Back to GetFilings.com
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, 2003
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 the Registrant's last business day of its most recently completed second
fiscal quarter (June 30, 2003), the aggregate market value of the Class A voting
stock held by non-affiliates of the Registrant was approximately $188,899,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report incorporates certain portions of the definitive proxy
material of the Registrant in respect of its 2004 Annual Meeting of
Shareholders.
Number of shares of common stock outstanding as of March 1, 2004:
Class A: 34,935,419
Class B: 874,935
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 15 operating
subsidiaries that are listed in the table below. Collectively,
Citizens and its subsidiaries are referred to herein as the
"Company", "we" or "us." Information concerning our subsidiaries
follows.
YEAR STATE OF BUSINESS
SUBSIDIARY INCORPORATED INCORPORATION ACTIVITY
---------- ------------ ------------- --------
Alliance Insurance 2001 Kentucky Insurance agency
Management, Inc. (AIM)
Citizens Insurance Company of 1968 Colorado Life insurance
America (CICA)
Citizens USA Life Insurance 1965 Illinois Life insurance
Company (CUSA)
Combined Underwriters Life 1986 Texas Life insurance
Insurance Company
(Combined)
Computing Technology, Inc. 1965 Colorado Data processing
(CTI)
First Alliance Corporation 1993 Kentucky Insurance holding
(First Alliance) company
First Alliance Insurance Company (FAIC) 1994 Kentucky Life insurance
2
YEAR STATE OF BUSINESS
SUBSIDIARY INCORPORATED INCORPORATION ACTIVITY
---------- ------------ ------------- --------
Funeral Homes of 1989 Louisiana Funeral home
America, Inc. (FHA)
Insurance Investors, Inc. (III) 1965 Texas Aircraft transportation
KYWIDE Insurance 1997 Kentucky Insurance agency
Management, Inc. (KYWIDE)
Mid-American Alliance 1996 Missouri Insurance holding
Corporation (Mid-American) company
Mid-American Alliance 1980 Missouri Insurance agency
Insurance Agency, Inc.
(MAAIA)
Mid-American Associates Insurance agency
Agency, Inc. (MAAAI) 2001 Missouri
Mid American Century Life 1983 Missouri Life insurance
Insurance Company (MACLIC)
Security Alliance Insurance 1996 Arkansas Life insurance
Company (SAIC)
Historically, our business has focused primarily on issuing ordinary
whole life insurance products to overseas residents, and most of our
revenues continue to be generated from this area. In addition, our
U.S. operations consist of the sale of ordinary whole life insurance
and limited benefit accident and health insurance products to
middle-income Americans, as well as managing books of life insurance
from insurance subsidiaries acquired over the past several years.
We actively review acquisition opportunities for other U.S. life
insurers, and we consider a variety of criteria when evaluating
potential acquisition candidates, including:
- the asset base and growth opportunities;
- insurance policy composition as well as persistency and
profitability of the policies;
- the market location and demographics of the policyholder
base;
- opportunities to achieve economies of scale;
- the effect of the acquisition on book value and earnings
per share;
- resources required to integrate the operations; and
- 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.
3
On January 26, 1999, we issued 609,269 shares of our Class A common
stock in a purchase transaction to acquire Insurance Investors and
Holding Co. of Springfield, Illinois, parent of Excalibur Insurance
Corporation
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. The aggregate
market value of the consideration was approximately $17.2 million.
On November 18, 2003, we issued approximately 775,000 shares of our
Class A common stock to acquire Mid-American. The aggregate market
value of the consideration was approximately $7.2 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
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
4
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, Section
16 reports filed by officers and directors, news releases, 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 furnish 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 three
business segments: offering selected lines of individual life
insurance policies in the United States, offering selected lines of
accident and health (A&H) insurance policies in the U.S. and the
acceptance of applications from foreign nationals and overseas
residents for the consideration of the issuance of individual
ordinary whole life insurance around the world. 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 accepted in the United States of
America (U.S. GAAP) concerning our operations for each of the five
years ended December 31, 2003.
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)
---------- ---------- ----------
2003 $2,408,004 $2,920,533 $2,664,269
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
(a) Dollars in thousands.
(b) Before assuming and ceding reinsurance from/to
reinsurers.
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 surrender activity during 2002 related to the uncertain economic
climate in several Latin American countries contributed to the decline in
insurance in-force. Increased issuance of new policies coupled with acquisitions
contributed to the growth in insurance in-force in 2003.
5
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)
-------------- ---------- --------------- ------------
2003 $217,888 8.2% $301,366 $1,793,912
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
(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.
Lapsation and surrender activity attributed to policyholders of First Alliance
and Mid-American, two companies we acquired in 2003, contributed approximately
$39,627,000 to the increase in 2003 lapses and surrenders. As described above,
the uncertain economic climate in several Latin American countries contributed
to the increased lapsation and surrender activity in 2002. The decline in ceded
premium in 2001 and 2002 related to an increase in our retention from $75,000 to
$100,000. The decline in ceded premium in 2003 is related to the termination of
a substantial portion of the major medical business acquired with the
acquisitions of Combined and Lifeline.
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
-------- -------------- ---------- ------------ -----
2003 $60,395,058 $2,383,768 $463,629 $14,784,958 $78,027,413
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
(a) After deduction for reinsurance ceded.
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. Additionally, the non-renewal of certain major
medical policies affected total premium income for 2000 and 2001. The 2002
increase in accident and health premiums is attributable to the acquisition of
Combined and Lifeline. The 2003 premium increase is related to increased new
life revenues and the acquisitions of First Alliance and Mid-American.
6
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
------------------------- ----------------------------
INSURANCE RATIO TO RATIO TO
PREMIUMS INSURANCE INSURANCE
(a)(b) AMOUNT(b) PREMIUMS AMOUNT(b) PREMIUMS
--------- --------- --------- --------- ---------
2003 $78,027 $37,194 47.7% $89,455 114.7%
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
(a) After premiums ceded to reinsurers.
(b) Dollars in thousands.
During 2000, accident and health premiums and claims decreased as discussed
above due to the cancellation of major portions of our group dental and major
medical business; however, due to the costs associated with the creation of a
U.S. 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, a decrease in lapses and surrenders combined
with a 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 resulted in decreases
in the ratio of benefits to premiums; however, the expenses associated with
conversion efforts and the administration of the accident and health business
increased the ratio of expenses to premiums. During 2003, increased new life
revenues from new business and the acquisitions of First Alliance and
Mid-American resulted in decreases in the ratio of benefits; however, the
expenses of these two acquisitions resulted in increases in the ratios of
expenses to premiums.
TABLE V
The following table sets forth changes in the face amount of new life insurance
business produced between participating and non-participating policies.
PARTICIPATING NONPARTICIPATING
TOTAL NEW ------------------------- ---------------------
BUSINESS (a) AMOUNT (a) PERCENT AMOUNT (a) PERCENT
------------ ---------- ------- ---------- -------
2003 $433,697 266,303 61.4% 167,394 38.6%
2002 410,352 265,476 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
(a) Dollars in thousands.
During 2000 and 2001, the percentage of participating new business grew due to
the mix of products issued. During 2003, the acquisitions of First Alliance and
Mid-American contributed to the increase in non-participating new business.
7
TABLE VI
The following table sets forth changes in the face amount of 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
------------ ---------- ------- ---------- ------- ---------- -------
2003 $433,697 $297,280 68.5% $76,637 17.7% $59,780 13.8%
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
(a) Dollars in thousands.
In 2000, new life business, measured in paid annualized premiums, increased
21.4%. In 2001, new life business increased 14.9%. In 2002, such business
increased 17.7% due to acquisitions and internal growth, while in 2003 the
increase was 2.9%. The 2003 growth was slowed by the economic downturn in
several Latin American countries.
TABLE VII
The following table sets forth deferred policy acquisition costs capitalized and
amortized compared to new life insurance business issued.
DEFERRED POLICY
TOTAL NEW ACQUISITION COSTS
BUSINESS -------------------------------------
ISSUED (a) CAPITALIZED (a) AMORTIZED (a)
---------- --------------- -------------
2003 $433,697 $16,558 $11,807
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
(a) Dollars in thousands.
Amortization expense in 1999, 2002 and 2003 increased due to higher surrender
activity while the decreases in 2001 and 2000 were due to improved persistency.
The increase in capitalized costs since 1999 is related to the increase in new
business issued.
8
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)
--------------- ---------- ----------------------
2003 $250,598,366 $14,322,275 5.7%
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 11,636,904 6.6
(a) Does not include realized and unrealized gains and losses on
investments.
During 2000, we terminated our 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 we were able to maintain our
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. During 2003, the low interest
rates available on newly invested money relative to prior years and the
significant call activity on the bonds owned negatively impacted our net
investment income compared to prior years.
(c) NARRATIVE DESCRIPTION OF BUSINESS
(i) BUSINESS OF CITIZENS
Our principal business is that of a life insurance holding
company. Through our subsidiaries, we offer life and accident
and health insurance. Additionally, we provide management
services to our subsidiaries and other companies who may
contract with us for our services, under management services
agreements. At December 31, 2003, we had approximately 120
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 78% of our
revenues are derived from its operations. Historically, CICA's
revenues have been from life insurance premiums and investment
income. CICA is a Colorado-domiciled life insurance company
that makes available ordinary whole-life products to high net
worth foreign nationals through contracts with overseas
marketing organizations. 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, 2003, 91.9% of CICA's
premium income was attributable to life, endowment and term
insurance, 7.6% to accident and health insurance, and .5% to
individual annuities. 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 0.5% to individual annuities. Of the life
policies in
9
force at December 31, 2003 and 2002, 45.8% and 43.0%,
respectively, were non-participating and 54.2% and 57.0%,
respectively, were participating.
CICA has created a United States marketing program focused on
the sale of ordinary whole life products to middle income
families. Sales to date have been insignificant. We intend to
expand sales efforts 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 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. 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).
At December 31, 2003, CICA has $30.8 million of insurance
in-force on individuals that are classified as substandard
risks, the majority of such business having been acquired in
the purchase of other companies. Management believes the
exposure to loss as a result of insuring these individuals is
minimal, since the premiums are increased to cover the nature
of the risk, additional reserves are established, and the
amount of 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 86.2%, 84.5%
and 82.4% of total CICA premiums for the years ended December
31, 2003, 2002 and 2001, respectively.
Areas representing more than 10% of CICA's total premiums for
the years ended December 31, 2003, 2002 and 2001 were:
Argentina - 15.3%, 19.4% and 23.3%; Colombia - 26.3%, 25.1%
and 21.9%; and Uruguay - 6.8%, 8.0% and 10.2%, respectively.
The following table sets forth the composition of CICA's total
yearly premium income by geographic area for the years
indicated.
10
AREA 2003 2002 2001
---- ---- ---- ----
Oklahoma 3.1% 3.5% 4.6%
Texas 3.7% 4.9% 4.2%
Mississippi 2.8% 3.0% 4.0%
Louisiana 1.0% .9% 1.1%
All Other States 3.2% 3.2% 3.7%
Foreign 86.2% 84.5% 82.4%
The whole life policies issued by CICA on 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 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. As a
result of the foreign markets, CICA is subjected 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 is not subject to currency
devaluation or foreign appropriation. Management believes that
many of the inherent risks in foreign countries, such as
political instability, hyperinflation 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.
11
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
3,778 individuals contracted at December 31, 2003 and 2,445
individuals contracted at December 31, 2002 and 1,838 at December
31, 2001.
COMMISSIONS
CICA's marketing associates are independent contractors, responsible
for their respective expenses, and are compensated based on a
percentage of premiums. Percentage amounts paid to insurance
associates on individual term, annuity and 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 consultants, these firms receive overriding first
year and renewal commissions on business written by associates under
their supervision, and all marketing expenses related thereto,
except conventions, 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
U.S. GAAP. 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 U.S. GAAP.
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 retains up to $100,000 of risk on any one person. As of
December 31, 2003, the aggregate amount of life insurance ceded
amounted to $171,992,000, or 5.6%, of total direct and assumed life
insurance in-force, and was $141,549,000 or 5.3% in 2002. CICA is
contingently liable with respect to ceded insurance should any
reinsurer be unable to meet the obligations reinsured.
As of December 31, 2003, CICA had in effect automatic reinsurance
agreements with reinsurers that provide for cessions of ordinary
insurance from CICA. These treaties
12
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. Automatic cession means
that so long as the risk is within the limits of the reinsurance
agreement the reinsurer must assume the risk. Facultative cases are
subject to specific underwriting approval of the reinsurer.
Over the past two years, treaties with Employers Reassurance (ERC),
American United Life Insurance Company (AUL) and Businessmen's
Assurance (BMA) were used by CICA for its international business.
The treaties were structured in such a way as to allow CICA to "self
administer" the cessions on a reduced cost basis.
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 AUL agreement provides that
on risks reinsured in specified countries, 100% of the risk in
excess of CICA's retention was ceded to AUL. CICA paid premiums to
ERC, BMA and AUL on an annual basis.
The cessions were on a yearly renewable term basis and were
automatic over CICA'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, 2003, CICA
had ceded $67,693,000 in face amount of insurance to ERC,
$28,086,000 to Riunione Adriatica di Sicurta of Italy, a predecessor
to AUL, $20,919,000 to BMA and $29,494,000 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, which is owned by General Electric.
Subsequently, ERC indicated a desire to withdraw from the
international reinsurance market because of a decision on the part
of its new parent.
A pool of two reinsurers was thereafter created to replace BMA, ERC
and AUL. Worldwide Reassurance of England (Worldwide) received 55%
of the reinsurance pool of all countries. Converium, of Germany, was
given 45% of the reinsurance pool. At December 31, 2003, CICA had
ceded $11,268,000 in face amount to Worldwide and $9,215,000 to
Converium. The former reinsurers retain their risk on business
previously ceded.
Worldwide and Converium are unauthorized reinsurers in the state of
Colorado. However, they have each agreed to provide a letter of
credit issued by a U.S. Bank in the amount of any liabilities they
may incur under the reinsurance agreements with CICA in the event
that a reinsurance credit is significant. There were no such
significant credits as of December 31, 2003.
In addition, 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, 2003,
CICA had ceded $1.3 billion in face amount of business to Swiss Re
under this treaty.
13
CICA monitors the solvency of its reinsurers in seeking 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.
(b) INSURANCE ASSUMED
At December 31, 2003, 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 $485,038,000
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, 2003 were distributed as follows: 90.0% in
fixed maturities, 0.2% in mortgage loans, 9.7% in policy loans and
0.1% in other long-term investments. CICA did not foreclose on any
mortgage loans in 2003. The investment policy of CICA is consistent
with the provisions of the Colorado Insurance Code.
At December 31, 2003, 97.4% 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
92.1% at December 31, 2002. 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 marketing persons, the approval
14
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 their 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 their domiciliary states and by representatives (on
an "association" or "zone" basis) of the other states in which they
are licensed to do business. An examination of CICA was concluded in
2003 for the five years ended December 31, 2001, by a statutory
examination accounting firm under contract with and supervision by
the Colorado Division of Insurance. The examination noted no
substantive findings, but made suggestions on a few minor
housekeeping matters. An independent public accounting firm audits
CICA annually.
Various states, including Colorado, have enacted "Insurance Holding
Company" legislation, which requires the registration and periodic
reporting by insurance companies that 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 unlikely 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 we are.
15
A large percentage of our first year and renewal life insurance
premium income comes from the international market. See "Business of
CICA - Geographical Distribution of Business." 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. 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.
Our international marketing plan stresses making available
dollar-denominated whole life, cash value build-up, insurance
products to high net worth individuals residing in foreign countries
and the sale of individual, cash value whole life and supplemental
accident and health products to United States residents.
