ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Citizens, Inc. (Citizens) operates primarily as an insurance holding company. It was incorporated in Colorado in 1977. Citizens is the parent company that directly or indirectly owns 100% of seven operating subsidiaries: Citizens Insurance Company of America (CICA), Computing Technology, Inc. (CTI), Insurance Investors, Inc. (III), Funeral Homes of America (FHA), Central Investors Life Insurance Company of Illinois (CILIC), First Investors Group, Inc. (Investors) and Excalibur Insurance Corporation (Excalibur) . Collectively, Citizens and its subsidiaries are referred to herein as the "Company." Pertinent information relating to Citizens' subsidiary companies is set forth below:
In June, 1997, CICA acquired American Investment Network, Inc. (AIN), a life insurance holding company and United Security Life Insurance Company (USLIC), its wholly-owned subsidiary, headquartered in Jackson, Mississippi with $7.5 million in assets, $3.4 million of stockholders' equity, annual revenues of $3.2 million and $67 million of life insurance in-force. Subsequently, AIN was liquidated. USLIC was merged into CICA in October, 2000.
To streamline corporate structure, in June, 1997, American Liberty Financial Corporation (ALFC), a wholly owned subsidiary, was merged into Citizens. American Liberty Life Insurance Company (ALLIC), a subsidiary of ALFC, was also merged into CICA.
In November, 1997, Citizens purchased 100% of the issued and outstanding shares of National Security Life and Accident Insurance Company (NSLIC). NSLIC was a Texas-domiciled life and accident and health insurer with assets of approximately $5 million and revenues of approximately $5 million. It was merged into CICA in June, 2000.
In January, 1999, Citizens acquired Investors, the parent of Excalibur.
On November 20, 2001, Citizens announced that definitive agreements had been reached between Citizens and Combined Underwriters Life Insurance Company (Combined) and Citizens and Lifeline Underwriters Life Insurance Company (Lifeline). Pursuant to the terms of the agreements, which were approved by Combined's and Lifeline's shareholders and regulatory authorities, Citizens issued approximately 753,000 shares of its Class A Common Stock to acquire Combined and approximately 305,000 shares of its Class A Common Stock to acquire Lifeline. The aggregate market value of the consideration was approximately $12.1 million. The transactions closed on March 19, 2002 and were accounted for as purchases.
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 in which operations are conducted; (ii) the effects of and changes in trade, monetary and fiscal policies and laws; (iii) inflation, interest rates, market and monetary fluctuations and volatility; (iv) the timely development of and acceptance of new products and services and perceived overall value of these products and services by existing and potential customers; (v) changes in consumer spending, borrowing and saving habits; (vi) concentrations of business from persons residing in third world countries; (vii) acquisitions; (viii) the persistency of existing and future insurance policies sold by the Company and its subsidiaries; (ix) the dependence of the Company on its Chairman of the Board; (x) the ability to control expenses; (xi) the effect of changes in laws and regulations (including laws and regulations concerning insurance) with which the Company and its subsidiaries must comply, (xii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as the Financial Accounting Standards
Board, (xiii) changes in the Company's organization and compensation plans; (xiv) the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; and (xv) the success of the Company at managing the risks involved in the foregoing.
Such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events.
(b) FINANCIAL INFORMATION REGARDING THE INSURANCE BUSINESS
Citizens, through CICA, CILIC, and Excalibur, operates principally in two business segments: selling selected lines of individual life and accident and health (A&H) insurance policies in domestic markets and individual ordinary life insurance in international markets. Except for certain insignificant operations, Citizens has 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 the operations of the Company for each of the five years ended December 31, 2001.
TABLE I
The following table sets forth (i) life insurance in-force and (ii) mean life insurance in-force.
- ---------- (a) In thousands (000s) (b) Before assuming and ceding reinsurance from/to reinsurers
The increases in insurance in-force prior to 1999 reflect the volumes of new business written by the Company as well as the impact of acquisitions. Economic and other market disruptions in the Company's international markets had a negative impact on the Company's persistency in 1999, contributing to the decline in insurance in-force. Improved persistency in 2001 combined with increased sale of new policies in 2000 and 2001 contributed to the growth in insurance in-force during 2000 and 2001.
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.
- ---------- (a) In thousands (000s) (b) Approximately 95 percent of the reinsurance is yearly renewable term insurance, with the remainder being coinsurance. Premiums reflect both life and accident and health business.
As described above, the disruption in certain international markets contributed to the increased lapsation and surrender activity in 1999. The decline in ceded premium in 1999 and 2000 was related to the termination of a substantial portion of NSLIC's major medical business, much of which had been ceded. The decline in ceded premium in 2001 related to an increase in the Company's retention from $75,000 to $100,000. The increase in ceded premium in 1998 was due to the cession of a substantial portion of the major medical accident and health business of NSLIC.
TABLE III
The following table sets forth information with respect to total insurance premiums.
- ---------- (a) After deduction for reinsurance ceded.
New sales of life insurance decreased slightly from 1997 to 1999. In 2000, new life sales increased, but overall life premium declined due to the lower level of sales in previous years coupled with the surrender activity shown in Table II above. In 2001, new life sales increased and the ratio of lapses and surrenders to mean in-force declined as shown in Table II above. Much of the 1998 increase in accident and health premiums related to the acquisition of USLIC and NSLIC. Additionally, much of the 2000 and 2001 decline in accident and health premiums related to management's decision to cancel a large portion of USLIC's group dental business and
NSLIC's major medical business during the third quarter of 1999 in order to curtail both claims and operating expenses.
