sale of stock 81,047 - Repayment of note payable (49,433) (7,000) Net cash provided (used) by financing activities 31,614 (7,000) Net increase (decrease) in cash and short-term investments 1,699,170 (7,826,223) Cash and short term investments at beginning of period 7,645,522 12,768,969 Cash and short term investments at end $9,344,692 $4,942,746 of period CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine-Months Ended September 30, 1996 and 1995 (Unaudited) Nine-months ended September 30, 1996 1995 Cash flows from operating activities: Net gain $1,311,998 $2,191,922 Adjustments to reconcile net gain to net cash provided by operating activities: Accrued investment income 618,280 160,643 Deferred policy acquisition costs (507) (1,936,106) Amortization of cost of insurance acquired, excess cost over net assets acquired and other intangibles 858,709 254,768 Prepaid reinsurance (582,915) (643,754) Reinsurance recoverable (181,832) (614,971) Other receivables 646,089 591,153 Property, plant and equipment (72,066) (197,444) Future policy benefit reserves 6,549,858 7,355,554 Other policy liabilities 1,820,325 568,787 Commissions payable and other (326,219) (13,354) liabilities Amounts paid out as trustee (61,917) (116,302) Deferred Federal income tax (1,021,663) (33,799) Federal income tax payable (1,025,106) (341,527) Other, net (919,761) 125,357 Net cash provided (used) by operating activities 7,613,273 7,350,927 Cash flows from investing activities: Maturity of fixed maturities 4,985,682 5,982,417 Sale of fixed maturities available for sale 15,214,840 22,718,636 Purchase of fixed maturities available for sale (24,896,186) (35,064,718) Net change in mortgage loans 133,433 700,996 Net change in guaranteed student loans 42,868 (27,173) Cash from merger 78,436 1,178,600 Change in other long-term investments 144,352 545 Increase in policy loans (net) (1,174,098) (2,231,831) Net cash provided (used) by investing activities (5,470,673) (6,742,528) CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine-Months Ended September 30, 1996 and 1995 (Unaudited) Nine-months ended September 30, 1996 1995 Cash flows from financing activities: Borrowed funds 0 175,000 Repayment of note payable (273,167) (100,540) Sale of stock 226,406 0 Net cash provided (used) by financing (46,761) 74,460 activities Net increase in cash and short- term investments 2,095,839 682,859 Cash and short term investments at beginning 7,248,853 4,259,887 of period Cash and short term investments at end $9,344,692 $4,942,746 of period NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1996 (1) Financial Statements The balance sheet for September 30, 1996, the statements of operations for the three- and nine-month periods ended September 30, 1996 and 1995, 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, 1996, 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, 1995 annual 10-K report filed with the Securities and Exchange Commission. The results of operations for the period ended September 30, 1996 are not necessarily indicative of the operating results for the full year. (2) Merger and Exchange On December 9, 1995, Citizens announced that it had signed definitive written agreements for the acquisition of Insurance Investors & Holding Co., a Peoria, Illinois based life insurance holding company. The agreement provided 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. Following approval by the Illinois Department of Insurance and the stockholders of Investors and Central, closing occurred on March 12, 1996. The transaction involved issuance of approximately 171,000 of Citizens' Class A shares and was accounted for as a purchase. (3) Proposed Merger and Exchange On October 28, 1996, the Company announced that it had signed definitive written agreements for the acquisition of American Investment Network, Inc. (American Investment), a Jackson, Mississippi, based life insurance holding company 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 American Investment agreement provides that following the acquisition by the Company, American Investment shareholders will receive 1 share of Citizens' Class A Common Stock for each 7.2 shares of American Investment Common Stock owned. The Company expects to issue approximately 700,000 Class A shares in connection with the transaction, which will be 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 Citizens' system. The agreement is subject to approval by American Investment's shareholders and regulatory authorities. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Nine-months ended September 30, 1996 and 1995 Net income for the nine-months ended September 30, 1996 was $1,311,998 or $.07 per share, compared to $2,191,922 or $.12 per share for the same period in 1995. Revenues increased to $46,156,2239,763,884, an increase of 24.2% over the first nine months of 1995 when revenues were $37,155,615. The primary reasons for the lower earnings in 1996 were increases in operating expenses as a result of recent acquisition of American Liberty Financial Corporation as well as increases in claims and surrenders Premium income for the first nine months of 1996 was $39,301,429 compared to $32,166,889 for the same period in 1995. This 22.2% increase is the result of the acquisition of American Liberty as well as the volume of new business written by the Company over the past eight years. Recent downturns in the economies of several Latin American countries where the Company had generated a large amount of new production, principally in Argentina, have slowed the rate of growth in those countries. However, production has begun to appear from the Pacific Rim countries and management believes that production for the year will exceed levels produced in 1995, but be below that seen in 1994. Several new products were introduced into the international market during the second quarter of 1996 which management believes will continue to give the Company an advantage over its competition; however, when such products have been introduced in the past, there has typically been a three to six month period before significant volumes of business are written. 