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 products are 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 that 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. However, we plan to exit the
accident and health business during 2004 through the cession of our
in-force business to another carrier.
(iii) 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. During 2003, Lifeline was
merged into Combined. 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 (64.6%), Oklahoma
(21.5%) and Louisiana (5.8%). At December 31, 2003 Combined had
assets of $28.1 million and 2003 revenues of $13.4 million. All
16
intercompany fees and expenses have been eliminated in the
consolidated financial statements.
As of December 31, 2003, Combined had $80,857,000 of life insurance
in force, of which $8,289,000 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, 2003, Combined also had
$10,212,815 (in premiums) of accident and health insurance in force
(including $444,253 of group business).
Combined operates as a stipulated premium company under Texas law.
Life and accident and health policies are primarily sold by
licensed, independent 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 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 and trains agents from among
persons who are not now engaged in the selling of life and accident
and health insurance.
During 2003, 92.6% of Combined's premium income was from accident
and health business and 7.4% was from life business.
INVESTMENTS
The investments of Combined are limited as to type and amount by the
Texas insurance laws 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 its 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 are designed to allow
Combined to compete in the life insurance and accident and health
marketplace and to provide
17
appropriate interest margins.
Of Combined's investments at December 31, 2003, 99.4% were in bonds
with the remaining .6% invested in preferred stocks. With respect to
the invested bonds, 88.6% were invested in U.S. Treasury securities
and obligations of U.S. Government corporations and agencies with
the remaining 11.4% 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 Generali USA Reinsurance Company (Generali), Kansas
City, Missouri. At December 31, 2003, Combined had ceded $8,289,000
in face amount to Generali.
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
U.S. GAAP. 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 U.S. GAAP.
(iv) BUSINESS OF CUSA, FAIC, MACLIC AND SAIC
In addition to the domestic life business of CICA, the remaining
domestic life operations originate from CUSA, First Alliance, MACLIC
and SAIC.
CUSA is an Illinois domiciled life insurer admitted to do business
in four states. During 2003, Excalibur Insurance Corporation was
merged into Central Investors Life Insurance Company of Illinois and
the merged company was renamed Citizens USA Life Insurance Company
(CUSA). At December 31, 2003, CUSA has assets of $6.9 million and
annual revenues of $380,000. All intercompany fees and expenses have
been eliminated in the consolidated financial statements. As of
December 31, 2003, CUSA had $4,112,000 in life insurance in force,
of which $1,155,000 was reinsured. During 2004, management plans to
begin marketing ordinary whole life insurance to residents of
Illinois and Indiana.
FAIC is a Kentucky domiciled life insurer admitted to do business in
six states. It was
18
acquired in connection with the Company's February 18, 2003
acquisition of First Alliance. At December 31, 2003, FAIC had assets
of $22.0 million and revenues since being acquired on February 18,
2003 of $5.6 million. All intercompany fees and expenses have been
eliminated in the consolidated financial statements. As of December
31, 2003, FAIC had $152,396,000 of life insurance in force, of which
$50,147,000 was reinsured.
MACLIC is a Missouri domiciled life insurer admitted to do business
in two states. It was acquired in connection with the Company's
November 18, 2003 acquisition of Mid-American. At December 31, 2003,
MACLIC had assets of $8.5 million and revenues since being acquired
on November 18, 2003 of approximately $415,000. MACLIC offers
ordinary whole life insurance policies with annuity riders to
residents of Missouri through a captive marketing force. During
2003, approximately $1.5 million of new life insurance premiums were
submitted. All intercompany fees and expenses have been eliminated
in the consolidated financial statements. As of December 31, 2003,
MACLIC had $78,135,000 of life insurance in force, of which
$28,734,000 was reinsured.
SAIC is an Arkansas domiciled life insurer admitted to do business
in Arkansas. It was also acquired in connection with the Company's
November 18, 2003 acquisition of Mid-American. At December 31, 2003,
SAIC had assets of approximately $385,000 and revenues since being
acquired on November 18, 2003 of $2,400. All intercompany fees and
expenses have been eliminated in the consolidated financial
statements. As of December 31, 2003, SAIC had $1,077,000 of life
insurance in force, of which $627,000 was reinsured. Mid-American's
Board of Directors had granted an Arkansas holding company an option
to acquire SAIC for $250,000 prior to the acquisition by Citizens.
The option expired on March 1, 2004 without being exercised.
CUSA, FAIC, MACLIC and SAIC all operate as life insurance companies
under the laws of their respective states of domicile. Life policies
are sold by licensed general agents of these companies. No agent has
underwriting authority. The commissions paid are believed by
management to be competitive with commissions paid by other life
insurance companies in the states in which CUSA, FAIC, MACLIC and
SAIC are licensed to operate. There is considerable competition for
obtaining qualified agents and these companies compete with other
well-established insurance companies for agents to sell their
policies.
INVESTMENTS
CUSA, FAIC, MACLIC and SAIC invest and reinvest certain of their
reserves and other funds. The investments of these companies are
limited as to type and amount by the insurance laws of their state
of domicile, 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 domicile
of CUSA, FAIC, MACLIC and SAIC is specified by the insurance laws of
those states. These statutes generally include general and specific
limitations on investments, records of investments and other
matters. The insurance law of these states 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 the investment portfolios of CUSA, FAIC,
MACLIC and SAIC is
19
handled by management, with all trades approved by a committee of
their respective Boards 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 CUSA, FAIC,
MACLIC and SAIC to meet its policyholder obligations. The type,
quality and mix will allow these companies to compete in the life
insurance marketplace and to provide appropriate interest margins.
Of CUSA's investments at December 31, 2003, 99.2% were in bonds,
with the remaining .8% invested in preferred stocks. With respect to
the invested bonds, 96.3% were invested in U. S. Treasury securities
and obligations of U. S. Government corporations and agencies, with
the remaining 3.7% invested in corporate securities.
Of FAIC's investments at December 31, 2003, 94.9% were in bonds,
with the remaining 5.1% invested in common stocks. With respect to
the invested bonds, 91.4% were invested in U. S. Treasury securities
and obligations of U. S. Government corporations and agencies, with
the remaining 8.6% invested in corporate securities.
All of MACLIC's investments at December 31, 2003 were in bonds. With
respect to the invested bonds, 37.2% were invested in U. S. Treasury
securities and obligations of U. S. Government corporations and
agencies, with the remaining 62.8% invested in public utilities and
corporate securities.
The invested assets of SAIC at December 31, 2003 were invested in
bonds. With respect to the invested bonds, 29.5% were invested in U.
S. Treasury securities and obligations of U. S. Government
corporations and agencies, with the remaining 70.5% invested in
corporate and political subdivisions securities.
REINSURANCE
As is customary among insurance companies, CUSA, FAIC, MACLIC and
SAIC reinsure with other companies portions of the life insurance
risks they 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, the company
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.
RESERVES
CUSA, FAIC, MACLIC and SAIC establish 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, they
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
20
claims, in addition to an estimate of claims that are incurred but
not reported based on actual historical experience. The companies
engaged an outside consulting actuary to assist in the calculation
of its reserves prepared in accordance with Accounting Principles
Generally Accepted in the United States of America.
(v) 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, 2003, CTI's total assets were approximately $1.3
million and revenues were $1.1 million. All intercompany fees and
expenses have been eliminated in the consolidated financial
statements.
(vi) 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, 2003, III's total assets were $1.1
million and revenues were $35,000. All intercompany fees and
expenses have been eliminated in the consolidated financial
statements.
(vii) BUSINESS OF FHA
FHA owns and operates a funeral home in Baker, Louisiana. At
December 31, 2003, FHA had total assets of $575,000 and total annual
revenues of $648,000. All intercompany fees and expenses have been
eliminated in the consolidated financial statements.
(viii) BUSINESS OF AIM, KYWIDE, MAAAI AND MAAIA
In connection with the acquisitions of First Alliance and
Mid-American, Citizens acquired four operating insurance agencies.
These insurance agencies market life and property and casualty
insurance products of various insurance companies to individuals and
companies. At December 31, 2003, these four insurance agencies had
total assets of approximately $164,000 and total revenues since
Citizens' acquisitions of First Alliance and Mid-American of
approximately $150,000. All intercompany fees and expenses have been
eliminated in the consolidated financial statements.
(ix) BUSINESS OF FIRST ALLIANCE AND MID-AMERICAN
First Alliance operates as an insurance holding company through its
directly or indirectly wholly owned subsidiaries FAIC, AIM and
KYWIDE. First Alliance is incorporated in Kentucky. At December 31,
2003, First Alliance had total assets of approximately $6,630,000
and total revenues since Citizens' acquisition of approximately
$204,000. All intercompany fees and expenses have been eliminated in
the consolidated financial statements.
Mid-American also operates as an insurance holding company through
its directly or indirectly wholly owned subsidiaries MACLIC, SAIC,
MAAAI and MAAIA. Mid-
21
American is incorporated in Missouri. At December 31, 2003,
Mid-American had total assets of approximately $6,390,000 and total
revenues since Citizens' acquisition of approximately $1,600. 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 and approximately one acre of
land nearby housing storage facilities. Approximately 50,000 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 in a 1995
acquisition, is owned and operated by FHA.
ITEM 3. LEGAL PROCEEDINGS
On April 24, 2003, the Court of Appeals for the Third District of
Texas affirmed in part and modified in part, a July 31, 2002, class
action certification granted by a Travis County, Texas district
court judge to the plaintiffs in a lawsuit filed in 1999 styled
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
actually securities that were offered or sold in Texas by
unregistered dealers 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 purchased insurance policies
or made premium payments since August 1996 and assigned policy
dividends to an overseas trust for the purchase of the Company's
Class A common stock. The remedy sought is rescission of the
insurance premium payments. The Company has filed a Petition for
Review with the Supreme Court of Texas for review of the decision of
the Court of Appeals. Review by the Texas Supreme Court is
discretionary. The Company believes the Plaintiffs' claim under the
Texas Securities Act is not valid and the class defined is not
appropriate for class certification and does not meet the legal
requirements for class action treatment under Texas law. 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 Supreme Court will grant the Company's
Petition for Review and will ultimately rule in the Company's 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 defend vigorously
against the individual claims. During the time of the Company's
appeal to the Texas Supreme Court, there will be no further district
court proceedings in the case. 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 a significant adverse
financial impact 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
22
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 the claims are adjudicated and paid.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our shareholders during the fourth
calendar quarter of 2003. A special meeting of shareholders was held
on March 4, 2004 for the purpose of considering amendments to the
Company's Articles of Incorporation relating to increasing the
number of authorized Class A and Class B common shares, creating a
class of preferred stock to be issued in series on terms approved by
the Board of Directors, and increasing the maximum number of members
of the Board of Directors from 9 to 15. All three amendments were
approved.
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 and a 7% stock dividend in 2003.
2003 2002
------------------------- ----------------------
QUARTER ENDED HIGH LOW HIGH LOW
--------------------- ------ ----- ------ -----
March 31 $ 7.37 $5.61 $10.56 $8.07
June 30 7.94 5.76 12.38 7.48
September 30 8.74 6.54 12.34 5.34
December 31 10.35 7.80 8.64 6.24
As of December 31, 2003, the approximate number of record owners of
our Class A common stock was 23,500. 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.
On December 31, 2003, we paid a 7% stock dividend to holders of
record as of December 1, 2003. The dividend resulted in the issuance
of 2,477,050 Class A shares (including 179,181 shares in treasury)
and 57,239 Class B shares.
23
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 15% common
stock dividend paid on June 1, 2002 and a 7% common stock dividend
paid on December 31, 2003, respectively.
YEAR ENDED DECEMBER 31,
(IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
NET OPERATING REVENUES $ 95,103 $ 83,004 $ 67,647 $ 66,678 $ 71,877
NET INCOME (LOSS) $ 3,126 $ 4,254 $ 3,963 $ 2,053 $ 1,271
NET INCOME (LOSS) PER SHARE $ .09 $ .13 $ .13 $ .07 $ .04
TOTAL ASSETS $390,093 $326,291 $282,086 $267,842 $255,485
NOTES PAYABLE $ -- $ -- $ -- $ -- $ --
TOTAL LIABILITIES $263,066 $224,499 $199,364 $190,529 $183,218
TOTAL STOCKHOLDERS' EQUITY $127,027 $101,792 $ 82,722 $ 77,313 $ 72,267
BOOK VALUE PER SHARE $ 3.66 $ 3.19 $ 2.67 $ 2.50 $ 2.35
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
OVERVIEW
During 2003, the Company focused its efforts on several key areas.
The Company's international life business continued to grow during
2003, despite continuing economic problems in some Latin American
markets that historically have been large sources of new premiums.
During the year, new marketing organizations were contracted in the
Pacific Rim and other locations around the world. Management
believes 2004 will see further increases in new production.
24
The Company's book of accident and health business continued to be a
source of significant overhead and attention. During the latter part
of the year, discussions began with another insurer that culminated
in a reinsurance arrangement that was signed in March 2004 whereby
all of the in force accident and health business will be ceded to
another reinsurer effective January 1, 2004 (See discussion of
Accident and Health business below). As a result of this activity
management expects to achieve overhead reductions of at least $1
million in 2004.
Development of our USA marketing operations continued. Changes were
made in the management of this program in late 2003 and early 2004,
and senior company executives have taken over the development
program.
Management continues to seek acquisitions that can add value to the
Company. During 2003, two transactions were completed. Because of
the growth in the Company's asset base and level of capital,
management is exploring opportunities for larger acquisition
transactions (those in the $30 million to $75 million purchase price
range). During 2003, a $30 million line of credit was negotiated
with Regions Bank which should be available during the first quarter
of 2004 (upon signing of formal loan documents) in order to permit
the Company to pursue larger transactions.
ACQUISITIONS AND MERGERS
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.
On November 18, 2003, we acquired all the outstanding shares of
Mid-American Alliance Corporation ("Mid-American"), the parent of
Mid American Century Life Insurance Company, a Missouri life
insurer, for approximately 800,000 shares of our Class A common
stock. The aggregate market value of the consideration was
approximately $7.2 million.
Management believes that the above acquisitions achieve several
objectives: because they were made for shares of our Class A common
stock, they provide a source of capital; each of the companies have
predominantly sound investments; their books of business are focused
on ordinary whole life insurance; and particularly in the case of
Mid-American, there are opportunities to expand our USA marketing
program.
25
During 2003, we consolidated certain operating subsidiaries in order
to reduce overhead and streamline operations. Lifeline Underwriters
Life Insurance Company ("Lifeline"), a Texas-domiciled life insurer
acquired in 2002, was merged with and into Combined Underwriters
Life Insurance Company ("Combined"), a Texas-domiciled life insurer
acquired in the same 2002 transaction. Combined and Lifeline were
acquired for approximately 1.1 million shares of our Class A common
stock with an aggregate market value of approximately $12.0 million.
Additionally, two Illinois-domiciled life insurers were merged:
Excalibur Insurance Corporation ("Excalibur") was merged into
Central Investors Life Insurance Company of Illinois ("CILIC") and
we subsequently changed CILIC's name to Citizens USA Life Insurance
Company ("CUSA").
RESULTS OF OPERATIONS
The Company's operations have historically focused on three areas:
international life insurance; USA life insurance; and acquisition of
other USA life insurance companies. Beginning in 2002 with the
acquisition of Combined, a new area was added, that of USA
supplemental accident and health business.
