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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
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 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 New York 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). 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 June 30, 2002, aggregate market value of the Class A voting stock held by
non-affiliates of the Registrant was approximately $258,932,841.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report incorporates certain portions of the definitive proxy
material of the Registrant in respect of its 2003 Annual Meeting of
Shareholders.
Number of shares of common stock outstanding as of March 15, 2003
Class A: 31,866,252
Class B: 817,696
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Citizens, Inc. (Citizens) operates primarily as an insurance holding
company. We were incorporated in Colorado in 1977. We are a parent
company that directly or indirectly owns 100% of eight operating
subsidiaries which are listed in the table below. Collectively,
Citizens and its subsidiaries are referred to herein as the
"Company", "we" or "us."
YEAR STATE OF BUSINESS
SUBSIDIARY INCORPORATED INCORPORATION ACTIVITY
---------- ------------ ------------- --------
Citizens Insurance Company of
America (CICA) 1968 Colorado Life insurance
Central Investors Life Insurance
Company of Illinois (CILIC) 1965 Illinois Life insurance
Combined Underwriters Life Insurance
Company (Combined) 1965 Texas Life insurance
Lifeline Underwriters Life Insurance
Company (Lifeline) 1985 Texas Life insurance
Excalibur Insurance Corp. (Excalibur) 1996 Illinois Life insurance
Computing Technology, Inc. (CTI) 1986 Colorado Data processing
Insurance Investors, Inc. (III) 1965 Texas Aircraft transportation
Funeral Homes of America (FHA) 1989 Louisiana Funeral home
Historically, our business has focused primarily on issuing life
insurance products to residents of Latin American countries, and
most of our revenues continue to be generated from this area. In
addition, our domestic operations consist of a limited amount of
U.S. insurance sales, as well as sales from insurance subsidiaries
acquired over the past several years.
We actively review domestic acquisition opportunities, and we
consider a variety of criteria when evaluating potential acquisition
candidates, including:
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o the asset base and growth opportunities related to a
target;
o insurance policy composition of a target as well as
persistency and profitability of the policies;
o the geographic market location of the target and
demographics of its policyholder base;
o opportunities to improve the efficiency of a target;
o the effect of the acquisition on earnings per share and
book value;
o required resources to integrate or add the operations of
the target; and
o the investment required for, and opportunity costs of,
the acquisition.
Our strategy in assimilating acquisitions is to emphasize revenue
growth as well as continuously review the operations of the acquired
entities and streamline operations where feasible. The following are
our acquisitions in the last five years, all of which we acquired
using our Class A common stock as the sole consideration.
In January, 1999, we acquired Investors, the parent of Excalibur for
609,269 shares of our Class A common stock. The aggregate market
value of the consideration was approximately $ 3.4 million.
On March 19, 2002, we issued approximately 753,000 shares of our
Class A common stock to acquire Combined and approximately 305,000
shares of our Class A common stock to acquire Lifeline. The
aggregate market value of the consideration was approximately $12.0
million.
On February 18, 2003, we issued approximately 2.6 million shares of
our Class A common stock to acquire First Alliance Corporation
(First Alliance). The aggregate market value of the consideration
was approximately $17.2 million.
On March 7, 2003, we entered into a Plan and Agreement of Merger
with Mid-American Alliance Corporation (Mid-American) a Missouri
insurance holding company, whereby we will acquire all of the
outstanding shares of Mid-American for shares of our Class A common
stock. The transaction values Mid-American's shares at $1.35 each
and our Class A shares based on the average closing price for the 20
trading days preceding closing. Closing is expected in mid 2003. The
anticipated market value of the consideration is expected to be $8.2
million.
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. Many of these
statements contain risk factors as well. 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
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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 where our
policyholders reside; (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.
We make available, free of charge, through our Internet website
(http://www.citizensinc.com), our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if
applicable, amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended, as soon as reasonably practicable after we electronically
file such reports with, or furnishes such reports to, the Securities
and Exchange Commission. We are not including the information
contained on our website as part of, or incorporating it by
reference into, this Annual Report on Form 10-K.
(b) FINANCIAL INFORMATION REGARDING THE INSURANCE BUSINESS
Through several of our subsidiaries, we operate principally in two
business segments: selling selected lines of individual life and
accident and health (A&H) insurance policies in domestic markets and
individual ordinary life insurance in international markets. Except
for certain insignificant operations, we do not, and have no present
intention to, engage in any non-insurance related business. The
following tables set forth certain statistical information on the
basis of accounting principles generally
4
accepted in the United States of America (U.S. GAAP) concerning our
operations for each of the five years ended December 31, 2002.
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)
------------------ ------------------ -------------------
2002 $2,416,610 $2,408,004 $2,412,307
2001 2,240,523 2,416,610 2,328,567
2000 2,197,844 2,240,523 2,219,184
1999 2,340,744 2,197,844 2,269,294
1998 2,250,197 2,340,744 2,295,471
(a) Dollars in thousands.
(b) Before assuming and ceding reinsurance from/to reinsurers.
Economic and other market disruptions in our international markets had a
negative impact on persistency in 1999, contributing to the decline in insurance
in-force. Improved persistency in 2001 combined with increased sale of new
policies in 2000 and 2001 contributed to the growth in insurance in-force during
2000 and 2001. Increased issuance of new policies in 2002 offset by increased
surrender activity during the year related to the current uncertain economic
climate in several Latin American countries contributed to the decline in
insurance in-force.
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.
RATIO OF REINSURANCE CEDED
LAPSES AND -------------------------------
SURRENDERS AMOUNT REINSURANCE
LAPSES AND TO MEAN OF PREMIUM
SURRENDERS (a) IN-FORCE REINSURANCE (a) CEDED (b)
-------------- -------- --------------- ---------
2002 $177,227 7.3% $152,103 $2,212,715
2001 113,482 4.9 206,386 2,312,232
2000 112,676 5.1 272,150 2,494,798
1999 115,018 5.1 278,689 2,539,155
1998 100,906 4.4 306,070 3,368,690
(a) Dollars in thousands.
(b) Approximately 95 percent of the reinsurance is yearly renewable term
insurance, with the remainder being coinsurance. Premiums reflect
both life and accident and health business.
As described above, the current uncertain economic climate in several Latin
American countries contributed to the increased lapsation and surrender activity
in 2002. The decline in ceded premium in 1999 and 2000 was related to the
termination of a substantial portion of major medical business which we acquired
in an acquisition in 1997, much of which had been ceded. The decline in ceded
premium in 2001 and 2002 related to an increase in our retention from $75,000 to
$100,000.
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TABLE III
The following table sets forth information with respect to total insurance
premiums.
ORDINARY ANNUITY & ACCIDENT
LIFE (a) UNIVERSAL LIFE GROUP LIFE & HEALTH (a) TOTAL
-------- -------------- ---------- ------------ -----
2002 $54,033,409 $283,185 $420,321 $13,473,966 $68,210,881
2001 48,142,397 216,905 543,792 5,059,843 53,962,937
2000 45,892,621 228,479 95,068 7,235,685 53,451,853
1999 47,687,414 261,880 484,746 10,886,317 59,320,357
1998 48,801,081 263,994 231,410 9,857,844 59,154,329
(a) After deduction for reinsurance ceded.
New life insurance revenues decreased slightly from 1998 to 1999. In 2000, new
life revenues increased, but overall life premium declined due to the lower
level of new issues in previous years coupled with the surrender activity shown
in Table II above. In 2001 and 2002, new life revenues increased but the ratio
of lapses and surrenders to mean in-force declined in 2001 but increased in 2002
as shown in Table II above. The 2002 increase in accident and health premiums is
attributable to the acquisition of Combined and Lifeline. Additionally, much of
the 2000 and 2001 decline in accident and health premiums related to
management's decision to cancel a large portion of group dental business and
major medical business during the third quarter of 1999 in order to curtail both
claims and operating expenses.
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)(b) AMOUNT(b) PREMIUMS AMOUNT(b) PREMIUMS
-------------- --------- -------- --------- --------
2002 $68,211 $31,403 46.0% $79,320 116.3%
2001 53,963 24,080 44.6 63,253 117.2
2000 53,452 22,551 42.2 63,693 119.2
1999 59,320 22,563 38.0 68,043 114.7
1998 59,154 23,580 39.9 66,914 113.1
(a) After premiums ceded to reinsurers.
(b) Dollars in thousands.
Conversion expenses from two acquisitions in 1997, as well as increases in
accident and health benefits, were the primary reasons for the 1999 increases in
policyholder benefits. During 2000, accident and health premiums and claims
decreased as discussed above due to the cancellation of major portions of the
group dental and major medical business; however, due to the costs
6
associated with launching a domestic ordinary life sales program and the
administrative costs of managing the run-off of the cancelled accident and
health business, the ratio of expenses to premiums increased. During 2001, the
decrease in lapses and surrenders combined with the decrease in accident and
health claims offset increased commissions and administration expenses,
resulting in a decrease in the ratio of benefits to premiums and an increase in
the ratio of expenses to premiums. During 2002, increased new life revenues and
increased accident and health premiums attributable to the acquisition of
Combined and Lifeline offset by increased lapses and surrenders, accident and
health claims, and commissions and administration expenses related to the
conversion of Combined and Lifeline resulted in decreases in the ratio benefits
to premiums and increases in the ratio of expenses to premiums.
TABLE V
The following table sets forth changes in the face amount new life insurance
business produced between participating and nonparticipating policies.
PARTICIPATING NONPARTICIPATING
TOTAL NEW ----------------------- -------------------------
BUSINESS (a) AMOUNT (a) PERCENT AMOUNT (a) PERCENT
------------ ---------- ------- ---------- -------
2002 $410,352 256,476 64.7% 144,876 35.3%
2001 346,132 235,847 68.1 110,285 31.9
2000 327,753 217,303 66.3 110,450 33.7
1999 287,238 180,800 62.9 106,438 37.1
1998 311,331 222,496 71.5 88,835 28.5
(a) Dollars in thousands.
The significant changes in 1999 were due to the volume of non-participating
credit life business produced by an acquisition. During 2000 and 2001, the
percentage of participating new business grew due to the mix of products issued.
Although new international life sales continued to grow in 2002, the percentage
of participating new business decreased due to the fact that most new life
products sold were non-participating.
TABLE VI
The following table sets forth changes in the face amount new life insurance
business issued according to policy types.
WHOLE LIFE
AND ENDOWMENT TERM CREDIT
TOTAL NEW ------------------------ ------------------------ -----------------------
BUSINESS (a) AMOUNT (a) PERCENT AMOUNT (a) PERCENT AMOUNT (a) PERCENT
------------ ---------- ------- ---------- ------- ---------- -------
2002 $410,352 $289,976 70.7% $80,342 19.5% $40,034 9.8%
2001 346,132 238,765 69.0 71,900 20.8 35,467 10.2
2000 327,753 220,691 67.3 56,747 17.3 50,315 15.4
1999 287,238 183,726 64.0 43,607 15.2 59,905 20.8
1998 311,331 224,918 72.2 51,531 16.6 34,882 11.2
(a) Dollars in thousands.
The decline in 1999 whole life production related to the disruption in our
international market previously discussed. In 2000, new life sales measured in
paid annualized premiums increased 21.4%. In 2001, new life sales measured in
paid annualized premiums increased 14.9%. In
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2002, new life sales measured in paid annualized premiums increased 17.7% due to
acquisitions and internal growth.
TABLE VII
The following table sets forth deferred policy acquisition costs capitalized and
amortized compared to new business life insurance issued.
DEFERRED POLICY
TOTAL NEW ACQUISITION COSTS
BUSINESS ------------------------------
ISSUED (a) CAPITALIZED (a) AMORTIZED (a)
----------
2002 $410,352 $14,423 $10,039
2001 346,132 11,112 8,568
2000 327,753 10,056 8,522
1999 287,238 9,287 10,029
1998 311,331 7,942 7,790
(a) Dollars in thousands.
Amortization expense in 1999 and 2002 increased due to higher surrender activity
while the decreases in 2001 and 2000 were due to improved persistency . The
increase in capitalized costs since 1998 is related to the increase in new
business issued.
TABLE VIII
The following table sets forth net investment income from our investment
portfolio.
RATIO OF NET
INVESTMENT INCOME
MEAN AMOUNT OF NET INVESTMENT TO MEAN AMOUNT
INVESTED ASSETS INCOME (a) OF INVESTED ASSETS (a)
--------------- ---------- ----------------------
2002 $216,352,206 $14,251,907 6.6%
2001 200,449,569 13,296,481 6.6
2000 184,270,944 12,550,754 6.8
1999 175,305,342 11,636,940 6.6
1998 169,461,908 11,279,125 6.7
(a) Does not include realized and unrealized gains and losses on
investments.
During 2000, the Company terminated its outside investment manager and changed
the mix of new investments, resulting in improved performance for the year.
During 2001, the significant decrease in yields in the bond market caused the
return on invested assets to drop slightly. During 2002 the Company was able to
maintain its investment yield by continuing to place less emphasis on government
guaranteed pass-through instruments and more emphasis on investments in callable
instruments issued by U.S. Government agencies.
(c) NARRATIVE DESCRIPTION OF BUSINESS
(i) BUSINESS OF CITIZENS
Our principal business is that of an insurance holding
company. Through our subsidiaries, we offer life and accident
and health insurance. Additionally, we
8
provide management services to our subsidiaries under
management services agreements. At December 31, 2002, we had
approximately 100 full time equivalent employees. All
intercompany fees and expenses have been eliminated in the
consolidated financial statements.
(ii) BUSINESS OF CICA
CICA is our primary insurance subsidiary and 85% of our
revenues are derived from its operations. Historically, CICA's
revenues have been from life 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. Additionally,
it offers specialty individual accident and health policies,
and credit life insurance policies, as well as ordinary whole
life insurance products, to U.S. residents. All intercompany
fees and expenses have been eliminated in the consolidated
financial statements.
During the year ended December 31, 2002, 92.1% of CICA's
premium income was attributable to life, endowment and term
insurance, 7.4% to accident and health insurance, and .5% to
individual annuities. During the year ended December 31, 2001,
90.2% of CICA's premium income was attributable to life,
endowment and term insurance, 9.4% to accident and health
insurance, and 0.4% to individual annuities. Of the life
policies in force at December 31, 2002 and 2001, 43.0% and
46.1%, were non-participating and 57.0% and 53.9%,
respectively, were participating.
From 1987 to 1997, CICA offered a series of participating
whole life policies designed for international markets.
Beginning January 1, 1998, CICA introduced a new series of
policies to replace the policies then offered. Ten plans make
up this series and, like those previously sold, are designed
for the international market. These plans, while are
non-participating, maintain many of the features of the
previous series and incorporate several new enhancements, such
as terminal illness protection as well as dismemberment
provisions.
Additionally, in 1997, CICA began offering specialty
individual accident and health products as well as ordinary
whole life policies to residents of the United States. The
sale of these products is focused in Oklahoma, Louisiana and
Mississippi.
CICA has developed a domestic ordinary whole life sales
program which has been marketed primarily in rural Texas.
Sales to date have been insignificant. In 2002, CICA retained
new marketing management for this program. We intend to expand
sales efforts beyond Texas to other states in which CICA is
licensed and believe that our recent acquisitions should
augment this program.
CICA's 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
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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. Non-United States applicants ages 0 through
39 can obtain up to $150,000 of insurance without a medical
examination. Medical examinations are required of all
non-United States applicants aged 40 and over. The
supplemental accident and health policies sold in the United
States have only minimal, field underwriting.
On life policies, CICA's maximum coverage on any one life is
not limited by our policy. However, CICA reinsures the amount
of coverage, which is in 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).
CICA has $32.6 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 this
insurance represents approximately 1.0% of the total insurance
in-force.
GEOGRAPHICAL DISTRIBUTION OF BUSINESS
CICA makes available ordinary whole-life insurance products to
residents of foreign countries worldwide. Premium income from
non-U.S. residents accounted for approximately 84.5%, 82.4%
and 82.7% of total CICA premiums for the years ended December
31, 2002, 2001 and 2000, respectively.
Areas representing more than 10% of CICA's total premiums for
the years ended December 31, 2002, 2001 and 2000 were:
Argentina - 19.4%, 23.3% and 27.7%; Columbia - 25.1%, 21.9%
and 20.2%; and Uruguay - 8.0%, 10.2% and 11.8%, respectively.
The following table sets forth the composition of CICA's total
yearly premium income by geographic area for the years
indicated.
