-----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, CoPKQFXrbKw3zbYYpRSaDnWL9Iws1RFnZTNmL+I/Td3DUYiJYKwwm42N7ipHoS2J XjKwHkL4TtBd0J6uuMdfqg== 0000950134-97-002757.txt : 19970410 0000950134-97-002757.hdr.sgml : 19970410 ACCESSION NUMBER: 0000950134-97-002757 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970409 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-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-13004 FILM NUMBER: 97577192 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-K/A 1 CITIZEN'S INC. FORM 10-K AMEND. NO. 1 (12-31-96) 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-K AMENDMENT NO. 1 [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 of incorporation) (IRS Employer Identification No.) 400 East Anderson Lane, Austin, Texas 78752 - ----------------------------------------- --------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (512) 837-7100 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Class A Common Stock American Stock Exchange -------------------- ----------------------- Securities registered pursuant to Section 12(g) of the Act: None ---- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes X No . ------- ------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 10, 1997, aggregate market value of the Class A voting stock held by non-affiliates of the Registrant was approximately $116,696,000. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Report incorporates certain portions of the definitive proxy material of the Registrant in respect of its 1997 Annual Meeting of Shareholders. Number of shares of common stock outstanding as of March 10, 1997 Class A:19,892,159 Class B:621,049 2 PART I ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS Citizens, Inc. ("Citizens") operates primarily as an insurance holding company. It was incorporated in 1977. Citizens is the parent holding company that directly or indirectly owns 100% of Citizens Insurance Company of America ("CICA"), Computing Technology, Inc. ("CTI"), Insurance Investors, Inc. ("III"), American Liberty Financial Corporation ("ALFC'), American Liberty Life Insurance Company ("ALLIC'), Funeral Homes of Louisiana ("FHL"), Insurance Investors & Holding Co. ("IIH"), Central Investors Life Insurance Company of Illinois ("CILIC") and Funeral Homes of America ("FHA"). Additionall, Citizens owns indirectly, 94.48% of First American Investment Corporation ("FAIC"). Collectively, Citizens and its subsidiaries are referred to herein as the "Company." Pertinent information relating to Citizens' subsidiary companies is set forth below:
YEAR STATE OF BUSINESS SUBSIDIARY INCORPORATED INCORPORATION ACTIVITY ---------- ------------ ------------- -------- CICA 1968 Colorado Life insurance CTI 1986 Colorado Data processing III 1965 Texas Aircraft transportation ALFC 1977 Louisiana Holding company ALLIC 1978 Louisiana Life insurance FAIC 1984 Louisiana Holding company FHL 1989 Louisiana Funeral home FHA 1993 Louisiana Dormant IIH 1963 Illinois Dormant CILIC 1965 Illinois Life insurance
Citizens acquired ALFC on September 14, 1995. The agreement provided that ALFC shareholders would receive 1.10 shares of Citizens' Class A Common Stock for each share of ALFC Common Stock owned and 2.926 shares of Citizens' Class A Common Stock for each one share of ALFC Preferred Stock owned. Citizens issued approximately 2,340,000 Class A shares in connection with the transaction, which was accounted for as a purchase. ALFC conducts certain non-insurance businesses through subsidiaries. In the early 1980's, ALFC incorporated several corporations which became general partners in oil and gas partnerships. These partnerships own working interest in oil properties in Louisiana and Oklahoma. In 1981, ALFC formed a subsidiary to market certain securities, but this corporation has been relatively inactive since 1983. It was liquidated in December, 1996. Additionally, in 1984, ALFC incorporated First American Investment Corporation (FAIC) which, in turn, has formed two funeral home subsidiaries. Citizens is currently assessing, from a business perspective, if it will continue or dispose of the non-insurance businesses. Citizens has no current plans -2- 3 to participate in the oil and gas business. ALFC's non-insurance businesses are immaterial to Citizens overall structure. Citizens plans to continue to devote virtually all of its resources to the development and operation of its insurance business. Citizens acquired IIH on March 12, 1996. IIH shareholders received one share of Citizens' Class A Common Stock for each eight shares of IIH Common Stock owned. Additionally, Citizens acquired the approximately 6% not already owned by IIH, based upon an exchange ratio of one share of Citizens' Class A common stock for each four shares of CILIC owned. The acquisition of these two companies involved the issuance of approximately 171,000 of Citizens' Class A shares which was accounted for as a purchase. On October 28, 1996, CICA announced that it had signed definitive written agreements for the acquisition of American Investment Network, Inc. (American Investment), a life insurance holding company headquartered in Jackson, Mississippi with $7.5 million in assets, $3.4 million of stockholders' equity, revenues of $3.2 million and $67 million of life insurance in force. The American Investment agreement provides that following the acquisition by CICA, American Investment shareholders will receive 1 share of Citizens, Inc. Class A Common Stock for each 7.2 shares of American Investment Common Stock owned. Citizens 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 the Citizens' system. The agreement is subject to approval by American Investment's shareholders and regulatory authorities. The Mississippi Department of Insurance held a public hearing on March 6, 1997 to consider the matter. On October 31, 1996, CICA, CICA Acquisition, Inc. (a subsidiary organized for purposes of this transaction) and FAIC entered into a merger agreement for the merger of CICA Acquisition, Inc. into FAIC. As part of this merger, CICA will acquire the approximately 5.5% of FAIC shares owned by minority investors at an exchange rate of 0.111 shares of Class A Common Stock for each 1 share of FAIC owned by minority investors. The merger became effective March 7, 1997, and Citizens expects to issue approximately 133,000 shares of Class A Common Stock in this transaction which was accounted for as a purchase. To streamline its corporate structure, Citizens and ALFC entered into a merger agreement dated November 22, 1996 for the merger of ALFC into Citizens. No shares of Citizens were issued in the merger which became effective in January 1997. Also on November 22, 1996, CICA and ALLIC entered into a merger agreement for the merger of ALLIC into CICA. Management does not expect to complete this merger until CICA's application for certificate of authority filed with the Mississippi Insurance Department is approved, which approval is expected in the second quarter of 1997. -3- 4 Certain statements contained in this Annual Report on Form 10-K are not statements of historical fact and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the "Act"), including, without limitation, the italicized statements and the statements specifically identified as forward-looking statements within this document. In addition, certain statements in future filings by the Company with the Securities and Exchange Commission, in press releases, and in oral and written statements made by or with the approval of the Company which are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements, include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure, and other financial items, (ii) statements of plans and objectives of the Company or its management or Board of Directors including those relating to products or services, (iii) statements of future economic performance and (iv) statements of assumptions underlying such statements. Words such as "believes", "anticipates", "expects", "intends", "targeted", "may", "will" and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to: (i) the strength of foreign and U.S. economies in general and the strength of the local economies in which operations are conducted; (ii) the effects of and changes in trade, monetary and fiscal policies and laws; (iii) inflation, interest rates, market and monetary fluctuations and volatility; (iv) the timely development of and acceptance of new products and services and perceived overall value of these 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. -4- 5 (b) FINANCIAL INFORMATION REGARDING THE INSURANCE BUSINESS Citizens, through CICA, ALLIC and CILIC operates principally in one business segment, that of selling selected lines of individual life and accident and health ("A&H") insurance policies. Except for certain insignificant operations acquired as a part of ALFC's holdings, Citizens has no present intention to engage in any non- insurance related business. The following tables set forth certain statistical information concerning the operations of the Company for each of the five years ended December 31, 1996. The information is presented in accordance with generally accepted accounting principles. TABLE I The following table sets forth (i) life insurance in force and (ii) mean life insurance in force.
IN FORCE MEAN LIFE BEGINNING IN FORCE INSURANCE OF YEAR END OF YEAR IN FORCE (a) (b) (a) (b) (a) (b) ------- ------- ------- 1996 $2,151,955 $2,231,017 $2,191,486 1995 2,144,709 2,151,955 2,148,332 1994 2,030,615 2,144,709 2,087,662 1993 1,696,606 2,030,615 1,863,611 1992 1,339,964 1,696,606 1,518,285
- ---------- (a) In thousands (000s) (b) Before ceding reinsurance to reinsurers. The increases in insurance in force as shown above reflect the volumes of new business written by the Company over the past five years. Approximately $40,243,000 of the 1995 increase relates to the acquisition of ALLIC described previously. TABLE II The following table sets forth (i) the ratio of lapses and surrenders to mean life insurance in force and (ii) life reinsurance ceded.
RATION OF REINSURANCE CEDED(b) LAPSES AND -------------------- SURRENDERS AMOUNT REINSURANCE LAPSES AND TO MEAN OF PREMIUM SURRENDERS (a) IN FORCE REINSURANCE (a) CEDED -------------- -------- --------------- ----- 1996 $101,860 4.6% $296,378 $2,511,318 1995 87,273 4.1 290,677 2,241,111 1994 84,390 4.0 285,104 2,309,672 1993 98,712 5.3 303,727 1,939,425 1992 83,305 5.5 238,677 1,486,531
- ---------- (a) In thousands (000s) (b) Approximately 95 percent of the reinsurance is yearly renewable term insurance, with the remainder being coinsurance. -5- 6 The increased lapsation during 1996 reflects the inclusion of the ALLIC insurance business. TABLE III The following table sets forth information with respect to total insurance premiums.
ORDINARY ANNUITY & ACCIDENT LIFE (a) UNIVERSAL LIFE GROUP LIFE AND HEALTH (a) TOTAL -------- -------------- ---------- -------------- ----- 1996 $49,563,720 $389,084 $309,953 $ 4,040,688 $ 54,303,445 1995 45,120,631 119,335 306,256 698,206 46,244,428 1994 42,984,741 75,564 541,370 259,250 43,860,925 1993 36,491,961 106,955 1,106,590 284,510 37,990,016 1992 28,415,877 3,067 469,514 316,395 29,204,853
- ---------- (a) After deduction for reinsurance ceded. Premium income has grown substantially since 1991 due to the volume of new business written each year. However, new sales of life insurance decreased in 1995, and remained at similar levels in 1996; therefore, the overall increase since 1995 is less than for previous years. The acquisition of ALLIC mitigated the total decline in new life insurance sales, although only three months of ALLIC's premiums are reflected in the above table for 1995. In 1992, the FCC acquisition added a small block of Universal Life business to the Company's portfolio. During 1992, the Federal Government increased the amount of insurance for veterans under the Servicemen's Group Life Insurance program, causing a one-time increase in group life premiums. TABLE IV The following table sets forth information relating to the ratio of underwriting and other expenses to insurance revenues.
COMMISSIONS, UNDERWRITING AND OPERATING EXPENSES, POLICY RESERVE INCREASES, COMMISSIONS, UNDERWRITING POLICYHOLDER BENEFITS AND AND OPERATING EXPENSES DIVIDENDS TO POLICYHOLDERS ---------------------- -------------------------- RATIO TO RATIO TO INSURANCE INSURANCE INSURANCE PREMIUMS (a) AMOUNT PREMIUMS AMOUNT PREMIUMS ------------ ------ -------- ------ -------- 1996 $54,303,445 $21,948,637 40.4% $59,113,575 108.9% 1995 46,244,428 17,375,574 37.6 50,767,435 109.8 1994 43,860,925 17,461,910 39.8 48,763,076 111.2 1993 37,990,017 15,918,491 41.9 43,644,554 114.9 1992 29,204,853 13,546,624 46.4 35,301,078 120.8
- ---------- (a) After premiums ceded to reinsurers. Prior to 1996, the ratios of expenses to premiums had declined each year since 1989. These declines are the result of three factors: 1) underwriting and operating expenses have generally -6- 7 not increased at the same rate as premium income due to the Company's efficient method of operation; 2) sales commissions as a percentage of total premium income are declining annually as the business enters renewal stages and commissions are paid at a lower rate than first year; and 3) the amount of new insurance written annually represents a smaller percentage of the Company's total premium income. However, in 1996, with the addition of ALLIC and the considerable expense associated with its marketing operation start-up, the ratio reached its highest level since 1993. TABLE V The following table sets forth changes in new business produced between participating and nonparticipating policies.
PARTICIPATING NONPARTICIPATING TOTAL NEW -------------------------- ---------------------------- BUSINESS (a) AMOUNT (a) PERCENT AMOUNT (a) PERCENT ------------ ---------- ------- ---------- ------- 1996 $337,051 $294,408 87.3% $42,643 12.7% 1995 296,811 271,108 91.3 25,703 8.7 1994 380,281 352,542 92.7 27,739 7.3 1993 376,460 345,882 91.9 30,578 8.1 1992 315,142 278,694 88.4 36,448 11.6
- ---------- (a) In thousands (000s) The percentage of the new business produced that is participating has increased steadily due to the fact that the Ultra Expansion products are all participating and represent the majority of new business. The decline in new business during 1995 was caused in part by disruptions in the international market. See Management's Discussion and Analysis. TABLE VI The following table sets forth changes in new business issued according to policy types.
WHOLE LIFE AND ENDOWMENT TERM UNIVERSAL LIFE TOTAL NEW ----------------------- ---------------------- ---------------------- BUSINESS (a) AMOUNT (a) PERCENT AMOUNT (a) PERCENT AMOUNT (a) PERCENT ------------ ---------- ------- ---------- ------- ---------- ------- 1996 $337,051 $296,985 88.1% $40,066 11.9% $0 - 1995 296,811 270,963 91.3 25,848 8.7 0 - 1994 380,281 352,357 92.7 27,924 7.3 0 - 1993 376,460 345,683 91.8 30,777 8.2 0 - 1992 315,142 279,941 88.8 34,243 10.9 958 0.3%
- ---------- (a) In thousands (000s) This table illustrates that virtually all of the new business written is whole life. The 1995 results reflect a decrease in new business during the year. -7- 8 TABLE VII The following table sets forth deferred policy acquisition costs capitalized and amortized compared to new business issued.
DEFERRED POLICY TOTAL NEW ACQUISITION COSTS BUSINESS -------------------------------- ISSUED CAPITALIZED AMORTIZED ------ ----------- ---------- 1996 $337,051,000 $10,531,222 $10,221,917 1995 296,811,000 10,579,704 8,511,876 1994 380,281,000 13,128,049 7,203,593 1993 376,460,000 13,472,064 6,455,401 1992 315,142,000 10,670,569 4,412,007
Capitalized policy acquisition expenses increased steadily until 1994, such increases reflecting the growing amount of new business issued. In 1994, the rate of capitalization was affected by an adjustment due to the lower interest environment. The amortization of these costs has grown as the aggregate deferred acquisition cost asset has increased. In 1996, this amortization increased due to the increase in surrender activity. For 1995 and 1996, the capitalized decrease reflects the reduction in the amount of new business produced and lower commission expenses incurred as a result thereof. TABLE VIII The following table sets forth investment results.
RATIO OF NET INVESTMENT INCOME MEAN AMOUNT OF NET INVESTMENT TO MEAN AMOUNT INVESTED ASSETS (a) INCOME (b) OF INVESTED ASSETS (a) ------------------- ---------- ---------------------- 1996 $134,167,938 $9,185,506 6.8% 1995 111,926,695 7,026,909 6.3 1994 90,419,823 5,295,784 5.9 1993 82,598,407 4,771,079 5.8 1992 66,704,026 3,929,495 5.9
- ---------- (a) The years 1992 forward includes assets acquired from FCC on July 31, 1992. The year 1995 includes assets acquired from ALLIC on September 14, 1995. The year 1996 includes assets acquired from CILIC on March 12, 1996. (b) Does not include realized and unrealized gains and losses on investments. Available yields began to increase in mid-1994 and the Company was able to obtain a slight growth in the return on invested assets. This growth continued throughout most of 1995, and continued through 1996. The Company hired an investment advisor in 1995, and this action contributed to the increased yield in 1996. -8- 9 (c) NARRATIVE DESCRIPTION OF BUSINESS (i) BUSINESS OF CITIZENS Citizens' principal business is ownership of CICA and ALLIC and their affiliates. Additionally, it provides management services to these companies under a management services agreement. At December 31, 1996, Citizens had approximately 75 full and part-time employees. (ii) BUSINESS OF CICA Historically, CICA's revenues have been derived from insurance premiums and revenues from investments. CICA is a Colorado-domiciled life insurance company marketing primarily ordinary whole-life products on an international basis through marketing companies. During the fiscal year ended December 31, 1996, 99.2% of CICA's premium income was attributable to life, endowment and term insurance; 0.2% to individual annuities; and 0.6% to accident and health insurance. Of the life policies in force at December 31, 1996 and 1995, 13.0% and 13.2%, were nonparticipating and 87.0% and 86.8%, respectively were participating. CICA's Ultra Expansion products are a series of participating whole life policies targeted for international markets. All of the Ultra products are participating with dividends ranging from 2% of the premium in the first year to 123% in the 20th year. A unique feature of the Ultra products is that the dividends are payable immediately upon payment of the annual premium. In late 1990, an immediate endowment was added to the product line. This endowment is paid annually in an amount determined by the insured at the time the policy is sold. In December 1992, CICA added a flexible amount deposit rider as a new feature to the Ultra products. All of these products carry surrender charges for the first 14 years and continuing benefit limitations to exclude certain causes of death that are not anticipated in standard mortality ratings. There are no other material policies or products offered by CICA. The CICA underwriting policy requires a medical examination of applicants for ordinary insurance in excess of certain prescribed limits. These limits are graduated according to the age of the applicant and the amount of insurance. Generally, the maximum amount of ordinary life insurance issued domestically without a medical examination is $200,000 for ages 0 through 35; $100,000 for ages 36 through 45; $50,000 for ages 46 through 50; $15,000 for ages 51 through 55; and $10,000 for ages 56 and over. Limits for insuring non- United States applicants without a medical examination are: $150,000 for ages 0 through 39; $50,000 for ages 40 through 65; and all amounts over age 65. On life policies, CICA's maximum coverage on any one life is not limited by company policy. However, CICA reinsures the amount of coverage which is in -9- 10 excess of its retention policy. See "Business of CICA - Reinsurance." CICA does not accept substandard risks above Table 6 (generally policyholders who cannot qualify for standard ordinary insurance because of past medical history) in exchange for which CICA would charge higher premiums. CICA has $21.8 million of insurance in force on individuals that are classified as substandard risks, the majority of such business having been acquired in the purchase of other companies. Management believes the exposure to loss as a result of insuring these individuals is minimal, since the premiums are increased to cover the nature of the risk, additional reserves are established, and the amount of insurance represents less than 1.0% of the total insurance in force. GEOGRAPHICAL DISTRIBUTION OF BUSINESS. For the year ended December 31, 1996, insurance policies held by residents of the State of Texas accounted for 1.8% of CICA's total premium income from direct business, and policies held by residents of Colorado represented 1.2% of premium income from direct business for the same period. All other states of the United States totaled 5.2% of the premium income from direct business with no single state, except as set forth above, accounting for as much as 1% of premium income. Business on foreign residents accounted for the remaining 91.8%. For the years ended December 31, 1995 and 1994, residents of the State of Texas accounted for 2.7% and 3.0%, respectively of CICA's total premium income. Residents of Colorado provided 2.1% and 2.1%, respectively, during the same period. No other states in the U.S. amounted to 1% of total premium income during the periods. Business on foreign citizens represented 91.8% of 1995 and 1994 premium income. The participating whole life policies accepted by CICA on high net worth residents of foreign countries have an average face amount of approximately $60,000 and are marketed primarily to the top 5% of the population in terms of household income. CICA accepts applications for international insurance policies marketed by several independent international marketing firms with whom CICA has nonexclusive marketing contracts. These firms market life insurance products to citizens of foreign countries, with a present emphasis in Latin America. Such life products are specially designed by CICA to be compatible with marketing methods and commission requirements. The international marketing firms have many years' experience marketing life insurance products for CICA. The contract with the marketers provides that they have the responsibility for recruiting and training salesmen. They are responsible for all of their overhead costs and bear the expense of awards. These firms guarantee any advances against future commissions made by CICA to marketers and their agents. In consideration for the services rendered, the marketing contractors receive an override commission on all new policies sold by them or their salesmen. See "Business of CICA - Commissions." The marketing -10- 11 contracts may be terminated for various causes, at any time by mutual consent of the parties or upon 30 days' notice by either party. These firms provide recruitment, training and supervision of their managers and salesmen in the sale of dollar-denominated life insurance products; however, all managers and salesmen contract directly with CICA and receive their commission from CICA. Accordingly, should the marketing arrangement between any firm and CICA be canceled for any reason, CICA believes it could continue suitable marketing arrangements with the individuals of the marketing firms without appreciable loss of present and future sales. There is, however, always a risk that sales could decrease. At present, CICA is dependent on the non-U.S. markets for virtually all of its new business. This subjects CICA to potential risks with regard to the continued ability to write such business should adverse events occur in the countries from which CICA receives applications. These potential risks include lapses of policies if funds that flow out of such countries were to become restricted and the improbable necessity that incorporating an insurance subsidiary in such countries would become required. Based on more than 30 years' experience in the marketplace in which CICA competes, management believes such risks are not material. The Company maintains no assets outside the U.S. and requires all premiums to be paid in the U.S. with U.S. dollars via drafts drawn on banks in the U.S.; therefore, it could lose no funds from currency devaluation or foreign appropriation. Further, management does not believe that the flow of funds will be restricted in the future, because almost all of the insureds are in the upper percentiles of incomes in their country. Such insureds are actively involved in business leadership roles in their communities and would be vehemently opposed to funds flow restriction. Many of the inherent risks in foreign countries, such as political instability, hyper-inflation and economic disruptions tend to improve rather than hurt CICA's business because it encourages individuals to convert assets out of local currencies to the more stable U.S. dollar. Additionally, management has made a concerted effort to expand the number of foreign countries from which it accepts business in an effort to reduce the impact on CICA of political or economic problems in any one country or region. MARKETING OPERATIONS. CICA holds licenses to do business in 11 states and accepts applications from numerous foreign countries. Additionally, CICA has applications for admission pending in two states. CICA's operations are conducted on the independent contractor basis, with a sales force at December 31, 1996 of 1,319 individuals and December 31, 1995 of 1,308 individuals. COMMISSIONS. CICA's marketing managers are independent contractors, responsible for their respective expenses, that are compensated on a percentage of premium basis. The maximum amount of commission expense which may be incurred by CICA on an individual life insurance policy is 110% of the first year premium, 10% of the premium for each of the next nine years and 2% of the -11- 12 premium for the eleventh and subsequent years as a continuing service fee. Percentage amounts paid to salesmen on individual term, annuity and accident and health insurance are substantially less than the levels paid for individual ordinary life insurance. The marketing managers receive overriding first year and renewal commissions on business written by individuals under their supervision and all marketing expenses except sales conventions related thereto are included in the above percentages. RESERVES. CICA establishes actuarial reserves as liabilities to meet obligations on all outstanding policies. Reserves and deferred acquisition costs are prepared in conformity with the American Academy of Actuaries Committee on Financial Reporting Principles. In determining such reserves CICA used the 1955 to 1960, 1965 to 1970, and 1975 to 1980 Select and Ultimate Mortality Tables with interest rates at 4% or in a range graded from 9% to 5% with recent issues reserved at 7% graded to 6 1/2%. Withdrawal assumptions are based primarily on actual historical experience. Statutory reserves are used for paid-up life business. Claims reserves include an amount equal to the expected benefit to be paid on reported claims in addition to an estimate of claims that are incurred but not reported, based on actual historical experience. CICA receives an independent actuarial certification of its reserves prepared in accordance with both Generally Accepted Accounting Principles and Statutory Accounting Principles. The certifications have noted no deficiencies for the years presented herein. REINSURANCE. CICA assumes and cedes insurance with other insurers, reinsurers and members of various reinsurance pools. Reinsurance arrangements are utilized to provide greater diversification of risk and minimize exposure on larger risks. (a) INSURANCE CEDED. CICA generally retains $75,000 of risk on any one person. As of December 31, 1996, the aggregate amount of life insurance ceded amounted to $293,864,000 or 13.5% of total direct and assumed life insurance in force, and $289,675,000 or 13.7% in 1995. CICA is contingently liable with respect to ceded insurance should any reinsurer be unable to meet the obligations reinsured. As of December 31, 1996, CICA had in effect automatic reinsurance agreements that provide for cessions of ordinary insurance from CICA. Additionally, CICA has reinsurance treaties in force with several reinsurers of life and accident and health insurance. These treaties provide for both automatic and facultative reinsurance of standard and substandard risks ceded to them by CICA for life, accident and health and supplemental benefits above CICA's retention limit on a yearly renewable term, coinsurance or modified coinsurance basis. A treaty with Employers Reassurance (ERC) has historically been the primary vehicle utilized by CICA for its international business. The treaty is structured in -12- 13 such a way as to allow CICA to "self administer" the cessions on a reduced cost basis. Prior to July 1, 1993, 100% of the risk up to $300,000 in excess of CICA's retention was ceded to ERC. On July 1, 1993, the treaty was amended and a like agreement was executed with Businessmen's Assurance (BMA). During 1995, a third carrier was added as a principal reinsurer, Riunione Adriatica di Sicurta, of Italy (RAS). The ERC and BMA agreements provide that for risks reinsured in specified countries on and after July 1, 1993, 70% of each risk in excess of CICA's retention will be ceded to ERC and 30% to BMA. The RAS agreement provides that on risks reinsured in specified countries on or after January 1, 1995, 100% of the risk in excess of CICA's retention will be ceded to RAS. CICA pays the premium to ERC, BMA and RAS on an annual basis and is responsible for the production of the reporting monthly and annually to ERC, BMA and RAS to allow proper accounting for the treaties. The cessions are on a yearly renewable term basis and are automatic up to $300,000 for ERC and RAS and $425,000 for BMA at which point the reinsurance is subject to a facultative review by the reinsurers. At December 31, 1996, CICA had ceded $189,449,000 in face amount of insurance to ERC, $26,669,000 to BMA and $41,813,000 to RAS under these agreements. RAS is an unauthorized reinsurer in the state of Colorado; however RAS has agreed to comply with all Colorado statutes regarding such companies. Under these statutes, RAS will provide a letter of credit, issued by a U.S. bank meeting the Colorado requirements, equal to any liabilities it incurs under this agreement. A reinsurance treaty with Connecticut General Life Insurance Company (CG) covers all of CICA's accidental death insurance supplementing its life insurance policies. These cessions are on a yearly renewable term basis and occur automatically if total accidental death benefits known to CICA are less than $250,000 or otherwise on a facultative review basis. At December 31, 1996, CICA had ceded $1,327,293,000 in face amount to CG under this treaty. Citizens closely monitors the solvency of its reinsurers to minimize the risk of loss in the event of a failure by one of the parties. The primary reinsurers of the Company, ERC, BMA, RAS and CG are large, well capitalized entities which have no current or prior history of financial difficulty. (b) INSURANCE ASSUMED. At December 31, 1996, CICA had in force reinsurance assumed as follows: -13- 14