INTERNATIONAL OPERATIONS
The acceptance of applications for U.S. dollar-denominated ordinary
whole life insurance from high net worth foreign nationals has been
the core business for the Company for the past 30 years. Through
CICA, the Company is a significant participant in this market. Our
niche allows the Company to participate in a marketplace where the
policies are typically large face amounts, the premiums are paid
annually, the persistency is high compared to U.S. policies, the
mortality as good as or better than that experienced in the United
States, the caliber of the marketers from whom applications are
received for consideration is higher and more professional than that
typically seen in the U.S., and there is no advancing of commissions
to producers. Overall, we expect our international operations to
continue to expand. The number of independent marketers contracted
has grown over the past few years. Historically, the majority of
such business was focused on Central and South America. The Company
receives applications from virtually every country in those regions.
Overall, foreign business made up more than 86% of CICA's premium
revenues in 2003.
During late 2002 and into 2003, expansion in the Pacific Rim,
particularly in Taiwan, was accomplished. CICA has established
relationships with a number of marketing organizations in the
Pacific Rim and during 2003 received approximately $2 million in
submitted premiums from that region. New submitted premiums for 2003
from the international market totaled more than $13.5 million
compared to $13.2 million in 2002.
Management is pleased with the growth in international production,
because several countries from which significant numbers of
applications have been received have undergone severe financial
crises over the past several years, particularly Argentina and
Venezuela. These two countries represent more than 18% of the
premium income of the Company. During the late 1980's Argentina
became the largest source of new business for CICA, particularly as
a new middle class emerged in that country's society. Because of
this emerging middle class, CICA (which has historically only
focused
26
on the upper income groups) began offering a plan in Argentina that
was designed for this group that was popularly received. When the
economic crises occurred, the middle class was severely impacted and
CICA experienced a decrease in new business and an increase in
surrenders. Since that time, management has refocused the marketing
organizations in this area on the high net worth individuals that
have historically been the core group of insureds. During 2003,
surrenders declined. Management is optimistic that in future years
production will increase from this area as the economy recovers.
Also during 2003, Venezuela's economy was dramatically disrupted as
the export of oil was halted. This event caused the volume of new
business from that country to drop significantly during the year.
Management is optimistic that once this situation is resolved, the
volume of new business received from that market should return to
previous levels. Total premium income from the international market
amounted to $51,972,440 during 2003, compared to $48,575,523 in 2002
and $44,397,043 in 2001. (See Note 9 of the "Notes to Consolidated
Financial Statements" for an analysis of the results of the
International Life segment.)
U.S. OPERATIONS
The Company's focus historically has been on the international
market because of the key advantages described above. However,
throughout the Company's history, it has always written U.S.
business, and through the acquisition of other U.S. life insurers,
has accumulated more than $11.3 million of annual U.S. life premium.
In 2000, management perceived an opportunity for the Company to
serve middle-income American families through the sale of an
ordinary whole life insurance product containing a no-load annuity
benefit. This product was introduced in Texas in 2000. Since that
time the Company has sought the marketing management necessary to
build a U.S. sales organization from scratch and to begin to write
the product in volume. After several attempts to bring in such
expertise, in early 2004, senior executives in the Company's home
office staff assumed this new management responsibility. We have
begun emphasizing the development of a sales force comprised
primarily of second career sales associates. Recent acquisitions
have created opportunities to increase production. Mid American
Century Life Insurance Company, a Missouri-domiciled life insurer
acquired in the acquisition of Mid-American Alliance Corporation, is
writing approximately $1.5 million of annual life premium. Through
this and other acquisitions, marketing operations are being
conducted in several states.
Additionally, through the 2002 acquisition of Combined Underwriters
Life Insurance Company ("Combined"), the Company acquired a unique
vehicle for the recruitment and licensure of marketing associates in
the state of Texas. Combined's charter creates what is known as a
"Stipulated Premium" company which has the capacity to recruit and
train marketers and put them into sales efforts based upon a
"certificate of authority" issued by the Company. This means that a
potential recruit can begin to sell insurance (up to $20,000 per
year of premium and face amounts of insurance less than $15,000)
immediately without the delays mandated by today's agent licensing
requirements. By facilitating a potential marketer's ability to make
sales while preparing for his/her Group 1 (standard agent license),
the Company believes it can generate a larger population of new
agents. Marketing associates under contract to Combined submitted
approximately $1 million of new life premium in 2003. Additionally,
the Company has a block of Credit
27
Life and Disability business written through furniture stores in
Texas, Louisiana and Arkansas. This business, sold by furniture
stores, is typically single premium, and amounted to $851,309 in
2003. Total U.S. life premium income for 2003 amounted to
$11,270,015, compared to $6,161,392 in 2002 and $4,506,051 in 2001.
Management intends to broaden the portfolio of ordinary whole life
products available in the United States to include products similar
to those available to overseas clients as well.
ACCIDENT AND HEALTH BUSINESS
For more than 30 years, we have had a small block of USA accident
and health business. This block grew through acquisitions in the
mid-1990's that brought other books of accident and health business,
including some major medical business; however, the acquisition of
Combined substantially increased both the amount of accident and
health business in force, as well as the volume of new business. The
blocks of business acquired in the mid-1990's were initially highly
unprofitable. Significant rate increases, coupled with the
non-renewal of the major medical business, have over time improved
the performance of these acquired blocks of business. The type of
accident and health business predominantly written by Combined has
historically been easier to manage and more profitable than other,
more volatile forms of accident and health coverages.
Our accident and health book of business acquired in the Combined
acquisition has not resulted in the type of operating profits we had
sought. Skyrocketing costs of health care in the United States have
made it difficult to structure rate increases that are adequate for
the unpredictable nature of the associated claims liability.
Additionally, reinsurance coverage, which the Company depends on to
minimize its exposure to so-called catastrophic claims, has become
less available and substantially more expensive in the past year.
Also, the administration of accident and health business is
burdensome in both costs and manpower. Although virtually all of the
major medical business in force for Combined and Lifeline has been
non-renewed over the past 24 months, and substantial rate increases
imposed on the remaining business, as a whole, the accident and
health business has proven to be a strain on profitability.
The ability of state insurance regulators to limit the timing and
size of rate increases also impacts the Company's ability to stay
ahead of the claims curve on certain types of accident and health
policies. Due to the failure of rate increases and the non-renewal
of certain blocks as described above to reach the level of
profitability to that experienced on the Company's life segments,
coupled with the fact that the accident and health business is not
the Company's core line of business, management determined in late
2003 to seek a buyer for the block of accident and health business.
In early 2004, management reached an agreement to transfer all of
the in force accident and health business to a Texas-domiciled
reinsurer effective January 1, 2004. The consideration for the
transfer, which will initially be accomplished through a 100%
coinsurance arrangement until the various state insurance
departments can approve an assumption reinsurance agreement, will be
a participation in any future profits on the book of business over a
10-year period. Management estimates that this action will result in
a decrease of approximately $14.7 million of annual premium income
but should improve long-term profitability. We expect that overhead
savings of more than $1.0 million annually will be achieved through
the transfer of this business. (See Note 9 of the "Notes to
Consolidated Financial Statements" for an analysis of the results of
the Accident and Health segment.)
28
During 2003, premium revenues from accident and health business were
$14,784,958, compared to $13,473,966 in 2002 and $5,059,843 in 2001.
During 2003, approximately $6.5 million of new accident and health
premiums were submitted. The increase from 2001 to 2002 reflects the
acquisition of Combined and Lifeline. Claims expenses for accident
and health business totaled approximately $9,110,000 for 2003,
$8,615,500 in 2002 and $3,301,300 in 2001. Commission expenses for
2003 were $2,812,600, while 2002 and 2001 totaled $2,472,500 and
$877,360, respectively. Administration expenses totaled $4,072,900
in 2003, $3,784,273 in 2002 and $1,113,166 in 2001. During 2002 and
2003, such expenses were greater than we expected due to a longer
and more expensive conversion of the computer systems utilized by
Combined and Lifeline to those used by the Company and severance
costs related to accrued leave time by employees at those companies.
Additionally, due to the high lapsation experienced in the books of
business of Combined and Lifeline, the amortization of the Cost of
Customer Relationships Acquired related to those acquisitions was
accelerated. During 2003, more than $3.9 million of such cost was
amortized.
CONSOLIDATED RESULTS
The following table sets forth the Company's net income for periods
indicated:
Year Ended Net Income Per Change from
December 31 Net Income Class A & B Shares Previous Year
----------- ---------- ------------------ -------------
2003 $3,126,000 $0.09 (26.5%)
2002 4,254,000 0.13 7.3%
2001 3,963,000 0.13 --
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, pro forma
net income would approximate $4,866,000 ($.16 per share) for the
year ended December 31, 2001. As further discussed below, increases
in amortization of cost of customer relationships acquired, and
amortization of intangible assets acquired in the First Alliance
acquisition coupled with losses on the accident and health business
related to claims and administration costs contributed to the
decreased earnings in 2003.
Total revenues for 2003 were $95,102,763 compared to $83,003,898 in
2002, an increase of 14.6%. In 2001 revenues were $67,646,824. The
acquisitions of First Alliance and Mid-American increased 2003
revenues by $6,127,555. The acquisitions of Combined and Lifeline
increased 2002 revenues by $11,270,166. The 2003 increase in
revenues was primarily due to a 5.7% increase in new life premiums
and a 17.1% increase in renewal life premiums and a 9.7% increase in
accident and health premiums. The 2002 increase in revenues was due
primarily to a 17.1% increase in new life 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 life revenues was due to the expansion of countries from
which applications have been received, while the increases in
accident and health premium relate to Combined and Lifeline.
Premium income increased by 14.4% from $68,210,881 in 2002 to
$78,027,413 in 2003. The 2003 increase was comprised of a $8,505,540
increase in life premiums and annuity and universal life
considerations and a $1,310,992 increase in accident and health
29
premiums. The February 2003 acquisition of First Alliance and the
November 2003 acquisition of Mid-American increased life premiums by
$4,344,761. Additionally, premiums received from new markets,
particularly the Pacific Rim, boosted revenues during the year.
Production of new life insurance premiums by CICA increased 5.7%
from 2002 to 2003 and 17.1% from 2001 to 2002. In addition,
management initiated a domestic ordinary life sales program in late
2000 targeting middle-income residents of the U.S. This program's
initial results to date have been insignificant; however, with the
recent acquisitions, the additional sales forces of the acquisitions
should provide expanded sales efforts for our domestic marketing
program. (See the discussion of U.S. marketing operations above).
Premium income increased by 26.4% from $53,962,937 in 2001 to
$68,210,881 in 2002. The 2002 increase was comprised of a $5,833,821
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. Management continued to implement
significant rate increases in supplemental non-cancelable accident
and health products and in March and April 2003 did not renew
approximately $2.3 million of annual premium related to major
medical policies due to increased loss ratios. As set forth above,
the Company is moving to cede its entire accident and health premium
to another carrier in order to achieve overhead reductions and
improve operating results. This course of action will result in
elimination of accident and health premiums.
Net investment income increased slightly during 2003 to $14,322,275
from $14,251,907 during 2002. The 2003 increase reflected continued
expansion of our asset base that was offset by lower yields
available on new investments. The acquisition of First Alliance and
Mid-American increased invested assets by $30.6 million and 2003
investment income by $849,217. As interest rates fell, there was a
significant amount of call activity on our bond portfolio. During
2003, more than $150 million of bonds were called or matured. Such
call activity was expected given the prevailing interest rates and
the nature of the bonds in the Company's portfolio.
A majority of new investment activity over the past three years has
focused on the acquisition of bonds issued by public agencies that
carry the implied full faith and credit of the Federal government,
such as FNMA and FHLMC. These bonds typically have stated maturities
of 15 years, but will carry a call feature (at par) that varies
between three months and two years. All bonds purchased are at par
or at a discount, so that the yield to call will be equal to or
greater than the yield to maturity. By choosing to invest in these
securities, the Company is exposed to reinvestment risk in the event
that interest rates fall for an extended period because the
securities will typically be called and the likelihood of increases
in market value above par is unlikely because the expectation is
that the bond will be called. Such events require reinvestment of
the proceeds at levels lower than the yields of the called bonds.
During 2003, such a period occurred; however, in many cases, the
Company was able to reinvest in bonds at levels at or near those of
the called bonds. These recently purchased bonds offer yields of 100
to 200 basis points above the Treasury curve and carry minimal
credit risk. Recent scrutiny and concern expressed over the levels
of mortgages owned by the various government backed corporations
(FNMA and FHLMC) has not resulted in decreases in credit ratings of
such entities and management expects to continue to make future
investments in these bonds for 2004. The Company does not believe
such declines in available yields will have a material adverse
effect on its future operating results because of the strong cash
flow available to
30
take advantage of any increases in interest rates. The 2002 results
increased 7.2% compared to the $13,296,481 earned in 2001, such
increase reflecting growth in invested assets. The acquisition of
Combined and Lifeline increased invested assets by $15.2 million and
2002 investment income by $528,021.
Realized gains for 2003 amounted to $1,883,105 compared to $477 for
2002 and a net loss of $148,415 in 2001. The increase was primarily
due to selective sales made by management of securities from earlier
acquisitions that did not meet the Company's credit criteria or risk
profile. In 2003 we also recognized $563,055 from the early
extinguishment of a liability, offset by the related amortization of
an intangible asset, as a result of the First Alliance acquisition.
The change in future policy benefit reserves increased from
$6,051,671 in 2002 to $7,904,091 in 2003. The change in future
policy benefit reserves in 2001 was $6,483,706. CICA's life reserves
increased $10.6 million in 2003, which offset decreases in accident
and health reserves. This is predominantly due to an increase in
persistency on the Company's overseas business. These persistency
improvements have led to an increase in policy reserves at an
accelerated rate compared to the past. CICA's accident and health
reserves decreased approximately $200,000 because of expected
lapsation and non-renewal as the Company continued to implement
significant rate increases. Accident and health policy reserves for
Combined decreased by approximately $3.0 million in 2003. The
non-renewal of the major medical block of business accounted for
$1.3 million of the $3.0 million decrease. In addition, Combined has
experienced high lapsation on new accident and health policies
issued. Including the policies terminated from the non-renewal of
the major medical business, the policy count for Combined's accident
and health policies decreased by approximately 33% during 2003
compared to 2002 resulting in accident and health policy reserves
decreasing by approximately $1.7 million. The change in policy
reserves for life and annuity policies for Combined resulted in a
net decrease of approximately $250,000.
FAIC, purchased on February 18, 2003, had an increase in policy
benefit reserves of approximately $580,000 since the date of
acquisition. Approximately $380,000 of the increase relates to
annuities and approximately $200,000 relates to life insurance.
Policyholder dividends increased to $3,666,260 in 2003, up 5.4% over
2002 dividends of $3,477,381. The 2002 amounts increased 5.5%
compared to $3,294,899 in 2001. Virtually all of CICA's overseas
policies are participating. Participating policies represented 47.7%
of our business in-force at December 31, 2003, although the
percentage of participating business has declined from approximately
91% in 1995 due to acquisitions in recent years.
Claims and surrenders increased 6.1% from $38,107,119 in 2002 to
$40,445,007 in 2003. In 2001 claims and surrenders were $29,189,132.
The 2003 increase included $3,002,197 related to the operations of
First Alliance and Mid-American. Improvements in the persistency of
the Company's overseas business coupled with the non-renewal of a
majority of the major medical business accounted for the remaining
change. The 2002 increase included $6,526,322 related to the
acquisitions of Combined and Lifeline.
