0001035704-01-500453.txt : 20011128
0001035704-01-500453.hdr.sgml : 20011128
ACCESSION NUMBER: 0001035704-01-500453
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 1
CONFORMED PERIOD OF REPORT: 20010930
FILED AS OF DATE: 20011107
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CITIZENS INC
CENTRAL INDEX KEY: 0000024090
STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311]
IRS NUMBER: 840755371
STATE OF INCORPORATION: CO
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-13004
FILM NUMBER: 1777502
BUSINESS ADDRESS:
STREET 1: 400 EAST ANDERSON LANE
CITY: AUSTIN
STATE: TX
ZIP: 78752
BUSINESS PHONE: 5128377100
MAIL ADDRESS:
STREET 1: 400 EAST ANDERSON LANE
CITY: AUSTIN
STATE: TX
ZIP: 78752
FORMER COMPANY:
FORMER CONFORMED NAME: CONTINENTAL INVESTORS LIFE INC
DATE OF NAME CHANGE: 19881222
10-Q
1
d91841e10-q.txt
FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2001
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended SEPTEMBER 30, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
---------------------- -----------------------
Commission File Number: 1-13004
--------------------------------------------------------
CITIZENS, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-0755371
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 East Anderson Lane, Austin, Texas 78752
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(512) 837-7100
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
As of October 30, 2001, Registrant had 24,417,118 shares of Class A
common stock, No Par Value, outstanding and 711,040 shares of Class B common
stock, No Par Value, outstanding.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Financial Position,
September 30, 2001 (Unaudited) and December 31,
2000 3
Consolidated Statements of Operations, Three Months
Ended September 30, 2001 and 2000 (Unaudited) 5
Consolidated Statements of Operations, Nine Months
Ended September 30, 2001 and 2000 (Unaudited) 6
Consolidated Statements of Cash Flows, Nine Months
Ended September 30, 2001 and 2000 (Unaudited) 7
Notes to Consolidated Financial Statements 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 19
PART II. OTHER INFORMATION 20
2
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
ASSETS
Investments:
Fixed maturities held-for-investment, at
amortized cost (market $6,037,500
in 2001 and $5,589,000 in 2000) $ 5,573,125 $ 5,582,802
Fixed maturities available-for-sale, at
fair value (cost $170,924,927 in
2001 and $165,996,272 in 2000) 174,704,817 164,945,698
Equity securities, at fair value (cost
$588,505 in 2001 and $713,235 in 2000) 563,927 675,726
Mortgage loans on real estate (net of reserve
of $50,000 in 2001 and 2000) 1,224,324 1,178,668
Policy loans 19,972,674 20,884,136
Other long-term investments 1,067,790 936,297
------------ ------------
Total investments 203,106,657 194,203,327
Cash 15,136,181 4,064,035
Accrued investment income 2,037,585 2,222,583
Reinsurance recoverable 2,849,468 2,662,724
Deferred policy acquisition costs 39,688,254 38,052,352
Other intangible assets 1,444,925 1,675,325
Federal income tax recoverable -- 174,978
Deferred federal income tax 3,302,023 4,628,750
Cost of insurance acquired 5,472,259 6,156,424
Excess of cost over net assets acquired 6,910,826 7,362,654
Property, plant and equipment 6,288,925 5,469,583
Other assets 957,886 1,169,629
------------ ------------
Total assets $287,194,989 $267,842,364
============ ============
See accompanying notes to consolidated financial statements. (Continued)
3
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Future policy benefit reserves $ 180,010,532 $ 175,269,307
Dividend accumulations 4,750,598 4,749,321
Premium deposits 4,175,160 3,033,514
Policy claims payable 3,036,491 2,866,110
Other policyholders' funds 2,350,711 2,245,947
------------- -------------
Total policy liabilities 194,323,492 188,164,199
Federal Income tax payable 1,067,450 --
Purchased securities 7,000,000 --
Other liabilities 1,180,175 1,355,718
Commissions payable 650,669 1,009,416
------------- -------------
Total liabilities 204,221,786 190,529,333
STOCKHOLDERS' EQUITY:
Common stock:
Class A, no par value, 50,000,000 shares
authorized, 26,642,938 shares issued in
2001 and 2000, including shares in
treasury of 2,225,820 in 2001 and 2000 79,701,590 79,701,590
Class B, no par value, 1,000,000 shares
authorized, 711,040 shares issued and
outstanding in 2001 and 2000 910,482 910,482
Retained earnings 3,775,186 1,311,655
Accumulated other comprehensive income (loss):
Unrealized investment gain (loss), net of tax 2,478,506 (718,135)
------------- -------------
86,865,764 81,205,592
Treasury stock, at cost (3,892,561) (3,892,561)
------------- -------------
Total stockholders' equity 82,973,203 77,313,031
------------- -------------
Total liabilities and stockholders' equity $ 287,194,989 $ 267,842,364
============= =============
See accompanying notes to consolidated financial statements.