TABLE IV
The following table sets forth information relating to the ratio of underwriting and other expenses to insurance revenues.
- ---------- (a) After premiums ceded to reinsurers.
The 1997 acquisitions of NSLIC and USLIC and their related conversion expenses as well as increases in accident and health benefits were the primary reasons for the 1998 and 1999 increases in policyholder benefits and the 1998 increase in commission, underwriting and operating expenses. During 2000, accident and health premiums and claims decreased as discussed above due to the cancellation of major portions of the group dental and major medical business; however, due to the development of a domestic ordinary life sales program and the administrative costs of managing the run-off of the cancelled accident and health business, the ratio of expenses to premium increased. During 2001, the decrease in lapses and surrenders combined with the decrease in accident and health claims offset increased commissions and administration expenses, resulting in a decrease in the ratio of expenses and benefits to premium.
TABLE V
The following table sets forth changes in new life insurance business produced between participating and nonparticipating policies.
- ---------- (a) In thousands (000s)
The significant changes in 1998 and 1999 were due to the volume of credit life business produced by NSLIC that is non-participating. During 2000 and 2001 the percentage of participating new business grew due to increases in the issuance of participating ordinary life policies internationally.
TABLE VI
The following table sets forth changes in new life insurance business issued according to policy types.
- ---------- (a) In thousands (000s)
Most of the 1998 and 1999 increases were due to the credit life business sold by NSLIC. The decline in 1998 and 1999 whole life production related to the disruption in the Company's international market. In 2000, new life sales measured in paid annualized premiums increased 21.4%. In 2001, new life sales measured in paid annualized premiums increased 14.9%.
TABLE VII
The following table sets forth deferred policy acquisition costs capitalized and amortized compared to new business life insurance issued.
The decrease in costs capitalized for 1998 reflected the reduction in the amount of new business produced and lower commission expenses incurred as a result thereof. Amortization in 1999 was high due to increased surrender activity. The increase in 2000 and 2001 capitalized costs related to the increase in new business issued, while the decrease in amortized costs was due to improved persistency.
TABLE VIII
The following table sets forth investment results.
- ---------- (a) The year 1997 includes assets acquired from NSLIC and USLIC. (b) Does not include realized and unrealized gains and losses on investments.
During 2000, the Company terminated its outside investment manager and changed the mix of new investments, resulting in improved performance for the year. During 2001, the significant decrease in yields in the bond market caused the return on invested assets to drop slightly.
(c) NARRATIVE DESCRIPTION OF BUSINESS
(i) BUSINESS OF CITIZENS
Citizens' principal business is ownership of CICA, Investors and their affiliates. Additionally, it provides management services to these companies under management services agreements. At December 31, 2001, Citizens had approximately 90 full and part-time employees. All intercompany fees and expenses have been eliminated in the consolidated financial statements.
(ii) BUSINESS OF CICA
Historically, CICA's revenues have been derived from life insurance premiums and revenues from investments. CICA is a Colorado-domiciled life insurance company marketing primarily ordinary whole-life products on an international basis through marketing companies. Additionally, it offers specialty individual accident and health policies to United States residents, and following the merger of NSLIC in 2000, credit life insurance policies to U.S. residents. All intercompany fees and expenses have been eliminated in the consolidated financial statements.
During the year ended December 31, 2001, 90.2% of CICA's premium income was attributable to life, endowment and term insurance, .4% to individual annuities and 9.4% to accident and health insurance. During the year ended December 31, 2000, 86.0% of CICA's premium income was attributable to life, endowment and term insurance, 0.4% to individual annuities, and 13.6% to accident and health insurance. Of the life policies in force at December 31, 2001
and 2000, 46.1% and 43.1%, were nonparticipating and 53.9% and 56.9%, respectively were participating.
From 1987 to 1997, CICA offered a series of participating whole life policies designed for international markets. Beginning January 1, 1998, CICA introduced a new series of policies to replace the policies then offered. Ten plans make up this series and, like those previously sold, are designed for the international market. These plans maintain many of the features of the previous series and incorporate several new enhancements, such as terminal illness protection as well as dismemberment provisions.
Additionally, following the merger with ALLIC, CICA began offering specialty individual accident and health products as well as ordinary whole life policies to residents of the United States. The sale of these products is focused in Oklahoma, Louisiana and Mississippi.
In 1999, management began developing a domestic ordinary life sales program and received regulatory approval of the product and related sales material in Texas during April of 2000. Management began recruiting efforts for associates in the State of Texas for the new product in mid-2000 and sales began late during second quarter 2000. This program, targeting rural areas of the United States, is expected to provide a new entre into the domestic life market for the Company. Due to changes in agency management, this program's initial results have not been as successful as management had anticipated; however, the Company believes the program will ultimately be successful. The Company intends to expand sales efforts beyond Texas to other states in which CICA is licensed.
The CICA underwriting policy requires a medical examination of applicants for ordinary insurance in excess of certain prescribed limits. These limits are graduated according to the age of the applicant and the amount of insurance. Generally, the maximum amount of ordinary life insurance issued domestically without a medical examination is $200,000 for ages 0 through 35; $100,000 for ages 36 through 45; $50,000 for ages 46 through 50; $15,000 for ages 51 through 55; and $10,000 for ages 56 and over. 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 age 40 and over . The supplemental accident and health policies sold in the U.S. have only minimal, field underwriting.
On life policies, CICA's maximum coverage on any one life is not limited by Company policy. However, CICA reinsures the amount of coverage, which is in excess of its retention policy. See "Business of CICA - Reinsurance." CICA does not accept substandard risks above Table 6 (generally policyholders who cannot qualify for standard ordinary insurance because of past medical history).