TYPE OF AMOUNT BUSINESS IN FORCE AT NAME OF COMPANY LOCATION ASSUMED END OF YEAR --------------- -------- ------- ----------- Prudential Insurance Newark, Ordinary Company (Prudential) New Jersey Group Life $304,380,000
The reinsurance agreement with Prudential provides for CICA to assume a portion of the insurance under a group insurance policy issued by Prudential to the Administrator of Veterans' Affairs, in accordance with the Servicemen's Group Life Insurance provisions of Sub-Chapter III of Chapter 19, of Title 38, United States Code. CICA's portion of the total insurance under the policy is allocated to CICA in accordance with the criteria established by the Administrator. The agreement continues in full force and effect at December 31, 1996. CICA has also entered into a Serviceman's Group Life Insurance Conversion Pool Agreement with Prudential, under the above described agreement, whereby CICA assumed a portion of the risk of Prudential under the group policy due to excess mortality under the conversion pool agreement resulting from issuing conversion policies as prescribed for membership in the conversion pool. INVESTMENTS. State insurance statutes prescribe the quality and percentage of the various types of investments which may be made by insurance companies and generally permit investment in qualified state, municipal, federal and foreign government obligations, high quality corporate bonds, preferred and common stock, real estate and mortgage loans by certain specified percentages. CICA's invested assets at December 31, 1996 were distributed as follows: fixed maturities - 70.9%, equity securities - 8.2%, mortgage loans - 1.2%, policy loans - 14.8%, government insured student loans - 0.3%, short-term investments - 0% and other long-term investments - 2.9% (see Note 2 of the "Notes to Consolidated Financial Statements"). Citizens did not foreclose on any mortgage loans in 1996. All mortgage loans are supported by independently appraised real estate. The investment policy of Citizens with regard to mortgage loans is consistent with the provisions of the Colorado Insurance Code. At December 31, 1996, 95.9% of CICA's investments in fixed maturities were comprised of U.S. Treasury securities and obligations of U.S. government corporations and agencies, including U.S. government guaranteed mortgage-backed securities, compared to 97.2% at December 31, 1995. Of these mortgage-backed securities, all were guaranteed by U.S. government agencies or corporations that are backed by the full faith and credit of the U.S. government or that bear the implied full faith and credit of the U.S. government. REGULATION. CICA is subject to regulation and supervision by the insurance department of each state or other jurisdiction in which it is licensed to do business. These departments have broad administrative powers relating to the granting and revocation of licenses to transact business, the licensing of marketing persons, the approval of policy forms, the advertising and solicitation of insurance, the form and content of mandatory financial statements, the reserve -14- 15 requirements, and the type of investments which may be made. CICA is required to file detailed annual reports with each such insurance department, and its books and records are subject to examination at any time. In accordance with state laws and the rules and practices of the National Association of Insurance Commissioners, CICA is examined periodically by examiners of its domiciliary state and by representatives (on an "association" or "zone" basis) of the other states in which it is licensed to do business. CICA's most recent examination which was completed during 1992, was for the six years ended December 31, 1991, and was conducted by a public accounting firm representing the Colorado Division of Insurance. CICA has been notified by the Colorado Division of Insurance to expect an examination during 1997 as of December 31, 1996. CICA is audited annually by an independent public accounting firm. See also "Management's Discussion and Analysis of Results of Operations." Various states, including Colorado, have enacted "Insurance Holding Company" legislation which requires the registration and periodic reporting by insurance companies which control, or are controlled by, other corporations or persons. Under most of such legislation, control is presumed to exist with the ownership of ten percent or more of an insurance company's voting securities. Citizens is subject to such regulation and has registered under such statutes as a member of an "insurance holding company system." The legislation typically requires periodic disclosure concerning the transactions between the registered insurer, the ultimate controlling party, and all affiliates and subsidiaries of the ultimate controlling party, and in many instances requires prior approval of intercorporate transfers of assets (including in some instances payment of dividends by the insurance subsidiary) within the holding company system. Since CICA does not physically conduct business in countries outside the U.S. but rather accepts applications from overseas marketers, it is not subject to regulation in countries where most of its insureds are residents. The prospect of such regulation is viewed as remote by management of Citizens because obtaining insurance through application by mail outside of one's country is a common practice in many foreign countries, particularly those where CICA's insureds reside. COMPETITION. The life insurance business is highly competitive, and CICA competes with a large number of stock and mutual companies. CICA believes that its premium rates and its policies are generally competitive with those of other life insurance companies, many of which are larger than CICA, selling similar types of insurance. CICA's marketing plan stresses the sale of dollar-denominated life insurance products to high net worth individuals residing in foreign countries, with present emphasis in Latin America. Approximately 86% of CICA's total first year and renewal premium income during 1996 came from that market, and virtually all new insurance production during 1996 and 1995 was derived from -15- 16 that source. See "Business of CICA - Geographical Distribution of Business." Management believes that CICA is a significant competitor in this market and attributes its success in penetrating that market to the expertise of management, the uniqueness of its life insurance products and competitiveness of its pricing methods. CICA faces competition from several other American life insurance companies that also sell U.S. dollar denominated policies to non-U.S. citizens, with no one company being dominant in the market. Some companies may be deemed to have a competitive advantage due to histories of successful operations and large agency forces. Management believes that its experience, combined with the special features of the Ultra Expansion policies, allows CICA to compete effectively in maintaining and pursuing new business. Management believes that CICA competes indirectly with non-U.S. companies in its business, particularly with respect to Latin American companies. CICA, as a U.S. domestic insurer paying claims in U.S. dollars in the U.S., has a different clientele and product than foreign-domiciled companies. CICA's product is usually acquired by persons in the top 5% of income of their respective countries. The policies sold by foreign companies are sold broadly and are priced based on the mortality of the entire populace of the respective geographic region. Because of the predominance of lower incomes in most of these countries, the mortality experience tends to be very high on the average, causing mortality charges which are considered unreasonable based on the life mortality experience of the upper five percent of income of the population. Additionally, the assets that back up the policies issued by foreign companies are invested in the respective countries, and thus, are exposed to the inflationary risks and economic crises that historically have impacted many foreign countries. Another reason that CICA experiences an advantage is that many of its policyholders desire to transfer capital out of their countries due to the perceived financial strength and security of the United States by foreigners. Also, management realizes that CICA competes indirectly with other U.S. and European insurers in countries where CICA's insureds reside. CICA's experience has been that its market niche is in attracting insureds who want the safety and security of a U.S. domestic insurer. Management of Citizens considers it to be difficult and speculative to estimate the potential of the foreign market for U.S. insurers. However, based upon the volume of new premium generated by CICA that originates from several countries in Latin America, management believes that CICA receives a substantial share of such business. However, Citizens does not have market share data to confirm management's belief. In CICA's limited block of accident and health insurance, (0.5% of total premium income), it is in competition with many life insurance companies as well as with voluntary and government-sponsored plans for meeting -16- 17 hospitalization and medical expenses such as Blue Cross/Blue Shield, "Medicare" and "Medicaid." Future expansion of such programs or the establishment of additional government health programs could adversely affect the future of accident and health insurance on CICA's books, most of which has been acquired in the acquisition of other companies. FEDERAL INCOME TAXATION. CICA is a "small company" as that term is defined in the Internal Revenue Code (the "Code"), section 806. As such, CICA qualified for a special small company deduction (presently equal to 60% of "tentative life insurance company taxable income") which serves to decrease significantly the amount of tax which might otherwise have to be paid. The Omnibus Reconciliation Act of 1993 (the "1993 Act") was signed into law on August 10, 1993. Among its provisions was an increase to corporate tax rates to 35% on taxable income between $10,000,000 and $15,000,000 and to 38% on taxable income between $15,000,000 and $18,300,000. This legislation had no material impact on the financial position of the Company. The Revenue Reconciliation Act of 1990 revised the method in which insurance companies claim deductions for policy acquisition costs. Previously, insurance companies were allowed to deduct actual policy acquisition costs as they were incurred. Beginning in 1990, policy acquisition costs are determined as a percentage of annual net premiums and are then deductible on a straight-line basis over a ten-year period rather than treated as an immediate deduction. This change in treatment for acquisition costs has had a significant impact on CICA's taxable income due to the relatively large amounts of such deferrals caused by the increases in new business. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations." CICA files a consolidated Federal income tax return with Citizens and its subsidiaries. At December 31, 1995, the Company had net operating loss carryforwards of $81,000 available to offset taxable income in future years. (iii) BUSINESS OF CTI CTI is a wholly-owned subsidiary of CICA and engages in the business of providing data processing services and acquisition and leasing of furniture and equipment for its parent as well as data processing services and software to other companies. Pursuant to an Information Systems Management and Services Contract dated October 1, 1991, CTI provides data processing services to the Company for a fixed fee of $53,000 per month. As of and for the year ended December 31, 1996, CTI's total assets were $787,000 and revenues were $674,000. All intercompany fees and expenses have been eliminated in the consolidated financial statements. -17- 18 (iv) BUSINESS OF III For much of the past decade, III has been dormant. In August, 1993, Citizens sold the stock of III to CICA for its book value. CICA subsequently contributed debit balances receivable of approximately $169,000 to III. III collected such receivables and, as additional consideration, received an airplane which it operates for Citizens and CICA. During 1994, CICA made an additional capital contribution of $200,000 to III. Also, during 1994, III acquired a different airplane for use in providing aviation transportation and services to Citizens and the airplane previously owned by III was sold. As of and for the year ended December 31, 1996, III's total assets were $790,000 and revenues were $166,000. All intercompany fees and expenses have been eliminated in the consolidated financial statements. (v) BUSINESS OF ALFC ALFC, a wholly-owned subsidiary of Citizens, served as the parent holding company for the American Liberty group prior to its acquisition by Citizens. ALFC's total assets, at December 31, 1996, which consist primarily of investments in its subsidiaries' stock, were $8,177,000 and revenues were $76,000. At December 31, 1996, a Plan and Agreement of Merger between Citizens, Inc. and ALFC was pending. During January 1997, ALFC was merged into Citizens, Inc. with Citizens surviving. All intercompany fees and expenses have been eliminated in the consolidated financial statements. (vi) BUSINESS OF ALLIC Historically, ALLIC's revenues have been derived from insurance premiums and revenues from investments. ALLIC is a Louisiana-domiciled life insurance company marketing primarily ordinary, whole-life products and accident and health specified disease, hospital indemnity and accidental death policies. During the fiscal year ended December 31, 1996, 47.9% of ALLIC's premium income was attributable to life, endowment and term insurance; 2.8% to individual annuities; and 49.3% to accident and health insurance. Of the life policies in force at December 31, 1996, 66.9% were nonparticipating and 33.1% were participating. During the fiscal year ended December 31, 1995, 48.1% of ALLIC's premium income was attributable to life, endowment and term insurance; 4.0% to individual annuities; and 47.9% to accident and health insurance. Of the life policies in force at December 31, 1995, 80.9% were nonparticipating and 19.1% were participating. On November 22, 1996, ALLIC executed a Plan and Agreement of Merger with CICA wherein, effective January 1, 1997, ALLIC will merge with and into CICA, with CICA surviving. At December 31, 1996, the Plan was waiting approval of regulatory authorities in Louisiana and the licensing of CICA to -18- 19 continue ALLIC's business in Mississippi. Management expects to consummate the transaction during the second quarter of 1997. The products offered by ALLIC are focused on niche markets in which the Company believes it can effectively compete. The primary niche markets currently targeted include the sale of "pre-need" burial policies and daily hospital indemnity policies for specified illnesses. On life policies, ALLIC's maximum coverage on any one life is not limited by company policy. However, ALLIC reinsures the amount of coverage which is in excess of the its retention policy. See "Business of ALLIC - Reinsurance." GEOGRAPHICAL DISTRIBUTION OF BUSINESS. For the year ended December 31, 1996, insurance policies held by residents of the State of Oklahoma accounted for 49.7% of ALLIC's total premium income from direct business. Policies held by residents of Mississippi represented 16.5%, Louisiana - 11.6%, Georgia - 8.3% and Texas - 7.9% of premium income from direct business for the same period. All other states of the United States totaled 6% of the premium income from direct business with no single state, except as set forth above, accounting for as much as 2% of premium income. For the year ended December 31, 1995, residents of Oklahoma accounted for 48.5% of total premium income from direct business. Policies held by residents of Mississippi represented 15.1%, Louisiana - 12.4%, Georgia - 9.9%, Texas - 8.1%, and Florida - 2.2% of premium income for the same period. No other states in the U.S. amounted to 2% of total premium income during the period. The life policies written by ALLIC have an average face amount of approximately $4,000. The low face amount is typical for pre-need and burial business. At December 31, 1996, ALLIC had approximately 9,800 such policies in force. MARKETING OPERATIONS. ALLIC holds licenses to do business in 20 states. ALLIC's operations are conducted through independent contractors on a basis similar to a general agency approach, with a marketing force at December 31, 1996 of approximately 200 representatives. COMMISSIONS. ALLIC's marketing representatives are independent contractors, responsible for their respective marketing-related expenses, and they are compensated on a percentage of premium basis. During 1996, the maximum amount of commission expense incurred by ALLIC on an individual life insurance policy was 105% of the first year premium, 15% of the second through tenth year premium. For accident and health insurance, the maximum commission was 100% of premium in the first year and 18% thereafter. Marketing managers receive overriding first year and renewal commissions on business written by individuals under their supervision. -19- 20 RESERVES. ALLIC records actuarial reserves established to meet obligations on outstanding policies as liabilities. Reserves and deferred acquisition costs are prepared in conformity with the American Academy of Actuaries Committee on Financial Reporting Principles. In determining such reserves ALLIC used the 1965 to 1970 Select and Ultimate Mortality Tables with interest rates at 7% level for life Purchase GAAP reserves. Statutory reserves are used for paid-up life business. Withdrawal assumptions are based primarily on actual historical termination rates. Accident and Health Purchase GAAP reserves are determined using various percentages of published 1974 Cancer Tables with Linton C termination rates and 1984 NAIC Cancer Tables with Linton CC termination rates and interest at 7% level. Historic GAAP reserves for pre-need life insurance were calculated using a graded death benefit and 100% of the 1965 to 1970 Ultimate Table, 7% interest, with terminations on single premium business assumed to be 2% per year and Linton A rates on all other plans. Claims reserves include an amount equal to the expected benefit to be paid on reported claims in addition to an estimate of claims that are incurred but not reported, based on actual historical experience. ALLIC receives an independent actuarial certification of its reserves prepared in accordance with both Generally Accepted Accounting Principles and Statutory Accounting Principles. The certifications have noted no deficiencies for the years presented herein. REINSURANCE. ALLIC cedes insurance with other insurers, reinsurers and members of various reinsurance pools. Reinsurance arrangements are utilized to provide greater diversification of risk and minimize exposure on larger risks. (a) INSURANCE CEDED. ALLIC generally retains $30,000 of risk on any one person for life insurance and cedes 100% of each accidental benefit risk on accident and health insurance policies. As of December 31, 1996, the aggregate amount of life insurance ceded amounted to $995,000 or 2.3% of total direct and assumed life insurance in force. ALLIC is contingently liable with respect to ceded insurance should any reinsurer be unable to meet the obligations assumed by it. As of December 31, 1996, ALLIC had in effect one automatic reinsurance agreement that provide for cessions of ordinary insurance from ALLIC in excess of its retention of $30,000 with a minimum cession of $2,000. On accident and health insurance, there is an additional agreement which provides for automatic cession of 100% in 1996 and thereafter of accidental death risks. A treaty with Businessmen's Assurance (BMA) is the primary vehicle utilized by ALLIC for its life reinsurance and Life Reassurance for its accidental death risks. ALLIC closely monitors the solvency of its reinsurers to minimize the risk of loss in the event of a failure by one of the parties. The primary reinsurers of the Company, BMA and Life Re are large, well capitalized entities which have no current or prior history of financial difficulty. -20- 21 (b) INSURANCE ASSUMED. At December 31, 1996, ALLIC had in force no reinsurance assumed. INVESTMENTS. State insurance statutes prescribe the quality and percentage of the various types of investments which may be made by insurance companies and generally permit investment in qualified state, municipal, federal and foreign government obligations, high quality corporate bonds, preferred and common stock, real estate and mortgage loans by certain specified percentages. ALLIC's invested assets at December 31, 1996 were distributed as follows: fixed maturities - 90.5%, equity securities - 2.5%, mortgage loans - none, policy loans - 1.5%, government insured student loans - none, cash and short-term investments - 4.5% and other long-term investments - 0.6%. At December 31, 1996, 32.9% of ALLIC investments in fixed maturities were comprised of U.S. Treasury securities and obligations of U.S. government corporations and agencies, including U.S. government guaranteed mortgage- backed securities. Of these mortgage-backed securities, all were guaranteed by U.S. government agencies or corporations that are backed by the full faith and credit of the U.S. government or that bear the implied full faith and credit of the U.S. government. Of the remaining fixed maturities, 63.0% are corporate securities and 4.1% are issued by States or Territories of the U.S. and Canada. None of ALLIC's bonds are less than investment grade. REGULATION. ALLIC is subject to regulation and supervision by the insurance department of each state or other jurisdiction in which it is licensed to do business. These insurance departments have broad administrative powers relating to the granting and revocation of licenses to transact business, the licensing of salesmen, the approval of policy forms, the advertising and solicitation of insurance, the form and content of mandatory financial statements, the reserve requirements, and the type of investments which may be made. ALLIC is required to file detailed annual reports with each such insurance department, and its books and records are subject to examination at any time. In accordance with state laws and the rules and practices of the National Association of Insurance Commissioners, ALLIC is examined periodically by examiners of its domiciliary state and by representatives (on an "association" or "zone" basis) of the other states in which it is licensed to do business. ALLIC's most recent examination which was completed during 1995, was for the three years ended December 31, 1994, and was conducted by the Louisiana Division of Insurance. Various states, including Louisiana, have enacted "Insurance Holding Company" legislation which requires the registration and periodic reporting by insurance companies which control, or are controlled by, other corporations or persons. Under most of such legislation, control is presumed to exist with the ownership of ten percent or more of an insurance company's voting securities. Citizens is -21- 22 subject to such regulation and has registered under such statutes as a member of an "insurance holding company system." The legislation typically requires periodic disclosure concerning the transactions between the registered insurer, the ultimate controlling party, and all affiliates and subsidiaries of the ultimate controlling party, and in many instances requires prior approval of intercorporate transfers of assets (including in some instances payment of dividends by the insurance subsidiary) within the holding company system. COMPETITION. The life insurance business is highly competitive and ALLIC competes with a large number of stock and mutual companies. ALLIC believes that its premium rates and its policies are generally competitive with those of other life insurance companies, many of which are larger than ALLIC, selling similar types of insurance. ALLIC's marketing plan stresses the sale of pre-need or burial policies as its primary life insurance product. Approximately forty-eight percent (48%) of the Company's total first year and renewal premium income during 1996 came from that market, and a similar percentage of new insurance production during 1995 was derived from that source. See "Business of ALLIC - Geographical Distribution of Business." Management believes that ALLIC has the potential to be a significant competitor in this market and attributes its success in penetrating that market to the expertise of management, the uniqueness of its life insurance products and competitiveness of its pricing methods. ALLIC faces competition from several other life insurance companies that also sell pre-need and burial policies, with no one company being dominant in the market. Some companies may be deemed to have a competitive advantage due to histories of successful operations and large agency forces. Management believes that its experience, combined with the special features of the pre-need program allows ALLIC to compete effectively in maintaining and pursuing new business. However, the high cost associated with the expansion of this market may inhibit ALLIC's ability to penetrate to a significant degree. The second aspect of ALLIC's marketing program involves the sale of hospital indemnity policies for specified illnesses. This block of business accounted for approximately 49% of total first year and renewal premium in 1996. ALLIC is in competition with many life insurance companies as well as with voluntary and government-sponsored plans for meeting hospitalization and medical expenses such as Blue Cross/Blue Shield, "Medicare" and "Medicaid." Future expansion of such programs or the establishment of additional government health programs could adversely affect the future of accident and health insurance on ALLIC's books. FEDERAL INCOME TAXATION. ALLIC is a "small company" as that term is defined in the Internal Revenue Code (the "Code"), section 806. As such, ALLIC qualified for a special small company deduction (presently equal to 60% of -22- 23 "tentative life insurance company taxable income") which serves to decrease significantly the amount of tax which might otherwise have to be paid. The Omnibus Reconciliation Act of 1993 (the "1993 Act") was signed into law on August 10, 1993. Among its provisions was an increase to corporate tax rates to 35% on taxable income between $10,000,000 and $15,000,000 and to 38% on taxable income between $15,000,000 and $18,300,000. This legislation had no material impact on the financial position of the Company. The Revenue Reconciliation Act of 1990 revised the method in which insurance companies claim deductions for policy acquisition costs. Previously, insurance companies were allowed to deduct actual policy acquisition costs as they were incurred. Beginning in 1990, policy acquisition costs are determined as a percentage of annual net premiums and are then deductible on a straight-line basis over a ten-year period rather than treated as an immediate deduction. This change in treatment for acquisition costs has had a significant impact on ALLIC's taxable income due to the relatively large amounts of such deferrals caused by the increases in new business. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations." ALLIC presently qualifies for a small company exception which allows it to deduct the costs over a shorter five-year period. In 1996 ALLIC filed a separate Federal income tax return. ALLIC filed a consolidated Federal income tax return with ALFC and its subsidiaries prior to the acquisition by Citizens. At December 31, 1996 ALLIC had net operating loss carryforwords of $613,000 to offset taxable income in future years. (vii) BUSINESS OF FAIC FAIC was formed in November 1984 for the purpose of organizing and financing proposed funeral home companies (FHL and FHA) and a proposed Louisiana life insurance company. FAIC offered stock to residents of the State of Louisiana during 1993 and 1994, raising approximately $1,200,000 in gross proceeds. FHL was capitalized with approximately $530,000 of the offering proceeds and FHA was capitalized with approximately $500,000. The offering was suspended in 1995. Currently, FAIC's activities are limited to ownership of FHL and FHA, comprising its total assets of $1 million at December 31, 1996 with total revenues of $4,700. See Item 1(a) General Development of Business. (viii) BUSINESS OF FHL Formed in 1989, FHL owns and operates a funeral home in Baker, Louisiana. Constructed in 1992, the Baker Funeral Home constitutes the primary business function of FHL. At December 31, 1996, FHL had total assets of $599,000 and total revenues of $261,000. -23- 24 (ix) BUSINESS OF FHA FHA was formed in 1993 to construct an additional funeral home. Currently those plans have been suspended and the company is dormant. At December 31, 1996, FHA had total assets of $517,000 and total revenues of $21,000. (x) BUSINESS OF IIH Insurance Investors and Holding Company served as the parent holding company for Central Investors Life Insurance Company of Illinois prior to the 1996 acquisition by Citizens. Formerly a Registrant under the Securities Act of 1933, this Company is currently dormant. (xi) BUSINESS OF CILIC CILIC is an Illinois domiciled life insurer admitted to do business in four states. Dormant for several years, the Company services a closed block of life insurance policies. At December 31, 1996, CILIC had assets of $2.7 million and revenues of $179,000. ITEM 2. DESCRIPTION OF PROPERTIES CICA owns its principal office in Austin, Texas, consisting of an 80,000 square foot office building. Approximately 27,000 square feet is occupied by CICA and its affiliates with the remainder of the building being leased or for lease. At December 31, 1996, the occupancy rate of the property was approximately 95%. CICA also owns 1.10 acres of land with a 13,000 square foot office building which previously served as the Company's executive offices. The property has a book value of $158,000. A triple-net lease was executed during 1995 on the building for a term of three years, with a purchase option at a price of $850,000 during the period. During 1995, CICA acquired through foreclosure, a 7,500 square foot office property in Wheatridge, Colorado for $116,000. Subsequently, the Company renovated the property, bringing its investments to $230,000. This property has previously been appraised for $475,000. Management had planned to use this building in conjunction with the Company's operations; however, decided to dispose of property and listed it for sale at $490,000 in December 1996. Through the acquisition of ALFC described above, the Company also owns a 6,324 square foot funeral home in Baker, Louisiana with a total cost of $473,000. This facility is owned and operated by a subsidiary, FHL. -24- 25 ITEM 3. LEGAL PROCEEDINGS The Company from time to time may be a party to various legal proceedings incidental to its business. Management does not expect the ultimate resolution of these legal proceedings to have a material adverse impact on the financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to shareholders of Citizens during the fourth calendar quarter of 1996. -25- 26 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Citizens' Class A common stock is traded on the American Stock Exchange (Amex). The high and low prices per share as supplied by the Amex Monthly Statistical Report are as follows.