AREA 2002 2001 2000
---- ---- ---- ----
Oklahoma 3.5% 4.6% 5.2%
Texas 4.9% 4.2% 4.4%
Mississippi 3.0% 4.0% 2.8%
Louisiana .9% 1.1% 1.1%
All Other States 3.2% 3.7% 3.8%
Foreign 84.5% 82.4% 82.7%
The whole life policies accepted by CICA on high net worth
residents of foreign countries have an average face amount of
approximately $66,000 and are issued primarily to individuals
in the top 5% of the population in terms of household income.
CICA has neither offices nor employees overseas. It accepts
applications for international insurance policies submitted by
several outside marketing firms and consultants in these
markets with whom CICA has non-exclusive contracts. These
firms and consultants specialize in marketing life insurance
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products to citizens of foreign countries and have many years
of experience marketing life insurance products. The outside
firms provide recruitment, training and supervision of their
managers and associates in the placement of dollar-denominated
life insurance products; however, all associates of these
firms contract directly with CICA and receive their
compensation from CICA. Accordingly, should the arrangement
between any outside marketing firm and CICA be canceled for
any reason, CICA believes it could continue suitable marketing
arrangements with the associates of the outside firms without
appreciable loss of present and future sales, as it has done
in the past. There is, however, always a risk that sales could
decrease. CICA's standard agreement with individual
consultants provides that the consultant is the representative
of the prospective insured. CICA's standard contract with
outside marketing firms provides that the firm has the
responsibility for recruiting and training its associates and
is responsible for all of its overhead costs including the
expense of contests and awards. These firms guarantee any
debts of their marketers and their associates. In
consideration for the services rendered, the marketing firms
receive a fee on all new policies placed by them or their
associates. See "Business of CICA - Commissions." CICA's
contracts with both outside marketing firms and consultants
provide that any party may terminate the contracts for various
causes at any time or upon 30 days' notice.
At present, CICA is dependent on the non-U.S. markets for a
large percentage of its new life insurance 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. Based on more
than 35 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. 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.
MARKETING OPERATIONS
CICA holds licenses to do business in 15 states and accepts
applications for consideration from any foreign country.
CICA's marketing operations are conducted by outside
consultants, with 2,445 individuals contracted at December 31,
2002 and 1,838 at December 31, 2001 and 1,302 individuals at
December 31, 2000.
COMMISSIONS
CICA's insurance consultants are independent contractors,
responsible for their respective expenses, and are compensated
on a percentage of premium basis. Percentage amounts paid to
insurance consultants on individual term, annuity and
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accident and health insurance are substantially less than the
levels paid for individual ordinary life insurance. With
respect to CICA's contracts with outside marketing firms,
these firms receive overriding first year and renewal
commissions on business written by their associates under
their supervision, and all marketing expenses 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 and accounting principles generally accepted in the
United States of America. 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 engaged
an outside consulting actuary to assist in the calculation of
its reserves prepared in accordance with Generally Accepted
Accounting Principles.
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 has historically retained $75,000 of risk on any one
person. Effective January 1, 2001, this amount was increased
to $100,000 based upon CICA's capital growth. As of December
31, 2002, the aggregate amount of life insurance ceded
amounted to $141,549,000, or 5.3%, of total direct and assumed
life insurance in-force, and was $204,989,000 or 7.2% in 2001.
CICA is contingently liable with respect to ceded insurance
should any reinsurer be unable to meet the obligations
reinsured.
As of December 31, 2002, CICA had in effect automatic
reinsurance agreements with reinsurers that provide for
cessions of ordinary insurance from CICA. 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, or coinsurance
basis.
Treaties with Employers Reassurance (ERC) and Businessmen's
Assurance (BMA) historically have been the primary vehicles
utilized by CICA for its international business. The treaties
were structured in such a way as to allow
12
CICA to "self administer" the cessions on a reduced cost
basis. During 1995, a third carrier was added as a principal
reinsurer, Riunione Adriatica di Sicurta, of Italy (RAS).
American United Life Insurance Company (AUL) replaced RAS in
2000.
The ERC and BMA agreements provide that for risks reinsured in
specified countries, 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, 100% of the risk in excess of CICA's retention was
ceded to RAS. AUL's treaty provided for the same share of
business that RAS previously reinsured. CICA paid premiums to
ERC, BMA and AUL on an annual basis and is responsible for the
production of the reporting monthly and annually to ERC and
BMA to allow proper accounting for the treaties. The RAS
agreement contained similar terms.
The cessions were on a yearly renewable term basis and were
automatic over the Company's retention up to $280,000 for ERC,
$120,000 for BMA and $400,000 for AUL, after which the
reinsurance is subject to a facultative review by the
reinsurers. At December 31, 2002, CICA had ceded $64,904,000
in face amount of insurance to ERC, $32,429,000 to RAS,
$19,106,000 to BMA and $21,851,000 to AUL under these
agreements.
In late 2002, AUL notified CICA that it would no longer be
accepting new reinsurance business effective January 1, 2003,
as a result of being purchased by ERC, who is owned by General
Electric. Prior to 2003 AUL reinsured one group of countries,
while BMA and ERC shared the coverage of the remaining
countries. The new arrangement provides for companies to share
in a pool of business.
Optimum Re Insurance Company of Dallas, Texas received 25% of
the reinsurance pool of all countries. The other two
reinsurers, Converium, of Germany, and Worldwide Reassurance,
of England, were given 20% and 55% of the reinsurance pool,
respectively.
Each of these last two reinsurers are unauthorized reinsurers
in the state of Colorado. However, they have agreed to provide
a letter of credit issued by a U.S. Bank in the amount of any
liabilities they may incur under this agreement. A reinsurance
treaty with Swiss Re Life & Health America, Inc. (Swiss Re)
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,
2002, CICA had ceded $1.1 billion in face amount of business
to Swiss Re under this treaty.
CICA 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 CICA are large, well capitalized
entities.
13
(b) INSURANCE ASSUMED
At December 31, 2002, CICA had in-force reinsurance assumed as
follows:
TYPE OF AMOUNT
BUSINESS IN-FORCE AT
NAME OF COMPANY LOCATION ASSUMED END OF YEAR
--------------- -------- ------- -----------
Prudential Insurance Newark,
Company (Prudential) New Jersey Group Life $318,142,000
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. CICA's portion of the total insurance under the
policy is allocated to CICA in accordance with the criteria
established by the Administrator.
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 within certain
specified percentages. CICA's invested assets at December 31,
2002 were distributed as follows: fixed maturities - 89.3%,
equity securities .1%, mortgage loans - .3%, policy loans -
10.2% and other long-term investments - .1%. CICA did not
foreclose on any mortgage loans in 2002. The investment policy
of CICA is consistent with the provisions of the Colorado
Insurance Code.
At December 31, 2002, 92.1% 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 90.8% at December 31, 2001. 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
Our insurance company subsidiaries are 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
14
marketing persons, 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.
Our insurance subsidiaries are 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, our insurance
subsidiaries are 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. An examination of CICA was concluded in 1998
for the five years ended December 31, 1996, by a public
accounting firm under contract with and supervision by the
Colorado Division of Insurance. An examination of CICA as of
December 31, 2001, was initiated by Colorado in November, 2002
and is expected to conclude in early 2003. CICA is audited
annually by an independent public accounting firm.
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. We are subject to such regulation and have
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 we do not physically conduct business in countries
outside the U.S. but rather accept applications for
consideration from overseas marketers, we are not subject to
regulation in countries where most of our insureds are
residents. We view the prospect of such regulation as remote
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 we
compete with a large number of stock and mutual life companies
both internationally and domestically as well as from
financial institutions which offer insurance products. We
compete with 1,500 to 2,000 other life insurance companies in
the United States, some of which we also compete with
internationally. We believe that our premium rates and
policies are generally competitive with those of other life
insurance companies selling similar types of ordinary
whole-life insurance, many of which are larger than us.
A large percentage of our first year and renewal life
insurance premium income during the last five years came from
the international market. See "Business of
15
CICA - Geographical Distribution of Business." Management
believes we are a significant competitor in the non-U.S.
market and attributes our market position to the expertise of
management, the uniqueness of our life insurance products and
the competitiveness of our pricing methods.
Given the significance of our international business, the
variety of markets in which we make ordinary whole-life
insurance available and the impact that economic changes have
on these foreign markets, it is not possible to ascertain our
competitive position.
Our international marketing plan stresses making available
dollar-denominated whole life insurance products to high net
worth individuals residing in foreign countries and the sale
of individual, whole life and supplemental accident and health
products to United States residents.
We face offshore competition from numerous 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 its
unique policies, allows us to compete effectively in pursuing
new business.
We compete indirectly with non-U.S. companies, particularly
with respect to Latin American companies. Since our premiums
must be paid in U.S. dollars drawn on U.S. banks, and we pay
claims in U.S. dollars, we have a different clientele and
product than foreign-domiciled companies. Our product is
usually acquired by persons in the top 5% of income of their
respective countries. The policies sold by foreign companies
are offered 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 we experience an advantage is that many of
our policyholders desire to transfer capital out of their
countries due to the perceived financial strength and security
of the United States.
With respect to our block of accident and health insurance we
compete with many 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 our accident and
health insurance business, most of which we acquired in the
acquisition of other companies.
16
FEDERAL INCOME TAXATION
CICA is a "small company" as that term is defined in Section
806 of the Internal Revenue Code (the "Code"). As such, CICA
qualifies for a special small company deduction (generally
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 Revenue Reconciliation Act of 1990 revised the method by
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.
CICA files a consolidated Federal income tax return with
Citizens and its subsidiaries.
(III) BUSINESS OF CILIC
CILIC is an Illinois domiciled life insurer admitted to do
business in four states. Dormant for several years, CILIC
services a closed block of life insurance policies. At
December 31, 2002, CILIC had assets of $3.2 million and annual
revenues of $191,000. All intercompany fees and expenses have
been eliminated in the consolidated financial statements.
(IV) BUSINESS OF COMBINED
Combined is a Texas-domiciled life and accident and health
insurer offering life and accident and health products
primarily to residents of the Southern United States. Combined
is licensed in the states of Alabama, Arizona, Arkansas,
Florida, Louisiana, Mississippi, Missouri, Montana, New
Mexico, Oklahoma, Texas and Virginia. The majority of
Combined's business is concentrated in Texas (62.1%), Oklahoma
(22.7%) and Louisiana (5.4%). At December 31, 2002 Combined
had assets $27.7 million and 2002 revenues of $10.5 million
since being acquired by us on March 19, 2002. All intercompany
fees and expenses have been eliminated in the consolidated
financial statements.
As of December 31, 2002, Combined had $68,947,000 of life
insurance in force, of which $7,061,000 was reinsured. The
maximum retention on any one life is $30,000. All of the
accidental death benefit coverage is reinsured. As of December
31, 2002, Combined also had $12,435,524 (in premiums) of
accident and health insurance in force (including $412,728 of
group business).
17
Combined operates as a stipulated premium company under Texas
law. Life and accident and health policies are primarily sold
by licensed general agents. In addition, individuals may also
be issued licenses to act as an agent and sell only life
insurance not to exceed $15,000 on any one life after
receiving certification from Combined that the individual has
completed a course of study and instruction on life insurance
and fixed annuities and passed, without aid, a written
examination. None of these agents or individuals licensed to
act as an agent has underwriting authority. The commissions
paid are believed by management to be competitive with
commissions paid by other life and accident and health
insurance companies in the states in which Combined is
licensed to operate. Combined is aware that there is
considerable competition for obtaining qualified agents and
that it competes with well-established insurance companies for
agents to sell its policies. Combined also recruits agents
from among persons who are not now engaged in the selling of
life and accident and health insurance, and Combined trains
such agents. Combined primarily sells through brokers and
those agents possibly could sell other companies' policies
that are similar in some respects to Combined's policies. This
arrangement is common with companies that primarily sell
through managing and personal producing general agents.
Since its acquisition on March 19, 2002, 85.1% of Combined's
premium income was from accident and health business and 14.9%
was from life business.
INVESTMENTS
Combined invests and reinvests certain of its reserves and
other funds. The investments of Combined are limited as to
type and amount by the Texas insurance laws which are designed
to insure prudent investment policies.
The investment of capital, paid-in and operating surplus and
other funds of insurers organized under the laws of the State
of Texas is specified by the Texas Insurance Code. These
statutes include general and specific limitations on
investments, records of investments and other matters. The
Texas insurance law regulating investments and other aspects
of the management of insurance companies is designed primarily
for the protection of the policyholders rather than investors.
The administration of Combined's investment portfolio is
handled by management, with all trades approved by a committee
of the Board of Directors. The guidelines used require that
bonds, both government and corporate, are of high quality and
comprise a majority of the investment portfolio. The assets
selected are intended to mature in accordance with the average
maturity of the insurance products and to provide the cash
flow for Combined to meet its policyholder obligations. The
type, quality and mix will allow Combined to compete in the
life insurance and accident and health marketplace and to
provide appropriate interest margins.
Of Combined's investments at December 31, 2002, 97.4% were in
bonds with the remaining 2.6% invested in common and preferred
stocks. With respect to the invested bonds, 88.7% were
invested in U.S. Treasury securities and obligations
18
of U.S. Government corporations and agencies with the
remaining 11.3% invested in corporate securities.
REINSURANCE
As is customary among insurance companies, Combined reinsures
with other companies portions of the life and accident and
health insurance risks it will underwrite. The primary purpose
of reinsurance agreements is to enable an insurance company to
reduce the amount of risk on any particular policy and, by
reinsuring the amount exceeding the maximum amount the
insurance company is willing to retain, to write policies in
amounts larger than it could without such agreements. Even
though a portion of the risk may be reinsured, Combined
remains liable to perform all the obligations imposed by the
policies issued by it and is liable if its reinsurer should be
unable to meet its obligation under the reinsurance
agreements. Combined's life insurance is being ceded through
reinsurance agreements with Businessmen's Assurance Company
(BMA), Kansas City, Missouri. At December 31, 2002, Combined
had ceded $7,061,000 in face amount to BMA. Combined also has
reinsurance agreements with Optimum Reinsurance Company,
Dallas, Texas and Associates Accident and Health Reinsurance
Company, Plymouth Meeting, Pennsylvania, providing coverage of
claims in excess of various amounts on several of its accident
and health policies. Approximately $386,000 in premiums was
ceded under these agreements in 2002.
RESERVES
Combined 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 and accounting principles generally accepted in the
United States of America. In determining such reserves
Combined used the 1975 to 1980 Select and Ultimate Mortality
Tables with interest rates at 6%. 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. Combined engaged an outside consulting actuary to
assist in the calculation of its reserves prepared in
accordance with Generally Accepted Accounting Principles.
(V) BUSINESS OF LIFELINE
Lifeline is a Texas domiciled life and accident and health
insurer admitted to do business in two states. It primarily
services a block of accident and health insurance policies and
a smaller block of life policies. At December 31, 2002,
Lifeline had assets of $4.9 million and annual revenues of
$780,000. All intercompany fees and expenses have been
eliminated in the consolidated financial statements.
19
(VI) BUSINESS OF EXCALIBUR
Excalibur is an Illinois-domiciled life insurer. It services a
small block of ordinary life insurance. At December 31, 2002,
Excalibur had assets of $3.3 million and annual revenues of
$190,000. All intercompany fees and expenses have been
eliminated in the consolidated financial statements.
(VII) 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, and subsequently amended, CTI
provides data processing services to the Company for a fixed
fee of $85,000 per month. As of and for the year ended
December 31, 2002, CTI's total assets were approximately
$637,000 and revenues were $1.1 million. All intercompany fees
and expenses have been eliminated in the consolidated
financial statements.
(VIII) BUSINESS OF III
III is a wholly owned subsidiary of CICA and engages in the
business of providing aviation transportation for the Company.
As of and for the year ended December 31, 2002, III's total
assets were $1.4 million and revenues were $90,000. All
intercompany fees and expenses have been eliminated in the
consolidated financial statements.
(IX) BUSINESS OF FHA
FHA owns and operates a funeral home in Baker, Louisiana. At
December 31, 2002, FHA had total assets of $590,000 and total
annual revenues of $582,000. All intercompany fees and
expenses have been eliminated in the consolidated financial
statements.
ITEM 2. DESCRIPTION OF PROPERTIES
We own our principal office in Austin, Texas, consisting of an
80,000 square foot office building. Approximately 55,000
square feet is occupied or reserved for our operations with
the remainder of the building being leased to a single tenant
under a multi-year lease.