4
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2001 2000
------------ ------------
REVENUES:
Premiums $ 13,892,419 $ 13,558,646
Annuity and universal life considerations 54,323 59,385
Net investment income 3,489,266 3,204,023
Realized gains (losses) 14,061 (89,561)
Other income 132,665 158,539
------------ ------------
Total revenues 17,582,734 16,891,032
BENEFITS AND EXPENSES:
Insurance benefits paid or provided:
Increase in future policy benefit reserves 1,383,049 2,145,261
Policyholders' dividends 905,569 836,021
Claims and surrenders 7,445,642 8,899,271
Annuity expenses 56,196 102,853
------------ ------------
Total insurance benefits paid or provided 9,790,456 11,983,406
Commissions 3,663,972 3,217,551
Other underwriting, acquisition and insurance expenses 2,514,909 2,443,061
Capitalization of deferred policy acquisition costs (3,065,171) (2,472,444)
Amortization of deferred policy acquisition costs 2,209,468 1,952,416
Amortization of cost of insurance acquired, excess of cost
over net assets acquired and other intangibles 523,757 388,922
------------ ------------
Total benefits and expenses 15,637,391 17,512,912
------------ ------------
Income (loss) before Federal income tax $ 1,945,343 $ (621,880)
Federal income tax expense (benefit) 585,000 (335,073)
------------ ------------
NET INCOME (LOSS) $ 1,360,343 $ (286,807)
============ ============
PER SHARE AMOUNTS:
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE OF
COMMON STOCK $ 0.05 $ (0.01)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 25,128,158 25,128,158
============ ============
See accompanying notes to consolidated financial statements.
5
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
------------ ------------
REVENUES:
Premiums $ 38,819,800 $ 38,798,671
Annuity and universal life considerations 165,988 184,643
Net investment income 10,110,224 9,257,159
Realized losses (47,527) (38,025)
Other income 369,779 464,424
------------ ------------
Total revenues 49,418,264 48,666,872
BENEFITS AND EXPENSES:
Insurance benefits paid or provided:
Increase in future policy benefit reserves 4,702,073 4,615,938
Policyholders' dividends 2,301,322 2,129,379
Claims and surrenders 21,606,679 23,969,251
Annuity expenses 170,281 416,975
------------ ------------
Total insurance benefits paid or provided 28,780,355 31,131,543
Commissions 9,633,958 8,822,030
Other underwriting, acquisition and insurance expenses 7,879,929 7,729,985
Capitalization of deferred policy acquisition costs (7,969,420) (6,774,815)
Amortization of deferred policy acquisition costs 6,333,518 6,350,208
Amortization of cost of insurance acquired, excess of cost over
net assets acquired and other intangibles 1,366,393 1,280,684
------------ ------------
Total benefits and expenses 46,024,733 48,539,635
------------ ------------
Income before Federal income tax 3,393,531 127,237
Federal income tax expense (benefit) 930,000 (234,398)
------------ ------------
NET INCOME $ 2,463,531 $ 361,635
============ ============
PER SHARE AMOUNTS:
BASIC AND DILUTED EARNINGS PER SHARE OF
COMMON STOCK $ 0.10 $ 0.01
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 25,128,158 25,128,158
============ ============
See accompanying notes to consolidated financial statements.
