-----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, B2ujHO3yQ/lAugp11fvqwKvta6b5VyrLcuJvcon1hU5gr6fDHJcWvtIDyLW9VxBG UxItC/e5pNyYIYP3X0/tKw== 0000024090-99-000004.txt : 19990816 0000024090-99-000004.hdr.sgml : 19990816 ACCESSION NUMBER: 0000024090-99-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: SEC FILE NUMBER: 001-13004 FILM NUMBER: 99688940 BUSINESS ADDRESS: STREET 1: 400 EAST ANDERSON LANE CITY: AUSTIN STATE: TX ZIP: 78752 BUSINESS PHONE: 5128377100 MAIL ADDRESS: STREET 1: 400 EAST ANDERSON LANE CITY: AUSTIN STATE: TX ZIP: 78752 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 June 30, 1999 or [ ]Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number: 1-13004 CITIZENS, INC. (Exact name of registrant as specified in its charter) Colorado 84-0755371 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 East Anderson Lane, Austin, Texas 78752 (Address of principal executive offices) (Zip Code) (512) 837-7100 (Registrant's telephone number, including area code) 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 June 30, 1999, Registrant had 21,374,357 shares of Class A common stock, No Par Value, outstanding and 621,049 shares of Class B common stock, No Par Value, outstanding. CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES INDEX Page Number Part I. Financial Information Item 1. Financial Statements Consolidated Statements of Financial Position, June 30, 1999 (Unaudited) and December 31, 1998 3 Consolidated Statements of Operations, Three-Months Ended June 30, 1999 and 1998 (Unaudited) 5 Consolidated Statements of Operations, Six-Months Ended June 30, 1999 and 1998 (Unaudited) 6 Consolidated Statements of Cash Flows, Six-Months Ended June 30, 1999 and 1998 (Unaudited) 7 Notes to Consolidated Financial 9 Statements Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations 120 Part Other Information 20 II. CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION June 30, 1999 and December 31, 1998 (Unaudited) June 30, December 1999 31,1998 Assets Investments: Fixed maturities held for investment, at amortized cost (fair value $5,523,500 in 1999 and $6,169,000 in 1998) $5,600,460 $ 5,606,374 Fixed maturities available for sale, at fair value (amortized cost $140,321,931 in 1999 and $141,202,761 in 1998) 139,081,942 146,645,842 Equity securities, at fair value (cost $716,294 in 1999 and $815,271 in 1998) 732,739 862,287 Mortgage loans on real estate (net of reserve of $50,000 in 1999 and 1998) 1,437,678 1,560,757 Policy loans 21,697,103 20,996,919 Guaranteed student loans 11,096 4,673 Other long-term investments 629,773 595,271 Short-term investments 300,000 8,050,000 Total investments 177,240,791 176,572,123 Cash 7,593,978 9,868,728 Prepaid reinsurance 951,514 - Reinsurance recoverable 1,930,330 1,755,561 Other receivables - 433,320 Accrued investment income 1,784,267 1,806,065 Deferred policy acquisition costs 35,745,025 37,259,386 Cost of insurance acquired 7,610,131 8,290,853 Excess of cost over net assets 8,442,889 8,375,799 acquired Other intangible assets 2,136,125 2,289,725 Property, plant and equipment 5,228,337 5,155,088 Federal income tax recoverable 20,240 - Deferred Federal income tax 2,997,739 699,848 Other assets 993,457 877,699 Total assets 252,974,823 253,384,195 See accompanying Notes to Consolidated Financial Statements CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED June 30, 1999 and December 31, 1998 (Unaudited) June 30, December 1999 31, 1998 Liabilities and Stockholders' Equity Liabilities: Future policy benefit reserves 163,128,693 160,176,329 Dividend accumulations 4,863,629 4,818,915 Premium deposits 2,558,390 2,013,274 Policy claims payable 4,005,262 4,801,548 Other policyholders' funds 2,015,885 1,632,662 Total policy liabilities 176,571,859 173,442,728 Other liabilities 1,667,055 2,067,392 Commissions payable 459,200 833,881 Notes payable - 333,333 Federal income tax payable - 1,534,269 Amounts held on deposit 210,264 268,913 Total liabilities 178,908,378 178,480,516 Stockholders' Equity: Common stock: Class A, no par value, 50,000,000 shares authorized, 23,318,179 shares issued in 1999 and 22,708,910 in 1998, including shares in treasury of 1,943,822 in 1999 and 1998 56,217,781 52,790,643 Class B, no par value, 1,000,000 shares Authorized, 621,049 shares issued and outstanding in 1999 and 1998 283,262 283,262 Accumulated other comprehensive income: Unrealized investment gains (losses) (807,539) 