CICA has $31 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 82.4%, 82.7% and 85.5% of total CICA premiums for the years ended December 31, 2001, 2000 and 1999, respectively.
Premiums in excess of 10% of CICA's total premiums for the years ended December 31, 2001, 2000 and 1999 were: Argentina - 23.3%, 27.7% and 32.3%; Columbia - 21.9%, 20.2% and 19.4%; and Uruguay -10.2%, 11.8% and 14.3%, respectively.
The following table sets forth CICA's total yearly premium income by geographic area for the years indicated.
The participating whole life policies accepted by CICA on high net worth residents of foreign countries have an average face amount of approximately $66,000 and are issued primarily to individuals in the top 5% of the population in terms of household income. CICA has neither offices nor employees overseas. It accepts applications for international insurance policies submitted by several independent firms in these markets with whom CICA has non-exclusive consulting contracts. These firms specialize in marketing life insurance products to citizens of foreign countries and have many years of experience marketing life insurance products. They provide recruitment, training and supervision of their managers and associates in the placement of dollar-denominated life insurance products; however, all consultants and associates contract directly with CICA and receive their compensation from CICA. Accordingly, should the consulting arrangement between any firm and CICA be canceled for any reason, CICA believes it could continue suitable marketing arrangements with the individuals of the consulting 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. The contract with the consultants provides that they are the representative of the prospective insured, have the responsibility for recruiting and training their sales associates and are responsible for all of their overhead costs including the expense
of contests and awards. These firms guarantee any debts of marketers and their associates. In consideration for the services rendered, the marketing consultants receive a fee on all new policies placed by them or their associates. See "Business of CICA - Commissions." Either party may terminate the marketing contracts for various causes at any time by mutual consent of the parties or upon 30 days' notice.
At present, CICA is dependent on the non-U.S. markets for a large percentage of its new life insurance business. This subjects CICA to potential risks with regard to the continued ability to write such business should adverse events occur in the countries from which CICA receives applications. These potential risks include lapses of policies if funds that flow out of such countries were to become restricted. Based on more than 35 years experience in the marketplace in which CICA competes, management believes such risks are not material. The Company maintains no assets outside the U.S. and requires all premiums to be paid in the U.S. with U.S. dollars via drafts drawn on banks in the U.S.; therefore, it could lose no funds from currency devaluation or foreign appropriation. Many of the inherent risks in foreign countries, such as political instability, hyper-inflation and economic disruptions, tend to improve rather than hurt CICA's business because it encourages individuals to convert assets out of local currencies to the more stable U.S. dollar.
MARKETING OPERATIONS
CICA holds licenses to do business in 15 states and accepts applications for consideration from any foreign country. CICA's operations are conducted on the independent contractor basis, with 1,838 individuals contracted at December 31, 2001 and 1,302 at December 31, 2000 and 1,415 individuals at December 31, 1999.
COMMISSIONS
CICA's marketing managers are independent contractors, responsible for their respective expenses, and are compensated on a percentage of premium basis. Percentage amounts paid to contractors on individual term, annuity and accident and health insurance are substantially less than the levels paid for individual ordinary life insurance. The marketing managers receive overriding first year and renewal commissions on business written by individuals under their supervision and all marketing expenses related thereto are included in the above percentages.
RESERVES
CICA establishes actuarial reserves as liabilities to meet obligations on all outstanding policies. Reserves and deferred acquisition costs are prepared in conformity with the American Academy of Actuaries Committee on Financial Reporting Principles and accounting principles generally accepted in the United States of America. In determining such reserves CICA used the 1955 to 1960,
1965 to 1970, and 1975 to 1980 Select and Ultimate Mortality Tables with interest rates at 4% or in a range graded from 9% to 5% with recent issues reserved at 7% graded to 6 1/2%. Withdrawal assumptions are based primarily on actual historical experience. Statutory reserves are used for paid-up life business. Claims reserves include an amount equal to the expected benefit to be paid on reported claims in addition to an estimate of claims that are incurred but not reported based on actual historical experience. CICA receives an independent actuarial certification of its reserves prepared in accordance with both Generally Accepted Accounting Principles and Statutory Accounting Practices. The certifications have noted no deficiencies for the years presented herein.
REINSURANCE
CICA assumes and cedes insurance with other insurers, reinsurers and members of various reinsurance pools. Reinsurance arrangements are utilized to provide greater diversification of risk and minimize exposure on larger risks.
(a) INSURANCE CEDED
CICA has historically retained $75,000 of risk on any one person. Effective January 1, 2001, this amount was increased to $100,000 based upon CICA's capital growth. The increase in retention is based upon the relative size and financial strength of CICA. As of December 31, 2001, the aggregate amount of life insurance ceded amounted to $204,989,000 or 7.2% of total direct and assumed life insurance in-force, and was $270,515,000 or 10.6% in 2000. CICA is contingently liable with respect to ceded insurance should any reinsurer be unable to meet the obligations reinsured.
As of December 31, 2001, CICA had in effect automatic reinsurance agreements with reinsurers that provide for cessions of ordinary insurance from CICA. Additionally, CICA has reinsurance treaties in force with several reinsurers of life and accident and health insurance. These treaties provide for both automatic and facultative reinsurance of standard and substandard risks ceded to them by CICA for life, accident and health and supplemental benefits above CICA's retention limit on a yearly renewable term, coinsurance or modified coinsurance basis.