6
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,463,531 $ 361,635
Adjustments to reconcile net gain to net cash provided by
operating activities:
Realized losses 47,527 38,025
Net deferred policy acquisition costs (1,635,902) (424,607)
Amortization of cost of insurance
acquired, excess cost over
net assets acquired and other intangibles 1,366,393 1,280,684
Depreciation 456,821 296,137
Change in:
Accrued investment income 184,998 325,358
Reinsurance recoverable (186,744) (922,226)
Future policy benefit reserves 4,741,225 4,615,938
Other policy liabilities 1,418,068 449,652
Deferred federal income tax (320,028) (353,203)
Federal income tax 1,242,428 (1,794,635)
Commissions payable and other liabilities (534,290) 566,318
Other, net 312,571 (83,862)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,556,598 4,355,154
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of fixed maturities, available-for-sale 4,047,125 7,614,678
Maturity of fixed maturities, available-for-sale 49,361,181 10,493,445
Purchase of fixed maturities, available-for-sale (51,459,074) (30,003,685)
Sale of equity securities, available-for-sale 97,501 --
Principal payments on mortgage loans 126,114 153,063
Mortgage loans funded (171,770) --
Sale of other long-term investments and property, plant and
equipment 21,750 16,930
See accompanying notes to consolidated financial statements. (Continued)
7
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
------------ ------------
Decrease in policy loans, net $ 911,462 $ 936,100
Purchase of other long-term investments and property, plant
and equipment (1,418,741) (947,045)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,515,548 (11,736,514)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
11,072,146 (7,381,360)
Cash and cash equivalents at beginning of period 4,064,035 11,149,084
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,136,181 $ 3,767,724
============ ============
Supplemental:
Cash paid during the period for
income taxes $ 7,600 $ 1,913,500
============ ============
See accompanying notes to consolidated financial statements.
8
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
(1) FINANCIAL STATEMENTS
The interim consolidated financial statements include the accounts and
operations of Citizens, Inc. (Citizens), incorporated in the state of
Colorado on November 8, 1977, and its wholly-owned subsidiaries, Citizens
Insurance Company of America (CICA), Computing Technology, Inc. (CTI),
Funeral Homes of America, Inc. (FHA), Insurance Investors, Inc. (III),
Central Investors Life Insurance Company of Illinois (CILIC), First
Investors Group, Inc. (Investors) and Excalibur Insurance Corporation
(Excalibur). Citizens and its consolidated subsidiaries are collectively
referred to as the "Company."
The statement of financial position for September 30, 2001, the statements
of operations for the three-month and nine-month periods ended September
30, 2001 and 2000, and the statements of cash flows for the nine-month
periods then ended have been prepared by the Company without audit. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and changes in cash flows at September 30, 2001 and for
comparative periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America (U.S. GAAP) have been omitted. It
is suggested that these financial statements be read in conjunction with
the financial statements and notes thereto included in the Company's
December 31, 2000 Annual Report on Form 10-K filed with the Securities and
Exchange Commission. The results of operations for the period ended
September 30, 2001 are not necessarily indicative of the operating results
for the full year.
(2) SEGMENT INFORMATION
The Company has two reportable segments identified by geographic area:
international business and domestic business. International business,
consisting of ordinary whole life business, is sold throughout Central and
South America. The Company has no assets, offices or employees outside of
the United States of America (U.S.) and requires that all transactions be
in U.S. dollars, and paid in the U.S. Domestic business, consisting of
traditional life and burial insurance, pre-need policies, accident and
health, specified disease, hospital indemnity and accidental death policies
are sold throughout the southern U.S. The accounting policies of the
segments are in accordance with U.S. GAAP and are the same as those
described in the summary of significant accounting policies. The Company
evaluates performance based on U.S. GAAP net income (loss) before federal
income taxes for its two reportable segments.
9
Geographic Areas - The following summary represents financial data of the
Company's continuing operations based on their location for the nine-month
period ended September 30, 2001 and 2000.