3,623,464 Retained earnings 20,302,095 20,135,464 75,995,599 76,832,833 Treasury stock, at cost (1,929,154) (1,929,154) Total stockholders' equity 74,066,445 74,903,679 Total liabilities and stockholders' 252,974,823 253,384,195 equity See accompanying Notes to Consolidated Financial Statements CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three-Months Ended June 30, 1999 and 1998 (Unaudited) Three-months ended June 30, 1999 1998 Revenues: Premiums 14,857,197 14,549,512 Annuity and Universal life 58,612 64,204 considerations Net investment income 2,912,273 2,787,417 Other income 167,914 145,594 Realized gains on investments 247,136 624,085 Interest expense (13,965) (8,431) 18,229,167 18,162,381 Benefits and expenses: Insurance benefits paid or provided: Increase in future policy benefit 1,926,161 2,323,379 reserves Policyholders' dividends 736,727 751,255 Claims and surrenders 8,365,566 8,190,825 Annuity expenses 176,232 91,715 11,204,686 11,357,174 Commissions 2,827,955 3,071,337 Underwriting, acquisition and insurance expenses 3,038,598 3,021,246 Capitalization of deferred policy acquisition costs (1,708,445) (1,899,615) Amortization of deferred policy acquisition costs 2,323,924 1,837,627 Amortization of cost of insurance acquired and excess of cost over net assets acquired 769,053 502,240 18,455,771 17,890,009 Income (loss) before Federal income tax $(226,604) $ 272,372 Federal income tax: Federal income tax expense (benefit) (115,484) 72,516 Net Income (loss) (111,120) $ 199,856 Per Share Amounts: Basic and diluted earnings per share of common stock $(0.01) $0.01 Weighted average shares outstanding 21,995,406 21,386,137 See accompanying Notes to Consolidated Financial Statements CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED Six-Months Ended June 30, 1999 and 1998 (Unaudited) Six-months ended June 30, 1999 1998 Revenues: Premiums 28,392,142 27,970,186 Annuity and Universal life considerations 127,895 130,702 Net investment income 5,917,231 5,504,064 Other income 351,431 389,997 Realized gains on investments 278,336 654,736 Interest expense (19,798) (27,023) 35,047,237 34,622,662 Benefits and expenses: Insurance benefits paid or provided: Increase in future policy benefit 3,099,810 3,835,053 reserves Policyholders' dividends 1,238,361 1,441,535 Claims and surrenders 16,572,827 14,962,318 Annuity expenses 310,361 190,287 21,221,359 20,429,193 Commissions 5,694,633 5,957,553 Underwriting, acquisition and 5,386,318 5,880,597 insurance expenses Capitalization of deferred policy (3,393,665) (3,414,322) acquisition costs Amortization of deferred policy 4,908,026 3,951,641 acquisition costs Amortization of cost of insurance acquired and excess of cost over net assets acquired 1,120,935 1,396,122 34,937,606 34,200,784 Income before Federal income tax $109,631 $ 421,878 Federal income tax: Federal income tax expense (benefit) (57,000) 109,438 Net Income $166,631 $ 312,440 Per Share Amounts: Basic and diluted earnings per share of common stock $0.01 $0.01 Weighted average shares outstanding 21,911,253 21,386,137 See accompanying Notes to Consolidated Financial Statements CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six-Months Ended June 30, 1999 and 1998 (Unaudited) Six-months ended June 30, 1999 1998 Cash flows from operating activities: Net income 166,631 312,440 Adjustments to reconcile net income to net cash provided by operating activities: Accrued investment income 56,123 117,285 Realized (gains) losses on sale of investments and other assets (278,336) (654,736) Deferred policy acquisition costs 1,514,361 537,319 Amortization of cost of insurance acquired and excess cost over net assets acquired 1,120,935 1,396,122 Depreciation 257,465 86,087 Prepaid reinsurance (951,514) (949,910) Reinsurance recoverable (174,412) (22,654) Other receivables 433,762 447,601 Deferred Federal income tax (15,253) (118,748) Future policy benefit reserves 2,884,650 3,399,583 Other policy liabilities 175,740 676,350 Commissions payable and other (794,546) (828,615) liabilities Amounts received (paid out) as trustee (58,649) (135,691) Federal income tax payable (1,854,509) (1,275,248) Other, net (41,703) 1,194,863 Net cash provided by operating activities 2,440,745 4,182,048 Cash flows from investing activities: Maturity of fixed maturities available- 4,790,070 5,054,551 for-sale Sale of fixed maturities available-for- 268,090 9,275,952 sale Purchase of fixed maturities