Treaties with Employers Reassurance (ERC) and Businessmen's Assurance (BMA) historically have been the primary vehicles utilized by CICA for its international business. The treaties are structured in such a way as to allow CICA to "self administer" the cessions on a reduced cost basis. During 1995, a third carrier was added as a principal reinsurer, Riunione Adriatica di Sicurta, of Italy (RAS). American United Life Insurance Company (AUL) replaced RAS in 2000.
The ERC and BMA agreements provide that for risks reinsured in specified countries, 70% of each risk in excess of CICA's retention will be ceded to ERC and 30% to BMA. The RAS agreement provided that on risks reinsured in specified countries, 100% of the risk in excess of CICA's retention was ceded to
RAS. AUL's treaty provides for the same share of business that RAS previously reinsured. CICA pays premiums to ERC, BMA and AUL on an annual basis and is responsible for the production of the reporting monthly and annually to ERC and BMA to allow proper accounting for the treaties. The RAS agreement contained similar terms.
The cessions are on a yearly renewable term basis and are automatic over the Company's retention up to $350,000 for ERC, $150,000 for BMA and $500,000 for AUL, after which the reinsurance is subject to a facultative review by the reinsurers. At December 31, 2001, CICA had ceded $91,172,000 in face amount of insurance to ERC, $52,704,000 to RAS, $28,895,000 to BMA and $28,285,000 to AUL under these agreements.
RAS is an unauthorized reinsurer in the state of Colorado; however, RAS has agreed to comply with Colorado statutes regarding such companies. Under these statutes, RAS will provide a letter of credit, issued by a U.S. bank meeting the Colorado requirements, equal to any liabilities it incurs under this agreement. RAS notified CICA in late 1999 that it was withdrawing from the reinsurance market effective January 1, 2001 and AUL replaced it.
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, 2001, CICA had ceded $1.3 billion in face amount of business to Swiss Re under this treaty.
CICA monitors the solvency of its reinsurers to minimize the risk of loss in the event of a failure by one of the parties. The primary reinsurers of CICA are large, well capitalized entities .
(b) INSURANCE ASSUMED
At December 31, 2001, CICA had in-force reinsurance assumed as follows:
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. The agreement continues in full force and effect at December 31, 2001.
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, 2001 were distributed as follows: fixed maturities - 88.9%, equity securities .3%, mortgage loans - .6%, policy loans - 10.1% and other long-term investments - .1%. CICA did not foreclose on any mortgage loans in 2001. All mortgage loans are supported by independently appraised real estate. The investment policy of CICA is consistent with the provisions of the Colorado Insurance Code.
At December 31, 2001, 90.8% 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 86.4% at December 31, 2000. Of these mortgage-backed securities, all were guaranteed by U.S. government agencies or corporations that are backed by the full faith and credit of the U.S. government or that bear the implied full faith and credit of the U.S. government.
REGULATION
CICA is subject to regulation and supervision by the insurance department of each state or other jurisdiction in which it is licensed to do business. These departments have broad administrative powers relating to the granting and revocation of licenses to transact business, the licensing of marketing persons, the approval of policy forms, the advertising and solicitation of insurance, the form and content of mandatory financial statements, the reserve requirements, and the type of investments which may be made. CICA is required to file detailed annual reports with each such insurance department, and its books and records are subject to examination at any time. In accordance with state laws and the rules and practices of the National Association of Insurance Commissioners, CICA is examined periodically by examiners of its domiciliary state and by representatives (on an "association" or "zone" basis) of the other states in which it is licensed to do business. An examination was concluded in 1998 for the five years ended December 31, 1996, by a public accounting firm under contract with and supervision by the Colorado Division of Insurance. CICA is audited annually by an independent public accounting firm.
Various states, including Colorado, have enacted "Insurance Holding Company" legislation, which requires the registration and periodic reporting by insurance companies which control, or are controlled by, other corporations or persons. Under most of such legislation, control is presumed to exist with the ownership of ten percent or more of an insurance company's voting securities. The Company is subject to such regulation and has registered under such statutes as a member of an "insurance holding company system." The legislation typically requires periodic disclosure concerning the transactions between the registered insurer, the ultimate controlling party, and all affiliates and subsidiaries of the ultimate controlling party, and in many instances requires prior approval of intercorporate transfers of assets (including in some instances payment of dividends by the insurance subsidiary) within the holding company system.
Since CICA does not physically conduct business in countries outside the U.S. but rather accepts applications for consideration from overseas marketers, it is not subject to regulation in countries where most of its insureds are residents. The prospect of such regulation is viewed as remote by management of CICA because obtaining insurance through application by mail outside of one's country is a common practice in many foreign countries, particularly those where CICA's insureds reside.
COMPETITION
The life insurance business is highly competitive, and CICA competes with a large number of stock and mutual life companies both internationally and domestically. CICA competes with 1,500 to 2,000 other life insurance companies in the United States, some of which it also competes with internationally. CICA believes that its premium rates and its 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 CICA.
A large percentage of CICA's first year and renewal life insurance premium income during the last five years came from the international market. See "Business of CICA - Geographical Distribution of Business." Management believes CICA to be a significant competitor in the non-U.S. market and attributes its market position to the expertise of management, the uniqueness of CICA's life insurance products and the competitiveness of its pricing methods.
Given the significance of CICA's international business, the variety of markets in which CICA makes ordinary whole-life insurance available and the impact that economic changes have on these foreign markets, it is not possible to ascertain CICA's competitive position.
CICA's international marketing plan stresses making available dollar-denominated life insurance products available to high net worth individuals residing in foreign countries and the sale of individual, whole life and supplemental accident and health products to United States residents.
CICA faces 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 CICA to compete effectively in pursuing new business.