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. Submitted annualized premium in September and October reflected significant increases over the prior year. Additionally, management has taken steps to increase the volume of new business produced by American Liberty's marketing representatives. Management is of the opinion that it will be sometime during the fourth quarter of 1996 before these steps, which include increased recruiting of new representatives, will have an effect on the Company's production. Net investment income increased 34.4% in the first nine months of 1996 compared to the same period in 1995. Net investment income for the nine months ended September 30, 1996 was $6,582,091 compared to $4,898,497 in 1995. 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. Management is working with a new investment management firm to further improve yields on the Company's bond portfolio while maintaining the overall credit quality. Future policy benefit reserves increased by $6,549,858 in 1996, compared to $7,355,554 in 1995. Increased lapsation of business in the international market influenced by the economic conditions described above affected the increase in 1996. Claims and surrenders expense increased to $19,283,265 at September 30, 1996 from $13,791,382 for the same period in 1995. Death claims increased to $3,312,101 in 1996 from $2,252,068 in 1995. The addition of American Liberty, which contributed $1,077,234 to death claim expense and was not included in the 1995 results, caused the increase over the prior years. Claims on accident and health insurance increased substantially during 1996 to $1,294,922 from $50,213. This increase is the result of the American Liberty acquisition. American Liberty markets an individual accident and health indemnity policy which comprises approximately 50% of its premium income. Surrender expense increased to $10,291,360 from $7,571,262. 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. The surrender activity in 1996 has been influenced by two factors-- the downturn in the economy of several Latin countries and the acquisition of American Liberty. Coupons and endowments increased to $3,698,624 in 1996 from $3,332,423 in 1995. 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. The remaining components of claims and expenses, consisting of supplemental contracts and payments of dividends and endowments previously earned and held at interest, amounted to $686,258 in 1996, compared to $585,416 in 1995. Commission expense increased to $8,630,952 from $7,558,495 in 1995. This increase relates to the larger block of premium income. Deferred policy acquisition costs capitalized in 1996 were $7,526,271 compared to $7,919,024 in 1995. The decrease is related to the decreases in new business production. Amortization of these costs was $7,525,764 for the first nine months of 1996 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 increased surrender activity. Underwriting, acquisition and insurance expenses increased 44.4% for the first nine months of 1996 compared to the same period in 1995, reaching $6,374,934 from $4,413,629. The increase is primarily attributable to the absorption of American Liberty and the conversion of its books and records to the systems utilized by the Company as well as costs associated with expanding the Company's management group. Management believes that reductions will begin to be achieved in the fourth quarter of 1996 as American Liberty's overhead is pared. Management is contemplating the merger of American Liberty into Citizens Insurance Company Of America as a means to further achieve reductions in overhead. The consolidation is expected to occur in early 1997. Three-months ended September 30, 1996 and 1995 Net income for the three-months ended September 30, 1996 was $645,535, or $.03 per share compared to $901,266, or $.05 per share for the same period in 1995. Revenues increased to $16,976,294, an increase of 26.5% over the same three months of 1995 when revenues were $13,420,798. The primary reasons for the lower quarterly earnings were increases in operating expenses and claim and surrender activity. Premium income for the third quarter of 1996 was $14,619,278 compared to $11,661,236 over the same period in 1995. This 25.4% increase is the result of the acquisition of American Liberty. The rate of increase on the Citizens block of business slowed in 1996 as the amount of new business produced by the Company slowed. Uncertainties about the economies in certain Latin American countries, principally Argentina, contributed to the lower rate of increase. Net investment income increased 22.7% in the third quarter of 1996 compared to the same period in 1995. Net investment income for the three months ended September 30, 1996 was $2,177,548 compared to $1,774,243 in 1995. 