available- (2,350,906) (13,319,865 for-sale ) Mortgage loans funded - (665,000) Sale of equity securities 92,500 151,464 Principal payments on mortgage loans 123,079 107,953 Net change in guaranteed student loans (6,423) 51,120 Sale of other long-term investments and property plant and equipment 4,212 954,689 See accompanying Notes to Consolidated Financial Statements CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED Six-Months Ended June 30, 1999 and 1998 (Unaudited) Six-months ended June 30, 1999 1998 Cash from merger 1,512,255 - Purchase of other long-term investments and property plant and equipment (364,855) (312,863) Purchase of short-term investments (41,350,000) (2,850,000) Sale of short-term investments 33,600,000 - Increase in policy loans (net) (700,184) (251,591) Net cash used by investing activities (4,382,162) (1,803,590) Cash flows from financing activities: Repayment of note payable (333,333) (604,097) Net cash used by financing activities (333,333) (604,097) Net increase (decrease) in cash and cash equivalents (2,274,750) 1,774,361 Cash and cash equivalents at beginning of period 9,868,728 6,454,956 Cash and cash equivalents at end of $7,593,978 $8,229,317 period Supplemental Disclosure of Non-Cash Investing and Financing Activities: In 1999, the Company issued 609,269 Class A stock to purchase all of the capital stock of First Investors Group, Inc. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of tangible $3,170,80 assets acquired 2 Fair value of intangible assets acquired, gross 353,703 Net assets acquired 3,524,50 5 Capital stock issued (3,427,13 8) Liabilities assumed $ 97,367 See accompanying Notes to Consolidated Financial Statements CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 (Unaudited) (1) Financial Statements The statement of financial position as of June 30, 1999, the statements of operations for the three and six-month periods ended June 30, 1999 and 1998, and the statements of cash flows for the six-month periods then ended have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows as of and for the period then ending June 30, 1999 and for comparative periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 1998 annual 10-K report filed with the Securities and Exchange Commission. The results of operations for the period ended June 30, 1999 are not necessarily indicative of the operating results for the full year. (2) Acquisition On September 15, 1998, Citizens announced that a definitive agreement had been reached between Citizens and First Investors Group, Inc. (Investors) of Springfield, Illinois wherein Citizens would acquire 100% of the outstanding shares of Investors for shares of Citizens Class A Common stock. Investors is the parent of Excalibur Insurance Corporation (Excalibur), also of Springfield, Illinois. This transaction closed on January 26, 1999. 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. Citizens issued 609,269 shares of its Class A Common stock to consummate the transaction, which was accounted for as a purchase. (3) Segment Information The Company has two reportable segments identified by geographic area: International Business and Domestic Business. International Business consists of ordinary whole-life business. International sales are throughout Latin America with policies sold to residents of 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 the same as those described in the summary of significant accounting policies. The Company evaluates performance based on GAAP net income (loss) before federal income taxes for its two reportable segments. Geographic Areas - The following summary represents financial data of the Company's continuing operations based on their location for the six-months ended June 30, 1999 and 1998. 1999 1998 Revenues U.S. Domestic $10,739,628 $10,206,607 International 24,307,609 24,416,055 Total Revenues $35,047,237 $34,622,662 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 six-month periods June 30, 1999 and 1998, is as follows: Six-months ended June 30 1999 1998 Revenue, excluding net investment income and realized gain (loss) on investments: Domestic 8,841,102 8,391,020 International 20,010,568 20,072,842 Total consolidated revenue 28,851,670 28,463,862 Net investment income: Domestic 1,813,235 1,622,574 International 4,103,996 3,881,490 Total consolidated net investment income 5,917,231 5,504,064 Amortization expense: Domestic 1,847,472 1,576,497 