Management believes that CICA competes indirectly with non-U.S. companies, particularly with respect to Latin American companies. CICA, as a U.S. domestic insurer paying claims in U.S. dollars in the U.S., has a different clientele and product than foreign-domiciled companies. CICA's product is usually acquired by persons in the top 5% of income of their respective countries. The policies sold by foreign companies are sold broadly and are priced based on the mortality of the entire populace of the respective geographic region. Because of the predominance of lower incomes in most of these countries, the mortality experience tends to be very high on the average, causing mortality charges which are considered unreasonable based on the life mortality experience of the upper five percent of income of the population.
Additionally, the assets that back up the policies issued by foreign companies are invested in the respective countries, and thus, are exposed to the inflationary risks and economic crises that historically have impacted many foreign countries. Another reason that CICA experiences an advantage is that many of its policyholders desire to transfer capital out of their countries due to the perceived financial strength and security of the United States.
Also, CICA competes indirectly with other U.S. and European insurers in countries where CICA's insureds reside. CICA's experience has been that its market niche is in attracting insureds who want the safety and security of a U.S. domestic insurer. Management of CICA considers it to be difficult and speculative to estimate the potential of the foreign market for U.S. insurers. However, based upon the volume of new premium generated by CICA that originates from many countries in Latin America, management believes that CICA receives a substantial share of such business. However, CICA does not have market share data to confirm management's belief.
CICA initiated a new domestic marketing program during 2000 focusing on the sale of individual ordinary life insurance products to residents of rural communities. This program is being initiated through one state at a time, and began in Texas. Management believes this market is overlooked by the majority of U.S. insurers. Competition from many U.S. companies is significantly greater in the domestic market, particularly as banking institutions enter the insurance market due to the passage of the Graham Leach Bliley Act in 1999.
In CICA's block of accident and health insurance (9.4% of total premium income), it is in competition 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 accident and health insurance on CICA's books, most of which has been acquired in the acquisition of other companies.
FEDERAL INCOME TAXATION
CICA is a "small company" as that term is defined in Section 806 of the Internal Revenue Code (the "Code"). As such, CICA qualifies for a special small company deduction (presently equal to 60% of "tentative life insurance company taxable income") which serves to decrease significantly the amount of tax, which might otherwise have to be paid.
The Revenue Reconciliation Act of 1990 revised the method by which insurance companies claim deductions for policy acquisition costs. Previously, insurance companies were allowed to deduct actual policy acquisition costs as they were incurred. Beginning in 1990, policy acquisition costs are determined as a percentage of annual net premiums and are then deductible on a straight-line basis over a ten-year period rather than treated as an immediate deduction. This change in treatment for acquisition costs has had a significant impact on CICA's taxable income due to the relatively large amounts of such deferrals caused by the increases in new business.
CICA files a consolidated Federal income tax return with Citizens and its subsidiaries.
(iii) BUSINESS OF CILIC
CILIC is an Illinois domiciled life insurer admitted to do business in four states. Dormant for several years, CILIC services a closed block of life insurance policies. At December 31, 2001, CILIC had assets of $3.0 million and annual revenues of $197,000. All intercompany fees and expenses have been eliminated in the consolidated financial statements.
(iv) BUSINESS OF INVESTORS
Investors is an Illinois holding company that owns Excalibur. All intercompany fees and expenses have been eliminated in the consolidated financial statements. Management expects to consolidate Investors with Citizens during 2002.
(v) BUSINESS OF EXCALIBUR
Excalibur is an Illinois-domiciled life insurer. It services a small block of ordinary life insurance. Excalibur is 100% owned by Investors. At December 31,
2001, Excalibur had assets of $3.0 million and annual revenues of $187,000. All intercompany fees and expenses have been eliminated in the consolidated financial statements.
(vi) 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, 2001, CTI's total assets were approximately $514,000 and revenues were $1.1 million. All intercompany fees and expenses have been eliminated in the consolidated financial statements.
(vii) BUSINESS OF III
III is a wholly owned subsidiary of CICA and engages in the business of providing aviation transportation for its parent and subsidiaries. As of and for the year ended December 31, 2001, III's total assets were $1.5 million and revenues were $130,000. All intercompany fees and expenses have been eliminated in the consolidated financial statements.
(viii) BUSINESS OF FHA
FHA owns and operates a funeral home in Baker, Louisiana. At December 31, 2001, FHA had total assets of $547,000 and total annual revenues of $540,000. All intercompany fees and expenses have been eliminated in the consolidated financial statements.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTIES
CICA owns its principal office in Austin, Texas, consisting of an 80,000 square foot office building. Approximately 50,000 square feet is occupied or reserved for occupancy by CICA and its affiliates with the remainder of the building being leased to a single tenant under a multi-year lease.
The Company also owns a 6,324 square foot funeral home in Baker, Louisiana with a total cost of $527,000. This facility, acquired as a result of a 1995 acquisition, is owned and operated by a subsidiary, FHA.
Because CICA owns its principal offices and FHA owns its facilities, neither CICA nor FHA makes any lease payments on these properties.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time may be a party to various legal proceedings incidental to its business. Management does not expect the ultimate resolution of these legal proceedings to have a material adverse impact on the results of operations or the financial condition of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders of Citizens during the fourth calendar quarter of 2001.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Citizens' Class A common stock is traded on the American Stock Exchange (AMEX) under the symbol CIA. The high and low prices per share as supplied by the Amex Monthly Statistical Report are as follows. These prices have been adjusted to reflect 7% stock dividends paid in 1999 and 2000.
As of December 31, 2001, the approximate number of record owners of Citizens' Class A common stock was 15,000. Management estimates the number of beneficial owners to be approximately 60,000.