2001 2000
----------- -----------
REVENUES
Domestic $ 9,075,212 $10,819,149
International 40,343,052 37,847,723
----------- -----------
Total Revenues $49,418,264 $48,666,872
=========== ===========
The following summary, representing revenues, amortization expense and
pre-tax income from continuing operations and identifiable assets for the
Company's reportable segments as of and for the nine months ended September
30, 2001 and 2000, is as follows:
NINE MONTHS ENDED SEPTEMBER 30 2001 2000
---------------------------------------------- ------------ ------------
Revenue, excluding net investment income
and realized losses:
Domestic $ 7,227,290 $ 8,769,640
International 32,128,277 30,678,098
------------ ------------
Total consolidated revenue, excluding net
investment income and realized losses $ 39,355,567 $ 39,447,738
============ ============
Net investment income:
Domestic $ 1,856,650 $ 2,057,962
International 8,253,574 7,199,197
------------ ------------
Total consolidated net investment income $ 10,110,224 $ 9,257,159
============ ============
Amortization expense:
Domestic $ 1,446,241 $ 1,710,752
International 6,253,670 5,920,140
------------ ------------
Total consolidated amortization expense $ 7,699,911 $ 7,630,892
============ ============
Realized losses:
Domestic $ (8,728) $ (8,453)
International (38,799) (29,572)
------------ ------------
Total consolidated realized losses $ (47,527) $ (38,025)
============ ============
Income before Federal income tax:
Domestic $ 626,707 $ 32,274
International 2,766,824 94,963
------------ ------------
Total consolidated income before
Federal income tax $ 3,393,531 $ 127,237
============ ============
10
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ -----------------
Assets:
Domestic $ 97,071,906 $ 93,476,985
International 190,123,083 174,365,379
------------ ------------
Total $287,194,989 $267,842,364
============ ============
Major categories of premiums are summarized as follows:
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
------------------ ------------------
Premiums:
Ordinary life $ 34,674,012 $ 32,903,984
Group life 245,290 363,560
Accident and health 3,900,498 5,531,127
------------ ------------
Total premiums $ 38,819,800 $ 38,798,671
============ ============
(3) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
For the three and nine months ended September 30, 2001, the other comprehensive
income amounts included in total comprehensive income consisted of unrealized
gains on investments in fixed maturities and equity securities
available-for-sale of $2,621,207 and $3,196,641, respectively, net of tax, and
for the same period in 2000 unrealized gains of $1,732,071 and $1,208,044,
respectively, net of tax. Total comprehensive income for the three and nine
months ended September 30, 2001 was $3,981,550 and $5,660,172, and for the same
period in 2000 total comprehensive income was $1,445,264 and $1,569,679,
respectively.
(4) EARNINGS PER SHARE
Basic and diluted earnings per share have been computed using the weighted
average number of shares of common stock outstanding during each period. The
weighted average shares outstanding for both the three and nine months ended
September 30, 2001 and 2000 were 25,128,158. The per share amounts have been
adjusted retroactively for all periods presented to reflect the change in
capital structure resulting from a 7% common stock dividend paid on December 31,
2000. The stock dividend resulted in the issuance of 1,877,265 Class A shares
(including 145,613 shares in treasury) and 46,517 Class B shares.
11
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Certain statements contained in this Form 10-Q 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 that may cause actual
results to differ materially from those in such statements. Factors that could
cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to: (i) the strength of foreign and U.S.
economies in general and the strength of the local economies in which operations
are conducted; (ii) the effects of and changes in trade, monetary and fiscal
policies and laws; (iii) inflation, interest rates, market and monetary
fluctuations and volatility; (iv) the timely development and acceptance of new
products and services and perceived overall value of these products and services
by existing and potential customers; (v) changes in consumer spending, borrowing
and saving habits; (vi) concentrations of business from persons residing in
third world countries; (vii) the Company's ability to consummate and integrate
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 of the Company 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 in 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.
12
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Net income for the nine months ended September 30, 2001 was $2,463,531 or $0.10
per share, compared to net income of $361,635, or $0.01 per share, for the same
period in 2000. Revenues increased to $49,418,264 in 2001 compared to the first
nine months of 2000 when revenues were $48,666,872. The increase in revenues was
driven by a 9.2% increase in net investment income that offset a 29.5% decline
in accident and health premiums.
Premium income for the first nine months of 2001 was $38,819,800 compared to
$38,798,671 for the same period in 2000. The increase is attributable to
increased production of new business for the first nine months of 2001 compared
to the same period in 2000 which offset a $1,630,629 decrease in accident and
health premiums. Accident and health premiums were $3,900,498 for the nine
months ended September 30, 2001 compared to $5,531,127 for the same period in
2000. Management cancelled a large portion of the existing blocks of United
Security Life Insurance Company's ("USLIC")'s group dental business and National
Security Life and Accident Insurance Company's ("NSLIC")'s (two wholly owned
subsidiaries that were merged into another life insurance subsidiary of the
Company in late 2000) major medical business during the third quarter of 1999 in
order to curtail both claims and operating expenses. This action contributed to
a $3,650,632 decrease in accident and health premiums for the year ended
December 31, 2000, as well as the above-referenced decrease in 2001. Management
believes this action enhanced near-term profitability and will enhance long-term
profitability. Because of increases in loss ratios, management has implemented
significant rate increases on the remaining supplemental non-cancelable accident
and health products, which has also contributed to the decrease in accident and
health premiums as some policyholders have elected to cancel their policies.