International 4,181,489 3,771,266 Total consolidated amortization expense 6,028,961 5,347,763 Realized gain (loss) on investments: Domestic 85,291 193,013 International 193,04 461,723 5 Total consolidated realized gain (loss) on investments $ 278,33 654,736 6 Income (loss) before federal income tax: Domestic 33,595 124,368 International 76,036 297,510 Total consolidated income (loss) before federal income taxes 109,631 421,878 Six-months Year ended ended June December 31, 30, 1999 1998 Assets: Domestic 79,940,044 80,069,406 International 173,034,779 173,314,789 Total $252,974,823 $253,384,195 (4) Comprehensive (Loss) For the three and six-months ended June 30, 1999, the other comprehensive loss amounts included in total comprehensive loss consisted of unrealized losses on investments in debt and equity securities of $(2,206,160) and $(4,431,003), and for the same periods in 1998, $(676,599) and $(597,872), respectively. Total comprehensive loss for the three and six-months ended June 30, 1999, was $(2,317,280) and $(4,264,372), and for 1998, $(476,743) and $(285,432), respectively. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Certain statements contained in this Form 10Q 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 and acceptance of new products and services and perceived overall value of these products and services by existing and potential customers; (v) changes in consumer spending, borrowing and saving habits; (vi) concentrations of business from persons residing in third world countries; (vii) acquisitions; (viii) the persistency of existing and future insurance policies sold by the Company and its subsidiaries; (ix) the dependence of the Company on its Chairman of the Board; (x) the ability to control expenses; (xi) the effect of changes in laws and regulations (including laws and regulations concerning insurance) with which the Company and its subsidiaries must comply, (xii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as the Financial Accounting Standards Board, (xiii) changes in the Company's organization and compensation plans; (xiv) the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; and (xv) the success of the Company at managing the risks involved in the foregoing. Such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events. Six-months ended June 30, 1999 and 1998 Net income for the six-months ended June 30, 1999 was $166,631 compared to $312,440 for the same period in 1998. Revenues reached $35,047,2379,763,884, an increase of 1.2% over the first six months of 1998 when revenues were $34,622,662. The increase in revenues were driven by a 3.7% increase in investment income and a 1.5% increase in premiums. Higher claims and surrenders combined with an increase in the amortization of deferred policy acquisition costs and cost of insurance acquired caused the decrease in earnings. Premium income for the first half of 1999 was $28,392,142 compared to $27,970,186 for the same period in 1998. Premium income was higher during the first six months of 1999 than in the previous year due a substantial increase in group accident and health business sold by the agents of United Security Life Insurance Company ("USLIC") from July 1998 through March 1999. This business, primarily group dental coverage, offset a decrease in the Company's core book of ordinary life business. This decrease in ordinary life premium is the result of 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. Management introduced a new line of ordinary life products in late 1998 and had anticipated growth in new international sales; however, due to the above-described conditions, such expected growth has not materialized. During the first half of 1999, management has intensified its recruiting and training efforts in Latin America, as well as other parts of the world and management believes such efforts will prove successful in the long-term in restoring sales to historical levels. Additionally, management has been developing a domestic ordinary life sales program during 1999 and expects to file such with regulatory authorities for approval during the third quarter. This program, targeting rural areas of the United States, is expected to be a major market for the Company in future years. Net investment income increased 7.5% in the first six months of 1999 compared to the same period in 1998. Net investment income for the six months ended June 30, 1999 was $5,917,231 