On November 2, 1999, the Company's Board of Directors declared a 7% stock dividend, payable on December 31, 1999 to holders of record as of December 1, 1999. The dividend resulted in the issuance of 1,763,805 Class A shares (including 136,091 shares in treasury) and 43,474 Class B shares.
On October 31, 2000, the Board declared a 7% stock dividend payable on December 31, 2000 to holders of record as of December 1, 2000. The dividend resulted in the issuance of 1,887,265 Class A shares (including 145,613 shares in treasury) and 46,517 Class B shares.
Citizens has not paid cash dividends in any of the past five years and does not expect to pay such in the immediate future. For restrictions on the present and future ability to pay dividends, see Note 6 of the "Notes to Consolidated Financial Statements."
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth, in summary form, selective data of the Company. This data, which is not covered in the report of the independent auditors, should be read in conjunction with the consolidated financial statements and notes which are included elsewhere herein (amounts in thousands except per share amounts). The per share amounts have been adjusted retroactively for all periods presented to reflect the change in capital structure resulting from 7% common stock dividends paid on December 31, 1999 and December 31, 2000, respectively.
See Part I (b) - Financial information regarding the insurance business and Item 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On November 20, 2001, Citizens announced agreements to acquire all outstanding shares of Combined Underwriters Life Insurance Company ("Combined") and Lifeline Underwriters Life Insurance Company ("Lifeline") for shares of Citizens Class A Common stock. Both Combined and Lifeline are members of the Walden P. Little Group of Tyler, Texas.
The agreement was approved by shareholders of Combined and Lifeline and insurance regulatory authorities in Texas in March, 2002. The exchange was based upon a market value of $8.64 per share for Combined and $5.00 per share for Lifeline. The price for Citizens shares of $11.479 was based upon its average closing price for the 20-days preceding closing, which occurred on March 19, 2002. The total aggregate consideration issued by Citizens amounted to approximately 1.1 million shares of Class A common stock.
Combined had revenues of $15.7 million for the year ended December 31, 2000, the last full year such data was available, and assets and stockholders' equity as of December 31, 2000 were $24.9 million and $6.3 million, respectively.
Lifeline had revenues of $838,000 for the year ended December 31, 2000 and assets and stockholders' equity as of December 31, 2000 were $4.1 million and $3.4 million, respectively.
Combined and Lifeline will continue to operate from their offices in Tyler, with a combined management team. Management believes that the acquisitions should enhance premium income and total revenue and provide the Company an established domestic marketing program. It is expected that the marketing operations of these companies will continue to write the supplemental accident and health products that have historically been the foundation of their new business, but will also provide a new division to offer the domestic ordinary life products developed by CICA.
RESULTS OF OPERATIONS
Net income of $3,963,113 or $.16 per share was earned during 2001, compared to net income of $2,052,741 or $.08 per share for the year ended December 31, 2000 and net income of $1,271,072 or $.05 per share in 1999. Increased production of new business coupled with improved persistency contributed to the increased earnings in 2001.
Total revenues for the year ended December 31, 2001 were $67,646,824 compared to $66,678,116 in 2000, an increase of 1.5%. In 1999 revenues were $71,877,058. The 2001 increase in revenues compared to 2000 was related to a 14.9% increase in new life sales (measured in paid annualized premiums), a 3.4% increase in renewal premiums and a 5.9% increase in net investment income that offset a 30.1% decrease in accident and health premiums (a decline from $7,235,685 in 2000 to $5,059,843 in 2001). The decrease in 2000 revenues was related to a 33.5% decrease in accident and health premiums (a decline from $10,886,317 in 1999 to $7,235,685 in 2000) as a result of the Company's termination of the book of individual major medical and group dental business as well as decreased renewal life premiums resulting from the lower persistency experienced in 1999.
Premium income increased by 1.0% from $53,451,853 in 2000 to $53,962,937 in 2001. Premium income decreased by 9.9% from $59,320,357 in 1999 to $53,451,853 in 2000. The 2001 increase is comprised of a $2,698,500 increase in life premiums offset by a $2,175,842 decrease in accident and health premiums. The 2000 decrease was primarily attributable to a $3,650,632 decrease in accident and health premiums.
During the second half of 1998, the Company began to experience a significant increase in the volume of accident and health claims created by high early utilization by holders of USLIC's group dental certificates. As a result of the substantial increase in the volume of claims plus an increase in the accident and health loss ratio, management moved to cancel a large portion of the existing block of USLIC's group dental business and NSLIC's individual major medical
business during the third quarter of 1999 in order to curtail both claims and operating expenses. This action contributed to the $3,650,632 decrease in accident and health premiums in 2000 and an additional $2,175,842 decrease in 2001. Because of the increase in the loss ratio, management has implemented significant rate increases on the remaining supplemental non-cancelable accident and health products which has also contributed to the decrease in accident and health premiums, as some policyholders have elected to cancel their policies.
In January, 1998, CICA introduced a new line of international products known as the Millennia 2000 series; however, in 1998 and 1999, CICA's international sales were hampered due to the contraction of several Latin American economies, as well as competition from new local companies, many of whom are subsidiaries of large U.S. insurers. As a result, there was a decrease in the Company's core book of ordinary life business.
Production of new life insurance premiums by the associates of CICA measured in issued and paid annualized premiums increased 21.4% from 1999 to 2000 and 14.9% from 2000 to 2001. In addition, management initiated a domestic ordinary life sales program in late 2000. This program, targeting rural areas of the United States, is expected to provide a new entree into the domestic life market for the Company in future years. Due to changes in agency management, this program's initial results have not been as successful as management had anticipated; however, the Company believes the program will ultimately be successful. The Company intends to expand sales efforts beyond Texas to other states in which CICA is licensed.