1996 1995 ------------------ ---------------------- QUARTER ENDED HIGH LOW HIGH LOW ------------- ------ ------ ------ ----- March 31 9.13 8.50 9.25 7.13 June 30 7.50 5.13 9.69 8.25 September 30 8.13 7.38 15.63 7.25 December 31 9.75 7.69 9.88 8.06
(b) Citizens' Class A common stock is listed on the American Stock Exchange under the symbol CIA. (c) As of December 31, 1996, the approximate number of record owners of Citizens' Class A common stock was 14,200. Management estimates the number of beneficial owners to be approximately 48,000. (d) Citizens has not paid dividends in any of the past three years and does not intend to pay cash dividends in the immediate future. For restrictions on the present and future ability to pay dividends, see Note 7 of the "Notes to Consolidated Financial Statements." ITEM 6. SELECTED FINANCIAL DATA The table below sets forth, in summary form, selective data of the Company. This data, which is not covered in the report of the independent auditors, should be read in conjunction with the consolidated financial statements and notes which are included elsewhere herein (amounts in thousands except per share amounts).
YEAR ENDED DECEMBER 31, (IN THOUSANDS EXCEPT PER SHARE DATA) ------------------------------------------------------------------------ 1993 1992 1996 1995 1994 (AS RESTATED) (AS RESTATED) ------------ ------------ ------------ ------------ ------------ NET OPERATING REVENUES $ 63,822 $ 53,130 $ 49,212 $ 42,761 $ 33,134 NET INCOME $ 2,214 $ 2,750 $ 4,175 $ 5,526 $ 3,907 NET INCOME PER SHARE $ .11 $ .16 $ .25 $ .34 $ .24 TOTAL ASSETS $ 214,455 $ 205,486 $ 149,798 $ 134,105 $ 116,230 TOTAL LIABILITIES $ 147,572 $ 140,773 $ 114,742 $ 106,090 $ 93,442 TOTAL STOCKHOLDERS' EQUITY $ 66,883 $ 64,713 $ 35,056 $ 28,015 $ 22,787 BOOK VALUE PER SHARE $ 3.29 $ 3.24 $ 1.99 $ 1.68 $ 1.37
-26- 27 See Part I (b) - Financial information regarding the insurance business and Item 7 - Management's Discussion and Analysis. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 with $26 million in assets, $8 million of stockholders' equity, revenues of $9 million and $40 million of life insurance in force and (ii) Insurance Investors & Holding Co., a Peoria, Illinois based life insurance holding company with $2.5 million in assets and $1 million of stockholders' equity. The American Liberty acquisition was completed on September 14, 1995 with American Liberty shareholders receiving 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 share of American Liberty Preferred Stock owned. Citizens issued approximately 2.3 million Class A shares in connection with the transaction, which was accounted for as a purchase. The Insurance Investors agreement, consummated March 12, 1996, 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 acquired all shares of Central Investors Life Insurance Company, a 95% owned subsidiary of Insurance Investors & Holding, based upon an exchange ratio of one share of Citizens' Class A common stock for each four shares of Central Investors owned. The transaction, which was accounted for as a purchase, involved the issuance of approximately 171,000 shares. On October 28, 1996, Registrant announced that it had signed definitive written agreements for the acquisition of American Investment Network, Inc. (American Investment), a life insurance holding company headquartered in Jackson, Mississippi with $7.5 million in assets, $3.4 million of stockholders' equity, revenues of $3.2 million and $67 million of life insurance in force. The American Investment agreement provides that following the acquisition by Registrant, American Investment shareholders will receive 1 share of Registrant's Class A Common Stock for each 7.2 shares of American Investment Common Stock owned. Citizens 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 the Citizens' system. The agreement is subject to approval by American Investment's shareholders and regulatory authorities and is expected to close in mid 1997. -27- 28 RESULTS OF OPERATIONS Net income for the year ended December 31, 1996 was $2,213,726 or $.11 per share compared to $2,750,212 or $.16 per share in 1995 and $4,174,558 or $.25 per share in 1994. Increases in expenses associated with ALLIC's marketing activities and a minimal increase in the sale of new international life insurance premiums caused the decline in earnings in 1996. Decreased writing of new life insurance premiums contributed to the lower earnings in 1995, coupled with increased operating expenses incurred to acquire and convert ALFC. Total revenues for the year ended December 31, 1996 were $63,822,160 compared to $53,130,172 in 1995, an increase of 20.1%. The substantial revenue growth in 1996 is attributable to the inclusion of ALLIC for the entire year, which contributed approximately $9,200,000 to revenues. The 1995 revenues were 7.9% greater than 1994 when total revenues were $49,211,998. The smaller increase in revenues during 1995 resulted primarily from a reduction in new premium sales, whose decline offset increased investment income during the year. In 1995, the revenues of ALLIC are included only from the purchase date of September 14, 1995, and as such, only $2.6 million of ALLIC's total revenues of $9 million were included in the Company's results. Premium income reached $53,914,361 in 1996, a 16.9% increase over the previous year when premium income totaled $46,125,093. The 1995 amount represented a 5.3% increase over 1994 when premiums amounted to $43,785,361. Premiums for 1996 were boosted by the inclusion of ALLIC. ALLIC contributed $3.8 million of accident and health premium and an additional 4.1 million of life premiums. Additionally, CICA increased new premium sales to $9.7 million during the year from $9.5 million in 1995, which was a decrease from $11.8 million in 1994. In 1994 and 1995, management did not emphasize new business production due to its desire to increase Company capitalization before further expanding its premium writing. Additionally, during 1995, the Company saw significant disruption in the Argentine economy, lowering sales from that region which had been a major contributor to the Company's overall sales in recent years. Management believes the disruption has passed in that market and expects to see improved production from that area in the future although these expectations may not be realized for a variety of reasons including political and governmental disturbances, economic disturbances and other factors beyond the Company's control.. Additionally, only a small portion of the premium revenues of ALLIC are included in the 1995 results as described above. During late 1995 and 1996, management made a significant effort to expand the writing of pre-need insurance on the part of ALLIC. Included in this effort was the addition of several field agency managers, the design of new products, and printing of promotional materials. Despite this commitment and incurrence of approximately $700,000 in expenses, management abandoned these efforts late in 1996. It is management's belief that ALLIC is better served to continue to exploit its niche -28- 29 selling specialty accident and health life products through existing distribution channels although factors such as the reaction of the remaining ALLIC sales representatives to discontinuation of this effort as well as general competitive factors will affect the actual outcome. Because only a nominal amount of new premium was written through the now discontinued expansion efforts, management does not expect the change in focus to have a material effect on new sales. Management does, however, believe that the loss of momentum as a result of withdrawal of the program will cause a disruption in ALLIC's sales. The annual sales of new premiums produced by ALLIC represents less than 10% of total new premiums produced by the Company; therefore management does not believe this will have an adverse effect on the Company. Net investment income increased 30.7% during 1996 to $9,185,506 from $7,026,909 in 1995. In 1994, such income was $5,295,784. The 1996 results reflect actions taken during late 1994 and early 1995 to extend the duration of the Company's portfolio slightly to take advantage of higher yields. Overall, the duration was increased to approximately 6 years from 4 to 5 years. Additionally, the acquisition of ALLIC which increased the Company's invested assets by approximately $17.8 million, contributed, along with the Company's own internal growth. ALLIC represented $550,000 of 1995's investment income; however, this amount represented only slightly more than three months of earnings on that asset base. In 1996, the contribution was $1.2 million. The low yields available in the bond market during the Company's growth period have made it difficult to increase the return on the Company's invested assets without exposing the portfolio to undue risk; however, management believes that as yields rise (which occurred during 1994 and early 1995 and again in late 1996) the Company is positioned to take advantage of the investment opportunities that will present themselves and, thus, enhance future returns. Management hired the investment advisory firm of Asset Allocation and Management, Inc. of Chicago ("AAM"), Illinois in late 1995 to manage the Company's fixed maturity portfolio. It is the belief of management that an overall increase in returns can be achieved by implementing the plans of AAM to provide more diversity in the portfolio without significantly increasing risk. During 1996, a nominal reconfiguration was begun. In lieu of purchasing U.S. Treasury instruments, the Company began to purchase U.S. Government guaranteed mortgage pass-through securities. Management believes that an approximate 50 basis point increase in return can be achieved through the switch assuming current market yields do not decline.. Additionally, approximately $3 million of A to AA rated private placement bonds were acquired. Management expects to continue this strategy throughout 1997 as opportunities present themselves. Future policy benefit reserves increased $8,198,243 in 1996, compared to $11,033,763 in 1995 and $11,910,751 in 1994. Increased surrender activity during the year was the primary reason for the lower reserve increase in 1996. The decreased production in 1995, coupled with lower reserves as a result of a lower capitalization rate on policy acquisition costs, along with higher surrender activity in the international market as a result of the disruption described above, were the reasons for -29- 30 the lower reserve increase in 1995. Increasing premium income and favorable persistency in relation to premiums are the primary reasons for the increase in 1994. Increases in surrender activity on the block of Universal Life business acquired in the First Centennial Corp. acquisition in 1992 slowed the level of increase, particularly in 1994. These surrenders, which were expected by management, were increased by the relatively low interest rates paid on these plans during 1994 compared to the rates that were in effect several years ago when the plans were sold. Additionally, in the early years of a policy, the net reserves (benefit reserve less deferred acquisition costs) are small due to the large capitalized costs in the first and second policy years. As the policy matures, the reserve increases. The Company's reserves are certified annually by an independent actuary. Such certification noted no deficiencies for the years presented. Upon consummation of the acquisition of the minority interest, Citizens expects to incur a non-recurring charge to earnings of approximately $500,000 to $600,000. This charge is based upon the fair market value of the shares to be issued, less the minority interest acquired, and approximately $300,000 of goodwill. Overall policyholder dividends remained relatively stable in 1996 amounting to $2,363,201 from $2,422,168 in 1995 and $2,381,581 in 1994. In late 1993, management reduced the dividends paid on various plans to reflect the lower levels of return that were available in the bond market. As a result, the dividends paid in recent years have not been growing. Virtually all CICA's policies that have been sold since 1989 are participating. Participating policies represent a large majority (87%) of the Company's business in force and over 90% of new issues in 1996 and 1995. As a result, management expects continued growth in this item subject to factors such as persistency and future sales; however, dividends are factored into the policies' premiums and thus management does not believe continued increases in dividend expense will impair or dilute future profitability. Claims and surrenders increased 34.4% in 1996, reaching $25,919,054 from $19,282,954 in 1995. In 1994, such expenses were $16,635,259. The 1995 increases result primarily from growth in surrenders and endowments. Death benefits increased to $3,667,159 in 1996, compared to $2,923,339 in 1995. In 1994, such benefits were $2,533,569. ALLIC claims amount to $1,313,390 of the 1996 results. A large portion of the 1995 increase ($290,945) is attributable to the acquisition of ALLIC in September. The remaining increase in 1995 is due to the growth in the Company's in force business. During 1994, the claims incurred on the Servicemen's Group Life Insurance ("Segli") program returned to levels seen prior to 1993, declining by approximately $500,000. Additionally, during 1994 claims on the Company's in force business remained static with those incurred in 1993, despite the increasing block of business in force. The Company has historically adhered to a strict underwriting policy which requires complete medical examinations on all applicants who are foreign residents, except children, regardless of age or face amount of the policy applied for. For 1996 and future years, management initiated a change to more selective medical examinations in conjunction with dry spot blood tests and extensive medical questions on the application in order to lower the cost of new business without sacrificing necessary information for the underwriter. Additionally, X-rays and electrocardiograms are required depending on age and face -30- 31 amount of the policy. On all policies of $150,000 or more, inspection reports are required which detail the background resources and lifestyle of the applicant. The Company has developed numerous contacts throughout Latin America with which its underwriters can validate information contained in the application, medical or inspection report. The relatively high death claims experienced on the ALLIC block of business are expected due to the nature of the business (burial insurance) and the higher ages associated with such business. Endowment expense grew from $4,631,261 in 1995 to $5,192,607 in 1996, a 12.1% increase. In 1994, such expenses were $4,475,462. Beginning in late 1990, Citizens introduced a new series of plans called "Ultra Expansion Plus" which carried an immediate endowment benefit of an amount elected by the policyowner. This endowment is factored into the premium of the policy and is paid annually. Management does not expect this benefit to adversely impact profitability since it is factored into the cost of the policy. Policy surrenders were $14,421,683 in 1996, compared to $10,611,335 in 1995 and $8,637,306 in 1994. The increase in surrenders is, in the opinion of management, due to acquisitions and the growing block of business in force, as well as representative of the economic problems seen in Argentina during 1995 and early 1996. During 1996, commissions increased to $12,447,664 from $10,273,173 in 1995. During 1995, commissions declined to $10,273,173 from $12,382,372 in 1994. The majority of such amounts paid relates to first year commissions which were $8,677,297, $7,292,264 and $9,925,028, respectively, in 1996, 1995, and 1994. The 1996 increases relate to improved sales activity in CICA and approximately $1.5 million associated with ALLIC. The decline in first year commissions during 1995 relates to the slowdown in new sales discussed earlier. Underwriting, acquisition and insurance expenses increased to $9,500,973 in 1996 from $7,102,401 in 1995 and $5,079,538 in 1994. The 1996 expenses include approximately $3.2 associated with ALLIC. Due to the consolidation of ALLIC's operations with CICA, management believes significant reductions can be achieved through economies of scale. In order to convert a majority of CICA's marketing overhead from fixed to variable, management began discussions in early 1997 with an independent international marketing company to serve as managing agent for the Company's international marketing activities. This firm would receive an overriding commission on all new business sold internationally in exchange for the absorption of all marketing management and promotion activities. By taking such actions, management believes approximately $900,000 of fixed overhead can be converted to a variable expense in 1997 and thereafter. Management has utilized firms such as this in previous periods with great success at obtaining increases in sales and expense reductions. Additionally, management undertook the expense reductions associated with ALLIC's marketing operations discussed previously. These actions should result in an additional $700,000 of annual overhead reduction in future periods based upon the 1996 level of -31- 32 expenditures and the factors described earlier regarding the discontinued marketing operations. The 1995 expense increase reflects the growth experienced by the Company in recent years, particularly in the marketing area. As a result of a change in late 1993 in the management of marketing efforts, the Company absorbs a greater portion of the expense in exchange for paying lower first year commissions. The growth in expense in 1994 is primarily related to the increased home office marketing costs. Capitalized deferred policy acquisition costs were $10,531,222 in 1996, compared to $10,579,704 in 1995 and $13,128,049 in 1994. The decline in amounts in 1995 reflects the lower level of new sales experienced during the year, as well as the lower interest rate environment. There was an adjustment of capitalization for 1994 and after issued policies to reflect the lower interest rates available to be earned on the Company's investment portfolio compared to earlier years. Amortization of these costs was $10,221,917, $8,511,876 and $7,203,593 respectively in 1996, 1995, and 1994. The increased surrender activity discussed above contributed to the increased amortization in 1996. Amortization of cost of insurance acquired and excess of cost over net assets acquired increased to $1,398,859 in 1996 from $678,997 in 1995 and $606,487 in 1994. The increase is attributable to the goodwill and cost of insurance recorded on the acquisitions of ALLIC and IIH. LIQUIDITY AND CAPITAL RESOURCES Stockholders' equity increased to $66,830,016 at December 31, 1996 from $64,712,990 in 1995. The acquisition of IIH and the income earned during the period were the primary reasons for the growth in equity during 1996. The IIH acquisition discussed previously, increased invested assets by $2,995,000 and stockholders' equity by $1,542,501. The increase in equity during the year would have been greater but for a $1,978,000 unrealized loss (net of tax) on the Company's available-for-sale bond portfolio. This unrealized loss was attributable to decreases in prices in the bond market in 1996. 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 permits shares offered outside of the United States to non-United Stated persons pursuant to its 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 sold 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 -32- 33 which business is typically transacted overseas. Because of the success of the offering in the limited time period, a second offering was initiated in May 1995. The second offering, to the Company's international policyholders, expires in October 31, 1997. It currently prices the shares at $7.50 and requires a three-year holding period. As of December 31, 1996, approximately 135,350 shares had been purchased through the second Reg. S offering, resulting in a net increase to capital of $1,084,000. Invested assets grew to $138,311,136 in 1996 from $130,024,739 at December 31, 1995, an increase of 6.4%. The acquisition of IIH contributed approximately $2 million to said increase. The balance of the growth is attributable to the internal growth achieved by the Company. At December 31, 1996, 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 1997; however, because of continued uncertainty regarding long-term interest rates, management cannot rule out sales during 1997. Fixed maturities held to maturity, amounting to $5,627,256 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 1.2% of invested assets at December 31, 1996, (1.5% at December 31,1995) has historically been composed of small residential loans in Texas. At December 31, 1996, no mortgage loans were in default. At December 31, 1995, one mortgage loan was in default with a principal balance of approximately $92,000. During 1995, the loan to an affiliate described below was foreclosed. Management has established a reserve of $50,000 at December 31, 1996 (approximately 3% of the mortgage portfolio's balance) to cover potential unforeseen losses in the Company's mortgage portfolio. Policy loans comprise 14.3% of invested assets at December 31, 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, 1996. Management monitors the solvency of all financial institutions in which it has funds to minimize the exposure for loss. At December 31, 1996, management does not believe the Company is at risk for such a loss. During 1997, 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. -33- 34 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 leased to a third party on a triple-net basis for three years during 1995. The lease provided 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 option period expired in 1996. The property is being re-marketed with a $1.5 million asking price. The tenant retains a right of first refusal for the remainder of the lease. CICA owned 1,955,457 shares of Citizens Class A common stock at December 31, 1996 and 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 7% of admitted assets ($8,310,000), 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 December 31, 1996, that permitted transaction increased statutory surplus by $4,000,000 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. During 1995, Citizens re-acquired 115,943 of these shares and retired them. CICA had outstanding at December 31, 1996, 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 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, 1996 and 1995, CICA, ALLIC and CILIC were well above required minimum levels. FINANCIAL ACCOUNTING STANDARDS In May 1993, the FASB issued Statement 114 "Accounting by Creditors for Impairment of a Loan" ("Statement 114"). Statement 114 requires impaired loans to -34- 35 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. In March 1995, the FASB issued Statement 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." Statement 121 established accounting standards for the recognition and measurement of impairment on long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain intangibles to be disposed of. This statement does not apply to long-lived assets such as deferred policy acquisition costs and deferred tax assets. Statement 121 is effective for fiscal years beginning after December 15, 1995. The Statement 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, 1996 or December 31, 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. -35- 36 ITEM 8. FINANCIAL STATEMENTS CITIZENS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE REFERENCE --------- Independent auditor's report 43 Consolidated balance sheets at December 31, 1996 and 1995 44-45 Consolidated statements of operations - years ended December 31, 1996, 1995 and 1994 46-47 Consolidated statements of stockholders' equity - years ended December 31, 1996, 1995 and 1994 48 Consolidated statements of cash flows - years ended December 31, 1996, 1995 and 1994 49-50 Notes to consolidated financial statements 51-66 Schedules at December 31, 1996 and 1995: Schedule II - Condensed Financial Information of Registrant 67-69 Schedules for each of the years in the three-year period ended December 31, 1996: Schedule IV - Reinsurance 70
All other schedules have been omitted as the required information is inapplicable or the information required is presented in the financial statements or the notes thereto filed elsewhere herein. -36- 37 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During the 24 months preceding the date of the audited financial statements of Citizens included herein, there has been no change of accountants made by Citizens, nor has it reported on Form 8-K any disagreements between the Company and its independent accountants. -37- 38 PART III Items 10, 11, 12, and 13 of this Report incorporate by reference the information in the Company's definitive proxy material under the headings "Stock and Principal Stockholders," "Control of the Company," and "Election of Directors." to be filed with the Securities and Exchange Commission within 120 days after December 31, 1996. "Control of the Company," "Election of Directors," "Executive Officers," "Executive Officer and Director Compensation" and "Certain Reports" to be filed with the Securities and Exchange Commission within 120 days after December 31, 1996. -38- 39 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1 AND 2 FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The financial statements and schedules listed on the following index to financial statements and financial statement schedules are filed as part of this Form 10-K. (a) 3 EXHIBITS
EXHIBIT EXHIBIT NO. DESCRIPTION PAGE NO. ----------- ----------- -------- (1) Underwriting Agreement N/A (2) Plan of acquisition, reorganization, arrangement, liquidation or succession (e) (3) 3.1 Articles of Incorporation; as amended (d) 3.2 Bylaws (b) (4) Instruments defining the rights of security holders, including indentures N/A (5) Opinion re: Legality N/A (6) (Removed and Reserved) N/A (7) (Removed and Reserved) N/A (8) Opinion re: Tax Matters N/A (9) Voting Trust Agreement N/A (10) Material Contracts 10.1 Automatic Yearly Renewable term (NR) Life Reinsurance Agreement between Citizens Insurance Company of America and The Centennial Life Insurance Company dated March 1, 1982 (a) 10.2 Stock Purchase Agreement between Citizens Insurance Company of America and Citizens, Inc. (a) 10.3 Plan and Agreement of Merger and Exchange by and among Insurance Investors & Holding Co., Central Investors Life Insurance Company of Illinois, Citizens, Inc. and Citizens Acquisition, Inc. (g) 10.4 Self-Administered Automatic Reinsurance Agreement - Citizens Insurance Company of America and Riunione Adriatica di Sicurta, S.p.A. (h)
-39- 40 10.5 Plan and Agreement of Exchange dated October 28, 1996 between Citizens, Inc. and American Investment Network, Inc. (h) 10.6 Agreement and Plan of Merger dated October 31, 1996 between Citizens Insurance Company of America, CICA Acquisition, Inc., and First American Investment Corporation (h) 10.7 Plan and Agreement of Merger dated November 22, 1996 between Citizens, Inc. and American Liberty Financial Corporation, as amended Filed herewith 10.8 Plan and Agreement of Merger dated November 22, 1996 between Citizens Insurance Company of America and American Liberty Life Insurance Company, as amended Filed herewith 10.9 Bulk Accidental Death Benefit Reinsurance Agreement between Connecticut General Life Insurance Company and Citizens Insurance Company of America, as amended Filed herewith (11) Statement re: Computation of per share earnings N/A (12) Statement re: Computation of ratios N/A (13) Annual report to security holders, Form 10-Q or quarterly report to N/A security holders (14) (Removed and Reserved) N/A (15) Letter re: Unaudited interim financial statements N/A (16) Letter re: Change in certifying accountant N/A (17) Letter re: Director resignation N/A (18) Letter re: Change in accounting principles N/A (19) Report furnished to security holders N/A (20) Other documents or statements to security holders N/A (21) Subsidiaries of the registrant (i) (22) Published report regarding matters submitted to a vote of security holders N/A (23) Consents of expert and counsel (i) (24) Power of Attorney See signature page (25) Statement of eligibility of trustee N/A (26) Invitations for competitive bids N/A (27) Financial Data Schedule (i) (28) (Removed and Reserved) N/A (99) Additional Exhibits N/A
- ---------- (a) Filed as a part of the Amended No. 1 to Registration Statement on Form S-4, SEC File No. 33--4753, filed on or about June 19, 1992. -40- 41 (b) Filed with or referenced in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. (c) Filed with or referenced in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference. (d) Filed with or referenced in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. (e) Filed with or referenced in the Registrant's Current Report on Form 8-K dated December 9, 1994 and incorporated herein by reference. (f) Filed as a part of the Registration Statement on Form S-4, SEC File No. 33--59039, filed on or about May 2, 1995. (g) Filed as a part of the Registration Statement on Form S-4, SEC File No. 33--63275, filed on or about October 6, 1995. (h) Filed as a part of the Registration Statement on Form S-4, SEC File No. 333--16163, filed on or about November 14, 1996. (i) Filed with or referenced in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. (b) REPORTS ON FORM 8-K (1) Form 8-K dated October 28, 1996 reporting pursuant to Item 5 (Other Events) the execution of a definitive acquisition agreement with American Investment Network, Inc., a life insurance holding company based in Jackson, Mississippi. (2) Form 8-K dated November 19, 1996 reporting pursuant to Item 9 (Sales of Equity Securities Pursuant to Regulation S). (3) Form 8-K dated December 23, 1996 reporting pursuant to Item 9 (Sales of Equity Securities Pursuant to Regulation S). -41- 42 CITIZENS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE REFERENCE --------- Independent auditors' report 43 Consolidated balance sheets at December 31, 1996 and 1995 44-45 Consolidated statements of operations - years ended December 31, 1996, 1995 and 1994 46-47 Consolidated statements of stockholders' equity - years ended December 31, 1996, 1995 and 1994 48 Consolidated statements of cash flows - years ended December 31, 1996, 1995 and 1994 49-50 Notes to consolidated financial statements 51-66 Schedules at December 31, 1996 and 1995: Schedule II - Condensed Financial Information of Registrant 67-69 Schedules for each of the years in the three-year period ended December 31, 1996: Schedule IV - Reinsurance 70
All other schedules have been omitted as the required information is inapplicable or the information required is presented in the financial statements or the notes thereto filed elsewhere herein. -42- 43 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Citizens, Inc.: We have audited the consolidated financial statements of Citizens, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Citizens, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Notes 1 and 2 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities." KPMG PEAT MARWICK LLP Dallas, Texas February 21, 1997 -43- 44 CITIZENS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995 ------ ------------ ------------ Investments (note 2): Fixed maturities held to maturity, at amortized cost (market $5,217,000 in 1996 and $5,700,000 in 1995) $ 5,627,256 $ 5,636,785 Fixed maturities available for sale at market, (cost $110,759,634 in 1996 and $97,515,359 in 1995) 109,723,050 99,464,551 Equity securities, at market (cost $89,580 in 1996 and $23,329 in 1995) 50,155 -- Mortgage loans on real estate (net of reserve of $50,000 in 1996 and $145,080 in 1995) 1,672,522 1,910,608 Policy loans 19,819,125 18,911,275 Guaranteed student loans (net of reserve of $10,000 in 1996 and 1995) 298,683 333,387 Other long-term investments 920,345 679,436 Short-term investments 200,000 3,088,697 ------------ ------------ Total investments 138,311,136 130,024,739 Cash 6,085,383 4,160,156 Other receivables 594,088 1,219,107 Accrued investment income 1,682,084 2,022,809 Reinsurance recoverable 1,773,541 1,857,900 Deferred policy acquisition costs 36,933,753 36,624,448 Other intangible assets 1,633,625 1,820,325 Federal income tax receivable 357,608 -- Cost of insurance acquired (note 3) 7,219,594 7,522,827 Excess of cost over net assets acquired 13,677,800 14,045,848 Property, plant and equipment 5,442,578 5,546,075 Other assets 743,636 642,013 ------------ ------------ $214,454,826 $205,486,247 ============ ============
-44- 45 CITIZENS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, CONTINUED DECEMBER 31, 1996 AND 1995
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 ------------------------------------ ------------- ------------- Liabilities: Future policy benefit reserves (notes 4 and 5): Life insurance $ 123,812,996 $ 114,727,748 Annuities 3,936,178 4,261,847 Accident and health 4,651,905 4,337,782 Dividend accumulations 3,961,603 3,602,706 Premium deposits 1,803,358 1,553,414 Policy claims payable (notes 5 and 10) 2,966,818 3,197,291 Other policyholders' funds 1,958,992 1,945,332 ------------- ------------- Total policy liabilities 143,091,850 133,626,120 Other liabilities 2,052,001 2,001,320 Commissions payable 928,288 692,578 Notes payable (note 6) 489,166 772,834 Deferred Federal income tax (note 12) 842,250 2,372,742 Federal income tax payable -- 1,025,106 Minority interest -- 14,954 Amounts held on deposit 168,255 267,603 ------------- ------------- Total liabilities 147,571,810 140,773,257 ------------- ------------- Stockholders' equity (notes 7, 8, and 9): Common stock: Class A, no par value, 50,000,000 shares authorized, 21,761,894 shares issued in 1996 and 21,415,872 shares issued in 1995, including shares in treasury of 2,077,947 in 1996 45,941,552 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 investment gain (loss) (note 2) (710,166) 1,267,747 Retained earnings 23,430,634 21,216,908 ------------- ------------- 68,945,282 66,775,256 Treasury stock, at cost (2,062,266) (2,062,266) ------------- ------------- Total stockholders' equity 66,883,016 64,712,990 ------------- ------------- Commitments and contingencies (notes 5, 8, and 10) $ 214,454,826 $ 205,486,247 ============= =============