compared to $5,504,064 in 1998. This increase reflects the earnings on the growth in the Company's asset base as well as the inclusion of First Investors Group, Inc. and Excalibur Insurance Corporation in the 1999 results. In the coming quarters, management expects to further diversify the portfolio focusing on high quality private placement instruments as well as possibly mortgage loans. Through this diversification, management believes that additional yield can be earned with a minimal increase in risk. Claims and surrenders expense increased from $14,962,318 at June 30, 1998 to $16,572,827 for the same period in 1999, an increase of 10.8%. Death claims increased from $2,287,873 in 1998 to $2,488,342 in 1999. Surrender expense increased to $6,931,991 in 1999 from $6,662,466 in 1998. Management constantly monitors this activity, which is offset by surrendered policies. Coupons and endowments decreased to $2,333,517 in 1999 from $2,358,256 in 1998. Accident and health benefits increased 37.9% in the first six months of 1999 compared to the same period in 1998. Such benefits for the first six months ended June 30, 1999 were $4,334,515 compared to $3,143,944 in 1998. This increase is directly related to the USLIC and National Security Life and Accident Insurance Company ("NSLIC") blocks of business which consist of large amounts of scheduled benefit daily indemnity policies, major medical coverages, and group dental business. During the second half of 1998, the Company experienced a significant increase in the volume of claims, which resulted in a processing backlog. The backlog was created by the high early utilization by holders of the dental certificates, and although processing delays resulted, all such pending items were considered in the establishment of claim reserves. During the fourth quarter of 1998, management increased the number of individuals processing claims from approximately 13 to 30 and as a result, the backlog has been significantly reduced during the first six months of 1999. Since the purchase of USLIC and NSLIC there has been a substantial increase in the volume of claims plus an increase in the accident and health loss ratio. Management has decided to cancel a large portion of these existing blocks of group dental and major medical business on their next anniversary date in order to curtail both benefit and operation expenses. Most of the terminations will be effective prior to January 1, 2000. This action will result in the loss of approximately $5 million of annual premium income; however, due to the claims experience as well as the overhead necessary to administer, management believes such action will enhance near and long-term profitability. The remaining components of claims and surrenders, consisting of supplemental contracts and payments of dividends and endowments previously earned and held at interest, amounted to $484,462 in 1999, compared to $509,779 in 1998. Commission expense for the first six months of 1999 was $5,694,633 compared to $5,957,553 for the same period in 1998. The decrease reflects the decline in the production of new premiums by the agents of Citizens Insurance Company of America (CICA) during the second quarter of 1999. The group accident and health business produced by USLIC carries a relatively low commission. Deferred policy acquisition costs capitalized in 1998 were $3,414,322 compared to $3,393,665 in the current year. Amortization of these costs was $4,908,026 for the first half of 1999 compared to $3,951,641 for 1998. The increased amortization results from the increase in surrender activity. Underwriting, acquisition and insurance expenses decreased from $5,880,597 in the first half of 1998 to $5,386,318 in 1999, a reduction of 8.4%. The decrease can be attributed to the economies of scale being achieved after the consolidation of the administration of the business of USLIC and NSLIC. Amortization of cost of insurance acquired and excess of cost over net assets acquired decreased to $1,120,935 in 1999 from $1,396,122 in 1998. The decrease in amortization is related to a write-off of approximately $9.5 million of goodwill recorded on the purchase of American Liberty in third quarter 1998. Three-months ended June 30, 1999 and 1998 A net loss of $ (111,120) was incurred for the three-months ended June 30, 1999 compared to a net gain of $199,856 for the same period in 1998. Revenues slightly increased by $66,786 to $18,229,167 over the three months ended of 1998 when revenues were $18,162,381. The increase in revenues was related to a $307,685 increase in premium income, a $51,471 increase in net investment income, and a $95,705 increase in other income. These increases were offset by a decrease of $376,949 in realized gains due to the 1998 sale of a corporate aircraft. Higher expenses in claims and surrenders, amortization of deferred policy acquisition costs, and amortization of cost of insurance acquired contributed to the net loss. Premium income for the second three months of 1999 was $14,857,197 compared to $14,549,512 for the same period in 1998. Premium income in the second quarter remained flat due to the decline in new business produced by the CICA agents; however, an increase in the domestic sales for 1999 offset the international decline, and resulted in the small premium income increase. A majority of the domestic production was in the area of group dental business, which management has decided to cancel (see above). Net investment income increased 4.5% in the second quarter of 1999 compared to the same period in 1998. Net investment income for the three months ended June 30, 1999 was $2,912,273 compared to $2,787,417 in 1998. The inclusion of First Investors Group, Inc. and Excalibur Insurance Corporation were the primary reasons for the growth. Claims and surrenders expense increased to $8,365,566 at June 30, 1999 from $8,190,825 for the same period in 1998. Death claims decreased from $1,373,492 in 1998 to $1,137,966 in 1999. Surrenders increased by 13.0% in the second quarter of 1999 compared to the same period in 1998. Surrender expense for the three months ended June 30, 1999 was $3,750,212 compared to $3,318,783 in 1998. As described above, this increase is related to the economic problems experienced throughout Latin America as well as increased competition. Coupons and endowments decreased to $1,167,861 in 1999 from $1,224,365 in 1998. The endowment benefits, a significant component of the Company's international life insurance products, are factored into the premium much like dividends and therefor, the amount does not pose a threat to future profitability. Accident and Health benefits were $2,027,737 in 1999, compared to $2,001,908 in 1998. These expenses can be attributed to the USLIC and NSLIC blocks of business, which consist of large amounts of major medical and group dental business. In order to slow the growth of such benefits, management is terminating all major medical and group accident and health insurance. The remaining components of claims and surrenders, consisting of matured endowments, supplemental contracts and payments of dividends and endowments previously earned and held at interest, amounted to $281,790 in 1999, compared to $272,277 in 1998. Commission expense decreased to $2,827,955 from $3,071,337. The decrease reflects a slowdown in CICA's sales during the second quarter, which caused overall commissions for 1999 to drop despite the increase in NSLIC and USLIC sales. Underwriting, acquisition and insurance expenses increased slightly to $3,038,599 in the second quarter of 1999 from $3,021,327. These expenses have started to level since the absorption of USLIC and NSLIC. Management still feels a reduction in these expenses can be expected since the conversion of these two companies did not take place until the later half of 1998. Amortization of cost of insurance acquired and excess of cost over net assets acquired increased to $769,053 in 1999 from $502,240 in 1998. The increase is attributable to the amortization of excess of cost over net assets acquired and cost of insurance recorded on the acquisition of USLIC, NSLIC, FIG and American Liberty Life Insurance Company. Liquidity and Capital Resources Stockholders' equity decreased to $74,066,445 at June 30, 1999 from $74,903,679 at December 31, 1998. The decrease was attributable to unrealized gains of $3,623,464 at December 31, 1998 declining by $4,431,003 during the six-months ended June 30, 1999 resulting in an unrealized loss of $807,539, net of tax, at June 30, 1999. Declines in the market value of the Company's bond portfolio caused by higher market interest rates caused the change in unrealized gains. Invested assets increased to $177,240,791 in 1999 from $176,572,123 at December 31, 1998. The increase of policy loans by 3.3% caused the increase in invested assets. The decline in fixed maturity investments was offset by an increase in short- term investments. At June 30, 1999 and December 31, 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 value. The Company does not have a 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 1999. Fixed maturities held to maturity, amounting to $5,600,460 consist primarily of U.S. Treasury securities. Management has the intent and believes the Company has the ability to hold the securities to maturity. In order to monitor the market risk associated with the Company's investment policy, management measures the sensitivity of the portfolio to instantaneous interest rate changes. 