We also own a 6,324 square foot funeral home in Baker,
Louisiana with a total cost of $527,000. This facility,
acquired as a result of a 1995 acquisition, is owned and
operated by FHA.
ITEM 3. LEGAL PROCEEDINGS
On July 31, 2002, class action certification was granted by a
Travis County, Texas district court judge to the plaintiffs in
a lawsuit filed in 1999 style Delia Bolanos Andrade, et al v.
Citizens Insurance Company of America, Citizens, Inc.,
20
Negocios Savoy, S.A., Harold E. Riley, and Mark A. Oliver,
Case Number 99-09099. The suit alleges that life insurance
policies sold to certain non-U.S. residents by CICA are
securities and were sold in violation of the registration
provisions of the Texas securities laws. The suit seeks class
action status naming as a class all non-U.S. residents who
made premium payments since August 1996 and assigned policy
dividends to a trust for the purchase of our Class A common
stock. The remedy sought is rescission of the insurance
premium payments. The district court's class certification
order was appealed to the Third Court of Appeals in Austin,
Texas and oral arguments were heard in February, 2003. A
ruling from the appellate court is expected by mid 2003. We
believe the Plaintiff's claim under the Texas Securities Act
is not appropriate for class certification and does not meet
the legal requirements for class action treatment under Texas
law. Should the Third Court of Appeals rule against us, the
case would be further appealed to the Texas Supreme Court.
Recent decisions from the Texas Supreme Court indicate a more
defense-oriented approach to class certification cases,
especially in class action cases encompassing claimants from
more than one state or jurisdiction.
We expect the Texas appellate courts will ultimately rule in
our favor, decertify the class and remand the matter to
district court for further action. It is our intention to
vigorously defend the request for class certification, as well
as to vigorously defend against the individual claims. During
the time of the appeal, the district court proceedings will be
stayed. We are unable to determine the potential magnitude of
the claims in the event of a final class certification and the
plaintiffs prevailing on the substantive action, although we
would expect significant costs relating to any final class
action judgment.
In addition, from time to time we are a party to various legal
proceedings incidental to our business. Management does not
expect the ultimate resolution of these legal proceedings to
have a material adverse impact on our results of operations or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our shareholders during the
fourth calendar quarter of 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our Class A common stock was listed and began trading on the
New York Stock Exchange (NYSE) on August 22, 2002, under the
symbol CIA. Prior to that date, it traded on the American
Stock Exchange (AMEX). The high and low prices per share as
reported by the AMEX and NYSE are shown below. These prices
have been adjusted to reflect a 15% stock dividend paid in
2002.
21
2002 2001
---- ----
QUARTER ENDED HIGH LOW HIGH LOW
------------- ---- --- ---- ---
March 31 $ 11.30 $ 8.64 $ 6.09 $ 5.26
June 30 13.25 8.00 6.61 5.44
September 30 13.20 5.71 9.04 5.40
December 31 9.24 6.68 11.57 7.65
As of December 31, 2002, the approximate number of record
owners of our Class A common stock was 21,000. Management
estimates the number of beneficial owners to be approximately
70,000.
On June 1, 2002, we paid a 15% stock dividend to holders of
record as of May 1, 2002. The dividend resulted in the
issuance of 4,162,414 Class A shares (including 333,873 shares
in treasury) and 106,656 Class B shares.
We have not paid cash dividends in any of the past five years
and do not expect to pay such in the forseeable future. For
restrictions on the present and future ability to pay
dividends, see Note 6 of the "Notes to Consolidated Financial
Statements."
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION
PLANS
We do not maintain any equity compensation plans or
arrangements. Thus, we do not have any securities authorized
for issuance under these types of plans, nor have we issued
any options, warrants or similar instruments to purchase any
of our equity securities.
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth, in summary form, selected data of
the Company. This data, which is not covered in the report of
our independent auditors, should be read in conjunction with
the consolidated financial statements and notes which are
included elsewhere herein. The per share amounts have been
adjusted retroactively for all periods presented to reflect
the 7% common stock dividends paid on December 31, 1999 and
December 31, 2000, and a 15% stock dividend paid on June 1,
2002, respectively.
YEAR ENDED DECEMBER 31,
(IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
NET OPERATING REVENUES $ 83,004 $ 67,647 $ 66,678 $ 71,877 $ 72,685
NET INCOME (LOSS) $ 4,254 $ 3,963 $ 2,053 $ 1,271 $ (6,721)
NET INCOME (LOSS) PER SHARE $ .14 $ .14 $ .07 $ .04 $ (.24)
TOTAL ASSETS $326,291 $282,086 $267,842 $255,485 $ 253,384
NOTES PAYABLE $ -- $ -- $ -- $ -- $ 333
TOTAL LIABILITIES $224,499 $199,364 $190,529 $183,218 $ 178,480
TOTAL STOCKHOLDERS' EQUITY $101,792 $ 82,722 $ 77,313 $ 72,267 $ 74,904
BOOK VALUE PER SHARE $ 3.41 $ 2.86 $ 2.68 $ 2.51 $ 2.66
22
See Part I (a) and (b), and Item 7 - Management's Discussion and Analysis,
for information that may affect the comparability of the financial data
contained in the above table.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ACQUISITIONS
On March 19, 2002, we acquired all the outstanding shares of
Combined Underwriters Life Insurance Company ("Combined") and
Lifeline Underwriters Life Insurance Company ("Lifeline"), two
Texas life and health insurance companies, for approximately
1.1 million shares of our Class A common stock. The aggregate
market value of the consideration was approximately $12.0
million.
On February 18, 2003, we acquired all the outstanding shares
of First Alliance Corporation ("First Alliance"), the parent
of First Alliance Insurance Company, a Kentucky life insurer,
for approximately 2.6 million shares of our Class A common
stock. The aggregate market value of the consideration was
approximately $17.2 million. First Alliance will continue to
operate from its offices in Lexington, Kentucky.
On March 7, 2003, we entered into a Plan and Agreement of
Merger with Mid-American Alliance Corporation ("Mid-American")
a Missouri holding company, whereby we will acquire all of the
outstanding shares of Mid-American for shares of our Class A
common stock. The transaction values Mid-American's shares at
$1.35 each and our Class A shares based on the average closing
price for the 20 trading days preceding closing. Closing is
expected in mid 2003.
Management believes that the acquisitions should enhance
premium income and total revenue and augment our domestic
marketing program. The marketing operations of these companies
continue to write whole life insurance and supplemental
accident and health products that have historically been the
foundation of their business.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 2002, 2001
AND 2000
Net income of $4,254,217 or $.14 per share was earned during
2002, compared to net income of $3,963,113 or $.14 per share
for 2001 and net income of $2,052,741 or $.07 per share in
2000. The acquisitions of Combined and Lifeline increased net
income for 2002 by approximately $576,000. Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets", was adopted by us on January 1, 2002
and changed the accounting for goodwill and intangibles, as
discussed below. Had SFAS No. 142 been adopted in 2001 and
2000, pro forma net income would approximate $4,866,000 ($.17
per share) and $3,018,000 ($.10 per share), respectively, for
the years ended December 31, 2001 and 2000. Increased
production of new business coupled with
23
a 7.2% increase in net investment income and the change in
amortization of goodwill and intangibles contributed to the
increased earnings in 2002.
Total revenues for 2002 were $83,003,898 compared to
$67,646,824 in 2001, an increase of 22.7%. In 2000 revenues
were $66,678,116. The acquisitions of Combined and Lifeline
increased 2002 revenues by $11,270,166. The 2002 increase in
revenues compared to 2001 was due primarily to a 17.7%
increase in new life revenues (measured in paid annualized
premiums), a 4.5% increase in renewal life premiums, a 166.3%
increase in accident and health premiums and a 7.2% increase
in net investment income. The increase in new revenues was due
to increases of the number of marketing consultants submitting
business to us as well as the expansion of countries from
which applications have been received, while the increase in
accident and health sales relates to Combined and Lifeline.
The increase in 2001 over 2000 revenues was due primarily to a
14.9% increase in new life sales, a 3.4% increase in renewal
life premiums and a 5.9% increase in net investment income
that offset a 30.1% decrease in accident and health premiums.
The increase in new life revenues in 2001 was due to broader
penetration of existing markets.
Premium income increased by 26.4% from $53,962,937 in 2001 to
$68,210,881 in 2002. Premium income increased by 1.0% from
$53,451,853 in 2000 to $53,962,937 in 2001. The 2002 increase
was comprised of a $5,767,541 increase in life premiums and an
$8,414,123 increase in accident and health premiums. The March
2002 acquisitions of Combined and Lifeline increased life
premiums by $1,539,015 and accident and health premiums by
$9,186,710, offsetting a $772,587 reduction in our existing
book of accident and health business as a result of previous
terminations and rate increases. Consistent with our practice
over the past several years, Management will implement
significant rate increases in supplemental non-cancelable
accident and health products if loss ratios increase. This
course of action will contribute to decreases in accident and
health premiums. For example, during 2003, management intends
to non-renew virtually all of Combined's major medical
business, which accounted for approximately $2.5 million of
premium revenue in 2002.
The 2001 revenue increase was comprised of a $2,698,500
increase in life premiums offset by a $2,175,842 decrease in
accident and health premiums. Because of increases in accident
and health loss ratios, management implemented significant
rate increases in 1999 through 2001 on accident and health
products, which caused policy cancellations and a
corresponding decrease in accident and health premiums.
Production of new life insurance premiums by CICA measured in
issued and paid annualized premiums increased 17.7% from 2001
to 2002 and 14.9% from 2000 to 2001. In addition, management
initiated a domestic ordinary life sales program in late 2000
targeting rural areas. This program's initial results to date
have been insignificant; however, with the recent
acquisitions, coupled with new marketing management, the
additional sales forces of the acquisitions should provide
expanded sales efforts for our domestic marketing program.
Management also
24
believes that the acquisitions of Combined, Lifeline and First
Alliance will enhance premium income and total revenue.
Combined had a significant amount of accident and health
premiums when we acquired it. Although it continues to write
specified benefit accident and health policies, management has
discontinued the sale of major medical products and moved to
terminate all in-force major medical business. This action
will likely result in a decrease of approximately $2.5 million
of annual premium revenue but management believes this course
of action will enhance future profitability.
Net investment income increased 7.2% during 2002 to
$14,251,907 from $13,296,481 during 2001. The 2001 results
increased 5.9% compared to the $12,550,754 earned in 2000. The
2002 increase reflected continued expansion of our asset base.
In addition, the acquisitions of Combined and Lifeline
increased invested assets by $15.2 million and 2002 investment
income by $528,021. The 2001 and 2000 results reflected the
expansion of our asset base, and the actions taken in previous
years to change the mix and duration of our 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 and 2002, significant decreases in interest rates
occurred which slowed the growth in net investment income. As
a result, we expect returns on newly invested funds to decline
in the short-term. We do not believe such declines will have a
materially adverse effect on our future operating results.
We typically avoid investments in bonds and notes at
significant premiums in order to minimize the potential for
loss on early calls, although we incurred a $390,000 loss on
$9 million of U.S. Treasury notes which had been purchased at
a large premium in late 2001 to avoid additional loss. No
similar condition now exists within our bond portfolio which
could result in any significant future losses. Although
changes in interest rates could adversely affect the market
value of our bonds, calls of such instruments would not result
in material losses.
Policyholder dividends increased to $3,477,381 in 2002, up
5.5% over 2001 dividends of $3,294,899. The 2001 amounts
increased 8.5% compared to $3,037,343 in 2000. Virtually all
of CICA's policies that were sold between 1989 and 1997 were
participating. Participating policies represented a majority
(55.0%) of our business in-force at December 31, 2002,
although the percentage of participating business has declined
from approximately 91% in 1995 due to acquisitions in recent
years and a shift in product mix away from participating
policies to policies with endowments.
Claims and surrenders increased 30.6% from $29,189,132 in 2001
to $38,107,119 in 2002. In 2000 claims and surrenders were
$30,370,996. The increased surrender activity relating to the
current uncertain economic climate in several Latin American
countries was the primary reason for the increase in claims
and surrenders during 2002. The decline in claims as a result
of the cancellation of a large block of accident and health
business in 1999 and 2000, contributed to the 2001
improvement.
25
Death benefits increased 17.6% from $5,613,782 in 2001 to
$6,599,914 in 2002. Death benefits were $5,277,284 in 2000.
The 2002 increase was primarily due to the impact of the
above-discussed acquisitions, which increased such expense by
$712,052. CICA has historically adhered to an underwriting
policy which requires thorough medical examinations on all
applicants who are foreign residents, except children,
regardless of age or face amount of the policy applied for,
including x-rays and electrocardiograms. On all policies of
$150,000 or more, inspection reports are required which detail
the background resources and lifestyle of the applicant. We
have developed numerous contacts throughout Latin America with
which our underwriters can validate information contained in
applications, medical or inspection reports.
Accident and health benefits increased 161.0% from $3,301,341
in 2001 to $8,615,358 in 2002. Such claims were $5,158,623 in
2000. This increase in accident and health benefits is
directly related to the acquisition of Combined and Lifeline
discussed above, which generated $5,752,048 in claims,
offsetting a $438,031 reduction in claims on our existing book
of accident and health business. As a result of the
substantial increase in accident and health claims plus an
increase in loss ratios, in 1999 management cancelled a large
portion of the existing blocks of this business which was
acquired in prior acquisitions. This action resulted in
decreases in accident and health premiums of $2,175,842 in
2001 and $1,857,282 in 2002. Additionally, significant rate
increases were implemented on the accident and health business
remaining in force, and management expects to continue to
implement increases until such time as claims reach more
reasonable levels.
Endowment benefits increased 6.3% from $5,389,082 in 2001 to
$5,730,463 in 2002. In 2000, such expenses were $4,895,492.
Beginning in late 1990, CICA introduced a new series of
international policies that 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. Like policy dividends, endowments are factored
into the premium and as such the increase should have no
adverse impact on profitability.
Policy surrenders increased 16.2% from $14,435,486 in 2001 to
$16,777,391 in 2002. Surrenders were $14,124,514 in 2000. The
current uncertain economic climate in several Latin American
countries was the primary reason for the increased surrender
activity. The economies in Argentina, and Venezuela in
particular were in near-depressions during 2002. As such,
continued increases in surrenders relating to insured's
residing in these countries are expected. However, we are
optimistic about the long-term prospects for these countries.
Other claim expenses amounted to $383,993 in 2002, $449,441 in
2001 and $915,083 in 2000. These expenses are comprised of
supplemental contract benefits, interest on policy funds and
assorted other miscellaneous policy benefits.
During 2002, commissions increased 21.5% to $16,339,205 from
$13,444,270 in 2001. In 2000, commission expense was
$12,411,053. The 2002 increase is largely attributable to the
acquisition of Combined and Lifeline, whose 2002
26
commissions were $2,160,226. The remainder of the 2002
increase was due to the 17.7% increase in production of new
life insurance premiums. The increases in 2001 occurred
because of the 14.9% increased production and related
increased issuance of new life policies.
Underwriting, acquisition and insurance expenses increased
41.6% to $15,064,065 in 2002 compared to $10,635,639 in 2001
and $10,139,539 in 2000. The 2002 increase was due in part to
the acquisition of Combined and Lifeline which added
$1,954,738 of these expenses in 2002. Additional 2002 expenses
related to acquisition activities, costs associated with the
listing of our Class A common stock on the New York Stock
Exchange and other listing fees related to the acquisitions of
Combined and Lifeline and the 15% stock dividend paid in June,
2002. Additionally, in May 2002, in an attempt to more
efficiently manage and communicate with our independent
marketing consultants, we canceled our contract with an
independent international company that had served as the
managing general agent for our international marketing
activities since early 1997. We no longer pay an overriding
commission to this former managing firm on all new business
issued internationally but we now directly bear the related
costs of all marketing, management and promotional activities.
During 2001, we incurred overhead expenses related to
acquisition activities combined with expenses incurred to
continue to develop the domestic ordinary life sales program.
Capitalized deferred policy acquisition costs increased 30.0%
from $11,112,096 in 2001 to $14,442,757 in 2002. These costs
were $10,056,287 in 2000. The 2002 increase included
$1,518,389 of deferred policy acquisition costs that have been
capitalized by Combined and Lifeline since their acquisition.