See accompanying notes to consolidated financial statements. -45- 46 CITIZENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ------------ ------------ ------------ Revenues: Premiums (notes 5 and 11): Life insurance $ 49,873,673 $ 45,426,887 $ 43,526,111 Accident and health 4,040,688 698,206 259,250 Annuity and universal life considerations 389,084 119,335 75,564 Net investment income (note 2) 9,185,506 7,026,909 5,295,784 Realized gains (losses) on investments (note 2) 226,212 (109,096) (9,356) Other income 136,566 75,062 94,364 Interest expense (29,569) (107,131) (29,719) ------------ ------------ ------------ Total revenues 63,822,160 53,130,172 49,211,998 ------------ ------------ ------------ Benefits and expenses: Insurance benefits paid or provided: Increase in future policy benefit reserves 8,198,243 11,033,763 11,910,751 Policyholders' dividends 2,363,201 2,422,168 2,381,581 Claims and surrenders (note 5) 25,919,054 19,282,954 16,635,259 Annuity expenses 684,440 652,976 373,575 ------------ ------------ ------------ Total insurance benefits paid or provided 37,164,938 33,391,861 31,301,166 ------------ ------------ ------------ Commissions 12,447,664 10,273,173 12,382,372 Other underwriting, acquisition and insurance expenses 9,500,973 7,102,401 5,079,538 Capitalization of deferred policy acquisition costs (10,531,222) (10,579,704) (13,128,049) Amortization of deferred policy acquisition costs 10,221,917 8,511,876 7,203,593 Amortization of cost of insurance acquired and excess of cost over net assets acquired 1,398,859 678,997 606,487 ------------ ------------ ------------ Total benefits and expenses 60,203,129 49,378,604 43,445,107 ------------ ------------ ------------
(Continued) -46- 47 CITIZENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996 1995, AND 1994
1996 1995 1994 ---------- ---------- ---------- Income before Federal income taxes $3,619,031 $3,751,568 $5,766,891 Federal income tax expense 1,405,305 1,001,356 1,592,333 ---------- ---------- ---------- (note 12) Net income $2,213,726 $2,750,212 $4,174,558 ========== ========== ========== Net income per share of common stock (note 8) $ .11 $ .16 $ .25 ========== ========== ==========
See accompanying notes to consolidated financial statements. -47- 48 CITIZENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
COMMON STOCK UNREALIZED TOTAL ----------------------- INVESTMENT RETAINED TREASURY STOCKHOLDERS' CLASS A CLASS B GAINS (LOSSES) EARNINGS STOCK EQUITY ------------ -------- -------------- ----------- ----------- ------------ BALANCE AT DECEMBER 31, 1993 15,985,344 283,262 (352,374) 14,292,138 (2,193,666) 28,014,704 Cumulative effect of adoption of Statement No. 115 at January 1, 1994 net of taxes -- -- 690,388 -- -- 690,388 Net income -- -- -- 4,174,558 -- 4,174,558 Unrealized investment losses, net -- -- (3,308,611) -- -- (3,308,611) Sale of stock 5,384,334 -- -- -- -- 5,384,334 Sale of treasury stock 87,625 -- -- -- 12,375 100,000 ------------ -------- ----------- ----------- ----------- ------------ BALANCE AT DECEMBER 31, 1994 $ 21,457,303 $283,262 $(2,970,597) $18,466,696 $(2,181,291) $ 35,055,373 ============ ======== =========== =========== =========== ============ Net income -- -- -- 2,750,212 -- 2,750,212 Unrealized investment gains, net -- -- 4,238,344 -- -- 4,238,344 Acquisition of ALFC (note 9) 22,246,163 -- -- -- -- 22,246,163 Sale of stock 638,980 -- -- -- -- 638,980 Stock issuance costs (257,495) -- -- -- -- (257,495) Retire shares held in treasury stock (114,782) -- -- -- 114,782 -- Sale of treasury stock 37,170 -- -- -- 4,243 41,413 ------------ -------- ----------- ----------- ----------- ------------ BALANCE AT DECEMBER 31, 1995 $ 44,007,339 $283,262 $ 1,267,747 $21,216,908 $(2,062,266) $ 64,712,990 ============ ======== =========== =========== =========== ============ Net income -- -- -- 2,213,726 -- 2,213,726 Unrealized investment gains, net -- -- (1,977,913) -- -- (1,977,913) Acquisition of IIH(note 9) 1,542,501 -- -- -- -- 1,542,501 Sale of stock 445,462 -- -- -- -- 445,462 Stock issuance costs (157,500) -- -- -- -- (157,500) Exercise of options (note 8) 103,750 -- -- -- -- 103,750 ------------ -------- ----------- ----------- ----------- ------------ BALANCE AT DECEMBER 31, 1996 $ 45,941,552 $283,262 $ ( 710,166) $23,430,634 $(2,062,266) $ 66,883,016 ============ ======== =========== =========== =========== ============
See accompanying notes to consolidated financial statements -48- 49 CITIZENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1996 1995 1994 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 2,213,726 $ 2,750,212 $ 4,174,558 Adjustments to reconcile net income to net cash provided by operating activities, net of assets acquired: Realized gains (losses) on sale of investments and other assets 226,212 (109,096) 9,356 Accrued investment income 372,781 (131,835) (511,086) Net deferred policy acquisition costs (309,305) (2,086,984) (5,924,456) Amortization of cost of insurance acquired and excess cost over net assets acquired 1,398,859 678,997 606,487 Other receivables 626,300 602,662 (1,460,131) Future policy benefit reserves 8,357,859 9,929,505 11,910,751 Other policy liabilities 34,343 1,527,695 (1,219,297) Deferred Federal income tax (407,226) (981,068) (383,195) Federal income tax (1,368,629) (104,424) (982,197) Commissions payable and other liab 226,675 (224,308) (154,510) Amounts held on deposit (99,348) (42,829) (124,087) Other, net 672,085 613,198 2,110,818 ------------ ------------ ------------ Net cash provided by operating activities 11,944,332 12,421,725 8,053,011 ------------ ------------ ------------ Cash flows from investing activities: Maturity of fixed maturities held to maturity -- 2,600,000 51,625 Sale of fixed maturities available for sale 16,403,929 28,419,387 13,152,225 Maturity of fixed maturities available for sale 5,811,179 -- 963,151 Purchase of fixed maturities available for sale (33,759,945) (38,614,148) (40,486,808) Sale of equity securities 66,251 1,892 174,761 Principal payments on mortgage loans 391,804 652,819 935,276 Mortgage loans funded (203,718) (54,875) (340,474) Guaranteed student loans funded (100,902) (272,635) (335,440) Guaranteed student loans sold 135,606 179,491 475,796 Sale of other long-term investments and property plant and equipment (303,567) 474,257 331,276 Cash and short-term investments provided by merger 355,654 1,178,600 -- Increase in policy loans (net) (801,105) (3,491,760) (1,214,520) Purchase of other long-term investments and property, plant and equipment (691,632) (947,733) (1,237,652) ------------ ------------ ------------ Net cash used by investing activities (12,696,446) (9,874,705) (27,530,784) ------------ ------------ ------------
-49- 50 CITIZENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1996 1995 1994 ------------ ------------ ------------ Cash flows from financing activities: Additional borrowings on notes payable -- 60,461 -- Payments on notes payable (603,068) -- (388,359) Sale of stock 391,712 381,485 5,371,959 ------------ ------------ ------------ Net cash provided (used) by financing activities (211,356) 441,946 4,983,600 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (963,470) 2,988,966 (14,494,173) ------------ ------------ ------------ Cash and cash equivalents at beginning of year 7,248,853 4,259,887 18,754,060 ------------ ------------ ------------ Cash and cash equivalents at end of year 6,285,383 7,248,853 4,259,887 ============ ============ ============
Supplemental disclosures of cash flow information:
1996 1995 1994 ------------ ------------ ------------ Cash paid during the year for: Interest $ 38,826 $ 53,030 $ 61,304 ============ ============ ============ Income taxes $ 3,195,245 $ 2,000,000 $ 2,957,724 ============ ============ ============
Supplemental disclosures of non-cash investing and financing activities (see also Note 9): The Company issued Class A stock to purchase all of the capital stock of IIH in 1996 and ALFC in 1995. $ 1,542,501 $ 22,246,163 $ -- ============ ============ ============
In conjunction with the acquisitions, liabilities were assumed as follows: Fair value of tangible assets acquired $ 2,381,252 $ 18,744,097 $ -- Fair value of intangible assets acquired 614,665 18,574,952 -- ------------ ------------ ------------ Net assets acquired 2,995,917 37,319,049 -- Capital stock issued (1,542,501) (22,246,163) -- ------------ ------------ ------------ Liabilities assumed $ 1,453,416 $ 15,072,886 $ -- ============ ============ ============ Issuance of 4,248 treasury shares of stock $ -- $ 41,413 $ -- ============ ============ ============
See accompanying notes to consolidated financial statements. -50- 51 CITIZENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) NATURE OF BUSINESS The consolidated financial statements include the accounts and operations of Citizens, Inc. (Citizens), incorporated in the state of Colorado on November 8, 1977 and its wholly-owned subsidiaries, Citizens Insurance Company of America (CICA), Computing Technology, Inc. (CTI), formerly Continental Leasing Company, Insurance Investors, Inc. (III), American Liberty Financial Corp. (ALFC), and Insurance Investors and Holding Company (IIH). ALFC and its subsidiaries, American Liberty Life Insurance Company (ALLIC), First American Investment Corp. (FAIC), and American Liberty Exploration Company (ALEC) were acquired by Citizens in September 1995. IIH, which was acquired in March 1996, owns Central Investors Life Insurance Company of Illinois (CILIC). Citizens and its subsidiaries are collectively referred to as "the Company." All significant intercompany accounts and transactions have been eliminated. Citizens, Inc. provides life insurance policies through three of its subsidiaries - CICA, ALLIC, and CILIC. CICA sells ordinary whole-life policies internationally, with approximately 94% of premium income derived outside the United States. ALLIC issues life policies primarily as burial insurance and pre-need policies. Additionally, ALLIC offers accident and health specified disease, hospital indemnity, and accidental death policies, as well as annuities. CILIC does not actively market insurance policies, but does administer an in force block of life insurance. (b) INVESTMENTS, OTHER THAN AFFILIATES Investments are shown on the following basis: 1. Fixed maturities, primarily consisting of bonds which the Company has the ability and intent to hold to maturity are carried at amortized cost. Fixed maturities which may be sold prior to maturity to support the Company's investment strategies are considered held as available for sale and carried at fair value as of the balance sheet date. 2. Equity securities include non-redeemable preferred stock and are reported at fair value. -51- 52 3. Mortgage loans on real estate, policy loans, and guaranteed student loans are reported at unpaid principal balances less an allowance for uncollectible amounts, if any. 4. Other long-term investments consist primarily of real estate which is reported at cost not to exceed fair market value net of accumulated depreciation. 5. Short-term investments consist of treasury bills and commercial paper with maturities of ninety days or less, or commercial paper, and are carried at cost, which approximates market. Unrealized appreciation (depreciation) of equity securities and fixed maturities held for sale is shown as a separate component of stockholders' equity, net of tax in 1996 and 1995, and is not included in the determination of net income. Costs of investments sold are determined using the specific identification method. Net realized gains and losses are included in other income and expenses as incurred. The Company has assets with a fair value of $8,382,149 at December 31, 1996 on deposit with various state regulatory authorities to fulfill statutory requirements. (c) PREMIUM REVENUE AND RELATED EXPENSES Premiums on life and accident and health policies are reported as earned when due or, for short duration contracts, over the contract periods. Benefits and expenses are associated with earned premiums so as to result in recognition of profits over the estimated life of the contracts. This matching is accomplished by means of provisions for future benefits and the capitalization and amortization of deferred policy acquisition costs. Annuities are accounted for in a manner consistent with accounting for interest bearing financial instruments. Premium receipts are not reported as revenues but rather as deposits to annuity contracts. (d) DEFERRED POLICY ACQUISITION COSTS AND COST OF INSURANCE ACQUIRED Acquisition costs, consisting of commissions and policy issuance and underwriting expenses which relate to and vary with, the production of new business are deferred. These deferred policy acquisition costs are amortized primarily over the estimated premium paying period of the related policies in proportion to the ratio of the annual premium recognized to the total premium revenue anticipated using the same assumptions as were used in computing liabilities for future policy benefits. The Company uses the factor method to determine the amount of costs to be capitalized and the ending asset balance. During 1994, the factors used to determine -52- 53 costs capitalized were modified to more accurately reflect the costs attributable to each issue year. The capitalized costs and amortized costs for each year presented have been reclassified to reflect this factor revision. This reclassification did not change the ending asset balance for any year nor did it change the net impact on earnings in any year. The method followed in computing deferred policy acquisition costs limits the amount of such deferred cost to their estimated realizable value. The value of insurance acquired in the Company's various acquisitions, which is included in cost of insurance acquired in the accompanying consolidated financial statements, was determined based on the present value of future profits discounted at a risk rate of return. The cost of insurance acquired is being amortized over 30 years in proportion to the profit over the lives of the related policies. (e) POLICY LIABILITIES AND ACCRUALS Future policy benefit reserves have been computed by the net level premium method with assumptions as to investment yields, dividends on participating business, mortality and withdrawals based upon the Company's and industry experience, which provide for possible unfavorable deviation (see note 4). Annuity benefits are carried at accumulated contract values based on premiums paid by participants, annuity rates of return ranging from 3.0% to 7% (primarily at 4.00% - 5.5%) and annuity withdrawals. Premium deposits accrue interest at rates ranging from 3.5% to 8.25% per annum. Premiums are credited to income when due and accrued interest is credited annually to the deposit account. Policy and contract claims are based on case-basis estimates for reported claims, and on estimates, based on experience, for incurred but unreported claims and loss expenses. (f) EXCESS OF COST OVER NET ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS The excess of cost over the fair value of net assets acquired in the merger with Equities International Life Insurance Co., the 1992 acquisition of the net assets of First Centennial Corporation (FCC), the 1995 acquisition of ALFC and the 1996 acquisition of IIH are amortized on a straight-line basis ranging from 5 to 20 years. Other intangible assets, primarily the value of state licenses, are amortized on a straight-line basis over 10 years. -53- 54 (g) PARTICIPATING POLICIES At December 31, 1996 and 1995, participating business approximated 86% and 91%, respectively, of life insurance in force and premium income. The amount of dividends to be paid is determined annually by the Board of Directors. (h) EARNINGS PER SHARE Earnings per share have been computed using the weighted average number of shares of common stock outstanding during each period. The effects of outstanding stock options and warrants have not been included in the calculations because they are either not material or are antidilutive. The weighted average shares outstanding for the years ended December 31, 1996, 1995 and 1994 were 19,615,420, 17,668,047, and 16,882,164, respectively. (i) INCOME TAXES At December 31, 1995 the Company filed one consolidated return which included Citizens, Inc., CICA, and all direct non-life subsidiaries, excluding FAIC. Two additional returns were filed at December 31, 1995 which included FAIC and its subsidiaries and ALLIC. For the year ended December 31, 1996 the Company will file four separate tax returns as follows: 1) Citizens, Inc., CICA, and all direct non-life subsidiaries, excluding FAIC, 2) ALLIC, 3) CILIC, and 4) FAIC and its subsidiaries. Deferred tax asset and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (j) ACCOUNTING PRONOUNCEMENTS In May 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. Held-to-maturity debt securities will be carried at amortized cost while trading and available-for-sale securities will be carried at fair value. Unrealized holding gains and losses for trading securities will be included in earnings. Unrealized holding gains or losses for available-for-sale securities will be included as a component of equity on a net of tax basis. The Company adopted Statement 115 on January 1, 1994. -54- 55 In March 1995, the FASB issued Statement 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." Statement 121 established accounting standards for the recognition and measurement of impairment on long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain intangibles to be disposed of. This statement does not apply to long-lived assets such as deferred policy acquisition costs and deferred tax assets. Statement 121 is effective for fiscal years beginning after December 15, 1995. The Statement did not have a material impact on the Company's financial statements. (k) CASH EQUIVALENTS The Company considers as cash equivalents all securities whose duration does not exceed ninety days at the date of acquisition. These securities are reflected as short-term investments in the accompanying consolidated financial statements. (l) RECLASSIFICATIONS Certain reclassifications have been made to the 1995 and 1994 amounts to conform with the 1996 presentation. (m) DEPRECIATION Depreciation is calculated on a straight line basis using estimated useful lives ranging from 3 to 10 years. Leasehold improvements are depreciated over the estimated life of 30 years. (n) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. (2) INVESTMENTS A decline in the fair value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale and held-to-maturity are included in earnings and are -55- 56 derived using the specific identification method for determining the cost of securities sold. The amortized cost and estimated fair values of investments in debt securities as of December 31, 1996 and 1995 respectively, are as follows:
1996 ------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------ ----------- ----------- ------------ Fixed maturities held to maturity: US Treasury securities $ 5,627,256 $ -- $ 410,256 $ 5,217,000 ------------ ----------- ----------- ------------ Total 5,627,256 -- 410,256 5,217,000 ============ =========== =========== ============ Fixed maturities available for sale: US Treasury securities and obligations of US government corporations and agencies 67,828,066 639,107 (1,148,240) 67,318,933 Public Utilities 4,691,540 19,497 (237,212) 4,473,825 Debt securities issued by States of the United States and political subdivisions of the States 207,968 4,894 (8,252) 204,610 Debt securities issued by foreign governments 291,219 11,807 (466) 302,560 Corporate securities 9,061,298 176,078 (352,721) 8,884,655 Mortgage-backed securities 28,679,543 233,705 (374,781) 28,538,467 ------------ ----------- ----------- ------------ Total $110,759,634 $ 1,085,088 $(2,121,672) $109,723,050 ============ =========== =========== ============
1995 ------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------ ----------- ----------- ------------ Fixed maturities held to maturity: US Treasury securities $ 5,636,785 $ 63,215 $ -- $ 5,700,000 ----------- ---------- ----------- ------------ Total 5,636,785 63,215 $ -- 5,700,000 =========== ========== =========== ============ Fixed maturities available for sale: US Treasury securities and obligations of US government corporations and agencies 55,793,997 1,151,978 (171,686) 56,774,289 Public Utilities 5,146,972 111,606 (66,978) 5,191,600 Debt securities issued by State of the United States and political subdivisions of the States 290,418 17,582 -- 308,000 Debt securities issued by foreign governments 400,398 30,091 (2,489) 428,000 Corporate securities 7,522,769 368,746 (40,375) 7,851,140 Mortgage-backed securities 28,360,805 550,760 (43) 28,911,522 ----------- ---------- ------------- ------------ Total $97,515,359 $2,230,763 $ (281,571) $ 99,464,551 =========== ========== ============= ============
-56- 57 Concurrent with the adoption of the implementation guidance related to Statement 115, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities" issued by the Financial Accounting Standards Board, the Company reclassified certain investments from the held to maturity category to available for sale. The amortized cost of securities transferred was $12,778,241 and the unrealized gain on the date of transfer amounted to $145,937, net of taxes. The amortized cost and fair value of fixed maturities at December 31, 1996, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. FIXED MATURITIES HELD TO MATURITY
AMORTIZED ESTIMATED COST MARKET VALUE ---------- ------------ Due after ten years $5,627,256 $ 5,217,000 ---------- ------------ $5,627,256 $ 5,217,000 ========== ============
FIXED MATURITIES AVAILABLE FOR SALE
AMORTIZED ESTIMATED COST MARKET VALUE ------------ ------------ Due in one year or less $ 5,892,729 $ 5,874,870 Due after one year through five years 26,636,077 26,892,633 Due after five years through ten years 27,249,273 26,718,714 Due after ten years 22,302,012 21,698,366 ------------ ------------ 82,080,091 81,184,583 Mortgage-backed securities 28,679,543 28,538,467 ------------ ------------ Totals $110,759,634 $109,723,050 ============ ============
The Company had no investments in any one entity which exceeded 10% of stockholders' equity at December 31, 1996 other than investments guaranteed by the U.S. Government. The Company's investment in mortgage loans is concentrated 34% in Colorado, 50% in Texas and 16% in other states as of December 31, 1996. -57- 58 At December 31, 1996 and 1995, unrealized depreciation of equity securities of $39,425 and $23,329, respectively, consisted of gross unrealized losses. Major categories of investment income are summarized as follows:
YEAR ENDED DECEMBER 31 ------------------------------------- 1996 1995 1994 ----------- ---------- ---------- Investment income on: Fixed maturities $ 6,999,425 $5,208,785 $4,045,481 Equity securities -- 15,823 -- Mortgage loans on real estate 178,330 195,321 242,331 Policy loans 1,442,423 1,478,333 1,001,939 Short-term investments 526,910 106,872 123,119 Other 910,223 900,341 795,352 ----------- ---------- ---------- 10,057,311 7,905,475 6,208,222 Investment expenses 871,805 878,566 912,438 ----------- ---------- ---------- Net investment income $ 9,185,506 $7,026,909 $5,295,784 =========== ========== ==========
Equity securities of $23,328 and other long-term assets of $231,156 held by the Company as of December 31, 1996, did not produce income during the preceding 12 months. Proceeds from available for sale securities in 1996, 1995 and 1994 were $22,215,108, $29,132,810 and $13,152,225, respectively. Gross realized gains and losses on such sales were $175,125 and $199,890, respectively, for the year ended December 31, 1996, and $346,370 and $426,841, respectively, for the year ended December 31, 1995, and $645,912 and $420,119, respectively, for the year ended December 31, 1994. Realized gains (losses) on investments are as follows:
YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1995 1994 --------- --------- --------- Realized gains (losses): Fixed maturities $ (24,765) $ (80,471) $ 281,052 Equity securities -- -- (67,309) Other 250,977 (28,625) (223,099) --------- --------- --------- Net realized gains (losses) on investments 226,212 (109,096) (9,356) ========= ========= =========
-58- 59 (3) COST OF INSURANCE ACQUIRED Cost of insurance acquired is summarized as follows:
YEAR ENDED DECEMBER 31, --------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Balance at beginning of period $ 7,522,827 $ 2,271,866 $ 2,692,389 Increase related to acquisitions 121,000 5,562,574 -- Interest 564,212 171,541 198,121 Amortization (988,445) (483,154) (618,644) ----------- ----------- ----------- Balance at end of period $ 7,219,594 $ 7,522,827 $ 2,271,866 =========== =========== ===========
Accretion of interest on cost of insurance acquired is calculated based on the rates of interest used in setting the related policy reserves. These rates range from 6.5% to 8.5%. Estimated amortization in each of the next five years is as follows. Actual future amortization will differ from these estimates due to variances from estimated future withdrawal assumptions. 1997 1,055,521 1998 1,055,718 1999 943,009 2000 889,187 2001 853,990 Thereafter 2,731,116
(4) FUTURE POLICY BENEFIT RESERVES In applying purchase accounting to the future policy benefit reserves acquired through mergers, the Company revalued policy benefit reserves to reflect the Company's reserve assumptions with regard to interest rates, lapse rates and surrenders. The percentage of future policy benefits calculated under these assumptions at December 31, 1996 and 1995 are as follows:
1996 1995 ---- ---- Pre-American Liberty acquisitions 16.5% 20.4% American Liberty 9.0 12.7 Central 1.0 --
Various assumptions used to determine the future policy benefit reserves include the following: a) valuation interest rates from 4 - 9%, b) the mortality assumptions are from the 1955-60, 1965-70, and 1975-80 Select and Ultimate mortality tables, and c) withdrawals are based primarily on actual historical termination rates. -59- 60 (5) REINSURANCE CICA cedes all risks to other companies generally in excess of $75,000 per insured and 100% of accidental death benefits through yearly renewable term insurance or coinsurance contracts. ALLIC and CILIC cede life risks in excess of approximately $35,000 per insured to other companies through yearly renewable term insurance or coinsurance contracts. In addition, ALLIC reinsures all accidental death policies through a coinsurance arrangement whereby 90% of the benefit risk is assumed by the reinsurer. Risks are reinsured with other companies to permit the recovery of a portion of any direct losses. The Company remains contingently liable to the extent that the reinsuring companies cannot meet their obligations under these reinsurance treaties. At December 31, 1996 and 1995, life insurance in force aggregating approximately $304,380,000 and $285,001,000, respectively, was assumed and $296,378,000 and $290,677,000, respectively, was ceded to other insurance companies out of a total in force of approximately $2,231,017,000 and $2,151,955,000, respectively. Premiums assumed were approximately $310,000, $306,000, and $541,000 in the years ended December 31, 1996, 1995 and 1994, respectively. Premiums ceded were approximately $2,583,000, $2,241,000, and $2,310,000 in the years ended December 31, 1996, 1995 and 1994, respectively. Claims and surrenders assumed were approximately $314,000, $286,000 and $530,000 and claims and surrenders ceded were approximately $264,000, $377,000 and $928,000 in the years ended December 31, 1996, 1995 and 1994, respectively. Amounts paid or deemed to have been paid for reinsurance contracts are recorded as reinsurance receivables. The cost of reinsurance related to long duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. -60- 61 (6) NOTES PAYABLE Notes payable as of December 31, 1996 and 1995 consist of:
1996 1995 -------- -------- Note A; payable to bank, 7%, dated June 20, 1988, payable in nine annual installments of $66,667 beginning June 30, 1989, with remainder due June 30, 1998 $466,666 $533,334 Note B; payable to bank, prime (8.25% at December 31, 1996) dated May 24, 1995, payable in monthly installments of $3,000 plus interest beginning June 30, 1995 22,500 64,500 Note C; payable to individual, 6%, dated April 27, 1995, with principal and interest payable at maturity, April 26, 1996 -- 175,000 -------- -------- $489,166 $772,834 ======== ========
Note A is secured by two life insurance policies and proceeds from the surplus debenture between CICA and the Company. Note B is secured by computer equipment. (7) STOCKHOLDERS' EQUITY AND RESTRICTIONS The two classes of stock of Citizens are equal in all respects, except (a) the Class B common stock elects a simple majority of the Board of Directors of Citizens and the Class A common stock elects the remaining directors; and (b) each Class A share receives twice the cash dividends paid on a per share basis to the Class B common stock. Generally, the net assets of the insurance subsidiaries available for transfer to the Company are limited to the greater of the subsidiary net gain from operations during the preceding year or 10% of the subsidiary net statutory surplus as of the end of the preceding year as determined in accordance with accounting practices prescribed or permitted by insurance regulatory authorities. Payments of dividends in excess of such amounts would generally require approval by the regulatory authorities. Based upon statutory net gain from operation and surplus of the individual insurance companies as of and for the year ended December 31, 1996, approximately $1,640,000 of dividends could be paid to the Company without prior regulatory approval. CICA, ALLIC, and CILIC have calculated their risk based capital (RBC) in accordance with the National Association of Insurance Commissioners' Model Rule and the RBC rules as adopted by their state of domicile, Colorado, Louisiana, and Illinois respectively. The RBC as calculated exceeded levels requiring company or regulatory action. -61- 62 (8) STOCK OPTIONS During 1989, the Company entered into an agreement granting Stephen B. Booke, a financial public relations consultant providing services to the Company, the right and option to purchase 100,000 shares of Class A no par common stock of the Company at $2.50 per share, the fair market value of the common stock at the date of the agreement. Such option is for authorized but unissued shares at the date of the agreement. The option which would have expired on February 8, 1994 was extended for an additional 36 months during 1993. Transfer of this option is limited by the agreement. During 1996, 41,500 shares were issued in conjunction with the exercise of this option. (9) ACQUISITION, MERGER AND PROPOSED ACQUISITION The IIH agreement closed on March 12, 1996 and provided that Investors' shareholders would receive one share of Citizens' Class A Common Stock for each eight shares of Investors Common Stock owned. Additionally, Citizens acquired all shares of Central Investors Life Insurance Company (a 94% owned subsidiary of Investors) not already owned by Investors, based upon an exchange ratio of one share of Citizens' Class A common stock for each four shares of Central Investors owned. The acquisition of these two companies involved the issuance of approximately 171,000 of Citizens' Class A shares which was accounted for as a purchase. On October 28, 1996, CICA 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 CICA, American Investment shareholders will receive 1 share of Citizens, Inc. Class A Common Stock for each 7.2 shares of American Investment Common Stock owned. Registrant 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 the Company's system. The agreement is subject to approval by American Investment's shareholders and regulatory authorities. The Mississippi Department of Insurance held a public hearing on March 6, 1997 to consider the matter. 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 ALFC agreement provided that following the acquisition by Citizens, ALFC shareholders would receive 1.10 shares of Citizens' Class A ALFC for each share of ALFC Common Stock owned and 2.926 shares of -62- 63 Citizens' Class A Common Stock for each one share of AFLC Preferred Stock owned. Citizens issued approximately 2.3 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 transaction was consummated on September 14, 1995. (10) CONTINGENCIES The Company is a party to various legal proceedings incidental to its business. Contingent liabilities that might arise from litigation are not considered material in relation to the financial position of the Company. Reserves for claims payable are based on the expected claim amount to be paid after a case by case review of the facts and circumstances relating to each claim. A contingency exists with regard to these reserves until such time as the claims are adjudicated and paid. (11) INTERNATIONAL SALES A significant portion of the Company's business is derived through sales in Latin America. Approximately 74%, 64% and 77% of premiums recorded in the 1996, 1995, and 1994 consolidated statements of operations, respectively, represent policies sold to residents of Central and South America. Sales in Argentina and Columbia represented approximately 38% and 18% of reported premiums in 1996, 40% and 19% in 1995, and 49% and 23% in 1994, respectively. 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. (12) INCOME TAXES A reconciliation of Federal income tax expense computed by applying the Federal income tax rate of 34% to income before Federal income tax expense for the years ended December 31, 1996, 1995 and 1994 follows:
1996 1995 1994 ----------- ----------- ----------- Computed normal tax expense $ 1,230,470 $ 1,275,533 $ 1,960,743 Small life insurance company deduction (472,541) (423,084) (437,489) Change in valuation allowance (10,097) (62,355) -- Small life deduction rate change 218,438 -- -- Amortization of excess of costs over net assets acquired 331,373 109,041 63,228 Other 107,662 102,221 5,851 ----------- ----------- ----------- Federal income tax expense $ 1,405,305 $ 1,001,356 $ 1,592,333 =========== =========== ===========
Income tax expense for the years ended December 31, 1996, 1995 and 1994 consists of: -63- 64
1996 1995 1994 ----------- ----------- ----------- Current $ 1,812,531 $ 1,982,424 $ 1,975,528 Deferred (407,226) (981,068) (383,195) ----------- ----------- ----------- $ 1,405,305 $ 1,001,356 $ 1,592,333 =========== =========== ===========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are presented below.