Net investment income increased 5.9% during 2001 to $13,296,481 from $12,550,754 during 2000. The 2000 results were up 7.9% compared to the $11,636,940 earned in 1999. The 2001, 2000 and 1999 results reflect the continuing expansion of the Company's asset base, and the actions taken in previous years to change the mix and duration of the Company's invested assets to place less emphasis on government guaranteed mortgage pass-through instruments and more emphasis on investments in callable instruments issued by U.S. government agencies. Management terminated the Company's outside investment advisor effective March 31, 2000. The Company feels it can more effectively achieve its investment objectives by overseeing the investment activities in-house. During 2001, significant decreases in interest rates occurred. As a result, management expects returns on newly invested funds to decline in the short-term. Management does not believe such declines will have a materially adverse effect on future operating results, and believes the yield earned on newly invested money to be reasonable and in line with assumptions utilized in new-product development.
During the fourth quarter of 2001, the Company realized losses of approximately $390,000 before tax on the disposal of approximately $9 million of U.S. Treasury notes which were purchased in the early 1990s. The entire principal portion of the notes could have been called in February of 2002, at par. Management disposed
of the notes in order to reduce any potential loss in the event the notes were called. This avoided an additional $100,000 in losses when the notes were called in February 2002. The Company typically avoids investments in bonds and notes at significant premiums in order to minimize the potential for loss on early calls such as the situation described above. Management does not believe any similar condition exists within the Company's bond portfolio which could result in any significant future losses. An analysis of the Company's portfolio indicates that the total remaining exposure from such calls in the future is approximately $30,000.
Policyholder dividends increased to $3,294,899 in 2001, up 8.5% over 2000 dividends of $3,037,343. The 2000 amounts represented an increase of 6.8% compared to $2,843,681 in 1999. Virtually all of CICA's policies that have been sold since 1989 are participating. Participating policies represent a large majority (53.9%) of the Company's business in-force, although the percentage of participating business has declined from approximately 91% in 1995 due to acquisitions in recent years. Management expects continued growth in participating policies because CICA will continue to focus on sales of participating products internationally.
Claims and surrenders decreased 3.9% from $30,370,996 in 2000 to $29,189,132 in 2001. In 1999 claims and surrenders were $34,747,480. Decline on claims in accident and health benefits attributable to the respective blocks of business of NSLIC and USLIC were responsible for the 2000 decrease. The decline in claims on these blocks as a result of the above discussed cancellation of a large block of business in 1999 and 2000 contributed to the 2001 improvement.
Death benefits increased 6.4% from $5,277,284 in 2000 to $5,613,782 in 2001. Death benefits were $5,135,808 in 1999. Management believes the increase in 2001 was reflective of the increased business in force. The Company has historically adhered to an underwriting policy which requires complete medical examinations on all applicants who are foreign residents, except children, regardless of age or face amount of the policy applied for. Beginning in 1996, management initiated a change to more selective medical examinations in conjunction with dry spot blood tests and extensive medical questions on the application in order to lower the cost of new business without sacrificing necessary information for the underwriter. Additionally, X-rays and electrocardiograms are required depending on age and face amount of the policy. On all policies of $150,000 or more, inspection reports are required which detail the background resources and lifestyle of the applicant. The Company has developed numerous contacts throughout Latin America with which its underwriters can validate information contained in the application, medical or inspection report.
Accident and health benefits decreased 36.0% from $5,158,623 in 2000 to $3,301,341 in 2001. Such claims were $8,686,218 in 1999. As indicated above, as a result of the substantial increase in the volume of USLIC's accident and health claims plus an increase in the accident and health loss ratio, management cancelled a large portion of the existing blocks of USLIC's group dental and
NSLIC's individual major medical business during the third quarter of 1999. This action contributed to the decrease of $2,175,842 and $3,650,632 in accident and health premiums and the $1,857,282 and $3,527,595 decrease in accident and health claims in 2001 and 2000, respectively. Additionally, significant rate increases have been imposed on the accident and health business remaining in force.
Endowment benefits increased 10.1% from $4,895,492 in 2000 to $5,389,082 in 2001. In 1999, such expenses were $5,048,973. Beginning in late 1990, CICA introduced a new series of international policies that carried an immediate endowment benefit of an amount elected by the policyowner. This endowment is factored into the premium of the policy and is paid annually.
Policy surrenders increased 2.2% from $14,124,514 in 2000 to $14,435,486 in 2001. Surrenders were $14,920,985 in 1999. The relative stability in 2001, 2000 and 1999 is, in the opinion of management, the result of a campaign begun in mid-1997 to inform policyowners about the benefits of their policies.
Other claim expenses amounted to $449,441 in 2001, $915,083 in 2000 and, $955,496 in 1999. These expenses are comprised of supplemental contract benefits, interest on policy funds and assorted other miscellaneous policy benefits.
During 2001, commissions increased 8.3% to $13,444,270 from $12,411,053 in 2000. In 1999, commission expense was $12,234,053. The increases in 2001 and 2000 occurred because of the increased production and related increased issuance of new life policies.
Underwriting, acquisition and insurance expenses increased 4.9% to $10,635,639 in 2001 compared to $10,139,539 in 2000 and $10,328,996 in 1999. During 2000, overhead expenses were incurred to develop the domestic ordinary life sales program which offset reductions achieved following the termination of the accident and health business described above and the consolidation of NSLIC and USLIC. During 2001, the Company incurred overhead expenses related to acquisition activities combined with expenses incurred to continue to develop the domestic ordinary life sales program.