The remainder of the increase related to the 17.7% increase in
new life production. The increase in 2001 reflected the 14.9%
increase in sales throughout the year of whole life policies
internationally. Amortization of these costs was $10,039,403,
$8,568,445 and $8,521,972, respectively in 2002, 2001 and
2000. Most of the 2002 increase related to the increased
surrender activity caused by the current uncertain economic
climate in several Latin American countries.
Amortization of cost of customer relationships acquired,
excess of cost over net assets acquired and other intangibles
increased from $1,908,683 in 2001 to $2,527,996 in 2002. In
2000, such amortization was $1,995,660. The increase relates
to the amortization of cost of customer relationships acquired
with respect to the acquisition of Combined and Lifeline that
amounted to $1,888,885 in 2002 that more than offset our
adoption of the new Financial Accounting Standards Board's
(FASB) accounting statement where amortization of goodwill and
other intangibles ceased since management determined that
these intangibles have an indefinite life. Our analysis of
goodwill and other intangibles indicated that there was no
impairment as of December 31, 2002. The amortization of
goodwill and other intangibles amounted to $902,610 and
$965,590 for the years ended December 31, 2001 and 2000,
respectively.
27
LIQUIDITY AND CAPITAL RESOURCES
Stockholders' equity increased from $82,721,798 at December
31, 2001 to $101,792,305 at December 31, 2002. The increase
was attributable to $11,961,784 of Class A common stock issued
for the acquisition of Combined and Lifeline, net income of
$4,254,217 earned in 2002 and unrealized gains, net of tax,
increased by $2,854,506 as of December 31, 2002 over December
31, 2001. Increases in the market value of our bond portfolio
caused by higher bond prices resulted in the increase in
unrealized gains.
We paid a 15% stock dividend on June 1, 2002 to holders of
record as of May 1, 2002. A similar 7% dividend was paid on
December 31, 2000 to holders of record as of December 1, 2000.
Both dividends were paid using Class A and B shares that were
previously authorized but unissued. The dividends had the
effect of transferring $35,416,772 and $11,497,886
respectively in 2002 and 2000 from retained earnings to our
common stock and treasury stock.
Invested assets increased to $226,008,600 at December 31, 2002
from $206,695,811 at year end 2001, an increase of 9.3%. The
acquisition of Combined and Lifeline discussed above were the
primary reasons for the increase adding $15.2 million to
invested assets. Increases in fixed maturities
available-for-sale (7.5%), fixed maturities held-to-maturity
(104.4%) and policy loans (3.1%) were the primary categories
of invested assets that increased. Fixed maturities are
categorized into two classifications: fixed maturities
held-to-maturity, which are valued at amortized cost, and
fixed maturities available-for-sale which are valued at fair
value. Fixed maturities available-for-sale and fixed
maturities held-to-maturity were 84.9% and 5.0%, respectively,
of invested assets at December 31, 2002. Fixed maturities held
to maturity, amounting to $11,384,137 at December 31, 2002,
consist of U.S. Treasury and U.S. government agency
securities. Management has the intent and believes we have the
ability to hold the securities to maturity.
Policy loans comprised 9.1% of invested assets at December 31,
2002 compared to 9.7% at December 31, 2001. 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 we maintain adequate liquidity
despite the uncertain maturities of these loans.
Our cash balances at our primary depositories were
significantly in excess of Federal Deposit Insurance
Corporation coverage at December 31, 2002 and 2001. Management
monitors the solvency of all financial institutions in which
we have funds to minimize the exposure for loss. Management
does not believe we are at significant risk for such a loss.
During 2003, we intend to continue to utilize callable
securities issued by Federal agencies as cash management tools
to minimize excess cash balances and enhance returns.
In the wake of recent bankruptcy filings by large
corporations, concern has been raised regarding the use of
certain off-balance sheet special purpose entities such
28
as partnerships to hedge or conceal losses related to
investment activity. We do not utilize special purpose
entities as investment vehicles. Nor are there any such
entities which we have an investment that engages in
speculative activities of any description, and we do not use
such investments to hedge our investment positions.
Furthermore, there are no commitments or guarantees that
provide for the potential issuance of our stock.
Our subsidiary, CICA, owned 2,398,031 shares of our Class A
common stock at December 31, 2002, and 2,085,244 shares at
December 31, 2001. In our consolidated financial statements,
the shares 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.
We have a profit sharing plan that was effective January 1,
1978. The purpose of the plan is to provide a retirement
program for the exclusive benefit of the eligible employees of
the employer. The plan is designed to comply with the Employee
Retirement Income Security Act of 1974 (ERISA). An employee
become automatically eligible as of January 1st of the year in
which the employee completes 12 months of employment and has
worked at least 1,000 hours. An employee will be 100% vested
after seven or more years of service. Our Board of Directors
determines if a contribution will be made and the amount to be
made. The contribution, if any, is allocated based upon the
total number of employees participating in the plan and their
years of service. We made contributions of $300,000 in 2002,
$250,000 in 2001, and $200,000 in 2000. The Profit Sharing
Plan had net assets of $1,639,619 as of December 31, 2002,
$1,266,197 as of December 31, 2001 and $1,136,850 as of
December 31, 2000.
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 an insurance 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 affected company would
begin. At December 31, 2002, all of the Company's insurance
subsidiaries were above required minimum levels.
Effective January 1, 2001, the NAIC implemented codified rules
for statutory accounting. These rules were approved and
implemented by each state in which all of our insurance
subsidiaries operations are domiciled. CICA is domiciled in
Colorado, Combined and Lifeline are domiciled in Texas and
CILIC and Excalibur are domiciled in Illinois. CICA follows
certain Colorado state laws that differ from NAIC's codified
rules. 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 reserve is mandated; however, Colorado has
an exception if the difference between the premium charged and
the mortality factor included in the premium on participating
policies exceeds the reserve that would be established. Such
is the case for CICA. As a result, CICA
29
did not establish the reserve of approximately $3 million in
its statutory financial statements as of and for the year
ended December 31, 2002 or December 31, 2001. In Texas,
codified rules must be followed unless the Commissioner of
Insurance of the State of Texas permits specific practices
that differ from codified rules. Combined and Lifeline have
not requested explicit permission to deviate from the NAIC
codified rules. In Illinois, codified rules must be followed
unless the Commissioner of Insurance of the State of Illinois
permits specific practices that differ from the codified
rules. CILIC and Excalibur have not requested explicit
permission to deviate from the NAIC codified rules.
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are as follows:
POLICY LIABILITIES
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 our industry experience. The preparation of
financial statements requires management to make estimates and
assumptions that affect the reported amount of policy
liabilities and the increase in future policy benefit
reserves. Management's judgments and estimates for future
policy benefit reserves provide for possible unfavorable
deviation.
We continue to use the original assumptions (including a
provision for the risk of adverse deviation) in subsequent
periods to determine the changes in the liability for future
policy benefits (the "lock-in concept") unless a premium
deficiency exists. Management monitors these assumptions and
has determined that a premium deficiency does not exist.
Management believes that our policy liabilities and increase
in future policy benefit reserves as of and for the years
ended December 31, 2002, 2001 and 2000 are based upon
assumptions, including a provision for the risk of adverse
deviation, that do not warrant revision. The relative
stability of these assumptions and management's analysis is
discussed below.
In Table II in Item 1, the ratio of lapses and surrenders to
mean life insurance in-force has varied between 4.4% to 5.1%
for four of the past five years. The 2002 ratio of 7.3%
relates to surrenders caused by the current uncertain economic
conditions in several Latin American countries. After review
of the surrender and lapse detailed information, management
does not believe the 2002 increase reflects a negative trend
in lapses and surrender activity but rather an aberration in
the historical experience and no adjustment to persistency and
lapsation assumptions are needed in the computation of future
policy benefit reserves. Management believes that our
conservation program whereby policyholders that are
considering to surrender their policies are informed and
counseled about the benefits of their policies, should return
surrenders to our historical levels.
Table IV in Item 1 above, illustrates that during the past
five years the ratio of commissions, underwriting and
operating expenses to insurance premiums has ranged from 39.9%
to 46.0% and the ratio of commissions, underwriting and
operating expenses, policy reserves increases, policyholder
benefits and dividends to policyholders to insurance premiums
has ranged from 113.1% to 119.2%. Table VIII also shows that
the ratio of net investment income to mean amount of invested
assets has varied from 6.6% to 6.8% during the past five
years. As set
30
forth above in Management's Discussion and Analysis of
Financial Condition and Results of Operations, death benefits
for the years ended December 31, 2002, 2001 and 2000 were
$6,599,914, $5,613,782 and $5,277,284, respectively with
$712,052 of the 2002 increase in death benefits related to the
acquisitions of Combined and Lifeline.
DEFERRED POLICY ACQUISITION COSTS
Acquisition costs, consisting of commissions and policy
issuance, underwriting and agency expenses that 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.
We utilize the factor method to determine the amount of costs
to be capitalized and the ending asset balance. The factor
method is based on the ratio of premium revenue recognized for
the policies in force at the end of each reporting period
compared to the premium revenue recognized for policies in
force at the beginning of the reporting period. The factor
method ensures that policies that lapsed or surrendered during
the reporting period are no longer included in the deferred
policy acquisition costs calculation. The factor method limits
the amount of deferred costs to its estimated realizable
value, provided actual experience is comparable to that
contemplated in the factors.
Inherent in the capitalization and amortization of deferred
policy acquisition costs are certain management judgments
about what acquisition costs are deferred, the ending asset
balance and the annual amortization. Over 85% of our
capitalized deferred acquisition costs are attributed to first
year excess commissions. The remaining 15% are attributed to
costs that vary with and are directly related to the
acquisition of new and renewal insurance business. Those costs
generally included costs related to the production,
underwriting and issuance of new business. Use of the factor
method, as discussed above, limits the amount of unamortized
deferred policy acquisition costs to its estimated realizable
value provided actual experience is comparable to that
contemplated in the factors and results in amortization
amounts such that policies that lapse or surrender during the
period are no longer included in the ending deferred policy
acquisition cost balance.
A recoverability test which considers among other things,
actual experience and projected future experience, is
performed at least annually by third party actuarial
consultants. These annual recoverability tests initially
calculate the available premium (gross premium less benefit
net premium less percent of premium expense) for the next 30
years. The available premium per policy and the deferred
policy acquisition costs per policy are then calculated. The
deferred policy acquisition costs are then amortized over two
methods utilizing reasonable assumptions and two other methods
using pessimistic
31
assumptions. The two methods using reasonable assumptions
illustrate an early deferred policy acquisition recoverability
period. The two methods utilizing pessimistic assumptions
still support early recoverability of the aggregate deferred
policy acquisition costs. Based upon the extensive analysis
done to only capitalize expenses that vary with and are
directly related to the acquisition of new and renewal
insurance business, utilization of the factor method and
extensive, annual recoverability testing, management believes
that our deferred policy acquisition costs and related
amortization as of and for the years ended December 31, 2002,
2001 and 2000 limits the amount of deferred costs to its
estimated realizable value.
VALUATION OF INVESTMENTS IN FIXED MATURITY AND EQUITY
SECURITIES
At December 31, 2002, investments in fixed maturity and equity
securities were 89.9% and .3%, respectively, of total
investments. Approximately 94.4% of our fixed maturities were
classified as available-for-sale securities at December 31,
2002 with the remaining 5.6% classified as held-to-maturity
securities based upon our intent and ability to hold these
securities to maturity. All equity securities at December 31,
2002 are classified as available-for-sale securities. We have
no fixed maturity or equity securities that are classified as
trading securities at December 31, 2002.
Additionally, at December 31, 2002, 91.7% of our fixed
maturity securities are invested in U.S. Treasury securities
and obligations of U.S. government corporations and agencies,
including U.S. government guaranteed mortgage-backed
securities. All of these securities are backed by or bear the
implied full faith and credit of the U.S. government. We
evaluate the carrying value of our fixed maturity and equity
securities at least quarterly. A decline in the fair value of
any fixed maturity or equity 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. The
new cost basis is not changed for subsequent recoveries in the
fair value of the fixed maturity or equity security. Based
upon our emphasis of investing in fixed maturity securities
primarily composed of U.S. Treasury securities and obligations
of U.S. government corporations and agencies, including U.S.
government guaranteed mortgage-backed securities and callable
instruments issued by U.S. government agencies and its
analysis whether any declines in fair value below cost are
temporary or other than temporary, management believes that
our investments in fixed maturity and equity securities at
December 31, 2002 are not impaired and no other than temporary
losses need to be recorded. See also Item 7A below,
"Quantitative and Qualitative Disclosures about Market Risk."
ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended, was effective January 1,
2001. We adopted SFAS No. 133, as amended during 2001.
Implementation did not have an impact on our financial
statements since we have no derivative instruments and do not
participate in any hedging activities. Based on current
operations, we do not anticipate that SFAS No. 133 will have a
material effect on our financial position, results of
operation or liquidity.
32
SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities - A
Replacement of FASB Statement 125" was effective after March
31, 2001. We adopted SFAS No. 140 during 2001. Implementation
did not have an impact on our financial statements since we
were not involved in any such transfers, servicing or
extinguishments. Based on current operations, we do not
anticipate that SFAS No. 140 will have a material effect on
our financial position, results of operation or liquidity.
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," effective
after December 15, 2001. 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. We adopted SOP 00-3 in 2002. Management does not
believe that SOP 00-3 will have any impact on us since we are
already a stock life insurance company and we do not pay
dividends based on actual experience. We utilize contractual
life insurance dividend scales as shown in published dividend
illustrations at the date the insurance contracts are issued
in determining policyholder dividends.
In June 2001, The Financial Accounting Standards Board (FASB)
issued SFAS No. 141, "Business Combinations," (SFAS No. 141)
and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS
No. 142). 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 that intangible assets acquired in a
business combination must meet to be recognized and reported
separately from goodwill. SFAS No. 142 requires that goodwill
and intangible assets with indefinite useful lives no longer
be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived
Assets." We adopted the provisions of SFAS No. 141 as of July
1, 2001 and adopted the provisions of SFAS No. 142 as of
January 1, 2002.
We performed an assessment of whether there was an indication
that goodwill was impaired as of January 1 and December 31,
2002. To accomplish this, we identified our reporting units
and determined the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units as of
January 1 and December 31, 2002. We determined the fair value
of each reporting unit and compared it to the carrying amount
of the reporting unit. The fair value of the reporting units
exceeded the carrying amount of the reporting units at both
January 1 and
33
December 31, 2002, and we concluded that no goodwill or
intangible assets were impaired. This same analysis was also
performed as of December 31, 2002 with respect to the
intangible assets and goodwill recognized in the acquisitions
of Combined and Lifeline. That analysis also concluded that
there was no goodwill or intangible asset impairment as of
December 31, 2002. As of December 31, 2002, we had unamortized
goodwill of $7,783,405 and unamortized intangible assets of
$2,018,125. Amortization expense related to goodwill was
$595,410 and $658,390 for the years ended December 31, 2001
and 2000, respectively. In addition, the amortization expense
related to intangible assets was $307,200 for each of the
years ended December 31, 2001 and 2000. Had SFAS No. 142 been
adopted in 2001 and 2000, proforma net income would
approximate $4,866,000 ($.17 per share) and $3,018,000 ($.10
per share), respectively, for the years ended December 31,
2001 and 2000.
In August 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 addresses
financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets that result
from the acquisition, construction, development or normal
operations of a long-lived asset. SFAS No. 143 is effective
for fiscal years beginning after June 15, 2002. Management
does not believe SFAS No. 143 will have a significant effect
on our financial position, results of operations or liquidity.
In October 2001, the FASB issued SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144
supersedes and amends SFAS No. 121 and relevant portions of
SFAS No. 30. We adopted SFAS No. 144 on January 1, 2002. SFAS
No. 144 did not have a material effect on our financial
position, results of operation or liquidity.
In April 2002, the FASB issued SFAS No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections." SFAS 145 will affect
income statement classification of gains and losses from
extinguishment of debt and make certain other technical
corrections. Based on current operations, we do not anticipate
that SFAS No. 145 will have a material effect on our financial
position, results of operations or liquidity.
In July 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No.
146 spreads out the reporting of expenses related to
restructurings initiated after 2002. Commitment to a plan to
exit an activity or dispose of long-lived assets will no
longer be enough evidence to record a one-time charge for most
anticipated exit or disposal activities. Companies will
instead record exit or disposal costs when they are "incurred"
and can be measured by fair value and the recorded liability
will subsequently be adjusted for changes in estimated cash
flows. SFAS No. 146 will also revise accounting for specified
employee and contract terminations that are part of
restructuring activities. Based on current operations, we do
not anticipate that SFAS No. 146 will have a material effect
on our financial position, results of operations or liquidity.