1996 1995 ------------ ------------ Deferred tax assets: Future policy benefit reserves $ 11,027,119 $ 10,804,429 Net operating loss carryforwards 762,809 614,071 Investments, available for sale 365,843 -- Other 836,098 1,007,636 ------------ ------------ Total gross deferred tax assets 12,991,869 12,426,136 Less valuation allowance 545,860 555,957 ------------ ------------ Net deferred tax assets 12,446,009 11,870,179 ------------ ------------ Deferred tax liabilities: Deferred policy acquisition costs 9,257,148 9,315,657 Cost of insurance acquired 2,454,662 2,557,761 Investments available for sale -- 757,423 Other 1,576,449 1,612,080 ------------ ------------ Total gross deferred tax liabilities 13,288,259 14,242,921 ------------ ------------ Net deferred tax liability $ (842,250) $ (2,372,742) ============ ============
The Company has established a valuation allowance for net operating losses of ALFC and IIH which may not be used prior to their expiration. The Company and its subsidiaries have net operating losses at December 31, 1996 available to offset future taxable income of approximately $2,243,557 for Federal income tax and $227,000 for Federal alternative minimum tax purposes which expire through 2008. The net operating loss carryforward is subject to limitations under Section 382 of the Internal Revenue Code. At December 31, 1996, the Company had accumulated approximately $3,291,143 in its "policyholders' surplus account." This is a special memorandum tax account into which certain amounts not previously taxed, under prior tax laws, were accumulated. No new additions will be made to this account. Federal income taxes will become payable thereon at the then current tax rate (a) when and if distributions to the shareholder, other than stock dividends and other limited exceptions, are made in excess of the accumulated previously taxed income; or (b) when a company ceases to be a life insurance company as defined by the Internal Revenue Code and such termination is not due to another life insurance company acquiring its assets in a nontaxable transaction. The Company does not anticipate any transactions that would cause any part of this amount to become taxable. However, should the balance at December 31, 1996 become taxable, the tax computed at present rates would be approximately $1,119,000. -64- 65 (13) FAIR VALUE OF FINANCIAL INSTRUMENTS Estimates of fair values are made at a specific point in time, based on relevant market prices and information about the financial instrument. The estimated fair values of financial instruments presented below are not necessarily indicative of the amounts the Company might realize in actual market transactions. The carrying amount and fair value for the financial assets and liabilities on the consolidated balance sheets at each year-end were:
1996 1995 --------------------------- --------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------------ ------------ ------------ ------------ Financial assets: Fixed maturities $115,350,306 114,940,050 $105,101,336 105,164,551 Equity securities 50,155 50,155 -- -- Cash and short-term 6,285,383 6,285,383 7,248,853 7,248,853 investments Mortgage Loans 1,672,522 1,672,522 1,910,608 1,910,608 Student Loans 298,683 298,683 333,387 333,387 Financial Liabilities: Note Payable 489,166 489,166 772,834 772,834
Fair values for fixed income securities and equity securities are based on quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other assumptions, including the discount rate and estimates of future cash flows. Mortgage loans are secured principally by residential properties. Weighted average interest rate for these loans as of December 31, 1996, was approximately 9.6% with maturities ranging from one to fifteen years. Management believes that reported amounts approximate fair value. Student loans are guaranteed by the government. Weighted average interest rate for these loans as of December 31, 1996, was approximately 7.9%. Management believes that the reported amounts approximate fair value as these loans are sold as soon as possible. The carrying value of the note payable approximates fair value as the interest rate charged on the note payable is indexed with the prime rate. Policy loans have a weighted average interest rate of 7.6% as of December 31, 1996 and 1995 and have no specified maturity dates. The aggregate market value of policy loans approximates the carrying value reflected on the consolidated balance sheet. These loans typically carry an interest rate that is tied to the crediting rate applied to the related policy -65- 66 and contract reserves. Policy loans are an integral part of the life insurance policies which the Company has in force and cannot be valued separately. For cash, and short-term investments, accrued investment income, amounts recoverable from reinsurers, other assets, federal income tax payable and receivable, dividend accumulations, commissions payable, amounts held on deposit, and other liabilities, the carrying amounts approximate fair value because of the short maturity of such financial instruments. (14) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following table contains selected unaudited consolidated financial data for each quarter.
1996 ------------------------------------------------------------ FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER ------------ ------------ ------------ ------------ Revenues $ 17,666,077 $ 16,976,294 $ 15,484,789 $ 13,695,000 Expenses 16,221,781 16,093,457 14,936,524 12,951,367 Other (542,568) (237,302) (366,799) (258,636) Net income 901,728 645,535 181,466 484,997 Net income per share .04 .03 .01 .03
1995 ------------------------------------------------------------ FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER ------------ ------------ ------------ ------------ Revenues $ 16,115,722 $ 13,420,798 $ 12,872,679 $ 10,862,138 Expenses 15,659,326 11,727,114 11,488,128 10,497,876 Other (61,739) (31,757) (19,262) (28,407) Net income 558,290 901,266 1,017,773 272,883 Net income per share .03 .05 .06 .02
1994 ------------------------------------------------------------ FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER ------------ ------------ ------------ ------------ Revenues $ 13,752,088 $ 13,526,681 $ 12,114,056 $ 9,763,884 Expenses 11,982,416 11,810,114 10,461,651 9,190,926 Other (160,527) 74,999 (358,273) 499,090 Net income 878,741 1,447,695 929,361 918,761 Net income per share 0.04 0.09 0.06 0.06
-66- 67 SCHEDULE II CITIZENS, INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT CITIZENS, INC. (PARENT COMPANY) BALANCE SHEETS DECEMBER 31, 1996 AND 1995
1996 1995 ------------ ------------ Assets Investment in subsidiaries 64,241,647 63,481,741 Accrued investment income 20,089 24,346 Real estate 356,339 287,979 Cash 1,318,221 884,241 Notes receivable (1) 521,686 673,953 Other assets 1,073,825 680,502 ------------ ------------ $ 67,531,807 $ 66,032,762 ============ ============ Liabilities and Stockholders' Equity Liabilities: Notes payable $ 466,667 $ 533,333 Accrued expense and other 182,124 786,439 ------------ ------------ $ 648,791 $ 1,319,772 Stockholders' equity: Common stock: Class A $ 45,941,552 $ 44,007,339 Class B 283,262 283,262 Retained earnings 23,430,634 21,216,908 Unrealized investment gain (loss) of securities held by subsidiaries, net (710,166) 1,267,747 Treasury stock (2,062,266) (2,062,266) ------------ ------------ 66,883,016 64,712,990 ------------ ------------ $ 67,531,807 $ 66,032,762 ============ ============
(1) Eliminated in consolidation. See accompanying independent auditor's report. -67- 68 SCHEDULE II, CONTINUED CITIZENS, INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT CITIZENS, INC. (PARENT COMPANY) STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996 AND 1995 AND 1994
1996 1995 1994 ----------- ----------- ----------- Revenues: Management service fees (1) $10,428,468 $ 8,068,030 $ 6,749,976 Investment income (1) 83,957 118,103 131,933 Other 2,357 11,551 7,691 Realized (gain) loss 151,334 (1,573) 147,691 ----------- ----------- ----------- 10,666,116 8,196,111 7,037,291 ----------- ----------- ----------- Expenses: General 9,374,706 7,710,834 $ 6,189,677 Interest 34,853 42,113 20,583 Taxes 447,450 327,815 263,917 ----------- ----------- ----------- $ 9,857,009 $ 8,080,762 $ 6,474,177 ----------- ----------- ----------- Income (loss) before equity in income of unconsolidated subsidiaries 809,107 115,349 563,114 Equity in income of unconsolidated subsidiaries 1,404,619 2,634,863 3,611,444 ----------- ----------- ----------- Net income $ 2,213,726 $ 2,750,212 $ 4,174,558 =========== =========== ===========
(1) Eliminated in consolidation. See accompanying independent auditor's report. -68- 69 SCHEDULE II, CONTINUED CITIZENS, INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT CITIZENS, INC. (PARENT COMPANY) STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 2,213,726 $ 2,750,212 $ 4,174,558 Adjustments to reconcile net loss to net cash used by operating activities: Realized (gains) loss on sales of investments (151,334) -- 313,796 Depreciation -- -- 36,214 Equity in net income of unconsolidated subsidiaries (795,318) (3,871,812) (3,784,819) Accrued expenses and other liabilities (604,315) 514,447 (236,873) Accrued investment income 4,257 2,243 1,900 Other assets (393,323) 2,951 (243,866) ----------- ----------- ----------- Net cash provided (used) by operating activities 273,693 (601,959) 260,910 ----------- ----------- ----------- Cash flows from investing activities: Capital contribution to subsidiary (400,000) -- (5,200,000) Sale of equity securities -- -- 174,761 Payments on notes receivable 152,267 52,075 51,022 Sale of real estate 82,974 154,169 216,168 ----------- ----------- ----------- Net cash provided (used) by investing activities (164,759) 206,244 (4,758,049) ----------- ----------- ----------- Cash flows from financing activities: Sale of common stock, net 391,712 381,485 5,371,959 Payment on notes payable (66,666) (73,849) (343,746) ----------- ----------- ----------- Net cash provided by financing activities 325,046 307,636 5,028,213 ----------- ----------- ----------- Net increase (decrease) in cash 433,980 (88,079) 531,074 Cash at beginning of year 884,241 972,320 441,246 ----------- ----------- ----------- Cash at end of year $ 1,318,221 $ 884,241 $ 972,320 =========== =========== ===========
See accompanying independent auditor's report. -69- 70 SCHEDULE IV CITIZENS, INC. AND SUBSIDIARIES REINSURANCE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
CEDED ASSUMED PERCENTAGE GROSS TO OTHER FROM OTHER NET OF AMOUNT AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET -------------- -------------- -------------- -------------- ------------ Year ended December 31, 1996: Life insurance in force $2,213,017,000 $ 296,378,000 $ 304,380,000 $2,221,019,000 13.7% ============== ============== ============== ============== Premiums: Life insurance 51,338,427 2,511,318 309,953 49,137,062 0.6% Accident and health insurance 4,111,969 71,281 0 4,040,688 -% -------------- -------------- -------------- -------------- Total premiums $ 55,450,396 2,582,599 309,953 53,177,750 0.6% ============== ============== ============== ============== Year ended December 31, 1995: Life insurance in force $1,866,954,000 $ 290,677,000 $ 285,001,000 $1,861,278,000 15.3% ============== ============== ============== ============== Premiums: Life insurance 47,361,742 2,241,111 306,256 45,426,887 0.7% Accident and health insurance 698,206 0 0 698,206 -- -------------- -------------- -------------- -------------- Total premiums $ 48,059,948 2,241,111 306,256 46,125,093 0.7% ============== ============== ============== ============== Year ended December 31, 1994: Life insurance in force $1,759,915,000 $ 285,104,000 $ 384,794,000 $1,859,605,000 20.7% ============== ============== ============== ============== Premiums: Life insurance 45,294,285 2,309,544 541,370 43,526,111 1.2% Accident and health insurance 259,378 128 0 259,250 -- -------------- -------------- -------------- -------------- Total premiums $ 45,553,663 2,309,672 541,370 43,785,361 1.2% ============== ============== ============== ==============
See accompanying independent auditor's report. -70- 71 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. CITIZENS, INC. Date: April 9, 1997 By: /s/ Mark A. Oliver ----------------------------------- Mark A. Oliver, President By: /s/ William P. Barnhill ----------------------------------- William P. Barnhill, Treasurer and Principal Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Mark A. Oliver, April 9, 1997 /s/ Mark A. Oliver, April 9, 1997 - --------------------------------- --------------------------------- Mark A. Oliver, Director Harold E. Riley, Chairman of the Board and Director By Mark A. Oliver, Attorney /s/ Mark A. Oliver, April 9, 1997 /s/ Mark A. Oliver, April 9, 1997 - --------------------------------- --------------------------------- Ralph M. Smith, Director Joe R. Reneau, Director By Mark A. Oliver, Attorney By Mark A. Oliver, Attorney /s/ Mark A. Oliver, April 9, 1997 - --------------------------------- --------------------------------- Flay F. Baugh, Director Timothy T. Timmerman, Director By Mark A. Oliver, Attorney /s/ Mark A. Oliver, April 9, 1997 /s/ Mark A. Oliver, April 9, 1997 - --------------------------------- --------------------------------- Rick D. Riley, Director Steve Shelton, Director By Mark A. Oliver, Attorney By Mark A. Oliver, Attorney /s/ Mark A. Oliver, April 9, 1997 - --------------------------------- T. Roby Dollar, Director By Mark A. Oliver, Attorney -71- 72 INDEX TO EXHIBITS
EXHIBIT EXHIBIT NO. DESCRIPTION PAGE NO. ----------- ----------- -------- (1) Underwriting Agreement N/A (2) Plan of acquisition, reorganization, arrangement, liquidation or succession (e) (3) 3.1 Articles of Incorporation; as amended (d) 3.2 Bylaws (b) (4) Instruments defining the rights of security holders, including indentures N/A (5) Opinion re: Legality N/A (6) (Removed and Reserved) N/A (7) (Removed and Reserved) N/A (8) Opinion re: Tax Matters N/A (9) Voting Trust Agreement N/A (10) Material Contracts 10.1 Automatic Yearly Renewable term (NR) Life Reinsurance Agreement between Citizens Insurance Company of America and The Centennial Life Insurance Company dated March 1, 1982 (a) 10.2 Stock Purchase Agreement between Citizens Insurance Company of America and Citizens, Inc. (a) 10.3 Plan and Agreement of Merger and Exchange by and among Insurance Investors & Holding Co., Central Investors Life Insurance Company of Illinois, Citizens, Inc. and Citizens Acquisition, Inc. (g) 10.4 Self-Administered Automatic Reinsurance Agreement - Citizens Insurance Company of America and Riunione Adriatica di Sicurta, S.p.A. (h) 10.5 Plan and Agreement of Exchange dated October 28, 1996 between Citizens, Inc. and American Investment Network, Inc. (h) 10.6 Agreement and Plan of Merger dated October 31, 1996 between Citizens Insurance Company of America, CICA Acquisition, Inc., and First American Investment Corporation (h) 10.7 Plan and Agreement of Merger dated November 22, 1996 between Citizens, Inc. and American Liberty Financial Corporation, as amended Filed herewith 10.8 Plan and Agreement of Merger dated November 22, 1996 between Citizens Insurance Company of America and American Liberty Life Insurance Company, as amended Filed herewith 10.9 Bulk Accidental Death Benefit Reinsurance Agreement between Connecticut General Life Insurance Company and Citizens Insurance Company of America, as amended Filed herewith (11) Statement re: Computation of per share earnings N/A (12) Statement re: Computation of ratios N/A (13) Annual report to security holders, Form 10-Q or quarterly report to security holders N/A (14) (Removed and Reserved) N/A (15) Letter re: Unaudited interim financial statements N/A (16) Letter re: Change in certifying accountant N/A (17) Letter re: Director resignation N/A (18) Letter re: Change in accounting principles N/A (19) Report furnished to security holders N/A (20) Other documents or statements to security holders N/A (21) Subsidiaries of the registrant (i) (22) Published report regarding matters submitted to a vote of security holders N/A (23) Consents of expert and counsel (i) (24) Power of Attorney See signature page (25) Statement of eligibility of trustee N/A (26) Invitations for competitive bids N/A (27) Financial Data Schedule (i) (28) (Removed and Reserved) N/A (99) Additional Exhibits N/A
- ---------- (a) Filed as a part of the Amended No. 1 to Registration Statement on Form S-4, SEC File No. 33--4753, filed on or about June 19, 1992. (b) Filed with or referenced in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. (c) Filed with or referenced in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference. (d) Filed with or referenced in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. (e) Filed with or referenced in the Registrant's Current Report on Form 8-K dated December 9, 1994 and incorporated herein by reference. (f) Filed as a part of the Registration Statement on Form S-4, SEC File No. 33--59039, filed on or about May 2, 1995. (g) Filed as a part of the Registration Statement on Form S-4, SEC File No. 33--63275, filed on or about October 6, 1995. (h) Filed as a part of the Registration Statement on Form S-4, SEC File No. 333--16163, filed on or about November 14, 1996. (i) Filed with or referenced in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. EX-10.7 2 PLAN & AGREEMENT OF MERGER DATED 11-22-96 1 EXHIBIT 10.7 PLAN AND AGREEMENT OF MERGER This Plan and Agreement of Merger ("Agreement") is entered into between AMERICAN LIBERTY FINANCIAL CORPORATION, a corporation organized under the laws of the State of Louisiana ("ALFC"), and CITIZENS, INC., a corporation organized under the laws of the State of Colorado ("Citizens"). WITNESSETH WHEREAS, Citizens and ALFC, a subsidiary of Citizens, desire to streamline operations and corporate structure by merging ALFC into Citizens; NOW, THEREFORE, the parties agree as follows. ARTICLE I The Merger 1.1 Subject to the terms and conditions set forth herein, ALFC will be merged into Citizens (the "Merger") with Citizens being the corporation surviving the Merger (the "Surviving Corporation"). The Articles of Merger and Certificate of Merger, in the forms attached hereto subject to any modifications as may be authorized or required in accordance with applicable law (collectively the "Merger Filings"), shall be completed, executed and filed as contemplated by this Agreement as soon as possible after all regulatory and shareholder approvals are obtained in accordance with law. 1.2 The effect of the Merger shall be as follows: (i) The Merger shall become effective (the "Effective Time") upon the later of (i) the approval and filing of the Merger Filings by and with the Departments of Insurance and Secretaries of State of Colorado and Louisiana, or (ii) the time and date specified in such Merger Filings. (ii) The Articles of Incorporation and Bylaws of Citizens shall be the Articles of Incorporation and Bylaws of the Surviving Corporation. The directors and officers of Citizens shall be the directors and officers of the Surviving Corporation. (iii) At and as of the Effective Time, (a) all treasury and outstanding shares of capital stock of ALFC shall be canceled regardless of actual surrender of the certificates therefor, and (b) all treasury and outstanding shares of capital stock of Citizens shall remain unchanged in all respects. -1- __________/__________ Initial Initial 2 1.3 This Agreement is subject in all respects to the provisions of the applicable insurance laws and shall not become effective until approval is obtained from the Departments of Insurance of the States of Colorado and Louisiana in accordance with the provisions of the laws of said states. Subject to such approval, this Agreement shall be effective for accounting purposes as of 12:01 a.m., on January 1, 1997. ARTICLE III Pre-Merger Obligations 3.1 As soon as practicable, the parties shall file with the Departments of Insurance in Colorado and Louisiana all of the documents required by applicable law. 3.2 At the earliest practicable date therefor without objection by applicable governmental authorities, this Agreement shall be duly submitted to vote by the shareholders of the parties to the extent and in the manner required by applicable law. ARTICLE IV Conditions to the Merger The following are conditions precedent to the Merger: 4.1 This Agreement and the transactions contemplated herein shall have been duly and validly authorized, approved and adopted at meetings of the shareholders of Citizens and ALFC to the extent required by, and in accordance with, the applicable laws. 4.2 This Agreement and the transactions contemplated herein shall have been approved by the Departments of Insurance of the States of Colorado and Louisiana in accordance with the provisions of the laws of said states. 4.3 No action, suit or proceeding shall have been instituted or shall have been threatened before any court or other governmental body or by any public authority to restrain, enjoin or prohibit the transactions contemplated herein, or which might subject any of the parties hereto or their directors or officers to any material liability, fine, forfeiture or penalty on the grounds that the transactions contemplated hereby, the parties hereto or their directors or officers, have violated any applicable law or regulation, or have otherwise acted improperly in connection with the transactions contemplated hereby. -2- __________/__________ Initial Initial 3 ARTICLE V Termination and Amendment Subject to compliance with applicable laws, at any time (whether before or after approval by shareholders of ALFC and/or Citizens): 5.1 The Board of Directors of Citizens or ALFC may terminate this Agreement. 5.2 The Board of Directors of Citizens or ALFC may amend the terms and conditions of this Agreement and/or the exhibits hereto. ARTICLE VI Miscellaneous 6.1 The Surviving Corporation may take any action (including executing and delivering any document) after the Effective Time in the name and on behalf of either Citizens or ALFC in order to carry out and effectuate the transactions contemplated by this Agreement. 6.2 This Agreement embodies the entire agreement between the parties, and there have been and are no agreements, representations or warranties among the parties other than those set forth herein or those provided for herein. Any reference to federal, state, local, or foreign statutes or laws shall be deemed also to refer to all rules and regulations promulgated thereunder unless the context otherwise requires. The word "including" shall mean including without limitation. The exhibits identified in this Agreement are incorporated herein by reference and made a part hereof. To facilitate the execution of this Agreement, any number of counterparts hereof may be executed, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one instrument. Each of the parties hereto will pay its own fees and expenses incurred in connection with the transactions contemplated by this Agreement. 