Production of new international life insurance premiums measured in paid,
annualized premiums increased 19.6% during the first nine months of 2001
compared to the same period in 2000 as a result of an increased emphasis on
recruiting and training agents. In addition, management initiated a domestic
ordinary life sales program in late 2000 targeting rural areas of the United
States that is expected to provide a new entre into the domestic life market for
the Company in future years. Because sales efforts have only recently begun,
management is unable to predict the success of this new program.
Net investment income increased 9.2% in the first nine months of 2001 compared
to the same period in 2000, amounting to $10,110,224 in 2001 compared to
$9,257,159 for the first nine months of 2000. This increase reflects continued
expansion of the Company's asset base and the actions taken in previous years to
change the mix and duration of the Company's invested assets to place less
emphasis on government guaranteed mortgage pass-through instruments and more
emphasis on investments in callable instruments issued by U.S. government
agencies. During 2001, there have been significant decreases in interest rates.
As a result, management expects returns on newly invested funds to decline in
the short term. Management does not believe such declines will have a materially
adverse effect on future operating results.
Claims and surrenders expense decreased 9.9% from $23,969,251 for the nine
months ended September 30, 2000 to $21,606,679 for the same period in 2001.
Death claims decreased 13.0%
13
from $4,726,708 in the first nine months of 2000 to $4,111,047 in the first nine
months of 2001 due to decreases in claim volume and average claim amount.
Surrender expense decreased 1.3% from $11,138,094 in the first nine months of
2000 to $10,992,511 in the first nine months of 2001. Improving persistency on
the Company's book of international whole life insurance business was the
primary reason for the decreased surrender activity. Endowments increased 11.6%
from $3,523,688 in the first nine months of 2000 to $3,932,776 in the first nine
months of 2001. Like policy dividends, endowments are factored into the premiums
and as such the increase should have no adverse impact on profitability.
Accident and health benefits were $2,308,277 for the first nine months of 2001
compared to $4,279,922 for the same period of 2000. This 46.1% decrease in
accident and health benefits is directly related to the cancellation of the
USLIC and NSLIC blocks of business discussed above.
The remaining components of claims and surrenders, comprised of supplemental
contract benefits, interest on policy funds and other miscellaneous policy
benefits, amounted to $262,068 for the first nine months of 2001, compared to
$300,839 for the first nine months of 2000.
Underwriting, acquisition and insurance expenses increased 1.9% from $7,729,985
in the first nine months of 2000 to $7,879,929 for the same period in 2001. The
increase is attributed to the start-up costs of the domestic marketing program
which offset reductions in the expenses associated with the administration of
the accident and health business and the merger of NSLIC and USLIC in late 2000
into another life insurance subsidiary of the Company.
Deferred policy acquisition costs capitalized in the first nine months of 2001
were $7,969,420 compared to $6,774,815 for the same period of the previous year.
Amortization of these costs was $6,333,518 for the first nine months of 2001
compared to $6,350,208 for the same period of 2000. Amortization of cost of
insurance acquired, excess of cost over net assets acquired ("goodwill") and
other intangible assets increased to $1,366,393 during the first nine months of
2001 from $1,280,684 for the same period in 2000. The increase in amortization
is related to the decreased persistency related to the closed books of business
of companies previously purchased. In the event that production or revenues from
the companies that comprise the goodwill fall below assumed levels, write-offs
of the asset could occur. Management believes its assumptions regarding the
various blocks of business to be realistic and, accordingly, does not expect
such an event to occur.
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Net income for the three months ended September 30, 2001 was $1,360,343 or $0.05
per share, compared to a net loss of $286,807, or $(0.01) per share, for the
same period in 2000. Revenues increased 4.1% in 2001 to $17,582,734 compared to
third quarter of 2000 revenues of $16,891,032. The increase in revenues was
driven by a 8.9% increase in net investment income that offset a 30.0% decline
in accident and health premiums.