34
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to
Others, an Interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34." This
Interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about
its obligations under guarantees issued and also clarifies
that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions
of the Interpretation are applicable to guarantees issued or
modified after December 31, 2002. The disclosure requirements
are effective for financial statements of annual periods ended
after December 31, 2002. Based on current operations, we do
not anticipate that the Interpretation will have a material
effect on our financial position, results of operations or
liquidity.
In December 2002, the FASB issued SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB No. 123." This statement amends SFAS No.
123, "Accounting for Stock Based Compensation," to provide
alternative methods of transition for a voluntary change to
the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures
in both annual and interim financial statements. Certain of
the disclosure modifications are required for fiscal years
ended after December 31, 2002. Based on current operations, we
do not anticipate that SFAS No. 148 will have a material
effect on our financial position, results of operations or
liquidity. We currently offer no stock-based employee
compensation.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51." This interpretation addresses
the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. The Interpretation
applies immediately to variable interests in variable interest
entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January
31, 2003. This interpretation requires certain disclosures in
financial statements issued after January 31, 2003. Based on
current operations, we do not anticipate that the
Interpretation will have a material effect on our financial
position, results of operations or liquidity.
ITEM 7A. 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 our available-for-sale
fixed maturities is as follows at December 31, 2002 and 2001:
35
DECREASES IN INTEREST RATES
-----------------------------------------
100 BASIS 200 BASIS 300 BASIS
POINTS POINTS POINTS
------ ------ ------
December 31, 2002 $5,672,000 $ 9,333,000 $13,207,000
========== =========== ===========
December 31, 2001 $8,042,000 $17,013,000 $27,015,000
========== =========== ===========
INCREASES IN INTEREST RATES
------------------------------------------------
100 BASIS 200 BASIS 300 BASIS
POINTS POINTS POINTS
------ ------ ------
December 31, 2002 $ (9,987,000) $(20,511,000) $(30,619,000)
============ ============ ============
December 31, 2001 $(16,938,000) $(28,041,000) $(38,030,000)
============ ============ ============
A sudden increase of interest rates 200 or 300 basis points
could result in substantial unrealized losses in our fixed
maturity portfolio as illustrated above. Management does not
believe such increases are likely to occur in the near-term.
Furthermore, our book of insurance business is such that the
likelihood of large surrender activity being triggered by a
rate increase that would force us to dispose of our fixed
maturities at a loss is highly unlikely.
There are no fixed maturities or other investments that we
classify as trading instruments. At December 31, 2002 and
2001, there were no investments in derivative instruments.
Approximately 91.8% of the fixed maturities we owned at
December 31, 2002 are instruments of the United States
government or are backed by U.S. government agencies or
private corporations carrying the implied full faith and
credit backing of the U.S. government. We have minimal
investment in equity securities. See also Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
PAGE
REFERENCE
---------
Independent auditors' report 40
Consolidated statements of financial position at
December 31, 2002 and 2001 41-42
Consolidated statements of operations
- years ended December 31, 2002, 2001 and 2000 43-44
Consolidated statements of stockholders' equity and comprehensive
income - years ended December 31, 2002, 2001 and 2000 45
Consolidated statements of cash flows
- years ended December 31, 2002, 2001 and 2000 46-47
Notes to consolidated financial statements
Schedules at December 31, 2002 and 2001: 48-70
Schedule II - Condensed Financial
Information of Registrant 71-73
Schedules for each of the years in the three-year
period ended December 31, 2002:
Schedule III - Supplementary Insurance Information 74-75
Schedule IV - Reinsurance 76
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
During the 24 months preceding the date of the audited financial
statements included herein, there has been no change of accountants
made by us, nor have we reported on Form 8-K any disagreements
between us and our independent accountants.
PART III
Items 10, 11, 12, and 13 of this Report incorporate by reference the information
in our definitive proxy material under the headings "Stock and Principal
Stockholders," "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, 2002.
37
PART IV
ITEM 14. CONTROLS AND PROCEDURES
Management recognizes its responsibility for maintaining effective and efficient
internal controls and disclosure controls (the controls and procedures by which
we ensure that information disclosed in annual and quarterly reports filed with
the securities and Exchange Commission ("SEC") is accurately processed,
summarized and reported within the required time period). We have procedures in
place for gathering the information that is needed to enable us to file required
reports with the SEC. We have a group of officers who are responsible for
reviewing all quarterly and annual SEC reports. This group consists of Rick D.
Riley, Vice Chairman and CEO, Mark A. Oliver, President, Marcia Emmons, Vice
President and Counsel and Richard C. Scott, Director.
Under the supervision and with the participation of management, including the
Chief Executive Officer and Chief Financial Officer, we conducted an evaluation
of our disclosure controls and procedures, as such term is defined under Rule
13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended,
within 90 days of the filing date of this report. Based on the evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective.
There have been no significant changes (including corrective actions with regard
to significant deficiencies or material weaknesses) in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of the evaluation referenced above.
ITEM 15. 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.
(B) EXHIBITS
See the Exhibits Index beginning on page 82.
38
CITIZENS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
PAGE
REFERENCE
---------
Independent auditors' report 40
Consolidated statements of financial position at
December 31, 2002 and 2001 41-42
Consolidated statements of operations
- years ended December 31, 2002, 2001 and 2000 43-44
Consolidated statements of stockholders' equity and comprehensive
income years ended December 31, 2002, 2001 and 2000 45
Consolidated statements of cash flows
- years ended December 31, 2002, 2001 and 2000 46-47
Notes to consolidated financial statements
Schedules at December 31, 2002 and 2001: 48-70
Schedule II - Condensed Financial
Information of Registrant 71-73
Schedulesfor each of the years in the three-year period ended
December 31, 2002:
Schedule III - Supplementary Insurance Information 74-75
Schedule IV - Reinsurance 76
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.
39
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Citizens, Inc.:
We have audited the consolidated financial statements of Citizens, Inc. and
consolidated 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America. 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 described in note 1(k) to the consolidated financial statements, the Company
changed its method of accounting for goodwill and intangible assets in 2002 as a
result of the adoption of Statement of Financial Standards No. 142, Goodwill and
Other Intangible Assets.
/s/ KPMG LLP
KPMG LLP
Dallas, Texas
March 7, 2003
40
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2002 AND 2001
ASSETS 2002 2001
------ ---- ----
Investments:
Fixed maturities held-to-maturity, at amortized cost $ 11,384,137 $ 5,569,899
Fixed maturities available-for-sale, at fair value 191,777,625 178,447,347
Equity securities available-for-sale, at fair value 639,316 568,398
Mortgage loans on real estate 619,084 1,109,547
Policy loans 20,596,371 19,984,477
Other long-term investments 992,067 1,016,143
------------ ------------
Total investments 226,008,600 206,695,811
Cash and cash equivalents 19,211,802 6,793,852
Accrued investment income 2,338,837 2,021,469
Reinsurance recoverable 2,254,175 2,450,015
Deferred policy acquisition costs 44,979,357 40,596,003
Other intangible assets 2,018,125 1,368,125
Deferred federal income tax 1,078,985 3,465,138
Cost of customer relationships acquired 14,191,172 5,150,351
Excess of cost over net assets acquired 7,783,405 6,767,244
Property, plant and equipment 5,590,498 5,946,806
Other assets 836,045 831,449
------------ ------------
Total assets $326,291,001 $282,086,263
============ ============
(Continued)
41
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED
DECEMBER 31, 2002 AND 2001
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
- ------------------------------------ ---- ----
Liabilities:
Future policy benefit reserves:
Life insurance $ 184,672,200 $ 170,381,823
Annuities 3,226,834 3,839,023
Accident and health 15,647,401 7,580,448
Dividend accumulations 4,859,391 4,779,329
Premium deposits 4,794,131 4,316,149
Policy claims payable 4,794,096 2,982,469
Other policyholders' funds 3,209,348 2,485,461
------------- -------------
Total policy liabilities 221,203,401 196,364,702
Commissions payable 1,912,972 1,506,700
Federal income tax payable 311,884 484,430
Other liabilities 1,070,439 1,008,633
------------- -------------
Total liabilities 224,498,696 199,364,465
------------- -------------
Stockholders' equity:
Common stock:
Class A, no par value, 50,000,000 shares authorized,
31,862,980 shares issued in 2002 and 26,642,938
shares issued in 2001, including shares in
treasury of 2,559,693 in 2002 and 2,225,820 in
2001 129,125,099 79,701,590
Class B, no par value, 1,000,000 shares
authorized, 817,696 shares issued and outstanding in
2002 and 711,040 shares issued and outstanding in 2001 1,870,389 910,482
Retained earnings (deficit) (25,887,787) 5,274,768
Accumulated other comprehensive income (loss):
Unrealized gains on securities, net of tax 3,582,025 727,519
------------- -------------
108,689,726 86,614,359
Treasury stock, at cost (6,897,421) (3,892,561)
------------- -------------
Total stockholders' equity 101,792,305 82,721,798
------------- -------------
$ 326,291,001 $ 282,086,263
============= =============
See accompanying notes to consolidated financial statements.
42
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
Revenues:
Premiums:
Life insurance $ 54,453,730 $ 48,686,189 $ 45,987,689
Accident and health 13,473,966 5,059,843 7,235,685
Annuity and universal life
considerations 283,185 216,905 228,479
Net investment income 14,251,907 13,296,481 12,550,754
Realized gains (losses) 477 (148,415) 86,569
Other income 540,633 535,821 588,940
------------ ------------ ------------
Total revenues 83,003,898 67,646,824 66,678,116
------------ ------------ ------------
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future policy benefit reserves 6,051,671 6,483,706 7,265,347
Policyholders' dividends 3,477,381 3,294,899 3,037,343
Claims and surrenders 38,107,119 29,189,132 30,370,996
Annuity expenses 280,789 205,516 468,752
------------ ------------ ------------
Total insurance benefits paid or provided 47,916,960 39,173,253 41,142,438
Commissions 16,339,205 13,444,270 12,411,053
Other underwriting, acquisition and insurance expenses 15,064,065 10,635,639 10,139,539
Capitalization of deferred policy acquisition costs (14,422,757) (11,112,096) (10,056,287)
Amortization of deferred policy acquisition costs 10,039,403 8,568,445 8,521,972
Amortization of cost of customer relationships acquired,
excess of cost over net assets acquired
and other intangibles 2,527,996 1,908,683 1,995,660
------------ ------------ ------------
Total benefits and expenses 77,464,872 62,618,194 64,154,375
------------ ------------ ------------
(Continued)
43
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
Income before Federal income tax $5,539,026 $5,028,630 $2,523,741
Federal income tax expense 1,284,809 1,065,517 471,000
---------- ---------- ----------
Net income $4,254,217 $3,963,113 $2,052,741
========== ========== ==========
Basic and diluted earnings
per share of common stock $ .14 $ .14 $ .07
========== ========== ==========
See accompanying notes to consolidated financial statements.
44
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
ACCUMULATED
COMMON STOCK RETAINED OTHER
--------------------------- EARNINGS COMPREHENSIVE TREASURY STOCKHOLDERS'
CLASS A CLASS B (DEFICIT) INCOME (LOSS) STOCK EQUITY
------------ ---------- ------------ ----------- ----------- ------------
BALANCE AT DECEMBER 31, 1999 $ 67,510,026 $ 584,863 $ 10,756,800 $(3,711,456) $(2,873,264) $ 72,266,969
------------ ---------- ------------ ----------- ----------- ------------
Comprehensive income:
Net income -- -- 2,052,741 -- -- 2,052,741
Unrealized investment gains, net -- -- -- 2,993,321 -- 2,993,321
------------ ---------- ------------ ----------- ----------- ------------
Comprehensive income -- -- 2,052,741 2,993,321 -- 5,046,062
Stock dividend 12,191,564 325,619 (11,497,886) -- (1,019,297) --
------------ ---------- ------------ ----------- ----------- ------------
BALANCE AT DECEMBER 31, 2000 $ 79,701,590 $ 910,482 $ 1,311,655 $ (718,135) $(3,892,561) $ 77,313,031
------------ ---------- ------------ ----------- ----------- ------------
Comprehensive income:
Net income -- -- 3,963,113 -- -- 3,963,113
Unrealized investment gains, net -- -- -- 1,445,654 -- 1,445,654
------------ ---------- ------------ ----------- ----------- ------------
Comprehensive income -- -- 3,963,113 1,445,654 -- 5,408,767
------------ ---------- ------------ ----------- ----------- ------------
BALANCE AT DECEMBER 31, 2001 $ 79,701,590 $ 910,482 $ 5,274,768 $ 727,519 $(3,892,561) $ 82,721,798
------------ ---------- ------------ ----------- ----------- ------------
Comprehensive income:
Net income -- -- 4,254,217 -- -- 4,254,217
Unrealized investment gains, net -- -- -- 2,854,506 -- 2,854,506
------------ ---------- ------------ ----------- ----------- ------------
Comprehensive income -- -- 4,254,217 2,854,506 -- 7,108,723
Acquisition of Combined 8,513,048 -- -- -- -- 8,513,048
Acquisition of Lifeline 3,448,736 -- -- -- -- 3,448,736
Stock dividend 37,461,725 959,907 (35,416,772) -- (3,004,860) --
------------ ---------- ------------ ----------- ----------- ------------
BALANCE AT DECEMBER 31, 2002 $129,125,099 $1,870,389 $(25,887,787) $ 3,582,025 $(6,897,421) $101,792,305
============ ========== ============ =========== =========== ============
See accompanying notes to consolidated financial statements.
45
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income $ 4,254,217 $ 3,963,113 $ 2,052,741
Adjustments to reconcile net income to
net cash provided by operating activities,
net of assets acquired:
Realized (gains) losses (477) 148,415 (86,569)
Net deferred policy acquisition costs (4,383,354) (2,543,651) (1,534,315)
Amortization of cost of customer
relationships acquired, excess cost over
net assets acquired and other intangibles 2,527,996 1,908,683 1,995,660
Depreciation 795,679 738,451 608,533
Deferred federal income tax 792,216 418,881 12,000
Change in:
Reinsurance recoverable 387,095 212,709 (478,995)
Future policy benefit reserves 5,645,152 6,531,987 7,856,111
Other policy liabilities 729,970 1,668,516 (347,198)
Accrued investment income (215,908) 201,114 (461,512)
Federal income tax (160,081) 659,408 (1,304,945)
Commissions payable and other liabilities 16,392 150,199 932,570
Other, net 207,228 466,384 157,828
------------ ------------- ------------
Net cash provided by operating activities 10,596,125 14,524,209 9,401,909
------------ ------------- ------------
Cash flows from investing activities:
Sale of fixed maturities, available-for-sale 2,239,875 11,626,961 10,325,965
Maturity of fixed maturities, available-for-sale 91,956,779 77,169,119 30,559,981
Purchase of fixed maturities, available-for-sale (95,427,418) (100,516,704) (57,178,261)
Sale of equity securities, available-for-sale 652,905 97,500 88
Principal payments on mortgage loans 490,463 240,891 195,536
Mortgage loans funded -- (171,770) --
Sale of other long-term investments and property, plant
and equipment 113,298 352,490 10,949
(continued)
46
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
2002 2001 2000
---- ---- ----
Cash and cash equivalents provided by
mergers and acquisitions $ 2,882,353 $ -- $ --
(Increase) decrease in policy loans, net (599,576) 899,659 672,208
Purchase of other long-term investments and
property, plant and equipment (486,854) (1,492,538) (1,073,424)
------------ ------------ ------------
Net cash provided by (used in)
investing activities 1,821,825 (11,794,392) (16,486,958)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 12,417,950 2,729,817 (7,085,049)
------------ ------------ ------------
Cash and cash equivalents at beginning of year 6,793,852 4,064,035 11,149,084
------------ ------------ ------------
Cash and cash equivalents at end of year $ 19,211,802 $ 6,793,852 $ 4,064,035
============ ============ ============
Supplemental:
2002 2001 2000
---- ---- ----
Cash paid (recovered) during the year for:
Interest $ -- $ -- $ --
============ ============ ============
Income taxes $ 665,139 $ (12,772) $ 1,763,945
============ ============ ============
Supplemental disclosures of non-cash investing and financing activities:
In the first quarter of 2002, the Company issued 752,701 Class A common shares
to purchase all the capital stock of Combined Underwriters Life Insurance
Company (Combined) and issued 304,928 Class A common shares to purchase all the
capital stock of Lifeline Underwriters Life Insurance Company (Lifeline). In
conjunction with the acquisition, cash and cash equivalents were provided as
follows:
Fair value of capital stock issued $ 11,961,784
Fair value of tangible assets acquired
excluding cash and cash equivalents (14,883,146)
Fair value of intangible assets acquired (13,234,978)
Liabilities assumed 19,038,693
------------
Cash and cash equivalents provided by
mergers and acquisitions $ 2,882,353
============
Issuance of 1,057,629 Class A shares $ 11,961,784
============
See accompanying notes to consolidated financial statements.