31
Year ended December 31,
-------------------------------------------
2003 2002 2001
---- ---- ----
Death claims $ 6,398,627 $ 6,599,914 $ 5,613,782
Surrender expenses 17,985,923 16,777,391 14,435,486
Accident and health benefits 9,109,965 8,615,358 3,301,341
Endowments 6,415,932 5,730,463 5,389,082
Other policy benefits 534,560 383,993 449,441
----------- ----------- -----------
Total claims and surrenders $40,445,007 $38,107,119 $29,189,132
=========== =========== ===========
Death benefits decreased 3.1% from $6,599,914 in 2002 to $6,398,627
in 2003. Death benefits were $5,613,782 in 2001. An improvement in
the mortality experience accounted for the 2003 results. 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 with whom our underwriters can
validate information contained in applications, medical or
inspection reports. The Company also retains only the first $100,000
of risk and cedes to other reinsurers the excess.
Accident and health benefits increased 5.7% from $8,615,358 in 2002
to $9,109,965 in 2003. Such claims were $3,301,341 in 2001. The 2003
increase is directly related to the acquisition of Combined, which
saw continued increases in claims incurred. The increase in 2002
accident and health benefits is directly related to the acquisition
of Combined and Lifeline discussed above, which generated $5,752,048
in claims. During 2003, we did not renew approximately $2.3 million
of major medical premiums on the Combined book of accident and
health business. In addition, significant rate increases were
implemented on the accident and health business remaining in force.
As was discussed above, management has negotiated a reinsurance
arrangement to cede off all of the accident and health business in
force in 2004.
Endowment benefits increased 12.0% from $5,730,463 in 2002 to
$6,415,932 in 2003. In 2001, such expenses were $5,389,082. CICA has
a series of international policies that carry 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 7.2% from $16,777,391 in 2002 to
$17,985,923 in 2003. Surrenders were $14,435,486 in 2001. The 2003
increase is directly related to the acquisitions of First Alliance
and Mid-American, discussed above, which generated $2,668,847 in
surrenders. The uncertain economic climate in several Latin American
countries was the primary reason for the increased 2002 surrender
activity. The economies in Argentina and Venezuela in particular
were in near-depressions during 2002. However, management is
optimistic about the long-term prospects for these countries.
32
Other claim expenses amounted to $534,560 in 2003, $383,993 in 2002
and $449,441 in 2001. These expenses are comprised of supplemental
contract benefits, interest on policy funds and assorted other
miscellaneous policy benefits.
During 2003, commissions increased 11.6% to $18,227,851 from
$16,339,205 in 2002. In 2001, commission expense was $13,444,270.
The 2003 increase was attributable to the acquisition of First
Alliance and Mid-American, whose 2003 commissions were $1,063,976.
The remainder of the 2003 increase was due to the 5.7% increase in
production of new life insurance premiums. The 2002 increase was due
to the acquisition of Combined and Lifeline, whose 2002 commissions
were $2,160,226 and because of a 17.7% increased production and
related increased issuance of new life policies. During 2002, the
Company terminated its arrangement with its international marketing
manager and transferred the responsibilities to the home office. As
a result, commission expense declined approximately $400,000 and
home office marketing and operating expenses increased.
Underwriting, acquisition and insurance expenses increased 25.9% to
$18,966,120 in 2003 compared to $15,064,065 in 2002 and $10,635,639
in 2001. The 2003 increase includes $2,136,416 of expenses related
to the acquisitions of First Alliance and Mid-American and
approximately $900,000 related to the annual marketing convention
for international producers for 2003 and 2004, an expense previously
borne by our international marketing manager. 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
marketing firm on new business issued internationally but instead
directly bear the related costs of all marketing, management and
promotional activities. Other factors in the increased expenses
relate to the start-up costs of the U.S. marketing program, and
approximately $250,000 was spent in attempting to acquire control of
First American Capital Corporation, a Kansas insurance holding
company, and on other merger and acquisition activities. The 2002
increase was due in part to the acquisition of Combined and
Lifeline, which added $1,954,738 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.
Additionally, as discussed above, the May 2002 cancellation of our
contract with an independent international company that served as
the managing general agent for our international marketing
activities increased 2002 expenses for the eight months of 2002 that
the Company incurred those costs. 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 14.6% from
$14,442,757 in 2002 to $16,557,855 in 2003. These costs were
$11,112,096 in 2001. The 2003 increase related to the 5.7% increase
in new life production. 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 17.1% increase in new life production.
Amortization of these costs was $11,806,640, $10,039,403 and
$8,568,455, respectively in 2003, 2002 and 2001. Most of the 2002
increase related to the increased surrender activity caused by the
uncertain economic climate in several Latin American countries.
33
Amortization of cost of customer relationships acquired, excess of
cost over net assets acquired and other intangibles increased from
$2,527,996 in 2002 to $7,110,436 in 2003. In 2001, such amortization
was $1,908,683. The 2003 increase relates to the amortization of
cost of customer relationships acquired with respect to the
acquisitions of Combined, Lifeline, First Alliance and Mid-American
that amounted to $5,643,769 and $563,055 related to amortization of
an intangible asset. The 2002 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, 2003 and December 31,
2002. The amortization of goodwill and other intangibles amounted to
$902,610 for the year ended December 31, 2001.
During 2003, the Company amended tax returns related to prior years
resulting in refunds that reduced 2003 current income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
Stockholders' equity increased from $101,792,305 at December 31,
2002 to $127,026,722 at December 31, 2003. The increase was
attributable to $17,194,513 and $7,223,557, respectively, of Class A
common stock issued for the acquisition of First Alliance and
Mid-American, net income of $3,126,265 earned in 2003 and unrealized
gains, net of tax, decreased by $2,309,918 as of December 31, 2003
compared to December 31, 2002. Decreases in the market value of our
bond portfolio caused by lower bond prices resulted in the decrease
in unrealized gains.
We paid a 7% stock dividend on December 31, 2003 to holders of
record as of December 1, 2003. A similar 15% dividend was paid on
June 1, 2002. Both dividends were paid using Class A and B shares
that were previously authorized but unissued. The dividends had the
effect of transferring $23,315,572 and $35,416,772, respectively, in
2003 and 2002 from retained earnings to our common stock and
treasury stock.
The Company has benefited from significant cash provided by
operations. In 2003, such cash was more than $13.6 million, while in
2002 and 2001, respectively, cash provided by operations was $10.6
million and $14.5 million. This cash flow permits the Company to
expand its life insurance activities and to take advantage of
investment opportunities as they arise
Invested assets increased to $275,188,132 at December 31, 2003 from
$226,008,600 at year-end 2002, an increase of 21.8%. The acquisition
of First Alliance and Mid-American discussed above were the primary
reasons for the increase adding $30.6 million to invested assets. In
addition, $21.3 million of excess cash was invested in fixed
maturities as interest rates began to gradually increase in late
2003. Increases in fixed maturities available-for-sale (23.8%),
fixed maturities held-to-maturity (2.8%) and policy loans (6.2%)
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,
34
and fixed maturities available-for-sale which are valued at fair
value. Fixed maturities available-for-sale and fixed maturities
held-to-maturity were 86.3% and 4.3%, respectively, of invested
assets at December 31, 2003. Fixed maturities held to maturity,
amounting to $11,699,899 at December 31, 2003, 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. (See the discussion of investment income above for further
disclosure regarding investment strategy and philosophy.)
Policy loans comprised 7.9% of invested assets at December 31, 2003
compared to 9.1% at December 31, 2002. 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 mortgage loan portfolio, which constituted 0.2% and 0.3% of
invested assets at December 31, 2003, and December 31, 2002,
respectively, has historically been comprised primarily of seasoned
small residential loans in Texas and Colorado. Management
established a reserve of $50,000 at December 31, 2003, and December
31, 2002, (approximately 8% to 9% of the mortgage portfolio's
balance) to cover potential unforeseen losses in our mortgage
portfolio. At December 31, 2003, no loans were past due for more
than 90 days.
Our cash balances at our primary depositories were significantly in
excess of Federal Deposit Insurance Corporation coverage at December
31, 2003 and 2002. 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. During 2003, the
Company transferred its primary banking relationship from JP Morgan
Chase to Regions Bank.
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 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 in which we have an investment that engage in
speculative activities of any description, and we do not use such
investments to hedge our investment positions.
Our subsidiary, CICA, owned 2,565,894 shares of our Class A common
stock at December 31, 2003, and 2,398,031 shares at December 31,
2002. 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 designed to provide a retirement
program for the exclusive benefit of our eligible employees. The
plan is designed to comply with the Employee Retirement Income
Security Act of 1974 (ERISA). 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 2003, $300,000 in 2002, and
$250,000 in 2001. The profit
35
sharing plan had net assets of $1,940,858 as of December 31, 2003,
$1,639,619 as of December 31, 2002 and $1,266,197 as of December 31,
2001.
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, 2003, 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 is domiciled in
Texas, FAIC in Kentucky, MACLIC in Missouri, SAIC in Arkansas and
CUSA 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 did not establish a reserve of approximately
$3 million in its statutory financial statements as of and for the
year ended December 31, 2003 or December 31, 2002. Texas, Illinois,
Kentucky, Missouri and Arkansas codified rules must be followed
unless the Commissioner of Insurance permits specific practices that
differ from codified rules. None of our insurance subsidiaries has
requested any permission to deviate from NAIC codified rules.
During 2003, we engaged in discussions with the investment banking
community regarding raising additional equity capital. Should we
decide to pursue equity capital, the purpose would be to utilize the
proceeds to pursue acquisitions. Management believes the Company has
sufficient capital for its long-term operating needs; however,
management may pursue additional equity capital to finance larger
acquisitions. During early 2004, the Company's shareholders approved
amendments to the Articles of Incorporation increasing the number of
authorized Class A and Class B shares and authorizing preferred
stock that could be issued upon approval of the Board of Directors.
The Company received a commitment from Regions Bank for a $30
million credit facility for use in acquisitions in late 2003.
Definitive documents are expected to be signed during March 2004.
The Company has historically avoided the incurrence of significant
amounts of debt; however, this facility should allow management to
pursue larger acquisitions. If a decision is made to utilize the
facility in conjunction with a transaction, management intends to
view the debt as a bridge facility. Before drawing on the debt,
management expects to develop a strategy designed to retire the debt
without restricting growth.
During the third quarter of 2003, management determined to transfer
the hardware platform that the Company's legacy computer system
operates on from the Wang environment to an IBM mainframe
environment. This decision was prompted by the need
36
to migrate to hardware that is widely available and supported.
Delivery of the new hardware occurred in October 2003, and
management estimates that the transition will take 12 to 18 months.
The Company's existing Data Processing staff will oversee the
conversion. The overall cost of the new hardware was less than
$1 million. Management expects to achieve an environment that the
Company can operate in for many years to come through this move.
The Sarbanes-Oxley Act of 2002 ("the Act") established sweeping new
guidelines for corporate governance. Subsequently, the New York
Stock Exchange adopted new rules that relate to such matters as the
composition of listed companies' Boards of Directors and various
committees thereof, the need to adopt specific policies as well as
the establishment of a Code of Ethics. The Company's Board of
Directors, Compensation Committee and Audit Committee were already
configured in such a way as to comply with the Act. Citizens has
operated under a "Principles, Purposes, Philosophy and Beliefs" for
numerous years that sets forth the manner in which the Company and
its officers, directors and employees are expected to function.
However, the Board of Directors has implemented a formal Code of
Ethics, including an insider trading policy, applicable to all
officers, directors and employees.
Additionally, the Act imposes a duty upon public companies to
document and test all internal controls and have such audited by
independent auditors. The Company has begun the process of
documenting all such control procedures and expects to complete the
documentation and testing in 2004.
The Company has committed to the following contractual obligations
as of December 31, 2003 with the payments due by the period
indicated below:
CONTRACTUAL LESS THAN 1 TO 3 MORE THAN
OBLIGATION TOTAL 1 YEAR YEARS 3 YEARS
----------------- ----- --------- ------ --------
Operating leases $ 525,378 $217,313 $308,065 --
Other 941,000 341,000 $600,000 --
---------- -------- --------
Total $1,466,378 $558,313 $908,065 --
========== ======== ========
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.
37
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, 2003, 2002 and 2001 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 4.9% to 5.1% for three of
the past five years, with 2003 being impacted by the acquisition of
First Alliance. The 2002 ratios of 8.2% and 7.3% relate to
surrenders caused by the current uncertain economic conditions in
several Latin American countries. In addition, the 2003 ratio of
8.2% includes First Alliance surrenders and lapses of approximately
$32.2 million (approximately 1.2% of the total). After review of the
surrender and lapse detailed information, management does not
believe the 2002 and 2003 increases reflect 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 surrendering 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 38.0% to 47.7% and the ratio
of commissions, underwriting and operating expenses, policy reserves
increases, policyholder benefits and dividends to policyholders to
insurance premiums has ranged from 114.7% to 119.2%. Table VIII also
shows that the ratio of net investment income to mean amount of
invested assets has varied from 1999 through 2002 6.6% to 6.8%. The
2003 5.7% represents the impact of the low interest environment. As
set forth above in Management's Discussion and Analysis of Financial
Condition and Results of Operations, death benefits for the years
ended December 31, 2003, 2002 and 2001 were $6,398,627, $6,599,914
and $5,613,782, respectively with $712,052 of the 2002 increase in
death benefits related to the acquisitions of Combined and Lifeline
and $320,213 of the 2003 increase in death benefits related to the
acquisitions of First Alliance and Mid-American.
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
38
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 that 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 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
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, 2003, 2002 and 2001 limits the amount of
deferred costs to its estimated realizable value.
VALUATION OF INVESTMENTS IN FIXED MATURITY AND EQUITY
SECURITIES
At December 31, 2003, investments in fixed maturity and equity
securities were 90.6% and .4%, respectively, of total investments.
Approximately 95.3% of our fixed maturities were classified as
available-for-sale securities at December 31, 2003 with the
remaining 4.7% classified as held-to-maturity securities based upon
our intent and ability to hold these securities to maturity. All
equity securities at December 31, 2003 are classified as
available-for-sale securities. We have no fixed maturity or equity
securities that are classified as trading securities at December 31,
2003.
Additionally, at December 31, 2003, 94.6% 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
39
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, 2003 are not
impaired and no other than temporary losses need to be recorded.
The gross unrealized losses on fixed maturities available-for-sale
amounted to $2,553,328 as of December 31, 2003. Of the total gross
unrealized loss, $41,746 of the fixed maturities available-for-sale
have been in a continuous unrealized loss situation for more than 12
months and $2,511,582 have been in a continuous unrealized loss
situation for less than 12 months. The fixed maturities
available-for-sale in a gross unrealized loss situation for more
than 12 months relate to two fixed maturities available-for-sale
issued by corporations and two callable instruments issued by U.S.
government agencies. These securities are being closely monitored by
the Company to determine if the unrealized loss as of December 31,
2003 indicates that there is a loss other-than-temporary. As of
December 31, 2003, the Company has determined that there is no need
to establish a new cost basis for these two securities since a loss
has not occurred.
Approximately $2,474,000 of the fixed maturities available-for-sale
that have been in a continuous unrealized loss situation for less
than 12 months are investments in callable instruments issued by
U.S. government agencies. These fixed maturities available-for-sale
are backed by the full faith and credit of the U.S. or bear the
implied full faith and credit of the U.S. government. Management
believes it is remote that unrealized losses on these instruments
will result in realized losses since the Company has the intent and
believes it has the ability to hold these securities to the call
date or maturity date. The remaining $39,079 of fixed maturities
available-for-sale that have been in a continuous unrealized loss
situation for less than 12 months are investments in fixed
maturities available-for-sale issued by corporations. The
investments in callable instruments issued by U.S. government
agencies and in fixed maturities available-for-sale of corporations
that have been in an unrealized loss position for less than 12
months are primarily in an unrealized loss position because their
coupon interest rate was less than the prevailing market interest
rates as of December 31, 2003. As of December 31, 2003, the Company
has determined that there is no need to establish a new cost basis
for these debt securities that have been in a continuous loss
situation for less than 12 months since a loss has not occurred. See
also Item 7A below, "Quantitative and Qualitative Disclosures about
Market Risk."
ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted Statement of Financial
Accounting Standard (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 $12,938,862 and
40
$7,783,405 and other intangible assets amounting to $2,418,125 and
$2,018,125 as of December 31, 2003, and December 31, 2002,
respectively, were determined to have an indefinite useful life and
will no longer be amortized. Instead goodwill and other intangible
assets will be subjected to annual impairment analyses under the
provisions of SFAS No. 142 and SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," respectively.
On January 1, 2003, the Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations." SFAS No. 143 addressed 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 did not and is not expected to have a
significant effect on the financial position, results of operations
or liquidity of the Company.
In October 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 superseded and amended 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 No. 145 affected income statement
classification of gains and losses from extinguishment of debt and
made certain other technical corrections. SFAS No. 145 was adopted
on January 1, 2003. SFAS No. 145 did not 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 spread
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
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 also revised accounting for specified employee and contract
terminations that are part of restructuring activities. The Company
adopted SFAS No. 146 on January 1, 2003. SFAS No. 146 did not 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 rescission
of FASB Interpretation No. 34." This Interpretation elaborated on
the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees issued
and also clarified that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the
obligation undertaken. The Company adopted FASB Interpretation No.
45 on January 1, 2003. FASB Interpretation No. 45 did not have a
material effect on the financial position, results of operations or
liquidity of the Company.
41
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 amended 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. The Company currently
offers no stock-based employee compensation. The Company adopted
SFAS No. 148 on January 1, 2003. SFAS No. 148 did not have a
material effect on the financial position, results of operations or
liquidity of the Company.
In December 2003, the FASB issued a revision to Interpretation No.
46, "Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51." that was originally issued in January 2003. This
interpretation as revised 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. The Company adopted FASB Interpretation No. 46 as revised on
December 31, 2003. FASB Interpretation 46 as revised did not have a
material effect on the financial position, results of operations or
liquidity of the Company.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." This
statement clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. This
statement is generally effective for contracts entered into or
modified after September 30, 2003, and all provisions should be
applied prospectively. The Company adopted SFAS No. 149 on September
30, 2003. SFAS No. 149 did not have a material effect on the
financial position, results of operations or liquidity of the
Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equities." This statement established standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS No. 150
requires that an issuer classify a financial instrument within its
scope as a liability (or an asset in some circumstances). Many of
the instruments within the scope of SFAS No. 150 were previously
classified as equity. Based on current operations, the Company does
not anticipate that SFAS No. 150 will have a material effect on the
financial position, results of operations or liquidity of the
Company.
In December 2003, the FASB issued a revision to SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits." This statement requires that companies provide more
details about their plan assets, benefit obligations, cash flows,
benefit costs and other relevant information. This statement is
effective for fiscal years ending after December 15, 2003. The
Company adopted the revision to SFAS No. 132 on December 31, 2003.
SFAS No. 132, as revised, did not have a material effect on the
financial position, results of operations or liquidity of the
Company.
42
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
The nature of our business exposes us to market risk. Market risk is
the risk of loss that may occur when changes in interest rates and
public equity prices adversely affect the value of our invested
assets. Interest rate risk is our primary market risk exposure.
Substantial and sustained increases and decreases in market interest
rates can affect the market value of our investments. The market
value of our fixed maturity, mortgage loan portfolio and policy
loans generally increases when interest rates decrease, and
decreases when interest rates increase.
Market Risk Related to Interest Rates
Our exposure to interest rate changes results from our significant
holdings of fixed maturity investments, mortgage loans on real
estate and policy loans, all of which comprised almost 99% of our
investment portfolio as of December 31, 2003. These investments are
mainly exposed to changes in treasury rates. Our fixed maturities
investments include U.S. government bonds, securities issued by
government agencies, and corporate bonds. Approximately 94.6% of the
fixed maturities we owned at December 31, 2003 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.
To manage interest rate risk, we perform periodic projections of
asset and liability cash flows to evaluate the potential sensitivity
of our investments and liabilities. We assess interest rate
sensitivity with respect to our available-for-sale fixed maturities
investments using hypothetical test scenarios that assume either
upward or downward 100 basis point shifts in the prevailing interest
rates. The following tables set forth the potential amount of
unrealized gains (losses) that could be caused by 100 basis point
upward and downward shifts on our available-for-sale fixed
maturities investments as of the dates indicated:
DECREASES IN INTEREST RATES
------------------------------------------------
100 BASIS 200 BASIS 300 BASIS
POINTS POINTS POINTS
------ ------ ------
December 31, 2003 $ 2,735,000 $ 6,730,000 $ 11,704,000
============ ============ ============
December 31, 2002 $ 5,672,000 $ 9,333,000 $ 13,207,000
============ ============ ============
INCREASES IN INTEREST RATES
------------------------------------------------
100 BASIS 200 BASIS 300 BASIS
POINTS POINTS POINTS
------ ------ ------
December 31, 2003 $(21,556,000) $(39,467,000) $(55,619,000)
============ ============ ============
December 31, 2002 $ (9,987,000) $(20,511,000) $(30,619,000)
============ ============ ============
While the test scenario is for illustrative purposes only and does
not reflect our expectations regarding future interest rates or the
performance of fixed-income markets, it is a near-term change that
illustrates the potential impact of such events. Due to the
composition of our book of insurance business, we believe it is
unlikely that we would encounter large surrender activity due an
interest rate increase that would force us to dispose of our fixed
maturities at a loss.
There are no fixed maturities or other investments that we classify
as trading instruments. At December 31, 2003 and 2002, there were no
investments in derivative instruments.
Market Risk Related to Equity Prices
Changes in the level or volatility of equity prices affect the value
equity securities we hold as investments. However, our equity
investments portfolio was less than 1% of our total investments at
December 31, 2003. Thus, we believe that significant decreases in
the equity markets would have an immaterial impact on our total
investment portfolio.
43
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 47
Consolidated statements of financial position at
December 31, 2003 and 2002 48
Consolidated statements of operations
- years ended December 31, 2003, 2002 and 2001 50
Consolidated statements of stockholders' equity and comprehensive
income - years ended December 31, 2003, 2002 and 2001 52
Consolidated statements of cash flows
- years ended December 31, 2003, 2002 and 2001 54
Notes to consolidated financial statements 56
Schedules at December 31, 2003 and 2002:
Schedule II - Condensed Financial
Information of Registrant 81
Schedules for each of the years in the three-year
period ended December 31, 2003:
Schedule III - Supplementary Insurance Information 84
Schedule IV - Reinsurance 86
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 our
independent accountants and us.
ITEM 9A. 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.
44
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, as
of the end of the Company's fiscal year covered by this Report on Form 10-K.
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.
PART III
Items 10, 11, 12, 13 and 14 of this Report incorporate by reference the
information in our definitive proxy material under the headings "Election of
Directors," "Executive Officers," "Executive Officer and Director Compensation,"
"Stock and Principal Stockholders," "Control of the Company," and "Principal
Accounting Fees and Services" to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2003.
PART IV
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) REPORTS ON FORM 8-K
(i) The Registrant filed a Form 8-K on November 19, 2003,
under Item 12 whereby it furnished its earnings press
release announcing third quarter 2003 financial results.
(ii) The Registrant filed a Form 8-K on November 19, 2003,
under Item 5 announcing the declaration of a 7% common
stock dividend.
(c) EXHIBITS
See the Exhibits Index beginning on page 88.
45
CITIZENS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
PAGE
REFERENCE
---------
Independent auditors' report 47
Consolidated statements of financial position at
December 31, 2003 and 2002 48
Consolidated statements of operations
- years ended December 31, 2003, 2002 and 2001 50
Consolidated statements of stockholders' equity and comprehensive
income years ended December 31, 2003, 2002 and 2001 52
Consolidated statements of cash flows
- years ended December 31, 2003, 2002 and 2001 54
Notes to consolidated financial statements 56
Schedules at December 31, 2003 and 2002:
Schedule II - Condensed Financial
Information of Registrant 81
Schedules for each of the years in the three-year
period ended December 31, 2003:
Schedule III - Supplementary Insurance Information 84
Schedule IV - Reinsurance 86
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.
46
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, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2003, 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(g) 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
Dallas, Texas
March 9, 2004
47
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2003 AND 2002
ASSETS 2003 2002
---- ----
Investments:
Fixed maturities held-to-maturity, at amortized cost $ 11,699,899 $ 11,384,137
Fixed maturities available-for-sale, at fair value 237,505,966 191,777,625
Equity securities available-for-sale, at fair value 1,142,352 639,316
Mortgage loans on real estate 547,469 619,084
Policy loans 21,873,634 20,596,371
Other long-term investments 2,418,812 992,067
------------ ------------
Total investments 275,188,132 226,008,600
Cash and cash equivalents 15,016,254 19,211,802
Accrued investment income 3,341,483 2,338,837
Reinsurance recoverable 3,337,761 2,254,175
Deferred policy acquisition costs 49,730,572 44,979,357
Other intangible assets 3,086,165 2,018,125
Deferred federal income tax 1,887,048 1,078,985
Cost of customer relationships acquired 16,884,456 14,191,172
Excess of cost over net assets acquired 12,938,862 7,783,405
Property, plant and equipment 5,942,726 5,590,498
Other assets 2,739,838 836,045
------------ ------------
Total assets $390,093,297 $326,291,001
============ ============
(Continued)
48
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED
DECEMBER 31, 2003 AND 2002
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
---- ----
Liabilities:
Future policy benefit reserves:
Life insurance $ 205,126,613 $ 184,672,200
Annuities 15,309,266 3,226,834
Accident and health 13,128,579 15,647,401
Dividend accumulations 4,823,504 4,859,391
Premium deposits 6,509,089 4,794,131
Policy claims payable 5,648,288 4,794,096
Other policyholders' funds 3,876,787 3,209,348
------------- -------------
Total policy liabilities 254,422,126 221,203,401
Commissions payable 2,272,216 1,912,972
Federal income tax payable 613,123 311,884
Payable for securities in the process of settlement 3,750,000 --
Other liabilities 2,009,110 1,070,439
------------- -------------
Total liabilities 263,066,575 224,498,696
------------- -------------
Stockholders' equity:
Common stock:
Class A, no par value, 50,000,000 shares
authorized, 37,674,293 shares issued
in 2003 and 31,862,650 shares issued
in 2002, including shares in treasury of
2,738,874 in 2003 and 2,559,693 in 2002 178,065,965 129,125,099
Class B, no par value, 1,000,000 shares
authorized, 874,935 shares issued and outstanding in 2003 and
817,696 shares issued and outstanding in 2002 2,437,052 1,870,389
Retained deficit (46,077,094) (25,887,787)
Accumulated other comprehensive income (loss):
Unrealized gains on securities, net of tax 1,272,107 3,582,025
------------- -------------
135,698,030 108,689,726
Treasury stock, at cost (8,671,308) (6,897,421)
------------- -------------
Total stockholders' equity 127,026,722 101,792,305
------------- -------------
$ 390,093,297 $ 326,291,001
============= =============
See accompanying notes to consolidated financial statements.
49
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
Revenues:
Premiums:
Life insurance $ 60,858,687 $ 54,453,730 $ 48,686,189
Accident and health 14,784,958 13,473,966 5,059,843
Annuity and universal life
considerations 2,383,768 283,185 216,905
Net investment income 14,322,275 14,251,907 13,296,481
Realized gains (losses) 1,883,105 477 (148,415)
Other income 869,970 540,633 535,821
------------ ------------ ------------
Total revenues 95,102,763 83,003,898 67,646,824
------------ ------------ ------------
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future
policy benefit reserves 7,904,091 6,051,671 6,483,706
Policyholders' dividends 3,666,260 3,477,381 3,294,899
Claims and surrenders 40,445,007 38,107,119 29,189,132
Annuity expenses 245,891 280,789 205,516
---------- ---------- ----------
Total insurance benefits
paid or provided 52,261,249 47,916,960 39,173,253
Commissions 18,227,851 16,339,205 13,444,270
Other underwriting, acquisition
and insurance expenses 18,966,120 15,064,065 10,635,639
Capitalization of deferred policy
acquisition costs (16,557,855) (14,422,757) (11,112,096)
Amortization of deferred policy
acquisition costs 11,806,640 10,039,403 8,568,445
Amortization of cost of customer relationships
acquired, excess of cost over net assets
acquired and other intangibles 7,110,436 2,527,996 1,908,683
------------ ------------ ------------
Total benefits and expenses 91,814,441 77,464,872 62,618,194
------------ ------------ ------------
(Continued)
50
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
Income before Federal income
tax $3,288,322 $5,539,026 $5,028,630
Federal income tax expense 162,057 1,284,809 1,065,517
---------- ---------- ----------
Net income $3,126,265 $4,254,217 $3,963,113
========== ========== ==========
Basic and diluted earnings
per share of common stock $ .09 $ .13 $ .13
========== ========== ==========
See accompanying notes to consolidated financial statements.
51
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
ACCUMULATED
COMMON STOCK RETAINED OTHER
-------------------- EARNINGS COMPREHENSIVE TREASURY STOCKHOLDERS'
CLASS A CLASS B (DEFICIT) INCOME (LOSS) STOCK EQUITY
------- ------- -------- ------------- ----- ------
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
------------ ---------- ------------ ----------- ----------- -------------
Comprehensive income:
Net income -- -- 3,126,265 -- -- 3,126,265
Unrealized investment losses, net -- -- -- (2,309,918) -- (2,309,918)
------------ ---------- ------------ ----------- ----------- -------------
Comprehensive income -- -- 3,126,265 (2,309,918) -- 816,347
Acquisition of First Alliance 17,194,513 -- -- -- -- 17,194,513
Acquisition of Mid-American 7,223,557 -- -- -- -- 7,223,557
Stock dividend 24,522,796 566,663 (23,315,572) -- (1,773,887) --
------------ ---------- ------------ ----------- ----------- -------------
BALANCE AT DECEMBER 31, 2003 $178,065,965 $2,437,052 $(46,077,094) $ 1,272,107 $(8,671,308) $ 127,026,722
============ ========== ============ =========== =========== =============
(Continued)
52
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME,
CONTINUED
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
A summary of the number of shares of common stock of Class A, Class B and
treasury stock (Class A) is as follows:
COMMON STOCK
---------------------- TREASURY
CLASS A CLASS B STOCK
------- ------- -----
BALANCE AT DECEMBER 31, 2000 26,642,607 711,040 (2,225,820)
---------- ------- -----------
BALANCE AT DECEMBER 31, 2001 26,642,607 711,040 (2,225,820)
---------- ------- -----------
Acquisition of Combined 752,701 -- --
Acquisition of Lifeline 304,928 -- --
Stock dividend 4,162,414 106,656 (333,873)
---------- ------- -----------
BALANCE AT DECEMBER 31, 2002 31,862,650 817,696 $(2,559,693)
---------- ------- -----------
Acquisition of First Alliance 2,560,994 -- --
Acquisition of Mid-American 774,229 -- --
Stock dividend 2,477,050 57,239 (179,181)
---------- ------- -----------
BALANCE AT DECEMBER 31, 2003 37,674,923 874,935 (2,738,874)
========== ======= ===========
See accompanying notes to consolidated financial statements.