Premium income for the third quarter of 2001 was $13,892,419 compared to
$13,558,646 for the same period in 2000. The 2.5% increase is attributable to
increased production of new life insurance during the third quarter of 2001 that
offset a $517,176 decrease in accident and health premiums which were $1,207,587
for the three months ended September 30, 2001 compared to $1,724,763 for the
same period in 2000. As indicated above, management cancelled a large portion of
the existing blocks of USLIC's group dental business and NSLIC's major medical
14
business during the third quarter of 1999 in order to curtail both claims and
operating expenses. This action resulted in a significant decrease in accident
and health premiums during the third quarter of 2000, as well as the
above-described decrease in 2001. Management believes this action enhanced
near-term profitability and will enhance future profitability. Because of
increases in loss ratios, management has implemented significant rate increases
on the remaining supplemental accident and health products which has contributed
to the decrease in accident and health premiums as some policyholders have
elected to cancel their policies.
Production of new international life insurance premiums measured in paid,
annualized premiums, increased 25.0% during the third quarter of 2001 compared
to the same period in 2000. This increase resulted from an increased emphasis on
recruiting and training agents. New domestic life sales remained negligible
during the quarter as management continued to recruit and train a domestic
agency force.
Net investment income increased 8.9% during the third quarter of 2001 compared
to the same period in 2000 to $3,489,266 from $3,204,023. This increase reflects
continued expansion of the Company's asset base and the actions taken in
previous years to change the mix and duration of the Company's invested assets
to place less emphasis on government guaranteed mortgage pass-through
instruments and more emphasis on investments in callable instruments issued by
U.S. government agencies. During 2001, there have been significant decreases in
interest rates. As a result, management expects returns on newly invested funds
to decline in the short term; however, Management does not believe such declines
will have a materially adverse effect on the future operating results of the
Company.
Claims and surrenders expense decreased 16.3% from $8,899,271 for the three
months ended September 30, 2000 to $7,445,642 for the same period in 2001. Death
claims decreased 44.7% from $2,371,646 in the third quarter of 2000 to
$1,310,495 in the third quarter of 2001 due to decreased claim volumes and
average claim amounts. Surrender expense increased 4.5% from $3,596,304 in the
third quarter of 2000 to $3,757,211 in the third quarter of 2001. Endowments
increased 24.1% from $1,227,726 in the third quarter of 2000 to $1,523,142 in
the third quarter of 2001. Like policy dividends, endowments are factored into
the premiums and as such the increase should have no adverse impact on
profitability. Accident and health benefits were $778,427 for the third quarter
of 2001 compared to $1,601,894 for the same period of 2000. This 51.4% decrease
in accident and health benefits is directly related to the cancellation of the
USLIC and NSLIC blocks of business discussed above.
The remaining components of claims and surrenders, comprised of supplemental
contract benefits, interest on policy funds and assorted other miscellaneous
policy benefits, amounted to $76,367 for the third quarter of 2001, compared to
$101,701 for the third quarter of 2000.
Underwriting, acquisition and insurance expenses increased 2.9% from $2,443,061
in the third quarter of 2000 to $2,514,909 for the same period in 2001. The
increase was attributable to the development costs of the domestic marketing
program which offset reductions in the expenses associated with the
administration of accident and health business and the merger of NSLIC and USLIC
in late 2000 into a life insurance subsidiary of the Company.
Deferred policy acquisition costs capitalized in the third quarter of 2001 were
$3,065,171 compared to $2,472,444 for the same period of the previous year.
15
Amortization of these costs was $2,209,468 for the third quarter of 2001
compared to $1,952,416 for the same period of 2000. Amortization of cost of
insurance acquired, excess of cost over net assets acquired ("goodwill") and
other intangible assets increased to $523,757 during the third quarter of 2001
from $388,922 for the same period in 2000. The increase in amortization is
related to decreased persistency related to closed books of business of
companies previously purchased. In the event that production or revenues from
the companies that comprise the goodwill fall below assumed levels, write-offs
of the asset could occur. Management believes its assumptions regarding the
various blocks of business to be realistic and, accordingly, does not expect
such an event to occur.