47
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
(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), Funeral Homes of America, Inc. (FHA), Insurance
Investors, Inc. (III), Central Investors Life Insurance Company of
Illinois (CILIC), Excalibur Insurance Corporation (Excalibur),
Combined Underwriters Life Insurance Company (Combined), Lifeline
Underwriters Life Insurance Company (Lifeline) and Industrial
Benefits, Inc (IBI). Citizens and its consolidated subsidiaries are
collectively referred to as "the Company."
Citizens provides life and health insurance policies through five of
its subsidiaries - CICA, CILIC, Excalibur, Combined and Lifeline.
CICA sells ordinary whole-life policies international and
domestically, and burial insurance, pre-need policies, accident and
health specified disease, hospital indemnity and accidental death
policies, throughout the southern United States. Excalibur sells
life insurance business throughout the State of Illinois. CILIC does
not actively market insurance policies, but administers an in-force
block of life insurance. Combined sells life and accident and health
insurance business throughout the southern United States. Lifeline
sells life and accident and health business throughout Texas and
Louisiana.
III provides aviation transportation to the Company. CTI provides
data processing systems and services to the Company. FHA is a
funeral home operator. IBI is inactive and has minimal assets and
liabilities.
(b) BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company
and its wholly owned subsidiaries have been prepared in conformity
with accounting principles generally accepted in the United States
of America (U.S. GAAP). All significant intercompany accounts and
transactions have been eliminated.
(c) INVESTMENTS, OTHER THAN AFFILIATES
Fixed maturities consist primarily of bonds. Fixed maturities, 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
48
the balance sheet date. Equity securities (including non-redeemable
preferred stock) are considered available-for-sale and are reported
at fair value.
Unrealized appreciation (depreciation) of equity securities and
fixed maturities held as available-for-sale is shown as a separate
component of stockholders' equity, net of tax, and is a separate
component of comprehensive income.
Mortgage loans on real estate and policy loans are reported at
unpaid principal balances less an allowance for uncollectible
amounts. Mortgage loans have an allowance for uncollectible amounts
of $50,000 at December 31, 2002 and 2001 which was estimated by the
Company based upon historical amounts that proved uncollectible.
Other long-term investments consist primarily of real estate that is
recorded at the lower of fair value, minus estimated costs to sell,
or cost. If the fair value of the real estate is less than the
carrying value, an impairment loss is recognized and charged to
earnings.
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 is 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.
Policy loans and other investments are primarily reported at cost.
The Company had assets with a fair value of $10,430,799 at December
31, 2002 and $9,538,429 at December 31, 2001 on deposit with various
state regulatory authorities to fulfill statutory requirements.
(d) 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 deposit liabilities to annuity
contracts.
49
(e) DEFERRED POLICY ACQUISITION COSTS AND COST OF CUSTOMER RELATIONSHIPS
ACQUIRED
Acquisition costs, consisting of commissions and policy issuance,
underwriting and agency expenses that 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 utilizes the factor method to determine the amount of
costs to be capitalized and the ending asset balance. The factor
method ensures that policies that lapsed or surrendered during the
reporting period are no longer included in the deferred policy
acquisition costs or the cost of customer relationships acquired
calculation. The factor method limits the amount of deferred costs
to its estimated realizable value, provided actual experience is
comparable to that contemplated in the factors. A recoverability
test which considers among other things, actual experience and
projected future experience, is performed at least annually.
The value of customer relationships acquired in the Company's
various acquisitions, which is included in cost of customer
relationships 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 customer
relationships acquired is being amortized over the anticipated
premium paying period of the related policies.
Deferred policy acquisition costs on universal life contracts are
capitalized and amortized over the life of the contract at a
constant rate based on the present value of the estimated gross
profit amounts expected to be earned over the life of the universal
life contracts.
(f) 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.
Annuity benefits are carried at accumulated contract values based on
premiums paid by participants, annuity rates of return ranging from
3.0% to 7.0% (primarily at 4.0% to 5.5%) and annuity withdrawals.
Premium deposits accrue interest at rates ranging from 3.5% to 8.25%
per annum. Cost of insurance is included in premium when collected
and 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.
50
Premiums collected on universal life contracts are not reported as
revenues in the statement of operations but are included in the
liability for policy benefits for universal life contracts based on
policyholders' account balances. Revenues from universal life
contracts are amounts assessed the policyholder for mortality and
expenses and are reported when assessed based upon one-year service
periods. Amounts assessed for services to be provided in future
periods are reported as unearned revenue and are recognized in
income over the benefit period.
The liability for policy benefits for universal life contracts is
based on the balance that accrues to the benefit of policyholders.
It includes any amounts assessed to compensate the Company for
services to be performed over future periods, any amounts previously
assessed by the Company against the policyholders that are
refundable at termination of the contract and any premium
deficiency.
(g) EXCESS OF COST OVER NET ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS
On January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." Under the guidelines of SFAS No. 142, excess of cost over
net assets acquired (goodwill) amounting to $7,783,405 and other
intangible assets determined to have an indefinite useful life
amounting to $2,018,125 will no longer be amortized. Instead
goodwill and other intangible assets will be subjected to annual
impairment analyses under SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets."
Prior to January 1, 2002, the excess of cost over the fair value of
net assets acquired in mergers and acquisitions was amortized on a
straight-line basis ranging from 5 to 20 years. Other intangible
assets, primarily the value of state licenses, were also amortized
on a straight-line basis ranging from 10 to 20 years prior to
January 1, 2002.
The Company continually monitors long-lived assets and certain
intangible assets, such as excess of cost over net assets acquired,
cost of customer relationships acquired and other intangible assets,
for impairment. An impairment loss is recorded in the period in
which the carrying value of the assets exceeds the fair value of
expected future cash flows. Any amounts deemed to be impaired are
charged, in the period in which such impairment was determined, as
an expense against earnings, no such loss was recorded in 2002, 2001
or 2000.
(h) PARTICIPATING POLICIES
At December 31, 2002 and 2001, participating business approximated
55% and 54%, respectively, of life insurance in-force and premium
income.
Policyholder dividends are determined based on the discretion of the
Company's Board of Directors. The Company utilizes contractual life
insurance dividend scales as shown in published dividend
illustrations at the date the insurance contracts are issued
(unrelated to the Company's net income) in determining policyholder
dividends. Policyholder dividends are accrued over the premium
paying periods of the insurance contracts.
51
(i) 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 the years
ended December 31, 2002, 2001 and 2000 were 29,860,836, 28,897,382
and 28,897,382, respectively. The per share amounts have been
adjusted retroactively for all periods presented to reflect the
change in capital structure resulting from a 15% stock dividend paid
in 2002 and a 7% stock dividend paid in 2000. The 2002 stock
dividend resulted in the issuance of 4,162,414 Class A shares
(including 333,873 shares in treasury) and 106,656 Class B shares
and the 2000 stock dividend resulted in the issuance of 1,887,265
Class A shares (including 145,613 shares in treasury) and 46,517
Class B shares. In addition, 1,057,629 Class A shares were issued in
March 2002 in conjunction with the acquisitions of Combined and
Lifeline.
(j) INCOME TAXES
For the year ended December 31, 2002, the Company plans to file five
separate tax returns as follows: 1) Citizens, Inc., CICA and all
direct non-life subsidiaries, 2) Excalibur, 3) Combined, 4) Lifeline
and 5) CILIC.
For the year ended December 31, 2001, the Company filed three
separate tax returns as follows: 1) Citizens, Inc., CICA and all
direct non-life subsidiaries, 2) Excalibur and 3) CILIC.
For the year ended December 31, 2000, the Company filed three
separate tax returns as follows: 1) Citizens, Inc., CICA and all
direct non-life subsidiaries, 2) Excalibur and 3) CILIC.
Deferred tax assets 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.
(k) ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, was effective January 1, 2001. The Company
adopted SFAS No. 133, as amended during 2001. Implementation did not
have an impact on the Company's financial statements since it has no
derivative instruments and does not participate in any hedging
activities. Based on current operations, the Company does not
anticipate that SFAS No. 133 will have a material effect on the
financial position, results of operation or liquidity of the
Company.
52
SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities - A Replacement of FASB
Statement 125" was effective after March 31, 2001. The Company
adopted SFAS No. 140 during 2001. Implementation did not have an
impact on the Company's financial statements since it was not
involved in any such transfers, servicing or extinguishments. Based
on current operations, the Company does not anticipate that SFAS No.
140 will have a material effect on the financial position, results
of operation 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" was effective after
December 15, 2001. 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. The Company adopted SOP 00-3 in
2002. 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 June 2001, the Financial Accounting Standards Board (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 that intangible assets acquired in a
business combination must meet to be recognized and reported
separately from goodwill. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The Company adopted the provisions of SFAS No.
141 as of July 1, 2001 and adopted the provisions of SFAS No. 142 as
of January 1, 2002.
The Company performed an assessment of whether there was an
indication that goodwill was impaired as of January 1 and December
31, 2002. To accomplish this, the Company identified its reporting
units and determined the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units as of
January 1 and December 31, 2002. The Company determined the fair
value of each reporting unit and compared it to the carrying amount
of the reporting unit. The fair value of the reporting units
exceeded the carrying amount of the reporting units at both January
1 and December 31, 2002, and the Company concluded that no goodwill
or intangible assets were impaired.
53
This same analysis was also performed as of December 31, 2002 with
respect to the intangible assets and goodwill recognized in the
acquisition of Combined and Lifeline. That analysis also concluded
that there was no goodwill or intangible asset impairment as of
December 31, 2002. As of December 31, 2002, the Company had
unamortized goodwill of $7,783,405 and unamortized intangible assets
of $2,018,125. Amortization expense related to goodwill was $595,410
and $658,390 for the years ended December 31, 2001 and 2000,
respectively. In addition, the amortization expense related to
intangible assets was $307,200 for each of the years ended December
31, 2001 and 2000. Had SFAS No. 142 been adopted in 2001 and 2000,
proforma net income would approximate $4,866,000 ($.17 per share)
and $3,018,000 ($.10 per share), respectively, for the years ended
December 31, 2001 and 2000.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of
tangible long-lived assets that result from the acquisition,
construction, development or normal operations of a long-lived
asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. Management does not believe SFAS No. 143 will have a
significant effect on the financial position, results of operations
or liquidity of the Company.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144
supersedes and amends SFAS No. 121 and relevant portions of SFAS No.
30. SFAS No. 144 was adopted on January 1, 2002. SFAS No. 144 did
not have a material effect on the financial position, results of
operation or liquidity of the Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS 145 will affect income statement
classification of gains and losses from extinguishment of debt and
make certain other technical corrections. Based on current
operations, the Company does not anticipate that SFAS No. 145 will
have a material effect on the financial position, results of
operations or liquidity of the Company.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 spreads
out the reporting of expenses related to restructurings initiated
after 2002. Commitment to a plan to exit an activity or dispose of
long-lived assets will no longer be enough evidence to record a
one-time charge for most anticipated exit or disposal activities.
Companies will instead record exit or disposal costs when they are
"incurred" and can be measured by fair value and the recorded
liability will subsequently be adjusted for changes in estimated
cash flows. SFAS No. 146 will also revise accounting for specified
employee and contract terminations that are part of restructuring
activities. Based on current operations, the Company does not
anticipate that SFAS No. 146 will have a material effect on the
financial position, results of operations or liquidity of the
Company.
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others, an
Interpretation of FASB Statements No. 5, 57 and 107 and a
54
rescission of FASB Interpretation No. 34." This Interpretation
elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under
guarantees issued and also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and
measurement provisions of the Interpretation are applicable to
guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for financial statements of
annual periods ended after December 31, 2002. Based on current
operations, the Company does not anticipate that the Interpretation
will have a material effect on the financial position, results of
operations or liquidity of the Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment
of FASB No. 123." This statement amends SFAS No. 123, "Accounting
for Stock Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications are required for
fiscal years ended after December 31, 2002. Based on current
operations, the Company does not anticipate that SFAS No. 148 will
have a material effect on the financial position, results of
operations or liquidity of the Company. The Company currently offers
no stock-based employee compensation.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of
ARB No. 51." This interpretation addresses the consolidation by
business enterprises of variable interest entities as defined in the
Interpretation. The Interpretation applies immediately to variable
interests in variable interest entities created after January 31,
2003, and to variable interests in variable interest entities
obtained after January 31, 2003. This interpretation requires
certain disclosures in financial statements issued after January 31,
2003. Based on current operations, the Company does not anticipate
that the Interpretation will have a material effect on the financial
position, results of operations or liquidity of the Company.
(l) CASH EQUIVALENTS
The Company considers as cash equivalents all securities whose
duration does not exceed 90 days at the date of acquisition.
(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 U.S. GAAP
requires management to make estimates and assumptions that affect
the reported amounts of
55
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.
(o) RECLASSIFICATIONS
Certain reclassifications have been made to the 2001 and 2000
amounts to conform to the 2002 presentation.
(2) INVESTMENTS
The cost, gross unrealized gains and losses and fair value of
investments of fixed maturities and equity securities
available-for-sale, as of December 31, 2002 and 2001, are as
follows:
2002
------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---- ----- -------- -----
Fixed maturities held-to-maturity:
US Treasury securities $ 11,384,137 $1,966,963 $ -- $ 13,351,100
============ ========== ========= ============
Fixed maturities available-for-sale:
US Treasury securities and
obligations of US government
corporations and agencies 17,611,374 1,725,911 -- 19,337,285
Public utilities 1,890,137 53,230 (74,922) 1,868,445
Debt securities issued by States
of the United States and political
subdivisions of the States 1,018,367 79,617 -- 1,097,984
Corporate debt securities 12,907,840 1,148,260 (112,036) 13,944,064
Securities not due at a single maturity date 152,908,627 2,653,421 (32,201) 155,529,847
------------ ---------- --------- ------------
Total fixed maturities
available-for-sale $186,336,345 $5,660,439 $(219,159) $191,777,625
============ ========== ========= ============
Total equity securities
available-for-sale $ 653,282 $ 10,421 $ (24,387) $ 639,316
============ ========== ========= ============
56
2001
--------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---- ----- -------- -----
Fixed maturities held-to-maturity:
US Treasury securities $ 5,569,899 $ 252,001 $ -- $ 5,821,900
============ ========== =========== ============
Fixed maturities available-for-sale:
US Treasury securities and
obligations of US government
corporations and agencies 18,521,452 1,075,165 (13,980) 19,582,637
Public utilities 1,935,441 4,440 (106,807) 1,833,074
Debt securities issued by States
of the United States and political
subdivisions of the States 1,021,298 39,551 (781) 1,060,068
Corporate debt securities 13,678,178 147,958 (315,003) 13,511,133
Securities not due at a single maturity date 142,168,570 1,994,409 (1,702,544) 142,460,435
------------ ---------- ----------- ------------
Total fixed maturities
available-for-sale $177,324,939 $3,261,523 $(2,139,115) $178,447,347
============ ========== =========== ============
Total equity securities
available-for-sale $ 588,505 $ 1,082 $ (21,189) $ 568,398
============ ========== =========== ============
The amortized cost and fair value of fixed maturities at December
31, 2002 by contractual maturity are shown below. Actual maturities
may 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
COST FAIR VALUE
---- ----------
Due after ten years $11,384,137 $13,351,100
=========== ===========
57
FIXED MATURITIES AVAILABLE-FOR-SALE
-----------------------------------
AMORTIZED
COST FAIR VALUE
---- ----------
Due in one year or less $ 3,156,716 $ 3,200,010
Due after one year through five years 6,003,421 6,530,846
Due after five years through ten years 7,127,810 7,861,054
Due after ten years 17,139,771 18,655,868
------------ ------------
33,427,718 36,247,778
Securities not due at a single maturity date 152,908,627 155,529,847
------------ ------------
Totals $186,336,345 $191,777,625
============ ============
The Company had no investments in any one entity that exceeded 10%
of stockholders' equity at December 31, 2002 other than investments
guaranteed by the U.S. Government.