53
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net income $ 3,126,265 $ 4,254,217 $ 3,963,113
Adjustments to reconcile net income to
net cash provided by operating activities,
net of assets acquired:
Realized (gains) losses on sale
of investments and other assets (1,883,105) (477) 148,415
Net deferred policy acquisition costs (4,751,215) (4,383,354) (2,543,651)
Amortization of cost of customer
relationships acquired, excess of cost over net
assets acquired and other intangibles 7,110,436 2,527,996 1,908,683
Depreciation 688,913 795,679 738,451
Deferred Federal income tax (87,812) 792,216 418,881
Change in:
Accrued investment income (714,297) (215,908) 201,114
Reinsurance recoverable 195,380 387,095 212,709
Future policy benefit reserve 9,150,762 5,645,152 6,531,987
Other policy liabilities 2,580,571 729,970 1,668,516
Federal income tax 316,511 (160,081) 659,408
Commissions payable and other liabilities (928,766) 16,392 150,199
Other, net (1,173,405) 207,228 466,384
------------- ------------ ------------
Net cash provided by operating activities 13,630,238 10,596,125 14,524,209
------------- ------------ ------------
Cash flows from investing activities:
Sale of fixed maturities, available-for-sale 11,826,358 2,239,875 11,626,961
Maturity of fixed maturities, available-for-sale 150,447,345 91,956,779 77,169,119
Purchase of fixed maturities, available-for-sale (183,619,375) (95,427,418) (100,516,704)
Sale of equity securities, available-for-sale 838,416 652,905 97,500
Purchase of equity securities, available-for-sale (1,671) -- --
Principal payments on mortgage loans 210,365 490,463 240,891
Mortgage loans funded (138,750) -- (171,770)
Sale of other long-term investments and property, plant and
equipment 229,660 113,298 352,490
(Continued)
54
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
2003 2002 2001
---- ---- ----
Cash and cash equivalents provided by
mergers and acquisitions $ 4,600,511 $ 2,882,353 $ --
(Increase) decrease in policy loans, net (987,213) (599,576) 899,659
Purchase of other long-term investments and
property, plant and equipment (1,231,432) (486,854) (1,492,538)
------------ ------------ ------------
Net cash provided by (used in) investing
activities (17,825,786) 1,821,825 (11,794,392)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (4,195,548) 12,417,950 2,729,817
------------ ------------ ------------
Cash and cash equivalents at beginning of year 19,211,802 6,793,852 4,064,035
------------ ------------ ------------
Cash and cash equivalents at end of year $ 15,016,254 $ 19,211,802 $ 6,793,852
============ ============ ============
Supplemental:
2003 2002 2001
---- ---- ----
Cash paid (recovered) during the year for:
Interest $ -- $ -- $ --
============ ============ ============
Income taxes $ (51,370) $ 665,139 $ (12,772)
============ ============ ============
Supplemental disclosures of non-cash investing and financing activities:
In the first quarter of 2003, the Company issued 2,560,994 Class A common shares
in connection with the acquisition of First Alliance Corporation. In the third
quarter of 2003, the Company issued 774,229 Class A common shares in connection
with the acquisition of Mid-American Alliance Corporation. In the first quarter
of 2002, the Company issued 752,701 Class A common shares in connection with the
acquisition of Combined Underwriters Life Insurance Company and issued 304,928
Class A common shares in connection with the acquisition of all the capital
stock of Lifeline Underwriters Life Insurance Company. In conjunction with the
acquisitions, cash and cash equivalents were provided by acquisitions as
follows:
2003 2002
---- ----
Fair value of capital stock issued $ 24,418,070 $ 11,961,784
Fair value of tangible assets acquired
excluding cash and cash equivalents (28,583,673) (14,883,146)
Fair value of intangible assets acquired (16,027,217) (13,234,978)
Liabilities assumed 24,793,331 19,038,693
------------ ------------
Cash and cash equivalents provided by
mergers and acquisitions $ 4,600,511 $ 2,882,353
============ ============
Issuance of 2,560,994 Class A shares $ 17,194,513
============
Issuance of 774,229 Class A shares $ 7,223,557
============
Issuance of 1,057,629 Class A shares $ 11,961,784
============
See accompanying notes to consolidated financial statements.
55
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(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), Citizens USA Life Insurance Company (CUSA),
Combined Underwriters Life Insurance Company (Combined), First
Alliance Corporation (First Alliance), First Alliance Insurance
Company (FAIC), Alliance Insurance Management, Inc. (AIM), KYWIDE
Insurance Management, Inc. (KYWIDE), Mid-American Alliance
Corporation (Mid-American), Mid American Century Life Insurance
Company (MACLIC), Security Alliance Insurance Company (SAIC),
Mid-American Associates, Agency, Inc. (MAAAI), Mid-American Alliance
Insurance Agency, Inc. (MAAIA) and Industrial Benefits, Inc. (IBI).
Citizens and its consolidated subsidiaries are collectively referred
to as "the Company."
During 2003, Citizens acquired First Alliance and its related
companies (FAIC, AIM and KYWIDE) and Mid-American and its related
companies (MACLIC, SAIC, MAAAI and MAAIA) on February 18, 2003 and
November 18, 2003, respectively. In addition, Lifeline Underwriters
Life Insurance Company (Lifeline) was merged into Combined,
Excalibur Insurance Corporation (Excalibur) was merged into Central
Investors Life Insurance Company of Illinois (CILIC) and CILIC was
renamed Citizens USA Life Insurance Company.
Citizens provides life and health insurance policies through five of
its subsidiaries - CICA, CUSA, Combined, FAIC and SAIC. CICA issues
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. CUSA sells life insurance
business in four states and administers an in-force block of life
insurance. Combined markets life and accident and health insurance
business throughout the southern United States. FAIC offers life and
annuity business primarily in Kentucky, MACLIC markets life and
annuity business throughout Missouri and SAIC is a dormant life
insurer.
III provides aviation transportation to the Company. CTI provides
data processing systems and services as well as furniture and
equipment to the Company. FHA is a funeral home operator. AIM,
KYWIDE, MAAAI and MAAIA are insurance agencies. IBI is inactive and
has minimal assets and liabilities.
56
(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 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, 2003 and 2002 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 $30,409,236 at December
31, 2003 and $10,430,799 at December 31, 2002 on deposit with
various state regulatory authorities to fulfill statutory
requirements.
57
(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.
(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 that 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.
58
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.
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 on 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) and other intangible assets
determined to have an indefinite useful life 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."
The Company performed assessments of whether there was an indication
that goodwill and intangible assets were impaired on January 1 and
December 31, 2002 and December 31, 2003 and concluded there was no
goodwill or intangible impairment as of January 1, 2002, December
31, 2002 and December 31, 2003. Amortization expense related to
goodwill and to intangible assets was $595,410 and $307,200,
respectively, for the year ended December 31, 2001. Had SFAS No. 142
been adopted in 2001, proforma net income would approximate
$4,866,000 ($.16 per share) for the year ended December 31, 2001.
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.
59
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 2003, 2002
or 2001.
(h) PARTICIPATING POLICIES
At December 31, 2003 and 2002, participating business approximated
48% and 55%, 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.
(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, 2003, 2002 and 2001 were 34,693,385, 31,951,095,
and 30,920,199, respectively. The per share amounts have been
adjusted retroactively for all periods presented to reflect the
change in capital structure resulting from a 7% common stock
dividend paid in 2003 and a 15% common stock dividend paid in 2002.
The 2003 stock dividend resulted in the issuance of 2,447,050 Class
A shares (including 179,181 shares in treasury) and 57,239 Class B
shares and 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. In addition, 1,057,629 Class A shares were
issued in March 2002 in conjunction with the acquisitions of
Combined and Lifeline; 2,560,994 Class A shares were issued in
February 2003 for the acquisition of First Alliance; and 774,229
Class A shares were issued in November 2003 for the acquisition of
Mid-American.
(j) INCOME TAXES
For the year ended December 31, 2003, the Company plans to file nine
separate tax returns as follows: 1) Citizens, Inc., CICA, CUSA and
all its direct non-life subsidiaries, 2) Excalibur, 3) Combined, 4)
Lifeline, 5) FAIC, 6) MACLIC, 7) SAIC, 8) First Alliance and its
direct non-life subsidiaries and 9) Mid-American and all direct
non-life subsidiaries.
For the year ended December 31, 2002, the Company filed four
separate tax returns as follows: 1) Citizens, Inc., CICA, CILIC and
all direct non-life subsidiaries, 2) Excalibur, 3) Combined and 4)
Lifeline.
60
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.
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
On January 1, 2002, the Company adopted Statement of Financial
Accounting Standard (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 $12,938,862 and
$7,783,405 and other intangible assets amounting to $2,418,125 and
$2,018,125 as of December 31, 2003, and December 31, 2002,
respectively, were determined to have an indefinite useful life and
will no longer be amortized. Instead goodwill and other intangible
assets will be subjected to annual impairment analyses under the
provisions of SFAS No. 142 and SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," respectively.
On January 1, 2003, the Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations." SFAS No. 143 addressed 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 did not and is not expected to have a
significant effect on the financial position, results of operations
or liquidity of the Company.
In October 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 superseded and amended 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 No. 145 affected income statement
classification of gains and losses from extinguishment of debt and
made certain other technical corrections. SFAS No. 145 was adopted
on January 1, 2003. SFAS No. 145 did not 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 spread
out the reporting of expenses related to restructurings initiated
after 2002. Commitment to a plan to exit an activity
61
or dispose of long-lived assets will no longer be enough evidence to
record a 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 also revised accounting for specified
employee and contract terminations that are part of restructuring
activities. The Company adopted SFAS No. 146 on January 1, 2003.
SFAS No. 146 did not 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 rescission
of FASB Interpretation No. 34." This Interpretation elaborated on
the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees issued
and also clarified that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the
obligation undertaken. The Company adopted FASB Interpretation No.
45 on January 1, 2003. FASB Interpretation No. 45 did not 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 amended 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. The Company currently
offers no stock-based employee compensation. The Company adopted
SFAS No. 148 on January 1, 2003. SFAS No. 148 did not have a
material effect on the financial position, results of operations or
liquidity of the Company.
In December 2003, the FASB issued a revision to Interpretation No.
46, "Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51." that was originally issued in January 2003. This
interpretation as revised 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. The Company adopted FASB Interpretation No. 46 as revised on
December 31, 2003. FASB Interpretation 46 as revised did not have a
material effect on the financial position, results of operations or
liquidity of the Company.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." This
statement clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. This
statement is generally effective for contracts entered into or
modified after September 30, 2003,
62
and all provisions should be applied prospectively. The Company
adopted SFAS No. 149 on September 30, 2003. SFAS No. 149 did not
have a material effect on the financial position, results of
operations or liquidity of the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equities." This statement established standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS No. 150
requires that an issuer classify a financial instrument within its
scope as a liability (or an asset in some circumstances). Many of
the instruments within the scope of SFAS No. 150 were previously
classified as equity. Based on current operations, the Company does
not anticipate that SFAS No. 150 will have a material effect on the
financial position, results of operations or liquidity of the
Company.
In December 2003, the FASB issued a revision to SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits." This statement requires that companies provide more
details about their plan assets, benefit obligations, cash flows,
benefit costs and other relevant information. This statement is
effective for fiscal years ending after December 15, 2003. The
Company adopted the revision to SFAS No. 132 on December 31, 2003.
SFAS No. 132, as revised, did not 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 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 2002 and 2001
amounts to conform to the 2003 presentation.
63
(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, 2003 and 2002, are as follows:
2003
-------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---- ----- -------- -----
Fixed maturities held-to-maturity:
US Treasury securities $ 11,699,899 $1,778,871 $ -- $ 13,478,770
============ ========== =========== ============
Fixed maturities available-for-sale:
US Treasury securities and
obligations of U.S. government
corporations and agencies 15,856,886 1,537,195 -- 17,394,081
Public utilities 657,335 9,922 -- 667,257
Debt securities issued by States
of the United States and political
subdivisions of the States 671,410 49,203 -- 720,613
Corporate debt securities 11,320,691 779,329 (67,329) 12,032,691
Securities not due at a single maturity date 207,428,536 1,748,787 (2,485,999) 206,691,324
------------ ---------- ----------- ------------
Total fixed maturities
available-for-sale $235,934,858 $4,124,436 $(2,553,328) $237,505,966
============ ========== =========== ============
Total equity securities
available-for-sale $ 786,026 $ 359,575 $ (3,249) $ 1,142,352
============ ========== =========== ============
64
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 U.S. 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
============ ========== ========= ============
For investments of fixed maturities and equity securities
available-for-sale that have unrealized losses as of December 31,
2003, the cost, gross unrealized losses that have been in a
continuous unrealized loss position for less than 12 months, gross
unrealized losses that have been in a continuous unrealized loss
position for 12 months or longer and fair value are as follows:
65
UNREALIZED (LOSSES) MORE THAN AND LESS THAN 12 MONTHS
----------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
(LOSSES) LESS (LOSSES) MORE
THAN 12 THAN 12 FAIR
COST MONTHS MONTHS VALUE
---- ------ ------ -----
Fixed maturities held-to-maturity $ -- $ -- $ -- $ --
============ =========== ============= ============
Fixed maturities available-for-sale:
Corporate debt securities 117,500 -- (28,250) 89,250
Corporate debt securities 1,143,189 (39,079) -- 1,104,110
Securities not due at a single maturity
date 266,807 -- (13,496) 253,311
Securities not due at a single maturity
date 115,546,999 (2,472,503) -- 113,074,496
------------ ----------- ----------- ------------
Fixed maturities
available-for-sale $117,074,495 $(2,511,582) $ (41,746) $114,521,167
============ =========== =========== ============
Equity securities
available-for-sale 60 (45) -- 15
Equity securities
available-for-sale 29,348 -- (3,204) 26,144
------------ ----------- -------- ------------
Equity securities
available-for-sale $ 29,408 $ (45) $ (3,204) $ 26,159
============ =========== =========== ============
The gross unrealized losses on fixed maturities available-for-sale
amounted to $2,553,328 as of December 31, 2003. Of the total gross
unrealized loss of $2,553,328, $41,746 of the fixed maturities
available-for-sale have been in a continuous unrealized loss situation for
more than 12 months and $2,511,582 have been in a continuous unrealized
loss situation for less than 12 months. The fixed maturities
available-for-sale in a gross unrealized loss situation for more than 12
months relate to two fixed maturities available-for-sale issued by
corporations and two callable instruments issued by U.S. government
agencies. These securities are being closely monitored by the Company to
determine if the unrealized loss as of December 31, 2003 indicates that
there is a loss which is other-than-temporary. As of December 31, 2003,
the Company has determined that there is no need to establish a new cost
basis for these two securities since a loss has not occurred.
$2,472,503 of the fixed maturities available-for-sale that have been in a
continuous unrealized loss situation for less than 12 months are
investments in callable instruments issued by U.S. government agencies.
These fixed maturities available-for-sale are backed by the full faith and
credit of the U.S. or bear the implied full faith and credit of the U.S.
government. It is remote that unrealized losses on these instruments will
result in realized losses since the Company has the intent and believes it
has the ability to hold these securities to the call date or maturity
date. The remaining $39,079 of fixed maturities available-for-sale that
have been in a continuous unrealized loss situation for less than 12
months are investments in fixed maturities available-for-sale issued by
corporations. The investments in callable instruments issued by U.S.
government agencies and in fixed maturities available-for-sale of
corporations that have been in an unrealized loss position for less than
12 months are primarily in an unrealized loss position because their
coupon
66
interest rate was less than the prevailing market interest rates as of
December 31, 2003. As of December 31, 2003, the Company has determined
that there is no need to establish a new cost basis for these debt
securities that have been in a continuous loss situation for less than 12
months since a loss has not occurred.