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 $2,541,236 in 1996, compared to $2,395,711 in 1995. The amount of increase in the third quarter of 1996 reflects the increased surrender activity as well as the lower levels of production during the year. Claims and surrenders expense increased to $7,319,704 at September 30, 1996 from $4,797,568 for the same period in 1995. The additional accident and health claims of American Liberty as well as increased surrender activity were the reasons for the increase. Underwriting, acquisition and insurance expenses increased 30.3% for the third quarter 1996 compared to the same period in 1995, reaching $1,973,659 from $1,514,144. The increase is primarily attributable to the absorption of American Liberty's overhead and the conversion of its records, which was achieved late in the second quarter of 1996. Management expects to see expense reductions beginning late in 1996 as a result of the economies of scale that will be achieved through the conversion. Liquidity and Capital Resources Stockholders' equity increased during 1996 to $66,760,232 from $64,712,990 at December 31, 1995. The acquisition of Insurance Investors & Holding Co., the earnings achieved in 1996, as well as an improvement in the market value of the Company's available for sale fixed maturity portfolio contributed to the increase. On October 28, 1996, the Company announced that it had signed definitive written agreements for the acquisition of American Investment Network, Inc. (American Investment), a Jackson, Mississippi, based life insurance holding company 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 American Investment agreement provides that following the acquisition by the Company, American Investment shareholders will receive 1 share of Citizens' Class A Common Stock for each 7.2 shares of American Investment Common Stock owned. The Company expects to issue approximately 700,000 Class A shares in connection with the transaction, which will be 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 Citizens' system. The agreement is subject to approval by American Investment's shareholders and regulatory authorities. 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 runs 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 and purchases can be made 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. As of September 30, 1996, approximately 130,000 shares had been sold. Invested assets grew to $134,231,444 at September 30, 1996 from $130,024,739 at December 31, 1995. At September 30, 1996 and December 31, 1995, 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. Virtually all of the Company's bonds are classified as "available for sale." The Company does not have a plan to make material dispositions of fixed maturities during 1996; however, because of continued uncertainty regarding long-term interest rates, management cannot rule out additional sales during 1996. The Company's mortgage loan portfolio, which constitutes 1.3% of invested assets at September 30, 1996, has historically been composed of small residential loans in Texas. Management does not expect to incur a significant loss on any loans and has established a reserve of $145,080 (approximately 8% of the mortgage portfolio's balance) to cover potential unforeseen losses in the Company's mortgage portfolio. Policy loans comprise 15.0% of invested assets at September 30, 1996 compared to 14.5% at December 31, 1995. 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, Texas Commerce Bank Austin, Texas, were significantly in excess of Federal Deposit Insurance Corporation (FDIC) coverage at December 31, 1995 and September 30, 1996. 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 1996, the Company has high grade commercial paper as cash management tools to minimize excess cash balances and enhance return. 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 30,000 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 leased to a third party on a triple-net basis for three years during 1995. CICA owned 1,955,457 shares of Citizens Class A common stock at September 30, 1996 and December 31, 1995. 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 ($6,300,000), 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 Citizens by CICA, limited to 2% of admitted assets. As of September 30, 1996, that permitted transaction increased statutory surplus by $6,000,000 over what it would have been had prescribed accounting practices been followed. In the Citizens' consolidated financial statements, this stock is shown as treasury stock. CICA had outstanding at September 30, 1996 and December 30, 1995, a $466,000 surplus debenture 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") 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 insurance regulators begins. At December 31, 1996 and 1995 CICA's ratios were 700.6% and 560.6%, respectively, well above minimum levels. ALLIC's ratios were 939.6% and 1,000.8% respectively, also well above minimum levels. Financial Accounting Standards 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 enterprise's 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 to 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. Implementation did not have a material impact on the Company's 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 resale in the near term. The Company had no investment securities classified as trading at January 1, 1994, December 31, 1995, or June 30, 1996. Held-to-maturity security 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, not 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 associated with transfers of securities from held-to- maturity to available-for-sale are recorded as a separate component of equity for securities transferred from available-for- sale to held-to-maturity 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. Realize 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 on 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 See Item 5, below. Item 5. Other Information James I. Dunham resigned as President and a member of the Board of Directors on November 11, 1996. There were no disagreements between Mr. Dunham and the Company. Item 6. Exhibits and Reports on Form 8-K Current report on Form 8-K dated October 18, 1996 regarding the execution of a definitive agreement to acquire American Investment Network, Inc. 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: November 13, 1996 EX-27 2
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