The Company's investment in mortgage loans is concentrated 56% in
Texas and 44% in Colorado as of December 31, 2002.
Major categories of net investment income are summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
Investment income on:
Fixed maturities $ 12,204,716 $ 11,673,562 $ 10,885,567
Equity securities 53,422 47,745 51,401
Mortgage loans on real estate 64,962 99,049 124,092
Policy loans 1,582,200 1,508,733 1,532,238
Long-term investments 865,027 825,329 852,117
Other 568,988 176,221 191,354
------------ ------------ ------------
15,339,315 14,330,639 13,636,769
Investment expenses (1,087,408) (1,034,158) (1,086,015)
------------ ------------ ------------
Net investment income $ 14,251,907 $ 13,296,481 $ 12,550,754
============ ============ ============
Proceeds and gross realized gains (losses) from sales and maturities
of fixed maturities available-for-sale for 2002, 2001 and 2000 are
summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
Proceeds $ 94,196,654 $ 88,796,080 $ 40,885,946
============ ============ ============
Gross realized gains $ 274,078 $ 337,169 $ 284,038
============ ============ ============
Gross realized (losses) $ (323,367) $ (613,826) $ (193,801)
============ ============ ============
Proceeds and gross realized gains (losses) from sales of equity securities
available-for-sale for 2002, 2001 and 2000 are summarized as follows:
58
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
Proceeds $ 652,905 $ 97,500 $ 88
========= ========= =======
Gross realized gains $ 36,295 $ -- $ --
========= ========= =======
Gross realized (losses) $ (14,272) $ (27,230) $(2,970)
========= ========= =======
Realized gains (losses) are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
Realized gains (losses):
Fixed maturities $(49,289) $(276,657) $ 90,237
Equity securities 22,023 (27,230) (2,970)
Other 27,743 155,472 (698)
-------- --------- --------
Net realized gains (losses) $ 477 $(148,415) $ 86,569
======== ========= ========
(3) COST OF CUSTOMER RELATIONSHIPS ACQUIRED AND EXCESS OF COST OVER NET
ASSETS ACQUIRED
Cost of customer relationships acquired is summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
Balance at beginning of period $ 5,150,351 $ 6,156,424 $ 7,186,494
Increase (decrease) related to:
Acquisitions 11,568,817 -- --
Interest 983,897 461,732 538,988
Amortization (3,511,893) (1,467,805) (1,569,058)
------------ ----------- -----------
Balance at end of period $ 14,191,172 $ 5,150,351 $ 6,156,424
============ =========== ===========
Accretion of interest on cost of customer relationships 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. These amounts
are equal to the carrying value due and exclude interest accretion at
rates ranging from 6.5% to 8.5%. Actual future amortization will differ
from these estimates due to variances from estimated future withdrawal
assumptions.
YEAR AMOUNT
---- ------
2003 $2,585,597
2004 2,142,331
2005 1,939,756
2006 1,737,757
2007 1,581,838
Thereafter 4,203,893
59
Excess of cost over net assets acquired is summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------
ACCUMULATED
GROSS AMORTIZATION NET
----- ------------ ---
Balance at December 31, 1999 $11,835,543 $(3,814,499) $ 8,021,044
Amortization -- (658,390) (658,390)
----------- ----------- -----------
Balance at December 31, 2000 $11,835,543 $(4,472,889) $ 7,362,654
Amortization -- (595,410) (595,410)
----------- ----------- -----------
Balance at December 31, 2001 $11,835,543 $(5,068,299) $ 6,767,244
Acquisition 1,016,161 -- 1,016,161
----------- ----------- -----------
Balance at December 31, 2002 (1) $12,851,704 $(5,068,299) $ 7,783,405
=========== =========== ===========
----------
(1) See Note 1 above regarding the Company's adoption of SFAS 142 which
resulted in no accumulated amortization in 2002.
(4) POLICY LIABILITIES
Various assumptions used to determine the future policy benefit reserves
include the following: a) valuation interest rates from 4 to 9%, b)
mortality assumptions are from the 1955 to 1960, 1965 to 1970, and 1975 to
1980 Select and Ultimate mortality tables and c) withdrawals are based
primarily on actual historical termination rates.
The following table presents information on changes in the liability for
accident and health policy and contract claims for the years ended
December 31, 2002 and 2001.
2002 2001
---- ----
Policy and contract claims payable at January 1 $ 1,067,190 1,370,419
Less: reinsurance recoverables 136,898 344,413
----------- ----------
Net balance at January 1 930,292 1,026,006
Acquisition of Combined and Lifeline 2,057,455 --
Less: reinsurance recoverables 229,938 --
----------- ----------
Net acquired balance 1,827,517 --
Add claims incurred, related to:
Current year 9,125,439 3,565,692
Prior years (509,445) (264,351)
----------- ----------
8,615,994 3,301,341
Deduct claims paid, related to:
Current year 7,056,604 2,304,867
Prior years 2,097,957 1,092,188
----------- ----------
9,154,561 3,397,055
60
Net balance December 31 2,219,242 930,292
Plus reinsurance recoverable 266,841 136,898
----------- ----------
Policy and contract claims payable, Dec. 31 $ 2,486,083 1,067,190
=========== ==========
The development of prior year claim reserves reflects normal changes
in actuarial estimates.
A summary of the policy claims payable is as follows:
DECEMBER 31
-----------
2002 2001
---- ----
Liability for accident and health policy and contract claims $2,486,083 $1,067,190
Liability for life policy and contract claims 2,308,013 1,915,279
---------- ----------
Policy claims payable $4,794,096 $2,982,469
========== ==========
(5) REINSURANCE
In the normal course of business, the Company reinsures portions of
certain policies that it underwrites to limit disproportionate risks.
During 2002 and 2001, the Company retained varying amounts of individual
insurance up to a maximum retention of $100,000 on any life. On health
policies there are varying retention limits ranging from $25,000 to
$75,000 depending on the product with some of the supplemental hospital
and surgical policies reinsured on a quota share basis. The Company's
share of risk on the quota share reinsurance is 50%. The Company remains
contingently liable to the extent that the reinsuring companies cannot
meet their obligations under these reinsurance treaties.
Assumed and ceded reinsurance activity as of December 31, 2002 and 2001 is
summarized as follows:
2002 2001
---- ----
Aggregate assumed life insurance in-force $ 318,142,000 $ 440,023,000
=============== ===============
Aggregate ceded life insurance in-force $ (152,103,000) $ (206,386,000)
=============== ===============
Total life insurance in-force $ 2,574,043,000 $ 2,650,247,000
=============== ===============
Premiums and claims and surrenders assumed and ceded for the years ended
December 31, 2002, 2001 and 2000:
2002 2001 2000
---- ---- ----
Premiums assumed $ 420,321 $ 543,792 $ 95,068
=========== =========== ===========
Premiums ceded $(2,212,715) $(2,312,232) $(2,494,798)
=========== =========== ===========
Claims and surrenders assumed $ 409,798 $ 533,452 $ 87,025
=========== =========== ===========
Claims and surrenders ceded $(1,987,816) $(1,554,866) $(1,710,160)
=========== =========== ===========
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
61
accounted for over the life of the underlying reinsured policies using
assumptions consistent with those used to account for the underlying
policies.
(6) STOCKHOLDERS' EQUITY AND RESTRICTIONS
The two classes of stock of the Company are equal in all respects, except
(a) each Class A share receives twice the cash dividends paid on a per
share basis to the Class B common stock; and (b) 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.
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 operations and surplus of the individual insurance
companies as of and for the year ended December 31, 2002, approximately
$3,900,000 of dividends could be paid to the Company without prior
regulatory approval.
CICA, CILIC, Combined, Lifeline and Excalibur 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
respective state of domicile. The RBC as calculated for CICA, CILIC,
Combined, Lifeline and Excalibur as of December 31, 2002 exceeded levels
requiring company or regulatory action.
(7) MERGERS AND ACQUISITIONS
On March 19, 2002, the Company acquired Combined in exchange for 752,701
shares of its Class A common stock. On March 19, 2002, the Company also
acquired Lifeline in exchange for 304,928 shares of its Class A common
stock.
On November 11, 2002, the Company announced that a definitive agreement
had been reached between Citizens and First Alliance Corporation (First
Alliance) whereby the Company would acquire 100% of First Alliance's
outstanding shares. Pursuant to the terms of the agreement, which was
approved by First Alliance's shareholders and regulatory authorities, the
Company issued approximately 2.6 million shares of its Class A Common
Stock to acquire First Alliance. The transaction closed on February 18,
2003, and the aggregate market value of the consideration was
approximately $17.2 million.
On March 7, 2003, the Company entered into a Plan and Agreement of Merger
with Mid-American Alliance Corporation (Mid-American) a Missouri insurance
holding company, whereby it will acquire all of the outstanding shares of
Mid-American for shares of the Company's Class A common stock. The
transaction values Mid-American's shares at $1.35 each and the Company's
shares based on the average closing price for the 20 trading days
preceding closing. Closing is expected in mid 2003. The anticipated market
value of the consideration is expected to be $8.2 million.
62
(8) CONTINGENCIES
On July 31, 2002, class action certification was granted by a Travis
County, Texas district court judge to the plaintiffs in a lawsuit filed in
1999 style Delia Bolanos Andrade, et al v. Citizens Insurance Company of
America, Citizens, Inc., Negocios Savoy, S.A., Harold E. Riley, and Mark
A. Oliver, Case Number 99-09099. The suit alleges that life insurance
policies sold to certain non-U.S. residents by CICA are securities and
were sold in violation of the registration provisions of the Texas
securities laws. The suit seeks class action status naming as a class all
non-U.S. residents who made premium payments since August 1996 and
assigned policy dividends to a trust for the purchase of our Class A
common stock. The remedy sought is rescission of the insurance premium
payments. The district court's class certification order was appealed to
the Third Court of Appeals in Austin, Texas and oral arguments were heard
in February, 2003. A ruling from the appellate court is expected by
mid-2003. The Company believes the Plaintiffs' claim under the Texas
Securities Act is not appropriate for class certification and does not
meet the legal requirements for class action treatment under Texas law.
Should the Third Court of Appeals rule against the Company, the case would
be further appealed to the Texas Supreme Court. Recent decisions from the
Texas Supreme Court indicate a more defense-oriented approach to class
certification cases, especially in class action cases encompassing
claimants from more than one state or jurisdiction.
The Company expects the Texas appellate courts will ultimately rule in its
favor, decertify the class and remand the matter to district court for
further action. It is the Company's intention to vigorously defend the
request for class certification, as well as to vigorously defend against
the individual claims. During the time of appeal, the district court
proceedings will be stayed. The Company is unable to determine the
potential magnitude of the claims in the event of a final class
certification and the plaintiffs prevailing on the substantive action,
although the Company would expect significant cost relating to any final
class action judgment.
The Company is a party to various legal proceedings incidental to its
business. The Company has been named as a defendant in various legal
actions seeking payments for claims denied by the Company and other
monetary damages. In the opinion of management, the ultimate liability, if
any, resulting from any contingent liabilities that might arise from
litigation are not considered material in relation to the financial
position or results of operations 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.
(9) 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 primarily 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 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, is sold throughout the southern
63
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 before federal income taxes for its two reportable segments.
Geographic Areas - The following summary represents financial data
of the Company's continuing operations based on their location.
2002 2001 2000
---- ---- ----
REVENUES
U.S $23,893,723 $11,991,619 $14,340,251
Non-U.S 59,110,175 55,655,205 52,337,865
----------- ----------- -----------
Total Revenues $83,003,898 $67,646,824 $66,678,116
=========== =========== ===========
The following summary, representing revenues and pre-tax income from
continuing operations and identifiable assets for the Company's reportable
segments as of and for the years ended December 31, 2002, 2001 and 2000,
is as follows:
YEARS ENDED DECEMBER 31 2002 2001 2000
---- ---- ----
Revenue, excluding net investment income and
realized gains (losses)
Domestic $19,790,994 $ 9,660,887 $11,622,382
International 48,960,520 44,837,871 $42,418,411
----------- ------------ -----------
Total consolidated revenue $68,751,514 $ 54,498,758 $54,040,793
=========== ============ ===========
Net investment income:
Domestic $ 4,102,592 $ 2,357,041 $ 2,699,251
International 10,149,315 10,939,440 9,851,503
----------- ------------ -----------
Total consolidated net investment
income $14,251,907 $ 13,296,481 $12,550,754
=========== ============ ===========
Amortization expense:
Domestic $ 3,676,614 $ 1,896,086 $ 1,922,308
International 8,890,785 8,581,042 8,595,324
----------- ------------ -----------
Total consolidated amortization
expense $12,567,399 $ 10,477,128 $10,517,632
=========== ============ ===========
Realized gains (losses)
Domestic $ 137 $ (26,309) $ 18,618
International 340 (122,106) 67,951
----------- ------------ -----------
Total consolidated realized gains (losses) $ 477 $ (148,415) $ 86,569
=========== ============ ===========
Income before federal income tax:
64
Domestic $ 2,139,484 $ 829,277 $ 290,577
International 3,399,542 4,199,353 2,233,164
----------- ------------ -----------
Total consolidated income before federal
income taxes $ 5,539,026 $ 5,028,630 $ 2,523,741
=========== ============ ===========
2002 2001
---- ----
Assets as of December 31:
Domestic $118,041,708 $ 93,652,639
International 208,249,293 188,433,624
------------ ------------
Total $326,291,001 $282,086,263
============ ============
Major categories of premiums are summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
Premiums:
Ordinary life $54,033,409 $48,142,397 $45,892,621
Annuity and universal life 283,185 216,905 228,479
Group life 420,321 543,792 95,068
Accident and health 13,473,966 5,059,843 7,235,685
----------- ----------- -----------
Total premiums $68,210,881 $53,962,937 $53,451,853
=========== =========== ===========
The following table sets forth the Company's total yearly percentage of premiums
income by geographic area for the years indicated:
AREA 2002 2001 2000
---- ---- ---- ----
Colombia 21.2% 21.9% 19.2%
Argentina 16.3 23.3 26.3
Venezuela 7.4 7.8 5.1
Uraguay 6.8 10.2 11.2
Other Foreign 19.6 19.2 16.7
Texas 14.0 4.2 4.3
Oklahoma 6.3 4.6 5.0
Mississippi 3.0 4.0 7.1
Other States 5.4 4.8 5.1
----- ----- -----
TOTAL 100.0% 100.0% 100.0%
===== ===== =====
(10) 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
is as follows:
65
2002 2001 2000
---- ---- ----
Computed normal tax expense $ 1,883,269 $ 1,709,734 $ 858,072
Small life insurance company
deduction (565,769) (612,000) (573,000)
Amortization of excess of costs
over net assets acquired -- 202,439 224,000
Adjustment of prior year taxes (29,963) (276,492) --
Other (2,728) 41,836 (38,072)
----------- ----------- ---------
Federal income tax expense (benefit) $ 1,284,809 $ 1,065,517 $ 471,000
=========== =========== =========
Income tax expense for the years ended December 31, 2002, 2001 and 2000
consists of:
2002 2001 2000
---- ---- ----
Current $ 492,593 $ 646,636 $459,000
Deferred 792,216 418,881 12,000
---------- ---------- --------
$1,284,809 $1,065,517 $471,000
========== ========== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2002 and 2001 are presented below.
2002 2001
---- ----
Deferred tax assets:
Future policy benefit reserves $17,988,126 $16,186,294
Net operating loss carryforwards 892,713 87,000
Due and accrued dividends and expenses 690,050 656,333
Other 283,772 128,217
----------- -----------
Total gross deferred tax assets 19,854,661 17,057,844
Deferred tax liabilities:
Deferred policy acquisition costs, cost of customer
relationships acquired and intangible assets 16,051,938 12,253,001
Reinsurance 652,595 673,826
Investments available-for-sale 1,845,289 374,782
Other 225,854 291,097
----------- -----------
Total gross deferred tax liabilities 18,775,676 13,592,706
----------- -----------
Net deferred tax asset $ 1,078,985 $ 3,465,138
=========== ===========
In connection with the acquisition of Combined and Lifeline, a deferred
tax liability of $123,430 was recognized in accordance with SFAS No. 141,
"Business Combinations." A summary of the changes in the components of
deferred federal income taxes for 2002 and 2001 is as follows:
66
2002 2001
---- ----
Deferred tax assets (liabilities):
Balance January 1 $ 3,465,138 $ 4,628,750
Deferred tax expense (792,216) (418,881)
Acquisition of Combined and Lifeline (123,430) --
Investments available-for-sale (1,470,507) (744,731)
----------- -----------
Balance December 31 $ 1,078,985 $ 3,465,138
=========== ===========
The Company and its subsidiaries had net operating losses at December 31,
2002 available to offset future taxable income of approximately $2,626,000
for Federal income tax substantially all of which expire through 2020. A
portion of the net operating loss carryforward is subject to limitations
under Section 382 of the Internal Revenue Code.