The gross unrealized losses on equity securities available-for-sale
amounted to $3,249 as of December 31, 2003. Of the total gross unrealized
loss of $3,249, $3,204 have been in a continuous loss situation for more
than 12 months, and $45 has been in a continuous loss situation for less
than 12 months. As of December 31, 2003, the Company has determined that
there is no need to establish a new cost basis for these securities since
a loss has not occurred.
The amortized cost and fair value of fixed maturities at December 31, 2003
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 $ 11,669,899 $ 13,478,770
============ ============
FIXED MATURITIES AVAILABLE-FOR-SALE
AMORTIZED
COST FAIR VALUE
---- ----------
Due in one year or less $ 2,130,313 $ 2,174,837
Due after one year through five years 11,851,383 12,680,026
Due after five years through ten years 4,874,401 5,376,863
Due after ten years 9,650,225 10,582,916
------------ ------------
28,506,322 30,814,642
Securities not due at a single maturity date 207,428,536 206,691,324
------------ ------------
Totals $235,934,858 $237,505,966
============ ============
The securities not due at a single maturity date are obligations of the
U.S. government corporations and agencies.
The Company had no investments in any one entity that exceeded 10% of
stockholders' equity at December 31, 2003 other than investments
guaranteed by the U.S. Government.
The Company's investment in mortgage loans is concentrated 52% in Texas
and 48% in Colorado as of December 31, 2003.
Major categories of net investment income are summarized as follows:
67
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2003 2002 2001
---- ---- ----
Investment income on:
Fixed maturities $ 12,713,559 $ 12,204,716 $ 11,673,562
Equity securities 34,582 53,422 47,745
Mortgage loans on real estate 50,215 64,962 99,049
Policy loans 1,541,237 1,582,200 1,508,733
Long-term investments 916,346 865,027 825,329
Other 122,365 568,988 176,221
------------ ------------ ------------
15,378,304 15,339,315 14,330,639
Investment expenses (1,056,029) (1,087,408) (1,034,158)
------------ ------------ ------------
Net investment income $ 14,322,275 $ 14,251,907 $ 13,296,481
============ ============ ============
Proceeds and gross realized gains (losses) from sales and maturities of fixed
maturities available-for-sale for 2003, 2002 and 2001 are summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2003 2002 2001
---- ---- ----
Proceeds $162,273,703 $ 94,196,654 $ 88,796,080
============ ============ ============
Gross realized gains $ 1,543,954 $ 274,078 $ 337,169
============ ============ ============
Gross realized (losses) $ (311,801) $ (323,367) $ (613,826)
============ ============ ============
Proceeds and gross realized gains (losses) from sales of equity securities
available-for-sale for 2003, 2002 and 2001 are summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2003 2002 2001
---- ---- ----
Proceeds $ 838,416 $ 652,905 $ 97,500
============ ============ ============
Gross realized gains $ 18,344 $ 36,295 $ --
============ ============ ============
Gross realized (losses) $ (676) $ (14,272) $ (27,230)
============ ============ ============
Realized gains (losses) are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2003 2002 2001
---- ---- ----
Realized gains (losses):
Fixed maturities $ 1,232,153 $ (49,289) $ (276,657)
Equity securities 17,668 22,023 (27,230)
Gain from early extinguishment of a
liability 563,055 -- --
Gain from the sale of property, plant
and equipment 70,229 27,743 155,472
------------ ------------ ------------
Net realized gains (losses) $ 1,883,105 $ 477 $ (148,415)
============ ============ ============
68
(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,
------------------------------------------------
2003 2002 2001
---- ---- ----
Balance at beginning of period $ 14,191,172 $ 5,150,351 $ 6,156,424
Increase (decrease) related to:
Acquisitions 8,835,099 11,568,817 --
Amortization (6,141,815) (2,527,996) (1,006,073)
------------ ------------ ------------
Balance at end of period $ 16,884,456 $ 14,191,172 $ 5,150,351
============ ============ ============
Estimated amortization of cost of customer relationships acquired in each of the
next five years is as follows. Actual future amortization will differ from these
estimates due to variances from estimated future withdrawal assumptions.
YEAR AMOUNT
---- ------
2004 $3,033,650
2005 2,555,707
2006 2,319,806
2007 2,081,543
2008 1,890,462
Thereafter 5,003,288
Excess of cost over net assets acquired is summarized as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------
ACCUMULATED
GROSS AMORTIZATION NET
----- ------------ ---
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
Amortization 1,016,161 -- 1,016,161
------------ ------------ ------------
Balance at December 31, 2002 (1) $ 12,851,704 $ (5,068,299) $ 7,783,405
Acquisition 5,155,457 -- 5,155,457
------------ ------------ ------------
Balance at December 31, 2003 (1) $ 18,007,161 $ (5,068,299) $ 12,938,862
============ ============ ============
----------
(1) See Note 1 above regarding the Company's adoption of SFAS 142 which
resulted in no amortization in 2002 and 2003.
69
(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
life and accident and health policy and contract claims for the years
ended December 31, 2003 and 2002.
2003 2002
---- ----
Policies and contract claims payable at January 1 $ 4,794,096 2,982,469
Less: reinsurance recoverable 266,841 136,898
------------ ------------
Net balance at January 1 4,527,255 2,845,571
Acquisitions of Combined, Lifeline, First Alliance and
Mid-American 21,339 2,301,867
Less: reinsurance recoverable -- 229,938
------------ ------------
Net acquired balance 21,339 2,071,929
Add: claims incurred, related to:
Current year 16,378,033 16,149,215
Prior years (489,130) (683,020)
------------ ------------
15,888,903 15,466,195
Deduct: claims paid, related to:
Current year 12,671,422 11,797,910
Prior years 3,261,349 4,058,530
------------ ------------
15,932,771 15,856,440
------------ ------------
Net balance December 31 4,504,726 4,527,255
Plus: reinsurance recoverable 1,143,562 266,841
------------ ------------
Policy and contracts payable, December 31 $ 5,648,288 $ 4,794,096
============ ============
The development of prior year claim reserves reflects claims settling at
amounts less than actuarial estimates.
(5) REINSURANCE
In the normal course of business, the Company reinsures portions of
certain policies that it underwrites to limit disproportionate risks.
During 2003 and 2002, 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.
70
Assumed and ceded reinsurance activity as of December 31, 2003 and 2002 is
summarized as follows:
2003 2002
---- ----
Aggregate assumed life insurance in-force $ 485,038,000 $ 318,142,000
=============== ===============
Aggregate ceded life insurance in-force $ (301,366,000) $ (152,103,000)
=============== ===============
Net life insurance in-force $ 3,104,205,000 $ 2,574,043,000
=============== ===============
Premiums and claims and surrenders assumed and ceded for the years ended
December 31, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
Premiums assumed $ 463,629 $ 420,321 $ 543,792
=========== =========== ===========
Premiums ceded $(1,793,912) $(2,212,715) $(2,312,232)
=========== =========== ===========
Claims and surrenders assumed $ 457,899 $ 409,798 $ 533,452
=========== =========== ===========
Claims and surrenders ceded $(1,809,188) $(1,987,816) $(1,554,866)
=========== =========== ===========
Amounts paid or deemed to have been paid for reinsurance contracts are
recorded as reinsurance receivables. The cost of reinsurance related to
long duration contracts is accounted for over the life of the underlying
reinsured policies using assumptions consistent with those used to account
for the underlying policies.
(6) STOCKHOLDERS' EQUITY AND RESTRICTIONS
The two classes of common 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, 2003 approximately
$4,300,000 of dividends could be paid to the Company without prior
regulatory approval in 2004.
CICA, CUSA, Combined, FAIC, MACLIC and SAIC 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, CUSA,
Combined, FAIC, MACLIC and SAIC as of December 31, 2003 exceeded levels
requiring company or regulatory action.
71
(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 February 18, 2003, the Company acquired First Alliance in exchange for
2,560,994 shares of its Class A common stock.
On November 18, 2003, the Company acquired Mid-American in exchange for
774,229 shares of its Class A common stock.
(8) CONTINGENCIES
On April 24, 2003, the Court of Appeals for the Third District of Texas
affirmed in part and modified in part, a July 31, 2002, class action
certification granted by a Travis County, Texas district court judge to
the plaintiffs in a lawsuit filed in 1999 styled 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 actually securities that were offered or sold in
Texas by unregistered dealers 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 purchased insurance policies or made
premium payments since August 1996 and assigned policy dividends to an
overseas trust for the purchase of the Company's Class A common stock. The
remedy sought is rescission of the insurance premium payments. The Company
has filed a Petition for Review with the Supreme Court of Texas for review
of the decision of the Court of Appeals. Review by the Texas Supreme Court
is discretionary. The Company believes the Plaintiffs' claim under the
Texas Securities Act is not valid and the class defined is not appropriate
for class certification and does not meet the legal requirements for class
action treatment under Texas law. 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 Supreme Court will grant the Company's
Petition for Review and will ultimately rule in the Company's 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 defend vigorously against the
individual claims. During the time of the Company's appeal to the Texas
Supreme Court, there will be no further district court proceedings in the
case. 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 a
significant adverse financial impact relating to any final class action
judgment.
72
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
the claims are adjudicated and paid.
(9) SEGMENT INFORMATION
The Company has three reportable segments: International Life Business,
Domestic Health Business and Domestic Life Business. During 2003, the
Company changed its reportable segments by further segmenting the Domestic
Business into its Health and Life components to reflect the growth,
through acquisition, of its health insurance segment. The segment
information from prior periods has been restated. In prior periods, the
Company had two reportable segments: International Business and Domestic
Business.
International Life 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 Health Business, consisting of accident and health specified
disease, hospital indemnity and accidental death policies, is sold
throughout the southern U.S. Domestic Life Business, consisting of
traditional life, burial insurance and pre-need policies, is sold
throughout the southern U.S. The accounting policies of the segments are
in accordance with U.S. GAAP and are the same as those described in the
summary of significant accounting policies. The Company evaluates
performance based on U.S. GAAP net income before federal income taxes for
its three reportable segments.
Geographic Areas - The following summary represents financial data of the
Company's continuing operations based on their location.
2003 2002 2001
---- ---- ----
REVENUES
U.S $31,756,796 $23,893,723 $11,991,619
Non-U.S 63,345,967 59,110,175 55,655,205
----------- ----------- -----------
Total Revenues $95,102,763 $83,003,898 $67,646,824
=========== =========== ===========
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, 2003, 2002 and 2001,
is as follows:
73
YEARS ENDED DECEMBER 31 2003 2002 2001
---- ---- ----
Revenue, excluding net investment income and
realized gains (losses)
Domestic Life $ 11,560,524 $ 6,317,028 $ 4,601,044
Domestic Health 14,784,958 13,473,966 5,059,843
International Life 52,551,901 48,960,520 44,837,871
------------ ------------ ------------
Total consolidated revenue $ 78,897,383 $ 68,751,514 $ 54,498,758
============ ============ ============
Net investment income:
Domestic Life $ 4,594,403 $ 3,769,232 $ 2,199,690
Domestic Health 188,103 333,360 157,351
International Life 9,539,769 10,149,315 10,939,440
------------ ------------ ------------
Total consolidated net investment
income $ 14,322,275 $ 14,251,907 $ 13,296,481
============ ============ ============
Amortization expense:
Domestic Life $ 4,216,119 $ 1,253,718 $ 498,376
Domestic Health 5,665,479 2,422,896 1,397,710
International Life 9,035,478 8,890,785 8,581,042
------------ ------------ ------------
Total consolidated amortization
expense $ 18,917,076 $ 12,567,399 $ 10,477,128
============ ============ ============
Realized gains (losses)
Domestic Life $ 628,808 $ 137 $ (26,309)
Domestic Health -- -- --
International Life 1,254,297 340 (122,106)
------------ ------------ ------------
Total consolidated realized gains (losses) $ 1,883,105 $ 477 $ (148,415)
============ ============ ============
Income (loss) before federal
income tax:
Domestic Life $ (302,259) $ 2,678,127 $ 485,053
Domestic Health (1,369,040) (538,643) 344,224
International Life 4,959,621 3,399,542 4,199,353
------------ ------------ ------------
Total consolidated income before Federal income
taxes $ 3,288,322 $ 5,539,026 $ 5,028,630
============ ============ ============
2003 2002
---- ----
Assets as of December 31:
Domestic Life $139,642,798 $102,982,620
Domestic Health 15,827,325 15,059,088
International Life 234,623,174 208,249,293
------------ ------------
Total $390,093,297 $326,291,001
============ ============
Major categories of premiums are summarized as follows:
74
YEAR ENDED DECEMBER 31,
-------------------------------------------
2003 2002 2001
---- ---- ----
Premiums and annuity and
universal life considerations:
Ordinary life $60,395,058 $54,033,409 $48,142,397
Annuity and universal life 2,383,768 283,185 216,905
Group life 463,629 420,321 543,792
Accident and health 14,784,958 13,473,966 5,059,843
----------- ----------- -----------
Total premiums $78,027,413 $68,210,881 $53,962,937
=========== =========== ===========
The following table sets forth the Company's total yearly percentage of premiums
income by geographic area for the years indicated:
AREA 2003 2002 2001
- ---- ---- ---- ----
Colombia 20.4% 21.2% 21.9%
Argentina 11.8 16.3 23.3
Venezuela 6.9 7.4 7.8
Uruguay 5.2 6.8 10.2
Other Foreign 22.3 19.6 19.2
Texas 13.3 14.0 4.2
Kentucky 7.1 .1 .1
Oklahoma 5.9 6.3 4.6
Mississippi 2.5 3.0 4.0
Other States 4.6 5.3 4.7
----- ----- -----
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:
2003 2002 2001
---- ---- ----
Computed normal tax expense $ 1,118,030 $ 1,883,269 $ 1,709,734
Small life insurance company
deduction (320,324) (565,769) (612,000)
Amortization of excess of costs
over net assets acquired -- -- 202,439
Adjustment of prior year
current taxes (658,980) (29,963) (276,492)
Other 23,331 (2,728) 41,836
----------- ----------- -----------
Federal income tax expense $ 162,057 $ 1,284,809 $ 1,065,517
=========== =========== ===========
75
Income tax expense benefit for the years ended December 31, 2003, 2002 and
2001 consists of:
2003 2002 2001
---- ---- ----
Current $ 249,869 $ 492,593 $ 646,636
Deferred (87,812) 792,216 418,881
----------- ----------- -----------
$ 162,057 $ 1,284,809 $ 1,065,517
=========== =========== ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2003 and 2002 are presented below.
2003 2002
---- ----
Deferred tax assets:
Future policy benefit reserves $ 17,612,495 $ 17,988,126
Net operating loss carryforwards 4,330,141 892,713
Due and accrued dividends and expenses 559,180 690,050
Other 264,496 283,772
------------ ------------
Total gross deferred tax assets 22,766,312 19,854,661
Valuation allowance (1,318,931) --
------------ ------------
Total gross deferred tax assets net of
valuation allowance 21,447,381 19,854,661
Deferred tax liabilities:
Deferred policy acquisition costs, cost of customer
relationships acquired and intangible assets 18,550,176 16,051,938
Reinsurance -- 652,595
Investments available-for-sale 655,329 1,845,289
Other 354,828 225,854
------------ ------------
Total gross deferred tax liabilities 19,560,033 18,775,676
------------ ------------
Net deferred tax asset $ 1,887,048 $ 1,078,985
============ ============
In connection with the acquisitions of First Alliance and Mid-American, a
valuation allowance of $1,318,931 was established to reduce deferred tax
assets to the amount that is more likely than not to be realized.