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 in rates of 100, 200 and 300 basis points would generate losses of $1,041,000, $7,484,000 and $13,738,000, respectively. Under either interest rate scenario, the portfolio carries positive convexity. At June 30, 1999, decreases of 100, 200 and 300 basis points, respectively, would result in increases in market values of $4,123,000, $10,839,000 and $17,820,000, respectively. Increases in rates of 100, 200 and 300 basis points would generate losses of $9,240,000, $15,440,000 and $21,245,000 respectively. The Company's mortgage loan portfolio, which constitutes 0.8% of invested assets at December 31, 1998 and June 30, 1999, has historically been composed of small residential loans in Texas. Management has established a reserve of $50,000 at June 30, 1999 and December 31, 1998 (approximately 3% of the mortgage portfolio's balance) to cover potential losses in the Company's mortgage portfolio. Policy loans comprise 12.2% of invested assets at June 30, 1999. 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 June 30, 1999 and December 31, 1998. Management monitors the solvency of all financial institutions in which it has funds to minimize the exposure for loss. At June 30, 1999, management does not believe the Company is at risk for such a loss. During 1999, 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. 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. The Company relocated to the building in September 1993. The Company occupies approximately 35,000 square feet of space in the building, which is 100% leased. CICA owned 1,822,332 shares of Citizens Class A common stock at June 30, 1999 and December 31, 1998. Statutory accounting practices prescribed by Colorado require that the Company carry its investment at market value reduced by the percentage ownership of Citizens by CICA, limited to 2% of admitted assets. As of June 30, 1999 and December 31, 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. At June 30, 1999 and December 31, 1998 CICA had outstanding a surplus debenture payable to Citizens for $266,667 and $333,333, respectfully. For statutory accounting purposes, this debenture is a component of surplus, while for GAAP it is eliminated in consolidation. Citizens has historically recognized a liability for its related obligation to a bank in a like amount; however, in April 1999 Citizens paid off the corresponding note to Chase Bank. The NAICNational 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 the Company would begin. At December 31, 1998, CICA, and CILIC were well above required minimum levels. NSLIC and USLIC fell below the 200% level as reported on their December 31, 1998 Annual Statement to insurance regulatory authorities. Management immediately made capital contributions to both companies to raise them above the minimum levels. Further evaluation of the estimate of claims reserves indicated provisions for pending claims for NSLIC were overstated. Management has amended the 1998 statutory financial statements of NSLIC to increase surplus by approximately $1,000,000, as a result of the overstatement, bringing the Company well above the 200% level of RBC. Information Systems and the Year 2000 Company personnel have been actively planning, identifying and resolving year 2000 issues for more than a year. These activities have continued throughout 1999 with parallel testing and final remediation actions concluding in late July, 1999. In the late 1980's, the Company began developing software to routinely audit its data bases and its source code. These internal audit tools run daily and provide perpetual balancing of the Company's policy and agency master files to its general ledger. The source code audit tool has been an instrumental key to identifying