At December 31, 2002, the Company had accumulated approximately $3,291,000
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, 2002 become taxable, the tax
computed at present rates would be approximately $1,119,000.
(11) 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 as follows:
67
2002 2001
--------------------------------- --------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
Financial assets:
Fixed maturities $203,161,762 $205,128,725 $184,017,246 $184,269,247
Equity securities 639,316 $ 639,316 568,398 568,398
Cash and cash
equivalents 19,211,802 19,211,802 6,793,852 6,793,852
Mortgage Loans 619,084 738,100 1,109,547 1,109,547
Financial liabilities:
Annuities 3,226,834 3,226,834 3,839,023 3,839,023
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 rates for these loans as of December 31, 2002 and 2001,
were approximately 8.9% and 8.7%, respectively, with maturities ranging
from one to fifteen years. Management estimated the fair value using an
interest rate of 6.6%. Management believes that reported 2001 amounts
approximate fair value.
The carrying value and fair values for the Company's liabilities under
annuity contract policies are the same as the interest rates credited to
these products and are periodically adjusted by the Company to reflect
market conditions. The fair value of liabilities under all insurance
contracts are taken into consideration in the overall management of
interest rate risk, which minimizes exposure to changing interest rates
through the matching of investment maturities with amounts due under
insurance contracts.
Policy loans have a weighted average interest rate of 7.6% as of both
December 31, 2002 and 2001 and have no specified maturity dates. The
aggregate fair 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 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, 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.
68
(12) OTHER COMPREHENSIVE INCOME (LOSS)
The changes in the components of other comprehensive income (loss) are
reported net of income taxes of 34% for the periods indicated as follows:
YEAR ENDED DECEMBER 31, 2002
----------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------ ------ ------
Unrealized gain on securities:
Unrealized holding gain
arising during the period $ 4,297,747 $(1,461,237) $ 2,836,510
Add: reclassification adjustment for losses
included in net income 27,266 (9,270) 17,996
----------- ----------- -----------
Other comprehensive income $ 4,325,013 $(1,470,507) $ 2,854,506
=========== =========== ===========
YEAR ENDED DECEMBER 31, 2001
----------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------ ------ ------
Unrealized gain on securities:
Unrealized holding gain
arising during the period $ 1,886,498 $ (641,409) $ 1,245,089
Add: reclassification adjustment for
losses included in net income 303,887 (103,322) 200,565
----------- ----------- -----------
Other comprehensive income $ 2,190,385 $ (744,731) $ 1,445,654
=========== =========== ===========
YEAR ENDED DECEMBER 31, 2000
----------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------ ------ ------
Unrealized gain on securities:
Unrealized holding gain
arising during the period $ 4,622,602 $(1,571,685) $ 3,050,917
Less: reclassification adjustment for gains
included in net income (87,267) 29,671 (57,596)
----------- ----------- -----------
Other comprehensive income $ 4,535,335 $(1,542,014) $ 2,993,321
=========== =========== ===========
69
(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table contains selected unaudited consolidated financial
data for each calendar quarter
2002
----------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Revenues $23,684,268 $22,253,889 $21,296,992 $15,768,749
Expenses 21,996,828 21,834,228 19,923,701 13,710,115
Federal income tax expense 332,859 196,729 199,390 555,831
Net income 1,354,581 222,932 1,173,901 1,502,803
Basic and diluted earnings per share .04 .01 .04 .05
2001
----------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Revenues $18,228,560 $17,582,734 $16,353,749 $15,481,781
Expenses 16,593,461 15,637,391 15,617,737 14,769,605
Federal income tax expense 135,517 585,000 155,000 190,000
Net income 1,499,582 1,360,343 581,012 522,176
Basic and diluted earnings per share .05 .05 .02 .02
70
SCHEDULE II
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2002 AND 2001
2002 2001
---- ----
Assets
Investment in subsidiaries (1) $ 96,195,418 $ 77,922,929
Fixed maturities available-for-sale, at fair value 2,589,282 2,690,942
Accrued investment income 23,918 30,277
Real estate 796,556 817,584
Cash 1,292,334 950,614
Other assets 1,841,247 1,142,365
------------- ------------
$ 102,738,755 $ 83,554,711
============= ============
Liabilities and Stockholders' Equity
Liabilities -
Accrued expense and other $ 946,450 $ 832,913
------------- ------------
Stockholders' equity:
Common stock:
Class A 129,125,099 79,701,590
Class B 1,870,389 910,482
Retained earnings (deficit) (25,887,787) 5,274,768
Accumulated other comprehensive income:
Unrealized investment gain of
securities held by subsidiaries, net of tax 3,582,025 727,519
Treasury stock (6,897,421) (3,892,561)
------------- ------------
$ 101,792,305 $ 82,721,798
------------- ------------
$ 102,738,755 $ 83,554,711
============= ============
(1) Eliminated in consolidation.
See accompanying independent auditors' report.
71
SCHEDULE II, CONTINUED
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 AND 2001 AND 2000
2002 2001 2000
---- ---- ----
Revenues:
Management service fees (1) $16,139,592 $ 13,529,199 $12,252,079
Investment income 154,081 178,815 129,515
Other 5,341 6,541 35,174
Realized gain 23,971 18,857 --
----------- ------------ -----------
16,322,985 13,733,412 12,416,768
----------- ------------ -----------
Expenses:
General 15,640,428 12,273,653 11,047,326
Taxes 639,881 1,495,025 806,657
----------- ------------ -----------
16,280,309 13,768,678 11,853,983
----------- ------------ -----------
Income (loss) before equity in income
of unconsolidated subsidiaries 42,676 (35,266) 562,785
Equity in income of unconsolidated subsidiaries 4,211,541 3,998,379 1,489,956
----------- ------------ -----------
Net income $ 4,254,217 $ 3,963,113 $ 2,052,741
============ =========== ==========
(1) Eliminated in consolidation.
See accompanying independent auditors' report.
72
SCHEDULE II, CONTINUED
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income $ 4,254,217 $ 3,963,113 $ 2,052,741
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized gains on sales (23,971) (18,857) --
Equity in net income of unconsolidated subsidiaries (4,211,541) (3,998,379) (1,489,956)
Accrued expenses and other liabilities 113,537 412,620 251,494
Change in accrued investment income 6,359 14,406 (30,273)
Other 35,881 354,325 300,896
----------- ----------- -----------
Net cash provided by operating activities 174,482 727,228 1,084,902
----------- ----------- -----------
Cash flows from investing activities:
Purchase of fixed maturities, available-for-sale (2,237,762) (3,022,974) (2,540,066)
Maturities of fixed maturities, available-for-sale 2,405,000 2,865,000 --
Payments on notes receivable -- 200,000 66,667
Investment in real estate -- (38,913) (58,280)
----------- ----------- -----------
Net cash provided by (used in)
investing activities 167,238 3,113 (2,531,679)
----------- ----------- -----------
Net increase (decrease) in cash 341,720 730,341 (1,446,777)
Cash at beginning of year 950,614 220,273 1,667,050
----------- ----------- -----------
Cash at end of year $ 1,292,334 $ 950,614 $ 220,273
=========== =========== ===========
See accompanying independent auditors' report.
73
SCHEDULE III
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
AS OF DECEMBER 31, 2002 AND 2001
DECEMBER 31
-----------
2002 2001
---- ----
Deferred policy acquisition cost:
Domestic $ 16,272,101 $ 13,477,873
International 28,707,256 27,118,130
------------ ------------
Total consolidated deferred policy
acquisition costs: $ 44,979,357 $ 40,596,003
============ ============
Future policy benefits, losses, claims
and loss expenses:
Domestic $ 75,370,979 $ 61,348,209
International 132,969,552 123,435,554
------------ ------------
Total consolidated future policy benefits,
losses, claims and loss expenses $208,340,531 $184,783,763
============ ============
Unearned premiums:
Domestic $ 159,163 $ 113,451
International 280,795 228,270
------------ ------------
Total consolidated unearned premiums $ 439,958 $ 341,721
============ ============
Other policy claims and benefits payable:
Domestic $ 4,494,215 $ 3,731,420
International 7,928,697 7,507,798
------------ ------------
Total consolidated other policy claims
and benefits payable $ 12,422,912 $ 11,239,218
============ ============
See accompanying independent auditors' report.
74
SCHEDULE III, CONTINUED
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION, CONTINUED
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
Premium revenue:
Domestic $19,635,358 $ 9,565,894 $11,495,721
International 48,575,523 44,397,043 41,956,132
----------- ----------- -----------
Total consolidated premium revenue $68,210,881 $53,962,937 $53,451,853
=========== =========== ===========
Net investment income:
Domestic $ 4,102,592 $ 2,357,041 $ 2,699,251
International 10,149,315 10,939,440 9,851,503
----------- ----------- -----------
Total consolidated net investment income $14,251,907 $13,296,481 $12,550,754
=========== =========== ===========
Benefits, claims, losses and settlement expenses:
Domestic $15,116,021 $ 9,699,316 $11,244,773
International 32,800,939 29,473,937 29,897,665
----------- ----------- -----------
Total consolidated benefits, claims, losses and
settlement expenses $47,916,960 $39,173,253 $41,142,438
=========== =========== ===========
Amortization of deferred policy acquisition costs:
Domestic $ 1,683,660 $ 1,512,837 $ 1,477,795
International 8,355,743 7,055,608 7,044,177
----------- ----------- -----------
Total consolidated amortization of deferred policy
acquisition costs $10,039,403 $ 8,568,445 $ 8,521,972
=========== =========== ===========
Other operating expenses:
Domestic $ 5,088,809 $ 1,937,713 $ 2,647,320
International 9,975,256 8,697,926 7,492,219
----------- ----------- -----------
Total consolidated other operating expenses $15,064,065 $10,635,639 $10,139,539
=========== =========== ===========
See accompanying independent auditors' report.
75
SCHEDULE IV
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
REINSURANCE
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
CEDED ASSUMED PERCENTAGE
GROSS TO OTHER FROM OTHER NET OF AMOUNT
AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET
------ --------- --------- ------ --------------
Year ended December 31, 2002
Life insurance in-force $2,408,004,000 $152,103,000 $318,142,000 $2,574,043,000 12.4%
============== ============ ============ ==============
Premiums:
Life insurance 55,354,800 1,321,391 420,321 54,453,730 .8%
Accident and health insurance 14,365,290 891,324 -- 13,473,966 --
-------------- ------------ ------------ --------------
Total premiums $ 69,720,090 $ 2,212,715 $ 420,321 $ 67,927,696 .6%
============== ============ ============ ==============
Year ended December 31, 2001
Life insurance in-force $2,416,610,000 $206,386,000 $440,023,000 $2,650,247,000 16.6%
============== ============ ============ ==============
Premiums:
Life insurance 49,865,195 1,722,798 543,792 48,686,189 1.1%
Accident and health insurance 5,649,277 589,434 -- 5,059,843 --
-------------- ------------ ------------ --------------
Total premiums $ 55,514,472 $ 2,312,232 $ 543,792 $ 53,746,032 1.0%
============== ============ ============ ==============
Year ended December 31, 2000
Life insurance in-force $2,240,523,000 $272,150,000 $326,267,000 $2,294,640,000 14.2%
============== ============ ============ ==============
Premiums:
Life insurance 48,046,655 2,154,034 95,068 45,987,689 .2%
Accident and health insurance 7,576,449 340,764 -- 7,235,685 --
-------------- ------------ ------------ --------------
Total premiums $ 55,623,104 $ 2,494,798 $ 95,068 $ 53,223,374 .2%
============== ============ ============ ==============
See accompanying independent auditors' report.
76
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: March 25, 2003 By: /s/ Mark A. Oliver
------------------------------------
Mark A. Oliver, President
By: /s/ David J. Mehle
------------------------------------
David J. Mehle, Executive Vice
President, Chief Financial Officer
and Treasurer
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.
Each individual whose signature appears below hereby designates and appoints
Harold E. Riley and Mark A. Oliver, and each of them, as such person's true and
lawful attorney's-in-fact and agents (the "Attorneys-in-Fact") with full power
of substitution and resubstitution, for each person and in such person's name,
place, and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Annual Report on Form 10-K, which
amendments may make such changes in this Annual Report on Form 10-K as either
Attorney-in-Fact deems appropriate and to file therewith, with the Securities
and Exchange Commission, granting unto such Attorneys-in-Fact and each of them,
full power and authority to do and perform each and every act and think
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that such Attorneys-in-Fact or either of them, in
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Dated: March 25, 2003
/s/ Mark A. Oliver /s/ Harold E. Riley
- ------------------------------------- ----------------------------------
Mark A. Oliver, Director Harold E. Riley, Chairman of the
Board and Director
/s/ Dr. Richard C. Scott /s/ Timothy T. Timmerman
- ------------------------------------- ----------------------------------
Dr. Richard C. Scott, Director Timothy T. Timmerman, Director
/s/ Rick D. Riley /s/ Steve Shelton
- ------------------------------------- ----------------------------------
Rick D. Riley, Director Steve Shelton, Director
/s/ Dr. E. Dean Gage
- -------------------------------------
Dr. E. Dean Gage, Director
I, Rick D. Riley, certify that:
1. I have reviewed this annual report on Form 10-K of Citizens, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the Evaluation Date); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrants
board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 25, 2003 /s/ Rick D. Riley
---------------------------------
Rick D. Riley
Chief Executive Officer
I, David Mehle, certify that:
1. I have reviewed this annual report on Form 10-K of Citizens, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, ( particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the Evaluation Date); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrants
board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 25, 2003 /s/ David Mehle
---------------------------------
David Mehle
Chief Financial Officer
EXHIBITS INDEX
--------------
EXHIBIT NO. DESCRIPTION
----------- -----------
3 3.1 Articles of Incorporation; as amended (a)
3.2 Bylaws (b) 10 Material Contracts
10.1 Automatic Yearly Renewable Term Life Reinsurance
Agreement between Citizens Insurance Company of
America and The Centennial Life Insurance Company
dated March 1, 1982 (c)
10.2 Self-Administered Automatic Reinsurance Agreement -
Citizens Insurance Company of America and Riunione
Adriatica di Sicurta, S.p.A. (d)
10.3 Bulk Accidental Death Benefit Reinsurance
Agreement between Connecticut General Life
Insurance Company and Citizens Insurance Company
of America, as amended (e)
10.4 Plan and Agreement of Exchange between Citizens,
Inc. and Combined Underwriters Life Insurance
Company (f)
10.5 Plan and Agreement of Exchange between Citizens,
Inc. and Lifeline Underwriters Life Insurance
Company (f)
10.6 Plan and Agreement of Merger between Citizens,
Inc., Citizens Acquisition, Inc. and First
Alliance Corporation (g)
21 Subsidiaries of the registrant *
23 Consent of KPMG LLP *
24 Power of Attorney (see signature page)
99.1 Chief Executive Officer Certification under Section 906 of
the Sarbanes-Oxley Act of 2002 *
99.2 Chief Financial Officer Certification under Section 906 of
the Sarbanes-Oxley Act of 2002 *
- ---------------
(a) Filed with or referenced in the Registrant's Current Report on Form 8-K
dated December 9, 1994 and incorporated herein by reference.
(b) 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.
(c) Filed as a part of the Amendment No. 1 to Registration Statement on Form
S-4, SEC File No. 33--4753, filed on or about June 19, 1992 and
incorporated herein by reference.
(d) Filed as a part of the Registration Statement on Form S-4, SEC File No.
333--16163, filed on or about November 14, 1996 and incorporated herein by
reference.
(e) 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.
(f) Filed as a part of the Registration Statement on Form S-4, SEC File No.
333-76926, on or about January 18, 2002 and incorporated herein by
reference.
(g) Filed as a part of the Registration Statement on Form S-4, SEC File No.
333-102016, on or about December 19, 2002, and incorporated herein by
reference.
* Filed herewith.