In addition, the acquisitions of First Alliance, Mid-American and Combined
and Lifeline resulted in the recognition of deferred tax liabilities of
$376,485, $93,224 and $123,430 in accordance with SFAS No. 141, "Business
Combinations." A summary of the changes in the components of deferred
federal income taxes for 2003 and 2002 is as follows:
76
2003 2002
---- ----
Deferred tax assets (liabilities):
Balance January 1 $ 1,078,985 $ 3,465,138
Deferred tax benefit (expense) 87,812 (792,216)
Acquisition of Combined and Lifeline -- (123,430)
Acquisition of First Alliance (376,484) --
Acquisition of Mid-American (93,223) --
Investments available-for-sale 1,189,958 (1,470,507)
----------- -----------
Balance December 31 $ 1,887,048 $ 1,078,985
=========== ===========
The Company and its subsidiaries had net operating losses at December 31,
2003 available to offset future taxable income of approximately
$11,809,000 for Federal income tax substantially all of which expire
through 2021. A portion of the net operating loss carryforward is subject
to limitations under Section 382 of the Internal Revenue Code. As a result
of the Company's income and the nature of the items from which its
deferred tax assets are derived, the Company has determined that it is
more likely than not that its deferred tax assets, net of the established
valuation allowance, will be realized.
At December 31, 2003, 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, 2003 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:
77
2003 2002
----------------------------- -----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
Financial assets:
Fixed maturities $249,205,865 $250,984,736 $203,161,762 $205,128,725
Equity securities 1,142,352 1,142,352 639,316 639,316
Cash and cash
equivalents 15,016,254 15,016,254 19,211,802 19,211,802
Mortgage Loans 547,469 698,063 619,084 738,100
Financial liabilities:
Annuities 15,309,266 15,309,226 3,226,834 3,226,834
Fair values for fixed income securities and equity securities are based on
quoted market prices. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
assumptions, including the discount rate and estimates of future cash
flows.
Mortgage loans are secured principally by residential properties. Weighted
average interest rates for these loans as of December 31, 2003 and 2002,
were approximately 8.3% and 8.9%, respectively, with maturities ranging
from one to fifteen years. Management estimated the 2003 fair value using
an interest rate of 6.2% and the 2002 fair value using an interest rate of
6.6%.
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 7.4% and 7.6% as of
December 31, 2003 and 2002, respectively, 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 that 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.
(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:
78
YEAR ENDED DECEMBER 31, 2003
--------------------------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------ ------ ------
Unrealized loss on securities:
Unrealized holding loss
arising during the period $(2,250,059) $ 765,021 $(1,485,038)
Add: reclassification adjustment
for gains included in net income (1,249,821) 424,941 (824,880)
----------- ----------- -----------
Other comprehensive income $(3,499,880) $ 1,189,962 $(2,309,918)
=========== =========== ===========
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
Less: reclassification adjustment
for gains included in net income 303,887 (103,322) 200,565
----------- ----------- -----------
Other comprehensive income $ 2,190,385 $ (744,731) $ 1,445,654
=========== =========== ===========
(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table contains selected unaudited consolidated financial
data for each calendar quarter.
2003
-----------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Revenues $ 26,866,996 $ 25,014,247 $ 23,516,018 $ 19,705,502
Expenses 24,892,692 23,166,905 23,619,892 20,134,952
Federal income tax
expense (benefit) (210,844) 532,898 (69,554) (90,443)
Net income (loss) 2,185,148 1,314,444 (34,320) (339,007)
Basic and diluted
earnings (loss) per
share .06 .04 .00 (.01)
79
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
(14) SUBSEQUENT EVENTS
On March 4, 2004, a special meeting of the shareholders was held and the
following items were approved:
1) The Company's Articles of Incorporation were amended to increase the number
of shares of its Class A common stock from 50,000,000 to 100,000,000 shares and
increase the number of authorized shares of its Class B common stock from
1,000,000 to 2,000,000 shares.
2) The Company's Articles of Incorporation were amended to create an authorized
class of 25,000,000 shares of preferred stock available for future issuance in
series with terms and preferences designated by the Company's Board of
Directors.
3) The Company's Articles of Incorporation were amended to increase the maximum
number of directors on its Board of Directors from nine to up to 15 members.
On March 9, 2004, the Company entered into a coinsurance agreement, effective
January 1, 2004, and ceded approximately $15 million of its annual accident and
health premium and corresponding benefits and claims. In consideration for this
cession, the Company will make a closing settlement payment in April 2004 of
approximately $10 million to the reinsurer representing the statutory accident
and health reserves and liabilities at January 1, 2004. Due to this cession, the
Company will also reduce its deferred policy acquisition costs and cost of
customer relationships acquired related to the accident and health insurance
business covered in this agreement by approximately $2 million and $3 million,
respectively. The Company does not anticipate that this reinsurance agreement
will have a material effect on the financial position, results of operations or
liquidity of the Company. The coinsurance agreement provides that this ceded
business will revert to the reinsurer when a parallel assumption reinsurance
agreement is approved by the various state insurance departments holding
jurisdiction. Such approval is expected during 2004.
80
SCHEDULE II
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2003 AND 2002
2003 2002
---- ----
Assets
Investment in subsidiaries (1) $ 121,672,194 $ 96,195,418
Fixed maturities available-for-sale, at fair value 3,186,281 2,589,282
Accrued investment income 59,870 23,918
Real estate 918,336 796,556
Cash 117,647 1,292,334
Other assets 2,032,817 1,841,247
------------- -------------
$ 127,987,145 $ 102,738,755
============= =============
Liabilities and Stockholders' Equity
Liabilities -
Accrued expense and other $ 960,423 $ 946,450
------------- -------------
Stockholders' equity:
Common stock:
Class A 178,065,965 129,125,099
Class B 2,437,052 1,870,389
Retained deficit (46,077,094) (25,887,787)
Accumulated other comprehensive income:
Unrealized investment gain of
securities held by subsidiaries, net of tax 1,272,107 3,582,025
Treasury stock (8,671,308) (6,897,421)
------------- -------------
$ 127,026,722 $ 101,792,305
------------- -------------
$ 127,987,145 $ 102,738,755
============= =============
(1) Eliminated in consolidation.
See accompanying independent auditors' report.
81
SCHEDULE II, CONTINUED
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003 AND 2002 AND 2001
2003 2002 2001
---- ---- ----
Revenues:
Management service fees (1) $ 19,570,459 $ 16,139,592 $ 13,529,199
Investment income 134,546 154,081 178,815
Other 12,472 5,341 6,541
Realized gain 4,450 23,971 18,857
------------ ------------ ------------
19,721,927 16,322,985 13,733,412
------------ ------------ ------------
Expenses:
General 19,080,752 15,640,428 12,273,653
Taxes 580,490 639,881 1,495,025
------------ ------------ ------------
19,661,242 16,280,309 13,768,678
------------ ------------ ------------
Income (loss) before equity in income
of unconsolidated subsidiaries 60,685 42,676 (35,266)
Equity in income of unconsolidated
subsidiaries 3,065,580 4,211,541 3,998,379
------------ ------------ ------------
Net income $ 3,126,265 $ 4,254,217 $ 3,963,113
============ ============ ============
(1) Eliminated in consolidation.
See accompanying independent auditors' report.
82
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, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
Cash flows provided by (used in) operating
activities:
Net income $ 3,126,265 $ 4,254,217 $ 3,963,113
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized gains on sales (4,450) (23,971) (18,857)
Equity in net income of unconsolidated subsidiaries (3,065,580) (4,211,541) (3,998,379)
Accrued expenses and other liabilities 13,973 113,537 412,620
Change in accrued investment income (35,952) 6,359 14,406
Other (425,025) 35,881 354,325
----------- ----------- -----------
Net cash provided by (used in) operating activities (390,769) 174,482 727,228
----------- ----------- -----------
Cash flows from investing activities:
Purchase of fixed maturities, available-for-sale (3,750,000) (2,237,762) (3,022,974)
Maturities of fixed maturities, available-for-sale 3,110,000 2,405,000 2,865,000
Payments on notes receivable -- -- 200,000
Investment in real estate (143,918) -- (38,913)
----------- ----------- -----------
Net cash provided by (used in) investing activities (783,918) 167,238 3,113
----------- ----------- -----------
Net increase (decrease) in cash (1,174,687) 341,720 730,341
Cash at beginning of year 1,292,334 950,614 220,273
----------- ----------- -----------
Cash at end of year $ 117,647 $ 1,292,334 $ 950,614
=========== =========== ===========
See accompanying independent auditors' report.
83
SCHEDULE III
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
AS OF DECEMBER 31, 2003 AND 2002
DECEMBER 31
-----------------------------
2003 2002
---- ----
Deferred policy acquisition cost:
Domestic Life $ 17,471,040 $ 14,253,092
Domestic Health 2,348,881 2,019,009
International Life 29,910,651 28,707,256
------------ ------------
Total consolidated deferred policy
acquisition costs: $ 49,730,572 $ 44,979,357
============ ============
Future policy benefits, losses, claims and loss expenses:
Domestic Life $ 80,092,410 $ 57,237,495
Domestic Health 15,244,873 18,133,484
International Life 143,875,463 132,969,552
------------ ------------
Total consolidated future policy benefits,
losses, claims and loss expenses $239,212,746 $208,340,531
============ ============
Unearned premiums:
Domestic Life $ 220,267 $ 138,858
Domestic Health 24,965 20,305
International Life 370,084 280,795
------------ ------------
Total consolidated unearned premiums $ 615,316 $ 439,958
============ ============
Other policy claims and benefits payable:
Domestic Life $ 5,816,406 $ 4,494,215
Domestic Health -- --
International Life 8,777,658 7,928,697
------------ ------------
Total consolidated other policy claims
and benefits payable $ 14,594,064 $ 12,422,912
============ ============
See accompanying independent auditors' report.
84
SCHEDULE III, CONTINUED
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION, CONTINUED
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
Premium revenue and annuity and universal
life considerations
Domestic Life $11,270,015 $ 6,161,392 $ 4,506,051
Domestic Health 14,784,958 13,473,966 5,059,843
International Life 51,972,440 48,575,523 44,397,043
----------- ----------- -----------
Total consolidated premium revenue $78,027,413 $68,210,881 $53,962,937
=========== =========== ===========
Net investment income:
Domestic Life $ 4,594,403 $ 3,769,232 $ 2,199,690
Domestic Health 188,103 333,360 157,351
International Life 9,539,769 10,149,315 10,939,440
----------- ----------- -----------
Total consolidated net investment income $14,322,275 $14,251,907 $13,296,481
=========== =========== ===========
Benefits, claims, losses and settlement expenses:
Domestic Life $ 8,245,538 $ 6,498,295 $ 6,394,389
Domestic Health 9,108,577 8,617,726 3,304,927
International Life 34,907,134 32,800,939 29,473,937
----------- ----------- -----------
Total consolidated benefits, claims, losses and
settlement expenses $52,261,249 $47,916,960 $39,173,253
=========== =========== ===========
Amortization of deferred policy acquisition costs:
Domestic Life $ 1,433,829 $ 1,214,406 $ 580,328
Domestic Health 1,761,316 469,254 932,509
International Life 8,611,495 8,355,743 7,055,608
----------- ----------- -----------
Total consolidated amortization of deferred
policy acquisition costs $11,806,640 $10,039,403 $ 8,568,445
=========== =========== ===========
Other operating expenses:
Domestic Life $ 4,063,820 $ 1,304,536 $ 824,547
Domestic Health 4,072,961 3,784,273 1,113,166
International Life 10,829,339 9,975,256 8,697,926
----------- ----------- -----------
Total consolidated other operating expenses $18,966,120 $15,064,065 $10,635,639
=========== =========== ===========
See accompanying independent auditors' report.
85
SCHEDULE IV
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
REINSURANCE
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
CEDED ASSUMED PERCENTAGE
GROSS TO OTHER FROM OTHER NET OF AMOUNT
AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET
------ --------- --------- ------ --------------
Year ended December 31, 2003
Life insurance in-force $2,920,533,000 $ 301,366,000 $ 485,038,000 $3,104,205,000 15.6%
============== ============== ============== ==============
Premiums:
Life insurance 61,777,374 1,382,316 463,629 60,858,687 .8%
Accident and health insurance 15,196,554 411,596 -- 14,784,958 --
-------------- -------------- -------------- --------------
Total premiums $ 76,973,928 $ 1,793,912 $ 463,629 $ 75,643,645 .6%
============== ============== ============== ==============
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%
============== ============== ============== ==============
See accompanying independent auditors' report.
86
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 9, 2004 By: /s/ Rick D. Riley
--------------------------------------
Rick D. Riley, Chief Executive Officer
By: /s/ Rick D. Riley
--------------------------------------
Mark A. Oliver, President and Treasure
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 9, 2004
/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
EXHIBITS
Exhibit Number Description of Exhibits
- -------------- -----------------------
3.1 Restated and Amended Articles of Incorporation *
3.2 Bylaws (a)
10.1 Self-Administered Automatic Reinsurance Agreement - Citizens
Insurance Company of America and Riunione Adriatica di
Sicurta, S.p.A. (b)
10.2 Bulk Accidental Death Benefit Reinsurance Agreement between
Connecticut General Life Insurance Company and Citizens
Insurance Company of America, as amended (c)
10.4 Plan and Agreement of Exchange between Citizens, Inc. and
Combined Underwriters Life Insurance Company (d)
10.5 Plan and Agreement of Exchange between Citizens, Inc. and
Lifeline Underwriters Life Insurance Company (e)
10.6 Plan and Agreement of Merger by and among Citizens, Inc.,
Citizens Acquisition, Inc. and First Alliance Corporation. (f)
10.7 Plan and Agreement of Merger by and among Citizens, Inc.,
Citizens Acquisition, Inc. and Mid-American Alliance
Corporation. (g)
11 Statement re: Computation of per share earnings (see Item 8 of
this report)
21 Subsidiaries of the Registrant*
23.1 Consent of KPMG LLP *
31.1 Certification of Chief Executive Officer required by Section
302 of the Sarbanes-Oxley Act of 2002.*
31.2 Certification of Chief Financial Officer required by Section
302 of the Sarbanes-Oxley Act of 2002.*
32.1 Certification required by Section 906 of the Sarbanes-Oxley
Act of 2002.*
32.2 Certification required by Section 906 of the Sarbanes-Oxley
Act of 2002.*
- ----------
* Filed herewith.
(a) Filed with the Registrant's Registration Statement on Form S-4,
Registration No. 33-59039, filed with the Commission on May 2, 1995.
(b) Filed as exhibit 10.8 with the Registration Statement on Form S-4., SEC
File No. 333-16163, filed on or about November 14, 1996.
(c) Filed as exhibit 10.9 with the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996 and incorporated herein by reference.
(d) Filed as Appendix A with the Registrant's Registration Statement on Form
S-4, Registration No. 333-76926 dated January 18, 2002 and incorporated
herein by reference.
(e) Filed as Appendix B with the Registrant's Registration Statement on Form
S-4, Registration No. 333-76926 dated January 18, 2002, and incorporated
herein by reference.
(f) Filed as Appendix A of the Registration Statement on Form S-4,
Registration No. 333-102016 dated December 19, 2002, and incorporated
herein by reference.
(g) Filed as Appendix A with the Registrant's Registration Statement on Form
S-4, Registration No. 333-106128 dated June 13, 2003, and incorporated
herein by reference.