6.3 This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Colorado without giving effect to any choice or conflict of law provision or rule (whether of the State of Colorado or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Colorado. -3- __________/__________ Initial Initial 4 IN WITNESS WHEREOF, the parties have set their hands and seals this 22nd day of November, 1996. CITIZENS, INC. AMERICAN LIBERTY FINANCIAL CORPORATION By: /s/ HAROLD E. RILEY By: /s/ HAROLD E. RILEY Harold E. Riley, Chairman Harold E. Riley, President -4- __________/__________ Initial Initial 5 CERTIFICATE OF MERGER Pursuant to the provisions of the Louisiana Business Corporation Law, AMERICAN LIBERTY FINANCIAL CORPORATION, a corporation organized under the laws of the State of Louisiana ("ALFC"), and CITIZENS, INC., a corporation organized under the laws of the State of Colorado ("Citizens"), adopt the following Certificate of Merger: First: In accordance with Section 12:112 of the Louisiana Business Corporation Law, a plan and agreement of merger has been approved, adopted, certified, executed and acknowledged by ALFC and Citizens. Second: At and as of the effective time set forth below, (a) ALFC will be merged into Citizens with Citizens being the corporation surviving the merger (the "Surviving Corporation"), (b) all treasury and outstanding shares of capital stock of ALFC shall be canceled regardless of actual surrender of the certificates therefor, and (c) all treasury and outstanding shares of capital stock of Citizens shall remain unchanged in all respects. Third: The Articles of Incorporation of Citizens shall be the Articles of Incorporation of the Surviving Corporation. Fourth: The executed plan and agreement of merger is on file at Surviving Corporation's principal place of business located at 400 East Anderson Lane, Austin, Texas 78752. A copy of the plan and agreement of merger will be furnished by Citizens, on request and without cost, to any shareholder of any corporation that is a party to the merger. Fifth: The merger will become effective on January 1, 1997 at 12:01 a.m. unless the merger is abandoned and a statement of abandonment is filed in accordance with applicable law. IN WITNESS WHEREOF, the undersigned officers of each corporation, duly authorized by the Boards of Directors of each corporation, have signed this Certificate of Merger as of November 22, 1996. -5- __________/__________ Initial Initial 6 CITIZENS, INC. By: /s/ HAROLD E. RILEY Harold E. Riley, Chairman AMERICAN LIBERTY FINANCIAL CORPORATION By: /s/ HAROLD E. RILEY Harold E. Riley, President -6- __________/__________ Initial Initial 7 CERTIFICATE OF SECRETARY The undersigned duly elected and qualified Secretary of American Liberty Financial Corporation does hereby certify that the plan and agreement of merger referred to herein, after being first duly signed by the President on behalf of American Liberty Financial Corporation, as authorized by its Board of Directors, was approved by the shareholder of the merged corporation in the manner required by the Louisiana Business Corporation Law. AMERICAN LIBERTY FINANCIAL CORPORATION November 22, 1996 By: /s/ MARK A. OLIVER ------------------------------------- Mark A. Oliver, Secretary CERTIFICATE OF SECRETARY The undersigned duly elected and qualified Secretary of Citizens, Inc. does hereby certify that the plan and agreement of merger referred to herein was duly signed by the Chairman on behalf of Citizens, Inc., as authorized by its Board of Directors. As the surviving corporation, shareholder approval was not required due to satisfaction of all conditions of Section 12:112E(1) of the Louisiana Business Corporation Law. CITIZENS, INC. November 22, 1996 By: /s/ MARK A. OLIVER ------------------------------------ Mark A. Oliver, Secretary -7- __________/__________ Initial Initial 8 SIGNATURE OF OFFICERS Pursuant to the Louisiana Business Corporation Law, the undersigned, Harold E. Riley, the duly elected and qualified President of American Liberty Financial Corporation, hereby executes this Certificate of Merger on behalf of American Liberty Financial Corporation. AMERICAN LIBERTY FINANCIAL CORPORATION November 22, 1996 By: /s/ HAROLD E. RILEY ---------------------------------- Harold E. Riley, President STATE OF TEXAS COUNTY OF TRAVIS BEFORE ME, the undersigned authority, personally came and appeared, Harold E. Riley, duly authorized to act on behalf of American Liberty Financial Corporation, who declared he is duly authorized and did execute the foregoing Certificate of Merger on behalf of American Liberty Financial Corporation. IN WITNESS WHEREOF, the appearer, witnesses and I have hereunto affixed our signatures on November 22, 1996. WITNESSES: AMERICAN LIBERTY FINANCIAL CORPORATION By: /s/ HAROLD E. RILEY Harold E. Riley, President /s/ BRIDGET CANTWELL ----------------------------------- Bridget Cantwell, Notary Public -8- __________/__________ Initial Initial 9 SIGNATURE OF OFFICERS Pursuant to the Louisiana Business Corporation Law, the undersigned, Harold E. Riley, the duly elected and qualified Chairman of Citizens, Inc., hereby executes this Certificate of Merger on behalf of Citizens, Inc.. CITIZENS, INC. November 22, 1996 By: /s/ HAROLD E. RILEY ---------------------------------- Harold E. Riley, Chairman STATE OF TEXAS COUNTY OF TRAVIS BEFORE ME, the undersigned authority, personally came and appeared, Harold E. Riley, duly authorized to act on behalf of Citizens, Inc., who declared he is duly authorized and did execute the foregoing Certificate of Merger on behalf of Citizens, Inc.. IN WITNESS WHEREOF, the appearer, witnesses and I have hereunto affixed our signatures on November 22, 1996. WITNESSES: CITIZENS, INC. By: /s/ HAROLD E. RILEY Harold E. Riley, Chairman /s/ BRIDGET CANTWELL ----------------------------------- Bridget Cantwell, Notary Public -9- __________/__________ Initial Initial 10 ARTICLES OF MERGER Pursuant to the provisions of the Colorado Business Corporation Act (the "Act"), AMERICAN LIBERTY FINANCIAL CORPORATION, a corporation organized under the laws of the State of Louisiana ("ALFC"), and CITIZENS, INC., a corporation organized under the laws of the State of Colorado ("Citizens"), adopt the following Articles of Merger: First: In accordance with Section 7-111-103 of the Act, a plan and agreement of merger has been approved, adopted and executed by ALFC and Citizens. Second: Pursuant to Section 7-111-103(7) of the Act, approval by the shareholders of Citizens, the surviving corporation, is not required. The plan and agreement of merger was approved by the shareholders of ALFC with the number of votes cast for the plan by each voting group entitled to vote separately on the merger being sufficient for approval by that voting group. Third: At and as of the effective time set forth below, (a) ALFC will be merged into Citizens with Citizens being the corporation surviving the merger (the "Surviving Corporation"), (b) all treasury and outstanding shares of capital stock of ALFC shall be canceled regardless of actual surrender of the certificates therefor, and (c) all treasury and outstanding shares of capital stock of Citizens shall remain unchanged in all respects. Fourth: The Articles of Incorporation of Citizens shall be the Articles of Incorporation of the Surviving Corporation. Fifth: The merger shall become effective on January 1, 1997 at 12:01 a.m. unless prior to such time the merger is abandoned and a statement of abandonment is filed in accordance with applicable law. Dated: November 22, 1996 CITIZENS, INC. AMERICAN LIBERTY FINANCIAL CORPORATION By: /s/ HAROLD E. RILEY By: /s/ HAROLD E. RILEY Harold E. Riley, Chairman Harold E. Riley, President -10- __________/__________ Initial Initial 11 AMENDMENT NO. 1 TO PLAN AND AGREEMENT OF MERGER This Amendment No. 1 ("Amendment") to the Plan and Agreement of Merger ("Agreement") is entered into between AMERICAN LIBERTY FINANCIAL CORPORATION, a corporation organized under the laws of the State of Louisiana ("ALFC"), and CITIZENS, INC., a corporation organized under the laws of the State of Colorado ("Citizens"). WITNESSETH WHEREAS, Article V of the Agreement permits the Citizens and ALFC Boards of Directors to amend the terms and conditions of the Agreement and the exhibits thereto; NOW, THEREFORE, the parties agree as follows. 1. AMENDMENT OF SECTION 1.2. Sections 1.2(i) is amended in its entirety to read as follows: "(i) For accounting purposes, the effective time ("Effective Time") of the Merger shall be as of 12:01 a.m., on January 1, 1997." 2. DELETION OF SECTION 1.3. Section 1.3 is deleted. 3. AMENDMENT OF CERTIFICATE OF MERGER AND ARTICLES OF MERGER. The Articles and Certificate of Merger attached to the Agreement are amended to delete all provisions defining the effective time of the merger. All remaining references to dates in the Certificate of Merger and the Articles of Merger are amended to reflect January 23, 1997. 4. SCOPE OF AMENDMENT. This Amendment embodies all of the changes to the Agreement as of the date hereof. Except as modified hereby, the Agreement remains in full force and effect. To facilitate execution, any number of counterparts hereof may be executed, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one instrument. IN WITNESS WHEREOF, the parties have executed this Amendment as of January 23, 1997. CITIZENS, INC. AMERICAN LIBERTY FINANCIAL CORPORATION By: /s/ HAROLD E. RILEY By: /s/ HAROLD E. RILEY Harold E. Riley, Chairman Harold E. Riley, President -1- __________/__________ Initial Initial EX-10.8 3 PLAN & AGREEMENT OF MERGER DATED 11-22-96 1 EXHIBIT 10.8 PLAN AND AGREEMENT OF MERGER This Plan and Agreement of Merger ("Agreement") is entered into between AMERICAN LIBERTY LIFE INSURANCE COMPANY, a stock insurance company organized under the laws of the State of Louisiana ("ALLIC"), and CITIZENS INSURANCE COMPANY OF AMERICA, a stock insurance company organized under the laws of the State of Colorado ("CICA"). WITNESSETH WHEREAS, ALLIC and CICA, as indirect wholly owned subsidiaries of a common parent corporation, desire to streamline operations and corporate structure by merging ALLIC into CICA; NOW, THEREFORE, the parties agree as follows. ARTICLE I The Merger 1.1 Subject to the terms and conditions set forth herein, ALLIC will be merged into CICA (the "Merger") with CICA being the corporation surviving the Merger (the "Surviving Corporation"). The Articles of Merger and Certificate of Merger, in the forms attached hereto subject to any modifications as may be authorized or required in accordance with applicable law (collectively the "Merger Filings"), shall be completed, executed and filed as contemplated by this Agreement as soon as possible after all regulatory and shareholder approvals are obtained in accordance with law. 1.2 The effect of the Merger shall be as follows: (i) The Merger shall become effective (the "Effective Time") upon the later of (i) the approval and filing of the Merger Filings by and with the Departments of Insurance and Secretaries of State of Colorado and Louisiana, or (ii) the time and date specified in such Merger Filings. (ii) The Articles of Incorporation and Bylaws of CICA shall be the Articles of Incorporation and Bylaws of the Surviving Corporation. The directors and officers of CICA shall be the directors and officers of the Surviving Corporation. (iii) At and as of the Effective Time, (a) all treasury and outstanding shares of capital stock of ALLIC shall be canceled regardless of actual surrender of the certificates therefor, and (b) all treasury and outstanding shares of capital stock of CICA shall remain unchanged in all respects. -1- __________/__________ Initial Initial 2 1.3 This Agreement is subject in all respects to the provisions of the applicable insurance laws and shall not become effective until approval is obtained from the Departments of Insurance of the States of Colorado and Louisiana in accordance with the provisions of the laws of said states. Subject to such approval, this Agreement shall be effective for accounting purposes as of 12:01 a.m., on January 1, 1997. ARTICLE III Pre-Merger Obligations 3.1 As soon as practicable, the parties shall file with the Departments of Insurance in Colorado and Louisiana all of the documents required by applicable law. 3.2 At the earliest practicable date therefor without objection by applicable governmental authorities, this Agreement shall be duly submitted to vote by the shareholders of the parties to the extent and in the manner required by applicable law. ARTICLE IV Conditions to the Merger The following are conditions precedent to the Merger: 4.1 This Agreement and the transactions contemplated herein shall have been duly and validly authorized, approved and adopted at meetings of the shareholders of CICA and ALLIC to the extent required by, and in accordance with, the applicable laws. 4.2 This Agreement and the transactions contemplated herein shall have been approved by the Departments of Insurance of the States of Colorado and Louisiana in accordance with the provisions of the laws of said states. 4.3 No action, suit or proceeding shall have been instituted or shall have been threatened before any court or other governmental body or by any public authority to restrain, enjoin or prohibit the transactions contemplated herein, or which might subject any of the parties hereto or their directors or officers to any material liability, fine, forfeiture or penalty on the grounds that the transactions contemplated hereby, the parties hereto or their directors or officers, have violated any applicable law or regulation, or have otherwise acted improperly in connection with the transactions contemplated hereby. -2- __________/__________ Initial Initial 3 ARTICLE V Termination and Amendment Subject to compliance with applicable laws, at any time (whether before or after approval by shareholders of ALLIC and/or CICA): 5.1 The Board of Directors of CICA or ALLIC may terminate this Agreement. 5.2 The Board of Directors of CICA or ALLIC may amend the terms and conditions of this Agreement and/or the exhibits hereto. ARTICLE VI Miscellaneous 6.1 The Surviving Corporation may take any action (including executing and delivering any document) after the Effective Time in the name and on behalf of either CICA or ALLIC in order to carry out and effectuate the transactions contemplated by this Agreement. 6.2 This Agreement embodies the entire agreement between the parties, and there have been and are no agreements, representations or warranties among the parties other than those set forth herein or those provided for herein. Any reference to federal, state, local, or foreign statutes or laws shall be deemed also to refer to all rules and regulations promulgated thereunder unless the context otherwise requires. The word "including" shall mean including without limitation. The exhibits identified in this Agreement are incorporated herein by reference and made a part hereof. To facilitate the execution of this Agreement, any number of counterparts hereof may be executed, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one instrument. Each of the parties hereto will pay its own fees and expenses incurred in connection with the transactions contemplated by this Agreement. 6.3 This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Colorado without giving effect to any choice or conflict of law provision or rule (whether of the State of Colorado or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Colorado. -3- __________/__________ Initial Initial 4 IN WITNESS WHEREOF, the parties have set their hands and seals this 22nd day of November, 1996. CITIZENS INSURANCE COMPANY AMERICAN LIBERTY LIFE OF AMERICA INSURANCE COMPANY By: /s/ HAROLD E. RILEY By: /s/ HAROLD E. RILEY Harold E. Riley, Chairman Harold E. Riley, President -4- __________/__________ Initial Initial 5 CERTIFICATE OF MERGER Pursuant to the provisions of the Louisiana Business Corporation Law, AMERICAN LIBERTY LIFE INSURANCE COMPANY, a stock insurance company organized under the laws of the State of Louisiana ("ALLIC"), and CITIZENS INSURANCE COMPANY OF AMERICA, a stock insurance company organized under the laws of the State of Colorado ("CICA"), adopt the following Certificate of Merger: First: In accordance with Section 12:112 of the Louisiana Business Corporation Law, a plan and agreement of merger has been approved, adopted, certified, executed and acknowledged by ALLIC and CICA. Second: At and as of the effective time set forth below, (a) ALLIC will be merged into CICA with CICA being the corporation surviving the merger (the "Surviving Corporation"), (b) all treasury and outstanding shares of capital stock of ALLIC shall be canceled regardless of actual surrender of the certificates therefor, and (c) all treasury and outstanding shares of capital stock of CICA shall remain unchanged in all respects. Third: The Articles of Incorporation of CICA shall be the Articles of Incorporation of the Surviving Corporation. Fourth: The executed plan and agreement of merger is on file at Surviving Corporation's principal place of business located at 400 East Anderson Lane, Austin, Texas 78752. A copy of the plan and agreement of merger will be furnished by CICA, on request and without cost, to any shareholder of any corporation that is a party to the merger. Fifth: The merger will become effective on January 1, 1997 at 12:01 a.m. unless the merger is abandoned and a statement of abandonment is filed in accordance with applicable law. -5- __________/__________ Initial Initial 6 IN WITNESS WHEREOF, the undersigned officers of each corporation, duly authorized by the Boards of Directors of each corporation, have signed this Certificate of Merger as of November 22, 1996. WITNESSES: CITIZENS INSURANCE COMPANY OF AMERICA By: /s/ HAROLD E. RILEY Harold E. Riley, Chairman AMERICAN LIBERTY LIFE INSURANCE COMPANY By: /s/ HAROLD E. RILEY Harold E. Riley, President -6- __________/__________ Initial Initial 7 CERTIFICATE OF SECRETARY The undersigned duly elected and qualified Secretary of American Liberty Life Insurance Company does hereby certify that the plan and agreement of merger referred to herein, after being first duly signed by the President on behalf of American Liberty Life Insurance Company, as authorized by its Board of Directors, was approved by the shareholder of the merged corporation in the manner required by the Louisiana Business Corporation Law. AMERICAN LIBERTY LIFE INSURANCE COMPANY November 22, 1996 By: --------------------------------- Mark A. Oliver, Secretary CERTIFICATE OF SECRETARY The undersigned duly elected and qualified Secretary of Citizens Insurance Company of America does hereby certify that the plan and agreement of merger referred to herein was duly signed by the Chairman on behalf of Citizens Insurance Company of America, as authorized by its Board of Directors. As the surviving corporation, shareholder approval was not required due to satisfaction of all conditions of Section 12:112E(1) of the Louisiana Business Corporation Law. CITIZENS INSURANCE COMPANY OF AMERICA November 22, 1996 By: --------------------------------- Mark A. Oliver, Secretary -7- __________/__________ Initial Initial 8 SIGNATURE OF OFFICERS Pursuant to the Louisiana Business Corporation Law, the undersigned, Harold E. Riley, the duly elected and qualified President of American Liberty Life Insurance Company, hereby executes this Certificate of Merger on behalf of American Liberty Life Insurance Company. AMERICAN LIBERTY LIFE INSURANCE COMPANY November 22, 1996 By: ------------------------------------------ Harold E. Riley, President, President STATE OF TEXAS COUNTY OF TRAVIS BEFORE ME, the undersigned authority, personally came and appeared, Harold E. Riley, duly authorized to act on behalf of American Liberty Life Insurance Company, who declared he is duly authorized and did execute the foregoing Certificate of Merger on behalf of American Liberty Life Insurance Company. IN WITNESS WHEREOF, the appearer, witnesses and I have hereunto affixed our signatures on November 22, 1996. WITNESSES: AMERICAN LIBERTY LIFE INSURANCE COMPANY By: - ------------------------ Harold E. Riley, President - ------------------------ ----------------------------------- Bridget Cantwell, Notary Public -8- __________/__________ Initial Initial 9 SIGNATURE OF OFFICERS Pursuant to the Louisiana Business Corporation Law, the undersigned, Harold E. Riley, the duly elected and qualified Chairman of Citizens Insurance Company of America, hereby executes this Certificate of Merger on behalf of Citizens Insurance Company of America. CITIZENS INSURANCE COMPANY OF AMERICA November 22, 1996 By: ------------------------------------ Harold E. Riley, Chairman STATE OF TEXAS COUNTY OF TRAVIS BEFORE ME, the undersigned authority, personally came and appeared, Harold E. Riley, duly authorized to act on behalf of Citizens Insurance Company of America, who declared he is duly authorized and did execute the foregoing Certificate of Merger on behalf of Citizens Insurance Company of America. IN WITNESS WHEREOF, the appearer, witnesses and I have hereunto affixed our signatures on November 22, 1996. WITNESSES: CITIZENS INSURANCE COMPANY OF AMERICA By: - ------------------------ Harold E. Riley, Chairman - ------------------------ ----------------------------------- Bridget Cantwell, Notary Public -9- __________/__________ Initial Initial 10 ARTICLES OF MERGER Pursuant to the provisions of the Colorado Business Corporation Act (the "Act"), AMERICAN LIBERTY LIFE INSURANCE COMPANY, a stock insurance company organized under the laws of the State of Louisiana ("ALLIC"), and CITIZENS INSURANCE COMPANY OF AMERICA, a stock insurance company organized under the laws of the State of Colorado ("CICA"), adopt the following Articles of Merger: First: In accordance with Section 7-111-103 of the Act, a plan and agreement of merger has been approved, adopted and executed by ALLIC and CICA. Second: Pursuant to Section 7-111-103(7) of the Act, approval by the shareholders of CICA, the surviving corporation, is not required. The plan and agreement of merger was approved by the shareholders of ALLIC with the number of votes cast for the plan by each voting group entitled to vote separately on the merger being sufficient for approval by that voting group. Third: At and as of the effective time set forth below, (a) ALLIC will be merged into CICA with CICA being the corporation surviving the merger (the "Surviving Corporation"), (b) all treasury and outstanding shares of capital stock of ALLIC shall be canceled regardless of actual surrender of the certificates therefor, and (c) all treasury and outstanding shares of capital stock of CICA shall remain unchanged in all respects. Fourth: The Articles of Incorporation of CICA shall be the Articles of Incorporation of the Surviving Corporation. Fifth: The merger shall become effective on January 1, 1997 at 12:01 a.m. unless prior to such time the merger is abandoned and a statement of abandonment is filed in accordance with applicable law. Dated: November 22, 1996 CITIZENS INSURANCE COMPANY AMERICAN LIBERTY LIFE OF AMERICA INSURANCE COMPANY By: By: Harold E. Riley, Chairman Harold E. Riley, President -10- __________/__________ Initial Initial 11 AMENDMENT NO. 1 TO PLAN AND AGREEMENT OF MERGER This Amendment No. 1 ("Amendment") to the Plan and Agreement of Merger ("Agreement") is entered into between AMERICAN LIBERTY LIFE INSURANCE COMPANY, a stock insurance company organized under the laws of the State of Louisiana ("ALLIC"), and CITIZENS INSURANCE COMPANY OF AMERICA, a stock insurance company organized under the laws of the State of Colorado ("CICA"). WITNESSETH WHEREAS, Article V of the Agreement permits the CICA and ALLIC Boards of Directors to amend the terms and conditions of the Agreement and the exhibits thereto; NOW, THEREFORE, the parties agree as follows. 1. AMENDMENT OF SECTION 1.2. Sections 1.2(i) is amended in its entirety to read as follows: "(i) For accounting purposes, the effective time ("Effective Time") of the Merger shall be as of 12:01 a.m., on January 1, 1997." 2. DELETION OF SECTION 1.3. Section 1.3 is deleted. 3. AMENDMENT OF CERTIFICATE OF MERGER AND ARTICLES OF MERGER. The Articles and Certificate of Merger are amended to (i) delete all provisions defining the effective time of the merger, (ii) delete all existing date references, and (iii) adopt the forms of Articles and Certificate of Merger incorporating such changes as are attached hereto. 4. SCOPE OF AMENDMENT. This Amendment embodies all of the changes to the Agreement as of the date hereof. Except as modified hereby, the Agreement remains in full force and effect. To facilitate execution, any number of counterparts hereof may be executed, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one instrument. IN WITNESS WHEREOF, the parties have executed this Amendment as of February 12, 1997. CITIZENS INSURANCE COMPANY AMERICAN LIBERTY LIFE OF AMERICA INSURANCE COMPANY By: /s/ HAROLD E. RILEY By: /s/ HAROLD E. RILEY Harold E. Riley, Chairman Harold E. Riley, President -1- __________/__________ Initial Initial 12 CERTIFICATE OF MERGER Pursuant to the provisions of the Louisiana Business Corporation Law, AMERICAN LIBERTY LIFE INSURANCE COMPANY, a stock insurance company organized under the laws of the State of Louisiana ("ALLIC"), and CITIZENS INSURANCE COMPANY OF AMERICA, a stock insurance company organized under the laws of the State of Colorado ("CICA"), adopt the following Certificate of Merger: First: In accordance with Section 12:112 of the Louisiana Business Corporation Law, a plan and agreement of merger has been approved, adopted, certified, executed and acknowledged by ALLIC and CICA. Second: At and as of the effective time set forth below, (a) ALLIC will be merged into CICA with CICA being the corporation surviving the merger (the "Surviving Corporation"), (b) all treasury and outstanding shares of capital stock of ALLIC shall be canceled regardless of actual surrender of the certificates therefor, and (c) all treasury and outstanding shares of capital stock of CICA shall remain unchanged in all respects. Third: The Articles of Incorporation of CICA shall be the Articles of Incorporation of the Surviving Corporation. Fourth: The executed plan and agreement of merger is on file at Surviving Corporation's principal place of business located at 400 East Anderson Lane, Austin, Texas 78752. A copy of the plan and agreement of merger will be furnished by CICA, on request and without cost, to any shareholder of any corporation that is a party to the merger. Dated: ____________________, 1997 CITIZENS INSURANCE COMPANY AMERICAN LIBERTY LIFE OF AMERICA INSURANCE COMPANY By: By: Harold E. Riley, Chairman Harold E. Riley, President -2- __________/__________ Initial Initial 13 CERTIFICATE OF SECRETARY The undersigned duly elected and qualified Secretary of American Liberty Life Insurance Company does hereby certify that the plan and agreement of merger referred to herein, after being first duly signed by the President on behalf of American Liberty Life Insurance Company, as authorized by its Board of Directors, was approved by the shareholder of the merged corporation in the manner required by the Louisiana Business Corporation Law. AMERICAN LIBERTY LIFE INSURANCE COMPANY , 1997 By: - -------------- ---------------------------------- Mark A. Oliver, Secretary CERTIFICATE OF SECRETARY The undersigned duly elected and qualified Secretary of Citizens Insurance Company of America does hereby certify that the plan and agreement of merger referred to herein was duly signed by the Chairman on behalf of Citizens Insurance Company of America, as authorized by its Board of Directors. As the surviving corporation, shareholder approval was not required due to satisfaction of all conditions of Section 12:112E(1) of the Louisiana Business Corporation Law. CITIZENS INSURANCE COMPANY OF AMERICA , 1997 By: - -------------- ---------------------------------- Mark A. Oliver, Secretary -3- __________/__________ Initial Initial 14 SIGNATURE OF OFFICERS Pursuant to the Louisiana Business Corporation Law, the undersigned, Harold E. Riley, the duly elected and qualified President of American Liberty Life Insurance Company, hereby executes this Certificate of Merger on behalf of American Liberty Life Insurance Company. AMERICAN LIBERTY LIFE INSURANCE COMPANY , 1997 By: - -------------- ---------------------------------- Harold E. Riley, President STATE OF TEXAS COUNTY OF TRAVIS BEFORE ME, the undersigned authority, personally came and appeared, Harold E. Riley, duly authorized to act on behalf of American Liberty Life Insurance Company, who declared he is duly authorized and did execute the foregoing Certificate of Merger on behalf of American Liberty Life Insurance Company. IN WITNESS WHEREOF, the appearer, witnesses and I have hereunto affixed our signatures on __________, 1997. WITNESSES: AMERICAN LIBERTY LIFE INSURANCE COMPANY By: - ------------------------ Harold E. Riley, President - ------------------------ ----------------------------------- Bridget Cantwell, Notary Public -4- __________/__________ Initial Initial 15 SIGNATURE OF OFFICERS Pursuant to the Louisiana Business Corporation Law, the undersigned, Harold E. Riley, the duly elected and qualified Chairman of Citizens Insurance Company of America, hereby executes this Certificate of Merger on behalf of Citizens Insurance Company of America. CITIZENS INSURANCE COMPANY OF AMERICA , 1997 By: - -------------- ---------------------------------- Harold E. Riley, Chairman STATE OF TEXAS COUNTY OF TRAVIS BEFORE ME, the undersigned authority, personally came and appeared, Harold E. Riley, duly authorized to act on behalf of Citizens Insurance Company of America, who declared he is duly authorized and did execute the foregoing Certificate of Merger on behalf of Citizens Insurance Company of America. IN WITNESS WHEREOF, the appearer, witnesses and I have hereunto affixed our signatures on __________, 1997. WITNESSES: CITIZENS INSURANCE COMPANY OF AMERICA By: - ------------------------ Harold E. Riley, Chairman - ------------------------ ----------------------------------- Bridget Cantwell, Notary Public -5- __________/__________ Initial Initial 16 ARTICLES OF MERGER Pursuant to the provisions of the Colorado Business Corporation Act (the "Act"), AMERICAN LIBERTY LIFE INSURANCE COMPANY, a stock insurance company organized under the laws of the State of Louisiana ("ALLIC"), and CITIZENS INSURANCE COMPANY OF AMERICA, a stock insurance company organized under the laws of the State of Colorado ("CICA"), adopt the following Articles of Merger: First: In accordance with Section 7-111-103 of the Act, a plan and agreement of merger has been approved, adopted and executed by ALLIC and CICA. Second: Pursuant to Section 7-111-103(7) of the Act, approval by the shareholders of CICA, the surviving corporation, is not required. The plan and agreement of merger was approved by the shareholders of ALLIC with the number of votes cast for the plan by each voting group entitled to vote separately on the merger being sufficient for approval by that voting group. Third: At and as of the effective time set forth below, (a) ALLIC will be merged into CICA with CICA being the corporation surviving the merger (the "Surviving Corporation"), (b) all treasury and outstanding shares of capital stock of ALLIC shall be canceled regardless of actual surrender of the certificates therefor, and (c) all treasury and outstanding shares of capital stock of CICA shall remain unchanged in all respects. Fourth: The Articles of Incorporation of CICA shall be the Articles of Incorporation of the Surviving Corporation. Dated: ____________________, 1997 CITIZENS INSURANCE COMPANY AMERICAN LIBERTY LIFE OF AMERICA INSURANCE COMPANY By: By: Harold E. Riley, Chairman Harold E. Riley, President -6- __________/__________ Initial Initial EX-10.9 4 BULK ACCIDENT/DEATH AGREEMENT DATED 1-1-89 1 EXHIBIT 10.9 BULK ACCIDENTAL DEATH BENEFIT REINSURANCE AGREEMENT NO. A-50494 between CONNECTICUT GENERAL LIFE INSURANCE COMPANY Bloomfield, Connecticut and CITIZENS INSURANCE COMPANY OF AMERICA Denver, Colorado 2 BULK ACCIDENTAL DEATH BENEFIT REINSURANCE AGREEMENT NO. A-50494 CONNECTICUT GENERAL LIFE INSURANCE COMPANY (herein called "CG") of Bloomfield, Connecticut hereby agrees to provide reinsurance for CITIZENS INSURANCE COMPANY OF AMERICA (herein called the "Ceding Company") of Denver, Colorado in consideration of premiums described herein. This is an Agreement solely between the Ceding Company and CG. The acceptance of risks hereunder shall not create any right or legal relation whatever between CG and the insured or the beneficiary under any policy of the Ceding Company reinsured hereunder. CG's liability on such acceptance shall begin simultaneously with, but not before, that of the Ceding Company. This Agreement shall be effective as of January 1, 1989, and shall be unlimited in duration, but may be terminated at any time, as to the handling of new business, by either party giving the other ninety days written notice. Ninety days notice will also be given to the Colorado Insurance Division by registered mail. CG shall continued to accept reinsurance during the ninety days aforesaid and shall remain liable on all reinsurance granted under this Agreement in accordance with its terms. The following pages are a part of this Agreement. IN WITNESS WHEREOF, the said CONNECTICUT GENERAL LIFE INSURANCE COMPANY and the said CITIZENS INSURANCE COMPANY OF AMERICA, by their respective officers, have executed and delivered these presents in duplicate on March 10, 1989. CITIZENS INSURANCE COMPANY CONNECTICUT GENERAL LIFE OF AMERICA INSURANCE COMPANY By: /s/ Alice M. Ellis By: /s/ Donna M. Peterson -------------------------- ------------------------- Vice President Director Date: March 16, 1989 Date: March 10, 1989 --------------------- -------------------- 3 ARTICLES 1: CESSIONS TO CG 1. Automatic Cessions: On and after the effective date of this Agreement, the Ceding Company shall cede, and CG shall accept automatically, Accidental Death Benefits standard and substandard risks when issued as a supplementary benefit to a life insurance policy. This automatic reinsurance shall be so much of its insurance of this type as exceeds the amount retained by the Ceding Company, as shown in Schedule A, and as qualifies for automatic reinsurance under this Agreement. The maximum amount on any life that may be ceded hereunder automatically shall not exceed $250,000. No cession shall be made automatically to CG on any life if evidence in the hands of the Ceding Company indicates that the total amount of supplementary accidental death insurance, including principal sum accident benefits and travel accident benefits, issued and contemplated, in the Ceding Company and all other insurers, will exceed $250,000 on that life. 2. Facultative Cessions: Risks which do not qualify as automatic reinsurance, or for which an underwriting opinion from CG is desired, may be submitted to CG on a facultative basis. 3. Net Amount at Risk: All reinsurance under this Agreement shall be on the yearly renewable term plan for the gross amount reinsured. ARTICLE 2: MODE OF CESSION 1. Automatic Cessions: No automatic cessions need be made with respect to automatic reinsurance under this agreement. Bulk handling procedures as provided in this agreement shall apply to accidental death benefits reinsured hereunder. 2. Facultative Cessions: The Ceding Company, if requested by CG, shall submit to CG a formal cession within five (5) working days after being advised that the original policy has been delivered and paid for. This shall be applicable to risks which do not qualify as automatic reinsurance. 4 ARTICLES 3: PREMIUM CALCULATIONS 1. Premium Rates: The annual premium rates for reinsurance shall be as follows:
Benefit Covered Annual Rate per $1,000 --------------- ----------------------- International Domestic ------------- -------- Accidental Death Benefit $ .82 $ .65 Accidental Death and Dismemberment .82 .65
Premiums for the substandard risks shall be taken at the appropriate multiples of the above. CG reserves the right to change the annual premium rates on any January 1 and shall give written notice to the Ceding Company no less than thirty (30) days prior to the effective date of such change. The new rates shall apply to and be effective for all policies requiring reinsurance. 2. Computing the Premium: Premiums will be computed on a calendar year basis and will be payable January 1 of each year. The premium payable January 1 of each year will be taken as the sum of: a.) The advance premium for the year just started; taken at the applicable annual rates shown above, applied to the reinsurance in force as of January 1 of the year just started, and, b.) The adjustment premium for the year just ended; taken at one-half the applicable annual rates shown above, applied to the increase or decrease in the reinsurance in force between January 1 and December 31 of the year just ended. Notwithstanding the above, due allowance shall be given for the period of time this agreement is in effect in the calendar year. ARTICLE 4: PREMIUM ACCOUNTING 1. The Ceding Company shall furnish CG, on forms supplied by CG, within 30 days following the end of each calendar year, notification of the amounts of reinsurance in force as of December 31 of such calendar year. The final premium adjustment for such calendar year and the annual amount payable for the next succeeding calendar year shall be determined from the reinsurance in force as of December 31. 2. All amounts payable shall be paid within 60 days of their respective due dates. 5 3. In the event of nonpayment of reinsurance premiums as provided in the preceding paragraph, CG shall have the right to terminate the reinsurance under all such policies. If CG elects to exercise this right, it shall give the Ceding Company 90 days' notice of its intention to do so; and if all reinsurance premiums in arrears, including any which may become in arrears during the 90-day period, are not paid before the expiration of such period, CG shall thereupon be relieved of future liability under all such reinsurance. The reinsurance so terminated may be reinstated at any time within 60 days of the date of termination upon receipt by CG of all reinsurance premiums in arrears; but in such event, CG shall have no liability for any loss incurred between the date of termination and the date of reinstatement of the reinsurance. The date of reinstatement shall be the date of receipt by CG of all reinsurance premiums in arrears. The right of CG thus to terminate reinsurance shall be without prejudice to its right to collect premiums for the period during which reinsurance was in force prior to the expiration of the 90-day notice. ARTICLE 5: ADJUSTMENTS Reductions: 1. If any portion of the risk carried by the Ceding Company on any life reinsured hereunder is terminated, the amount of reinsurance carried by the Ceding Company on that life shall be reduced by the same amount as of the date and time of the termination of the original insurance. 2. If reinsurance on a risk is carried by more than one reinsurer, such reduction shall be applied first to the reinsurance directly applicable to the Ceding Company's policy which is reduced or terminated; the reinsurance of CG being reduced by an amount which shall be the same proportion of the amount of reinsurance on that particular policy. 3. If the Ceding Company had retained any portion of the insurance thus terminated, a reduction equal to the amount of such retention shall be made in the reinsurance in force under other policies on the life insured, each reinsurer sharing in the reduction according to its proportion of the reinsurance on all other policies continuing in force on that life. In interpreting this paragraph, policies issued concurrently and at the same mortality rating shall be considered as one policy. Reinstatements If a risk lapses for nonpayment of premium and such risk is reinstated in accordance with the terms and rules of the Ceding Company, the reinsurance under such policy shall be reinstated automatically by CG, provided that such risk was reinsured automatically by CG. If such risk was reinsured facultatively by CG, the reinsurance shall be reinstated only upon approval by CG. 6 ARTICLE 6: RETENTION INCREASE AND RECAPTURE 1. The reinsurance of risks ceded under this agreement shall be maintained in force without reduction as long as the original risks carried by the Ceding Company on the life remain in force without reduction, except as provided in this Article. 2. If the Ceding Company increases its maximum limits of retention, reduction may be made in reinsurance on risks then in force in accordance with the following rules: a.) No reduction in the amount of risks because of changes in retention may be effected before the fifth January 1 following the calendar year in which reinsurance was effective under this agreement. b.) No reduction shall be made in the reinsurance on any life unless the Ceding Company retained its maximum limit of retention for the age and mortality rating at the time the accidental death insurance was issued, nor shall reduction be made in any class of fully reinsured business. c.) The new retention of the Ceding Company on each risk shall be determined by the insurance age and the mortality rating in effect at the date of issue of accidental death insurance. 3. In order to effect such reductions, the Ceding Company shall give written notice to CG of the increase in retention limits. The reinsurance shall be reduced by such amount, in each case, as will increase to its new retention the amount of total insurance to be carried by the Ceding Company at its own risk; but if any reinsurance be so reduced, all reinsurance in force in CG shall be similarly reduced, subject to the restrictions hereof. If there is reinsurance in other companies on risks eligible for recapture, the necessary reduction is to be applied in the same proportion as outlined in Article 5, "Reductions." 4. If the Ceding Company overlooks any reductions or cancellations of reinsurance which should be made on account of a retroactive increase in its retention limits, no acceptance by CG of reinsurance premium under such circumstances, after the effective date of the reductions or cancellations, shall make CG liable for such reinsurance; but CG shall be liable only for refund of the premiums so received, without interest. 5. If CG gives notice of an increase in the premium rates charged for reinsurance hereunder in accordance with Article 3, paragraph 1, the Ceding Company shall have the right to recapture 100 percent of the reinsurance in force as of the effective date of the rate increase. In order to effect the recapture, the Ceding Company shall give written notice to CG within 60 days following the date that CG gives notice of the premium rate increase. 7 ARTICLE 7: OVERSIGHTS CG shall be bound as the Ceding Company is bound, and if nonpayment of premiums within the time specified or failure to comply with any terms of this Agreement is shown to be unintentional and the result of misunderstanding or oversight on the part of either the Ceding Company or CG, both shall be restored to the positions they would have occupied had no such error or oversight occurred. ARTICLE 8: SETTLEMENT OF CLAIMS 1. The Ceding Company shall give CG immediate written notice of any report of loss for which claim may be made and shall provide full and true information concerning any claim or suit brought under a policy reinsured hereunder. 2. The Ceding Company shall furnish CG with a true copy of all proofs of loss, receipts and releases in connection with any claim under a policy reinsured hereunder. 3. CG shall cooperate with and assist the Ceding Company in the defense or control of any claim or suit under a reinsured policy. The cost of said defense or control shall be divided in the same proportion as the amount of risk retained by the Ceding Company bears to the total risk. 4. CG shall not be liable for any amount paid by the Ceding Company for punitive, exemplary, or compensatory damages awarded to the insured, arising out of the conduct of the Ceding Company in the investigation, trial, or settlement of any claim, or the failure to pay or a delay to pay any benefits under any policy. Also, CG shall not be liable for any statutory penalty imposed upon the Ceding Company on account of any unfair trade practice or any unfair claim practice. 5. CG shall be liable to the Ceding Company for the benefits covered by reinsurance hereunder. Payment of a death claim by CG shall be made in one lump sum to the Ceding Company regardless of the mode of settlement under the policy of the Ceding Company. However, if more than a 50% of the accidental death risk in any particular case is carried by CG, CG shall be consulted before the Ceding Company makes an admission or acknowledgment of liability. 6. Termination of this agreement for any reason shall not affect the rights and obligations of the Ceding Company or CG incurred prior to the date of termination. ARTICLE 9: INSOLVENCY 1. In the event of insolvency of the Ceding Company, all payments normally made to it by CG shall be payable directly to the liquidator, receiver or statutory successor of said Ceding Company, without diminution because of the insolvency of the Ceding Company. 8 2. In the event of insolvency of the Ceding Company, the liquidator, receiver or statutory successor shall give CG written notice of the pendency of a claim on a risk reinsured within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of any such claim, CG may investigate such claim and interpose in the name of the Ceding Company, its liquidator, receiver or statutory successor, but at CG's own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which CG may deem available to the Ceding Company or its liquidator, receiver or statutory successor. 3. The expense thus incurred by CG shall be chargeable, subject to court approval, against the Ceding Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Ceding Company solely as a result of the defense undertaken by CG. Where two or more reinsurers are participating in the same claim and a majority in interest elect to interpose a defense or defenses to any such claim, the expense shall be apportioned in accordance with the terms of the reinsurance agreement as though such expense had been incurred by the Ceding Company. ARTICLE 10: ARBITRATION 1. In the event of any dispute arising between the parties with reference to the rights or liabilities of either party in regard to any transaction under this agreement, the question shall be referred to three (3) arbitrators, one (1) to be chosen by each party from among the officers of life insurance companies and a third (3rd) to be chosen by the said two (2) arbitrators, before entering upon arbitration. Should one of the parties decline to appoint an arbitrator, or should the two arbitrators be unable to agree on the choice of a third, the appointment shall be left to the President of the American Council of Life Insurance or its successor. 2. The arbitrators shall interpret this agreement as an honorable engagement and not merely as a legal obligation and a majority decision of these arbitrators shall be final and binding on both parties and there shall be no appeal from the decision. The arbitrators shall interpret this agreement liberally rather than according to the rules of law, it being the intent of the agreement that the Reinsurer shall (1) take over, to the extent of the amount reinsured, all liability in every respect provided, and (2) follow the Ceding Company in its established rules and usual and customary office practices in regard to such insurance. 3. The arbitrators are released from judicial formalities and may abstain from following the strict rules of law. The meeting of the board of arbitrators shall be in Austin, Texas, unless some other place is mutually agreed upon. The cost of arbitration shall be borne by the losing party unless the arbitrators decide otherwise. It is specifically the intent of both parties that this Arbitration provision shall replace and be in lieu of any statutory arbitration provision. 9 ARTICLE 11: INSPECTION OF RECORDS 1. CG shall have the right, at any reasonable time, to inspect at the office of the Ceding Company all books and documents relating to the reinsurance under this agreement. 2. Every two (2) years, the Ceding Company shall furnish CG with an individual listing of all such reinsurance then in force hereunder. 10 CONNECTICUT GENERAL LIFE INSURANCE COMPANY Bloomfield, Connecticut SCHEDULE A For all ages and ratings, the limits for supplementary accidental death insurance coverages to be reinsured are:
Coverage Retention Limit Issue Limit - -------- --------------- ----------- Accidental Death Benefit -0- $ 250,000 Accidental Death and Dismemberment -0- 250,000
Policy and/or Certificate Forms covered by this Agreement --------------------------------------------------------- BO 1371E (11/86) IN 2616 BO 1371S (11/86) IN 2601 BO 0571E (11/86) IN 2601 JL BO 0571S (11/86) IN 2550 BO 0871E (11/86) IN 2564 BO 0871S (11/86) IN 2613 BO 0771 021371 BO 0671 BO 0471 021471 021271 022471 021171 021771
11 ADDENDUM NO. 1 to BULK ACCIDENTAL DEATH BENEFIT REINSURANCE AGREEMENT NO. A-50494 between CITIZENS INSURANCE COMPANY OF AMERICA Denver, Colorado (hereinafter known as the "Company") and CONNECTICUT GENERAL LIFE INSURANCE COMPANY Bloomfield, Connecticut (hereinafter known as the "Reinsurer") IT IS HEREBY MUTUALLY AGREED that, effective January 1, 1990, Equities International Life Insurance Company shall be merged with Citizens Insurance Company of America, Denver, Colorado. All other terms and conditions remain unchanged. IN WITNESS WHEREOF, this Addendum is executed in Philadelphia, Pennsylvania, this 14th day of May, 1990. CONNECTICUT GENERAL LIFE INSURANCE COMPANY By: /s/ Lynda McNeeley ------------------------- Director and in Denver, Colorado, this 24th day of May, 1990. CITIZENS INSURANCE COMPANY OF AMERICA By: /s/ Alice M. Ellis ------------------------- Vice President 12 ADDENDUM NO. 2 to BULK ACCIDENTAL DEATH BENEFIT REINSURANCE AGREEMENT A-50494 between CITIZENS INSURANCE COMPANY OF AMERICA Denver, Colorado (hereinafter known as the "Company") and CONNECTICUT GENERAL LIFE INSURANCE COMPANY Bloomfield, Connecticut (hereinafter known as the "Reinsurer") IT IS HEREBY UNDERSTOOD AND AGREED that, effective January 1, 1991, an Experience Refund provision shall be added to this agreement. The terms, conditions, and formula are stated in Article 12, listed below. ARTICLE 12 The following Experience Refund Formula shall be used: ER = X% (Premiums - Claims - Expenses) Deficit carryforward where, ER = Experience Refund X% = 2% for each $10,000 of premium subject to a maximum of 50% Premiums = Gross reinsurance earned premiums per contract year Claim = Paid claims during the contract year plus the outstanding claim reserves at the end of the contract year Expenses = Reinsurance expense of 10% of premiums Deficit Carryforward = any deficit from the previous Experience Refund shall be carried forward to extinction 13 The Experience Refund will be calculated annually within nine (9) months at the close of the contract year. If the Experience Refund is negative, no payment shall be due from the Ceding Company. However, a deficit is created and shall be carried forward until recovered by the Reinsurer. All other terms will remain unchanged. IN WITNESS WHEREOF, this addendum is executed in Philadelphia, Pennsylvania, this 12th day of November, 1991. CONNECTICUT GENERAL LIFE INSURANCE COMPANY By: /s/ Donna M. Peterson -------------------------- Assistant Vice President and in Austin, Texas, this 20th day of November, 1991. CITIZENS INSURANCE COMPANY OF AMERICA By: /s/ Roby Dollar ---------------------------- Executive Vice President 14 ADDENDUM NO. to ACCIDENTAL DEATH BENEFIT REINSURANCE AGREEMENT Originally Effective January 1, 1989 between CITIZENS INSURANCE COMPANY OF AMERICA Denver, Colorado (hereinafter referred to as the "Company") and CONNECTICUT GENERAL LIFE INSURANCE COMPANY Hartford, Connecticut (hereinafter referred to as the "Subscribing Reinsurer") It is hereby understood and agreed that effective 12:01 a.m., Local Time at the Company's Home Office, December 23, 1991, the following Intermediary Clause will be added to this Agreement: Intermediary: Intere Intermediaries, Inc., is hereby recognized as the Intermediary negotiating this Agreement for all business hereunder. All communications (including but no limited to notices, statements, premiums, return premiums, commissions, taxes, losses, loss adjustment expenses, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Subscribing Reinsurer through Intere Intermediaries, Inc., 100 Crescent Centre Parkway, Suite 1200, Tucker, Georgia, 30084. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Subscribing Reinsurer. Payments by the Subscribing Reinsurer to the Intermediary shall be deemed to constitute payment to the Company to the extent that such payments are actually received by the Company. All other terms and conditions remain unchanged. 15 IN WITNESS WHEREOF, the parties here have caused this Contract to be executed in triplicate by their duly authorized officers: In Austin, Texas this 28th day of January, 1992 CITIZENS INSURANCE COMPANY OF AMERICA By: /s/ Roby Dollar, Exec. V.P. ------------------------------ and in Philadelphia, Pennsylvania this 7th day of May, 1992. CONNECTICUT GENERAL LIFE INSURANCE COMPANY By: /s/ Lynda McNeeley ------------------------------ 16 AMENDMENT OF REINSURANCE AGREEMENT BETWEEN: CITIZENS INSURANCE COMPANY OF AMERICA (Ceding Company) and CONNECTICUT GENERAL LIFE INSURANCE COMPANY (Assuming Company) Agreement Number 028 Amendment Number 004 Effective Date: 01/01/89 Date of Execution: 03/16/89 Effective Date of Amendment: 01/01/93 Date of Amendment Execution: 05/06/93 Type of Amendment: To include Accidental Death Benefit riders written by First Centennial Life, wholly owned by Citizens Insurance Company of America of Denver, Colorado Agreement Type: Accidental Death Benefit Reinsurance Underlying Risk: Ordinary Life Statement of whether or not a Reinsurance Intermediary is involved in this transaction: The Reinsurance Intermediary involved in this transaction is reinsurance broker Intere Intermediaries, Inc., represented by Bob E. Askew, CLU, FLMI. Statement of whether agreement meets the conditions of Section 10-3-805(4)(a)(III), C.R.S.: This amendment does not meet the conditions of Section 10-3-805(4)(a)(III), C.R.S. Statement as to whether agreement transfers existing in-force business: This amendment does not transfer in-force business. 17 ADDENDUM NO. 4 to ACCIDENTAL DEATH BENEFIT REINSURANCE AGREEMENT Originally Effective January 1, 1989 between CITIZENS INSURANCE COMPANY OF AMERICA Denver, Colorado (hereinafter referred to as the "Company") and CONNECTICUT GENERAL LIFE INSURANCE COMPANY Hartford, Connecticut (hereinafter referred to as the "Subscribing Reinsurer") It is hereby understood and agreed that effective 12:01 a.m. Local Time at the Company's Home Office, January 1, 1993, Schedule A will be deleted in its entirety and replaced with the attached. All other terms and conditions remain unchanged. IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed in quadruplicate. In Austin, Texas, this 6th day of May, 1993. CITIZENS INSURANCE COMPANY OF AMERICA By: /s/ Roby Dollar, President ---------------------------------- and in Philadelphia, Pennsylvania this day of , 1993 CONNECTICUT GENERAL LIFE INSURANCE COMPANY By: /s/ Brenda H. [illegible] ------------------------- 18 SCHEDULE A For all ages and ratings, the limits for supplementary accidental death insurance coverages to be reinsured are:
Coverage Retention Limit Issue Limit - -------- --------------- ----------- Accidental Death Benefit -0- $ 250,000 Accidental Death and Dismemberment -0- 250,000
Policy and/or Certificate Forms covered by this Agreement BO 1371E (11/86) IN 2616 BO 1371S (11/86) IN 2601 BO 0571E (11/86) IN 2601 JL BO 0571S (11/86) IN 2550 BO 0871E (11/86) IN 2564 BO 0871S (11/86) IN 2613 BO 0771 BO2272C(6/90) 021371 BO2372C(6/90) BO 0671 BO2572C(6/90) BO 0471 BO2972C(6/90) 021471 B10872S 021271 B10972S 022471 B11072S 021171 B11272S 021771 B11772E B11872E B12072E
Coverage also includes policies written by First Centennial Life, a part of Citizens Insurance Company by merger. Those forms are: 0041 1280 ADB JWL-3 DI 404 R-6004(9/82) R-2-73 D.I. 202-2-48 R-2 19 AMENDMENT OF REINSURANCE AGREEMENT BETWEEN: CITIZENS INSURANCE COMPANY OF AMERICA (Ceding Company) and CONNECTICUT GENERAL LIFE INSURANCE COMPANY (Assuming Company) Agreement Number 028 Amendment Number 005 Effective Date: 01/01/89 Date of Execution: 03/16/89 Effective Date of Amendment: 12/31/91 Date of Amendment Execution: 09/15/93 Type of Amendment: To jointly elect to waive the general deductions limitation. Agreement Type: Accidental Death Benefit Reinsurance Underlying Risk: Ordinary Life Statement of whether or not a Reinsurance Intermediary is involved in this transaction: The Reinsurance Intermediary involved in this transaction is reinsurance broker Intere Intermediaries, Inc., represented by Bob E. Askew, CLU, FLMI. Statement of whether agreement meets the conditions of Section 10-3-805(4)(a)(III), C.R.S.: This amendment does not meet the conditions of Section 10-3-805(4)(a)(III), C.R.S. Statement as to whether agreement transfers existing in-force business: This amendment does not transfer in-force business. 20 DAC TAX AMENDMENT This amendment between CITIZENS INSURANCE COMPANY OF AMERICA (referred to as Ceding Company) and CONNECTICUT GENERAL LIFE INSURANCE COMPANY (referred to as Assuming Company), collectively called the "Parties," hereby amends and becomes part of all Reinsurance Agreement(s) between the parties. 1. The attached DAC Tax Article, entitled IRC. Section 1.848-2(g)(8) Election, is hereby added to the Agreement. 2. This Amendment does not alter, amend or modify the Reinsurance Agreement(s) other than as stated in this Amendment. It is subject to all of the terms and conditions of the Reinsurance Agreement(s) together with all Amendments and Addendums. In witness whereof, this amendment is signed in duplicate on this dates indicated at the home office of each company CITIZENS INSURANCE COMPANY OF AMERICA By: /s/ Roby Dollar, President --------------------------------- Date: September 15, 1993 --------------------------------- CONNECTICUT GENERAL LIFE INSURANCE COMPANY By: /s/ Ruth A. Van Keuren --------------------------------- Date: July 29, 1993 --------------------------------- 21 DAC TAX ARTICLE IRC Reg. Section 1.848-2(g)(8) Election 1. The Parties hereby make an election pursuant to Internal Revenue Code Regulation Section 1.848-2(g)(8). This election shall be effective for all taxable years for which the Reinsurance Agreement remains in effect commencing with the year ending December 31, 1991 2. The terms used in this Addendum are defined by reference to Regulation Section 1.848-2 promulgated on December 28, 1992. 3. The Party with net positive consideration for the reinsurance agreement for each taxable year will capitalize specified policy acquisition expenses with respect to the reinsurance agreement without regard to the general deductions limitation of Section 848(c)(1) of the Internal Revenue Code of 1986, as amended. 4. The Parties agree to exchange information pertaining to the amount of net consideration under the reinsurance agreement each year to ensure consistency. To achieve this, the Ceding Company shall provide the Assuming Company with a schedule of its calculation of the net consideration for all reinsurance agreements in force between them for a taxable year by no later than May 1 of the succeeding year (by June 15 for tax year 1992). The Assuming Company shall advise the Ceding Company if it disagrees with the amounts provided by no later than May 31 (July 15 for 1992, otherwise the amounts will be presumed correct and shall be reported by both parties in their respective tax returns for such tax year. If the Assuming Company contests the Ceding Company's calculation of the net consideration, the Parties agree to act in good faith to resolve any differences within thirty (30) days of the date the Assuming Company submits its alternative calculation and report the amounts agreed upon in their respective tax returns for such tax year. 5. The Parties shall attach to their respective 1992 federal income tax returns a schedule specifying that the joint election herein has been made for this reinsurance agreement. 6. The Assuming Company represents and warrants that it is subject to U.S. taxation under either Subchapter L or Subpart F of Part III of Subchapter N of the Internal Revenue Code of 1986, as amended. 22 AMENDMENT OF REINSURANCE AGREEMENT BETWEEN: CITIZENS INSURANCE COMPANY OF AMERICA (Ceding Company) and CONNECTICUT GENERAL LIFE INSURANCE COMPANY (Assuming Company) Agreement Number 028 Effective Date: 01/01/89 Date of Execution: 03/16/89 Effective Date of Amendment: 10/01/92 Date of Amendment Execution: 01/26/94 Type of Amendment: To update treaty to comply with regulation 3-3-2. Agreement Type: Bulk ADB Reinsurance Underlying Risk: Ordinary Life Statement of whether or not a Reinsurance Intermediary is involved in this transaction: The Reinsurance Intermediary involved in this transaction is reinsurance broker Intere Intermediaries, Inc., represented by Bob E. Askew, CLU, FLMI. Statement of whether agreement meets the conditions of Section 10-3-805 (4)(a)(III), C.R.S.: This amendment does not meet the conditions of Section 10-3-805(4)(a)(III), C.R.S. Statement as to whether agreement transfers existing in-force business: This amendment does not transfer in-force business. 23 ADDENDUM NO. 5 to ACCIDENTAL DEATH BENEFIT REINSURANCE AGREEMENT Originally Effective January 1, 1989 between CITIZENS INSURANCE COMPANY OF AMERICA Denver, Colorado (hereinafter referred to as the "Company") and CONNECTICUT GENERAL LIFE INSURANCE COMPANY Hartford, Connecticut (hereinafter referred to as the "Subscribing Reinsurer") It is hereby understood and agreed that effective 12:01 a.m. Local Time at the Company's Home Office, October 1, 1992, Article XIII, Special Colorado Provision, will be added to this Agreement as follows: ARTICLE XIII Special Colorado Provision All provisions of this Agreement are subject to the laws of the State of Colorado. Any Arbitration, in the event of insolvency of the Company, must also be subject to the laws of the State of Colorado. All other terms and conditions remain unchanged. 24 IN WITNESS WHEREOF, the parties hereto have caused this Endorsement to be executed in triplicate. In Austin, Texas this 26th day of January, 1994. CITIZENS INSURANCE COMPANY OF AMERICA By: /s/ Roby Dollar, President -------------------------------- and in Hartford, Connecticut, this 20th day of January , 1994. CONNECTICUT GENERAL LIFE INSURANCE COMPANY By: /s/ Brenda H. [illegible] ------------------------------- 25 AMENDMENT OF REINSURANCE AGREEMENT BETWEEN: CITIZENS INSURANCE COMPANY OF AMERICA (Ceding Company) and CONNECTICUT GENERAL LIFE INSURANCE COMPANY (Assuming Company) Agreement Number 028 Amendment Number 006 Effective Date: 01/01/89 Date of Execution: 03/16/89 Effective Date of Amendment: 08/01/94 Date of Amendment Execution: 10/17/94 Type of Amendment: To provide for Extra Contractual Damages to be subject to Counsel and Concurrence. Agreement Type: Bulk ADB Reinsurance Underlying Risk: Ordinary Life Statement of whether or not a Reinsurance Intermediary is involved in this transaction: The Reinsurance Intermediary involved in this transaction is reinsurance broker Intere Intermediaries, Inc., represented by Bob E. Askew, CLU, FLMI. Statement of whether agreement meets the conditions of Section 10-3-805(4)(a)(III), C.R.S.: This amendment does not meet the conditions of Section 10-3-805(4)(a)(III), C.R.S. Statement as to whether agreement transfers existing in-force business: This amendment does not transfer in-force business. 26 AMENDMENT NO. 6 to ACCIDENTAL DEATH BENEFIT REINSURANCE AGREEMENT Originally Effective January 1, 1989 between CITIZENS INSURANCE COMPANY OF AMERICA Denver, Colorado (hereinafter referred to as the "Company") and CONNECTICUT GENERAL LIFE INSURANCE COMPANY Hartford, Connecticut (hereinafter referred to as the "Reinsurer") It is hereby understood and agreed that effective 12:01 a.m. Local Time at the Company's Home Office, August 1, l994, Article 8 Settlement of Claims, Section four (4), will be voided and, Article XIV, Extra Contractual Damages Subject to Counsel and Concurrence, will be added to this Agreement as follows: ARTICLE XIV Extra Contractual Damages Subject to Counsel and Concurrence: In no event shall the Reinsurer participate in Extra Contractual Damages which are awarded against the Company as a result of an act, omission or course of conduct committed solely by the Company in connection with the insurance reinsured under this Agreement unless the Reinsurer shall have been made aware of and shall have concurred in writing with the actions taken by the Company which lead to the awarding of Extra Contractual Damages; and the Reinsurer's participation will be only to the extent that such awards actually involve the Reinsurance of this Agreement. The Company shall notify the Reinsurer of any actions which may lead to the awarding of Extra Contractual Damages and/or of any impending Extra Contractual Damages as soon as practicable by registered letter to both the Reinsurer's Underwriting Department and the Reinsurer's Claims Department. 27 The Reinsurer then has the obligation to notify the Company of its recommended action or decision by registered letter within 30 days of receipt of the above mentioned letter of notification. If the Reinsurer concurs with the Company's action, payment or settlement of such awarded damages will be shared by the Company and the Reinsurer in the proportions which govern this Agreement and will be within the limits of this Agreement. For purposes of this provision, the following definitions shall apply: "Extra Contractual Damages" mean Punitive Damages, Statutory Penalties and/or Compensatory Damages; "Punitive Damages" are those damages awarded as a penalty, the amount of which is not governed nor fixed by statute; "Statutory Penalties" are those amounts which are awarded as a penalty, but fixed in amount by statute; "Compensatory Damages" are those amounts awarded to compensate for the actual damages sustained, and are not awarded as a penalty nor fixed in amount by statute. All other terms and conditions remain unchanged. IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed in triplicate: In Austin, Texas this 17th day of October, 1994. CITIZENS INSURANCE COMPANY OF AMERICA By: /s/ Roby Dollar, President ----------------------------- and in Hartford, Connecticut this 29th day of September, 1994. CONNECTICUT GENERAL LIFE INSURANCE COMPANY By: /s/ Sharon A. Cardenas ----------------------------- 28 ADDENDUM NO. 7 to the ACCIDENTAL DEATH BENEFIT REINSURANCE AGREEMENT between Citizens Insurance Company of America Denver, Colorado (hereinafter referred to as the "Ceding Company") and Connecticut General Life Insurance Company Hartford, Connecticut (hereinafter referred to as the "Reinsurer") Effective March 31, 1995, this agreement shall be amended as follows: Paragraph 7 shall be added to Article 8 "Settlement of Claims": SETTLEMENT OF CLAIMS 7. The REINSURER agrees to reimburse the CEDING COMPANY for each claim with respect to which this agreement affords indemnity within 90 days after the REINSURER receives proof which is satisfactory to the REINSURER that the CEDING COMPANY has paid the claim. Article XV, "Entire Agreement" shall be added to the Agreement and shall read as follows: ARTICLE XV Entire Agreement: This agreement shall constitute the entire agreement between the parties with respect to the business being reinsured hereunder. There are no other understandings between the parties other than as expressed in this agreement. Any change or modification to this agreement shall be null and void unless made by amendment to this agreement and signed by both parties. This Amendment shall be attached to and form a part of the Accidental Death Benefit Reinsurance Agreement between the Ceding Company and Connecticut General Life Insurance Company, effective January 1, 1989. 29 IN WITNESS WHEREOF, the said Citizens Insurance Company of America, Denver, Colorado, and the said Connecticut General Life Insurance Company, Hartford, Connecticut, have by their respective officers executed and delivered this Addendum in duplicate. CITIZENS INSURANCE COMPANY OF AMERICA By: /s/ Roby Dollar --------------------------------- Title: Vice Chairman ------------------------------ Attest: /s/ Mark A. Oliver Date: May 12, 1995 ------------------ ------------------------------- CONNECTICUT GENERAL LIFE INSURANCE COMPANY By: /s/ Sharon A. Cardenas --------------------------------- Title: Director ------------------------------ Attest: /s/ Vicki Jones Date: April 25, 1995 --------------- ------------------------------- 30 ADDENDUM NO. 8 to the ACCIDENTAL DEATH BENEFIT REINSURANCE AGREEMENT Originally Effective January 1, 1989 between CITIZENS INSURANCE COMPANY OF AMERICA Denver, Colorado (hereinafter referred to as the "Company") and CONNECTICUT GENERAL LIFE INSURANCE COMPANY Hartford, Connecticut (hereinafter referred to as the "SUBSCRIBING REINSURER") It is hereby agreed that effective 12:01 a.m., Local Time at the Company's Home Office, April 1, 1995, the Intermediary Clause to this Agreement shall be changed as follows: Intermediary: Intere Intermediaries is hereby recognized as the Intermediary negotiating this Agreement for all business hereunder. All communications (including but not limited to notices, statements, premiums, return premiums, commissions, taxes, losses, loss adjustment expenses, salvages and loss settlements) relating thereto shall be transmitted to the COMPANY or the SUBSCRIBING REINSURER through Intere Intermediaries, 14901 Quorum Drive, Suite 540, Dallas, Texas 75240. Payments by the COMPANY to the Intermediary shall be deemed to constitute payment to the SUBSCRIBING REINSURER. Payments by the SUBSCRIBING REINSURER to the Intermediary shall be deemed only to constitute payment to the COMPANY to the extent that such payments are actually received by the COMPANY. All other terms and conditions of the Interests and Liabilities Contract remain unchanged. 31 IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed in triplicate: In Austin, Texas this 9th day of November, 1995, CITIZENS INSURANCE COMPANY OF AMERICA By: /s/ Roby Dollar, Vice Chairman ----------------------------------- and in Hartford, Connecticut this 29th day of September, 1995, CONNECTICUT GENERAL LIFE INSURANCE COMPANY By: /s/ Sharon Cardenas ----------------------------------- 32 ADDENDUM NO. 9 to the ACCIDENTAL DEATH BENEFIT REINSURANCE AGREEMENT between CITIZENS INSURANCE COMPANY OF AMERICA Denver, Colorado (hereinafter referred to as the "Ceding Company") and CONNECTICUT GENERAL LIFE INSURANCE COMPANY Hartford, Connecticut (hereinafter referred to as the "Reinsurer") It is hereby understood and agreed that effective 12:01 a.m., Local Time at the Company's Home Office, September 1, 1995, Schedule A, as amended by Addendum No. 4 is deleted in its entirety and is replaced by Schedule A1 attached hereto. All other terms and conditions remain unchanged. IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed in triplicate: In Austin, Texas, this 9th day of November, 1995 CITIZENS INSURANCE COMPANY OF AMERICA By: /s/ Roby Dollar, Vice Chairman --------------------------------- and in Hartford, Connecticut, this 3rd day of November, 1995. CONNECTICUT GENERAL LIFE INSURANCE COMPANY By: /s/ Sharon Cardenas --------------------------------- 33 SCHEDULE A1 (Effective September 1, 1995) For all ages and ratings, the limits for supplementary accidental death insurance coverages to be reinsured are:
Coverage Retention Limit Issue Limit - -------- --------------- ----------- Accidental Death Benefit -0- $250,000 Accidental Death and Dismemberment -0- $250,000
Policy and/or Certificate Forms covered by this Agreement: All Accidental Death Benefits, Accidental Death and Dismemberment Benefits provided under binders, certificates, contracts of insurance, and riders issued, inforce, assumed, or administered by the Company or its subsidiaries. 34 ADDENDUM NO. 10 to the ACCIDENTAL DEATH BENEFIT REINSURANCE AGREEMENT between CITIZENS INSURANCE COMPANY OF AMERICA Denver, Colorado (hereinafter referred to as the "Ceding Company") and CONNECTICUT GENERAL LIFE INSURANCE COMPANY Hartford, Connecticut (hereinafter referred to as the "Reinsurer") It is hereby understood and agreed that effective 12:01 a.m., Local Time at the Company's Home Office, January 1, 1996, this Agreement is amended for inforce, new and renewal business as follows: 1) Schedule A1, as amended by Addendum No. 9, is deleted in its entirety and is replaced with Schedule A2 attached hereto. 2) Article 12, as added by Addendum No. 2, is removed in its entirety and is replaced with the following terms, conditions, and formula: ARTICLE 12: EXPERIENCE REFUND The premiums and claims subject to the following Experience Refund Formula shall be the total payable under Treaty (A-50494-AH930907) and Treaty (102076/DH951040): ER= X% (Premiums-Claims-Expenses)-Deficit Carryforward where, ER= Experience Refund X%= 2% times each $10,000 of premium subject to a maximum of 60% Premiums = Gross reinsurance earned premiums per agreement year Claim = Paid claims during the agreement year plus the outstanding claim reserves at the end of the agreement year 35 Expenses = Reinsurance expenses 15.0% of premiums Deficit Carryforward = Any deficit from the previous Experience Refund shall be carried forward to extinction If Premium minus Claims minus Expenses results in: (A) a positive number, an Experience Refund shall be calculated based upon multiplying the resulting positive number by 2 (two) for each $10,000.00 of Premium, expressed as a percentage, subject to a maximum of 60% minus any previous Agreement Year's Deficit Carryforward. If subtraction of any previous Agreement Year's Deficit Carryforward from the Experience Refund results in a negative number, that negative shall be the Deficit Carryforward for the next Agreement Year and no Experience Refund shall be payable for the current Agreement Year. (B) a negative number, it shall be a Deficit Carryforward (DCF). If no previous Agreement Year's DCF exists, this negative number shall be the DCF for the next Agreement Year's calculation. If a prior DCF exists, both DCF's shall be added together to generate the DCF for the next Agreement Year. No payment shall be due from the Ceding Company. The Experience Refund shall be calculated annually within nine (9) months at the close of the Agreement Year. If the Experience Refund is negative, no payment shall be due from the Ceding Company. However, a deficit shall be created and shall be carried forward until recovered by the Reinsurer. All other terms and conditions remain unchanged. 36 IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed in triplicate: In Austin, Texas, this 9th day of November, 1995. CITIZENS INSURANCE COMPANY OF AMERICA By: /s/ Roby Dollar, Vice Chairman --------------------------------- and in Hartford, Connecticut this 3rd day of November, 1995. CONNECTICUT GENERAL LIFE INSURANCE COMPANY By: /s/ Sharon Cardenas --------------------------------- 37 SCHEDULE A2 (Effective January 1, 1996) For all ages and ratings, the limits for supplementary accidental death insurance coverages to be reinsured are:
Coverage Retention Limit Issue Limit - -------- --------------- ----------- Accidental Death Benefit -0- $250,000 Accidental Death and Dismemberment -0- $250,000
Policy and/or Certificate Forms covered by this Agreement: All Accidental Death Benefits, Accidental Death and Dismemberment Benefits provided under binders, certificates, contracts of insurance, and riders issued, inforce, assumed, or administered by the Company or its subsidiaries. Policies issued on or after January 1, 1996 with the expanded coverage endorsement nos. B16472E (9/95) and B16372S (9/95) shall provide coverage of accidental death benefits for up to $75,000 for homicides as defined in the rider, and up to $250,000 for all other accidents under the Accidental Death Benefit Rider or riders issued on or after January 1, 1996. 38 ADDENDUM NO. 11 to the ACCIDENTAL DEATH BENEFIT REINSURANCE AGREEMENT between CITIZENS INSURANCE COMPANY OF AMERICA Denver, Colorado (hereinafter referred to as the "Ceding Company") and CONNECTICUT GENERAL LIFE INSURANCE COMPANY Hartford, Connecticut (hereinafter referred to as the "Reinsurer") It is hereby understood and agreed that effective 12:01 a.m., Local Time at the Company's Home Office, January 1, 1996, this Agreement is amended for inforce, new and renewal business as follows: 1) Article 12, as amended by Addendum No. 10, is deleted in its entirety and is replaced with the following terms, conditions, and formula: ARTICLES 12: EXPERIENCE REFUND The premium and claims subject to Reinsurance Agreements (A-50494/AH960907), (10276/DH961040), (DH961047), and (DH961048) shall be combined for purposes of calculating the Experience Refund Formula as follows: ER = X% (Premiums-Claims-Expenses)-Deficit Carryforward where, ER= Experience Refund X = 2% times each $10,000 of premium subject to a maximum of 60% Premiums = Gross reinsurance earned premiums per agreement year 39 Claim = Paid claims during the agreement year plus the outstanding claim reserves at the end of the agreement year Expenses = Reinsurance expense 15.0% of premiums Deficit Carryforward = Any deficit from the previous Experience Refund shall be carried forward to extinction If Premium minus Claims minus Expenses results in: (A) A positive number, an Experience Refund shall be calculated based upon multiplying the resulting positive number by 2 (two) for each $10,000.00 of Premium, expressed as a percentage, subject to a maximum of 60% minus any previous Agreement Year's Deficit Carryforward. If subtraction of any previous Agreement Year's Deficit Carryforward from the Experience Refund results in a negative number, that negative shall be the Deficit Carryforward for the next Agreement Year and no Experience Refund shall be payable for the current Agreement Year. (B) a negative number, it shall be a Deficit Carryforward (DCF). If no previous Agreement Year's DCF exists, this negative number shall be the DCF for the next Agreement Year's calculation. If a prior DCF exists, both DCF's shall be added together to generate the DCF for the next Agreement Year. No payment shall be due from the Ceding Company. The combined Experience Refund for aforementioned Agreements shall be calculated under this Agreement annually within nine (9) months at the close of the Agreement Year. If the Experience Refund is negative, no payment shall be due from the Ceding Company. However, a deficit shall be created and shall be carried forward until recovered by the Reinsurer. All other terms and conditions remain unchanged. 40 IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed in triplicate: In Austin, Texas, this 19th day of December, 1995. CITIZENS INSURANCE COMPANY OF AMERICA By: /s/ Mark A. Oliver, EVP /s/ Roby Dollar, Vice Chairman ----------------------------------- and in Hartford, Connecticut, this 13th day of Dec., 1995. CONNECTICUT GENERAL LIFE INSURANCE COMPANY By: /s/ Sharon Cardenas ----------------------------------- 41 ADDENDUM NO. 12 to the ACCIDENTAL DEATH BENEFIT REINSURANCE AGREEMENT between CITIZENS INSURANCE COMPANY OF AMERICA Denver, Colorado (hereinafter referred to as the "Ceding Company") and CONNECTICUT GENERAL LIFE INSURANCE COMPANY Hartford, Connecticut (hereinafter referred to as the "Reinsurer") It is hereby understood and agreed that effective 12:01 a.m., Local Time at the Company's Home Office, January 1, 1996, this Agreement is amended to include Article 13 - Reinsurer's Liability, for inforce, new and renewal business as follows: ARTICLE 13: REINSURER'S LIABILITY The liability of the Reinsurer shall follow that of the Company and shall be subject in all respects to all the general and special stipulations, clauses, conditional receipts, waivers and modifications of the Company's policies. The Company will advise the Reinsurer of any major changes in policies or forms as it would affect, change or increase the liability of the Reinsurer. However, the Reinsurer shall not be bound by any such major changes until it has been so notified by the Company. All other terms and conditions remain unchanged. 42 IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed in triplicate: In Austin, Texas, this 7th day of March, 1996. CITIZENS INSURANCE COMPANY OF AMERICA By: /s/ Roby Dollar, Vice Chairman ---------------------------------- and in Hartford, Connecticut, this 26th day of February, 1996. CONNECTICUT GENERAL LIFE INSURANCE COMPANY By: /s/ Sharon Cardenas ---------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----