LIQUIDITY AND CAPITAL RESOURCES
Stockholders' equity increased to $82,973,203 at September 30, 2001 from
$77,313,031 at December 31, 2000. The increase was attributable to the net
income earned during the first nine months of 2001 and an increase in unrealized
gains, net of tax, of $3,196,641 during the period. Increases in the market
value of the Company's available-for-sale bond portfolio caused by decreases in
interest rates resulted in the increase in unrealized gains, net of tax.
Invested assets increased from $194,203,327 at December 31, 2000 to $203,106,657
at September 30, 2001. At September 30, 2001 and December 31, 2000, fixed
maturities were categorized into two classifications: fixed maturities
held-to-maturity, which were valued at amortized cost, and fixed maturities
available-for-sale which were valued at fair value. Fixed maturities
available-for-sale and fixed maturities held-to-maturity were 86.0% and 2.7%,
respectively, of invested assets at September 30, 2001. Fixed maturities
held-to-maturity, amounting to $5,573,125, consist primarily of U.S. Treasury
securities. Management has the intent and believes the Company has the ability
to hold these securities to maturity.
The Company's mortgage loan portfolio, which constituted 0.6% of invested assets
at December 31, 2000 and September 30, 2001, has historically been composed
primarily of seasoned small residential loans in Texas. Management established a
reserve of $50,000 at September 30, 2001 and December 31, 2000 (approximately 4%
of the mortgage portfolio's balance) to cover potential unforeseen losses in the
Company's mortgage portfolio.
Policy loans comprised 9.8% of invested assets at September 30, 2001. These
loans, which are secured by the underlying policy values, have annual yields
ranging from 5% to 10% percent and maturities that are related to the maturity
or termination of the applicable policies. Management believes that the Company
maintains more than adequate liquidity despite the uncertain maturities of these
loans.
Cash balances of the Company in its primary depository, Chase Bank, Austin,
Texas, were significantly in excess of Federal Deposit Insurance Corporation
coverage at September 30, 2001 and December 31, 2000. Management monitors the
solvency of all financial institutions in which the Company has funds to
minimize the exposure for loss. Management does not believe the Company is at
risk for such a loss. The increase in cash at September 30, 2001 was the result
of a timing difference between the receipt of proceeds of bonds that had been
called at the end of September and the settlement of the reinvestment of the
same.
16
CICA owned 2,085,244 shares of Citizens Class A common stock at September 30,
2001 and December 31, 2000. In the Citizens consolidated financial statements,
the shares of Citizens Class A common stock owned by CICA are combined with the
other treasury shares and the aggregate treasury shares are reported at cost in
conformity with U.S. GAAP. The Statutory Accounting Practices for these shares
prescribed by the National Association of Insurance Commissioners ("NAIC") and
the State of Colorado are not followed in the U.S. GAAP consolidated financial
statements of Citizens. Those Statutory Accounting Practices are only followed
with respect to filings made in accordance with the rules and regulations of the
various state insurance departments and the NAIC and require that CICA carry its
investment in Citizens shares at market value reduced by the percentage
ownership of Citizens by CICA, limited to 2% of admitted assets.
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 be required. At December 31, 2000 and September 30, 2001, all of
the Company's life insurance subsidiaries were above required minimum levels of
capital.
Effective January 1, 2001, the NAIC implemented codified rules for statutory
accounting. These rules are subject to implementation and approval by each
state. Colorado notified CICA that it has adopted the codified accounting rules;
however, certain state laws that differ from these rules should be followed. The
primary difference between the Colorado statutes and the codified rules involve
the establishment of a liability for future policy dividends payable. Under
codification, such a reserve is mandated; however, Colorado has an exception if
the difference between the premiums charged and the mortality factor included in
the premium on participating policies exceeds the reserve that would be
established. As a result, CICA did not establish the reserve of approximately $3
million in its statutory financial statements. Overall, the implementation of
codification had no material effect on the Company's statutory capital and
surplus.
The tragedies of September 11, 2001 have significantly impacted the life
insurance industry's operating results. None of the Company's life insurance
subsidiaries had ever written business in New York or Washington, D.C., and the
Company is unaware of any claims related to such events, therefore, does not
expect any adverse effects as a result.