system code that may need year 2000 remediation. By using this automated "bloodhound" combined with visual review of record and screen layouts/documentation, the Company's ESD staff have identified and addressed the "worst case" scenario for a year 2000 impact. The overall expenditure for addressing year 2000 issues is minimal because all planning, remediation and testing have been, and will continue to be, performed with existing staff during normal business hours. The Company utilizes a Wang VS 7160 for providing core processing and on-line support in conjunction with a local-area-network (LAN) based upon CISCO 5500 and 2900 intelligent switching components. The Company's Mitel telephone system was replaced during 1998 with a Mitel 2000 Light, nodal, fiber-optic system which is year 2000 compliant. Wang has certified the 7.53.00 operating system to be year 2000 compliant and the Company successfully completed installation and testing of this system in July, 1998. The Company uses Microsoft's WFW 3.11 and NT Server 3.51 (SP5), for its LAN, both of which are certified by Microsoft to be year 2000 compliant. The Company uses Word 6.0, EXCEL 5.0, and Notes 3.3 as applications on the LAN which are certified to be compliant except for the Notes product which is not compliant, but is reported to have no loss of data or functionality. However, only the Wang system is mission-critical with the in-house developed code for Host Daily Cycle systems being considered a part thereof. As for electronic data exchanges, the Company interacts with Chase Bank, Rudd and Wisdom, Dataplex, PCS Health Systems and certain reinsurance companies. The Chase Bank relationship is the only third-party interface that could be considered mission- critical and it can be circumvented (in less than one man-hour) by using paper drafts instead of electronic transactions should the Company find such to be desirable. Other vendor interfaces can be circumvented with hard-copy reporting should an electronic interface become untenable for some reason. The Company believes it has addressed its Year 2000 concerns. The Company has developed contingency and recovery plans aimed at ensuring the continuity of critical business functions before, on and after December 31, 1999. The contingency and recovery planning is complete. The Year 2000 contingency plans will be reviewed periodically throughout 1999 and revised as needed. The Company believes its Year 2000 contingency plan, coupled with existing "disaster recovery" and "business resumption" plans, minimize the impact Year 2000 issues may have on the organization Financial Accounting Standards In December 1997, the AICPA issued Statement of Position (SOP) 97- 3. 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 does not anticipate implementation of SOP 97-3 to 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 is currently completing an evaluation of the financial impact as well as the changes to its related disclosures. PART II. OTHER INFORMATION Item 1. Legal Proceedings None. Item 2 Changes in Securities None, other than disclosed in the Notes to Consolidated Financial Statements or Management's Discussion and Analysis of Financial Conditions and Results of Operations. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders The Annual Stockholders' Meeting was held at the Company's offices on June 1, 1999. At such meeting, the following individuals were elected to serve on the Board of Directors until the next annual meeting to be held the 1st Tuesday in June, 2000 or until their successors are duly elected and qualified: Class A: James C. Mott, Steven F. Shelton, Ralph M. Smith, and Timothy T. Timmerman. Class B: Harold E. Riley, T. Roby Dollar, Mark A. Oliver, Joe R. Reneau, M.D., and Rick D. Riley. Item 5. Other Information At the Annual Meeting of the Board of Directors held on June 1, 1999, the following individuals were elected officers of the Company: Harold E. Riley, Chairman of the Board and Chief Executive Officer; Mark A. Oliver, President and Assistant Treasurer; Jeffrey J. Wood, Executive Vice President, Secretary and Treasurer; and Russell C. King, Assistant Vice President, Personnel. 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 President By:/s/ Jeffrey J. Wood_____ Jeffrey J. Wood, CPA Executive Vice President, Secretary/Treasurer and CFO Date: May 15, 1995August 12, 1999 EX-27 2
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