17
FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, became effective as
of January 1, 2001. Implementation of SFAS No. 133, as amended, did not have a
material affect on the financial position, results of operations or liquidity of
the Company.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - A Replacement of Financial Accounting Standards
Board (FASB) Statement 125" revises the rules to be followed when determining
whether a special purpose entity (SPE) is a qualifying SPE (QSPE). SFAS No. 140
requires that a QSPE have at least 10% of its beneficial interests held by
parties unrelated to the transferor, limits the amount and type of derivative
instruments that a QSPE can hold and sets requirements for a transfer to a QSPE
to be accounted for as a sale. SFAS No. 140 is effective for transfers occurring
after March 31, 2001. However, expanded disclosures about securitizations and
collateral are effective for fiscal years ending after December 15, 2000. SFAS
No. 140 did not have a material effect on the financial position, results of
operations or liquidity of the Company.
In December 2000, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 00-3, "Accounting by Insurance Enterprises
for Demutualizations and Formations of Mutual Life Insurance Holding Companies
and for Certain Long-Duration Participating Contracts." SOP 00-3 provided
guidance on accounting by insurance enterprises for demutualizations and the
formation of mutual insurance holding companies. SOP 00-3 also applies to stock
insurance enterprises that apply SOP 95-1, "Accounting for Certain Insurance
Activities of Mutual Life Insurance Enterprises" to account for participating
policies. This SOP is effective for financial statements for fiscal years ending
after December 15, 2001. Management does not believe that SOP 00-3 will have any
impact on the Company since it is already a stock life insurance company and
does not pay dividends based on actual experience of the Company. The Company
utilizes contractual life insurance dividend scales as shown in published
dividend illustrations at the date the insurance contracts are issued in
determining policyholder dividends.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 as well as all purchase method business combinations
completed after June 30, 2001. SFAS No. 141 also specifies criteria intangible
assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill. Any purchase price allocable to an
assembled workforce may not be accounted for separately.
SFAS No. 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually. SFAS No. 142 also requires that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment.
The Company is required to adopt the provisions of SFAS No. 141 immediately; and
SFAS No. 142 is effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined
18
to have an indefinite useful life that are acquired in a purchase business
combination completed after June 30, 2001 will not be amortized, but will
continue to be evaluated for impairment in accordance with the appropriate
pre-SFAS No. 142 accounting literature. Goodwill and intangible assets acquired
in business combinations completed before July 1, 2001 will continue to be
amortized prior to the adoption of SFAS No. 142.
The Company estimates that, assuming that no goodwill and other intangible
assets are impaired in 2002, earnings for 2002 would increase by approximately
$900,000 as a result of the adoption of SFAS No. 141 and 142. Under these new
accounting standards goodwill and intangible assets would not be amortized but
instead would be subject to tests for impairment at least annually.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The unrealized gains (losses) that could be caused by decreases and increases in
the interest rates of 100, 200 and 300 basis points, respectively, on the
Company's available-for-sale fixed maturities is as follows at September 30,
2001:
DECREASES IN INTEREST RATES INCREASES IN INTEREST RATES
-------------------------------------- -------------------------------------------
300 BASIS 200 BASIS 100 BASIS 100 BASIS 200 BASIS 300 BASIS
POINTS POINTS POINTS POINTS POINTS POINTS
----------- ----------- ---------- ----------- ------------ ------------
$19,145,000 $12,761,000 $6,652,000 $(7,967,000) $(15,118,000) $(22,116,000)
=========== =========== ========== =========== ============ ============
At September 30, 2001 and December 31, 2000, there were no fixed maturities or
other investments that the Company classified as trading instruments. At
September 30, 2001 and December 31, 2000, there were no investments in
derivative instruments.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company may from time to time be a party to various legal
proceedings incidental to its business.
ITEM 2. CHANGES IN SECURITIES
None, other than disclosed in the Notes to the Financial Statements or
Management's Discussion and Analysis of Financial Condition and Results
of Operations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITIZENS, INC.
By: /s/ Mark A. Oliver
------------------------------------
Mark A. Oliver, FLMI
President
By: /s/ Jeffrey J. Wood
------------------------------------
Jeffrey J. Wood, CPA
Executive Vice President,
Secretary/Treasurer and CFO
Date: November 7, 2001
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