In order to convert a majority of CICA's marketing overhead from fixed to variable, management contracted in early 1997 with an independent international marketing company to serve as managing agent for the Company's international marketing activities. This firm receives an overriding commission on all new business issued internationally in exchange for the absorption of all marketing, management and promotion activities. By taking such actions, management believes a significant amount of fixed overhead has been converted to a variable expense. Management has utilized firms such as this in previous periods with success in obtaining increases in new business production and expense reductions.
Capitalized deferred policy acquisition costs increased 10.5% from $10,056,287 in 2000 to $11,112,096 in 2001. These costs were $9,287,457 in 1999. The increase in 2001 reflects increased sales throughout the year of traditional whole life policies internationally. The 2000 increase reflects increased fourth quarter sales activity. Amortization of these costs was $8,568,445, $8,521,972 and $10,028,806, respectively in 2001, 2000 and 1999.
Amortization of cost of insurance acquired, excess of cost over net assets acquired and other intangibles decreased from $1,995,660 in 2000 to $1,908,683 in 2001. In 1999, such amortization was $2,120,017.
A charge of $9.5 million was recorded in the third quarter of 1998 related to the non-recoverability of a portion of the excess of cost over net assets acquired ("goodwill") on the Company's books. The writedown was related to the goodwill recorded in the 1995 acquisition of American Liberty Financial Corporation (ALFC) and was caused by a decline in new production from insurance agents formerly associated with American Liberty. Subsequent to the acquisition, management implemented a 50% reduction in the amount of commission paid to these agents in order to preserve the profitability of the accident and health business which was negatively impacted by changes in state laws that severely limited profit margins, as well as mandated change in interest rates used to compute reserves on this business. In order to ascertain the recoverability of the goodwill balance, the Company performed an analysis of the relevant cash flows based upon estimated production, net of policy acquisition costs, policyholder benefits and other general expenses. As a result of this analysis, it was determined that an impairment of goodwill had occurred and a write-down to goodwill was necessary.
Management has continued to monitor production associated with these products. Through 2001, management was successful in reviving production from some of the largest producers of American Liberty. Should production by the former agents of American Liberty, now representing CICA, not meet expected amounts due to the rate increases described above, additional write-offs could result. At December 31, 2001, approximately $2.6 million of goodwill related to American Liberty remained on the balance sheet. New accounting rules regarding amortization of goodwill were promulgated by the Financial Accounting Standards Board (FASB) during 2001 as discussed below and became effective January 1, 2002. Under the new FASB pronouncement, annual amortization of such amounts would cease since goodwill has an indefinite life, and a charge would occur only if goodwill on the balance sheet was determined to be impaired. The Company has approximately $6.8 million of goodwill recorded at December 31, 2001. During 2001, $595,410 of goodwill was amortized.
LIQUIDITY AND CAPITAL RESOURCES
Stockholders' equity increased from $77,313,031 at December 31, 2000 to $82,721,798 at December 31, 2001. The increase was attributable to net income
of $3,963,113 earned in 2001 and unrealized gains (losses), net of tax, changing by $1,445,654 during 2001. Increases in the market value of the Company's bond portfolio caused by higher bond prices resulted in the change in unrealized (losses).
The Company paid a 7% stock dividend on December 31, 2000 to holders of record as of December 1, 2000. A similar 7% dividend was paid on December 31, 1999 to holders of record as of December 1, 1999. Both dividends were paid using Class A and B shares that were previously authorized but unissued. The dividends had the effect of transferring $11,497,886 and $10,649,736 respectively in 2000 and 1999 from retained earnings to Common Stock and Treasury Stock.
Invested assets increased to $206,695,811 in 2001 from $194,203,327 in 2000, an increase of 6.4%. An 8.2% increase in fixed maturities available-for-sale more than offset a 4.3% decrease in policy loans. At December 31, 2001 and 2000, fixed maturities have been categorized into two classifications: fixed maturities held-to-maturity, which are valued at amortized cost, and fixed maturities available-for-sale which are valued at fair value. Fixed maturities held to maturity, amounting to $5,569,899 at December 31, 2001 consist of U.S. Treasury securities. Management has the intent and believes the Company has the ability to hold the securities to maturity.
Policy loans comprise 9.7% of invested assets at December 31, 2001 compared to 10.8% at December 31, 2000. These loans, which are secured by the underlying policy values, have yields ranging from 5% to 10% percent and maturities that are related to the maturity or termination of the applicable policies. Management believes that the Company maintains more than adequate liquidity despite the uncertain maturities of these loans.
Cash balances of the Company in its primary depository, Chase Bank, were significantly in excess of Federal Deposit Insurance Corporation (FDIC) coverage at December 31, 2001 and 2000. Management monitors the solvency of all financial institutions in which it has funds to minimize the exposure for loss. At December 31, 2001, management does not believe the Company is at significant risk for such a loss. During 2002, the Company intends to continue to utilize callable securities issued by Federal agencies as cash management tools to minimize excess cash balances and enhance return.
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. The Company does not utilize special purpose entities as investment vehicles. Nor are there any such entities which the Company has an investment in that engage in speculative activities of any description, and the Company does not use such investments to hedge the Company or CICA positions. Furthermore, there are no commitments nor guarantees that provide for the potential issuance of the Company's stock.
CICA owned 2,085,244 shares of Citizens Class A common stock at both December 31, 2001 and December 31, 2000. In the Citizens consolidated financial statements, the shares of Citizens Class A Common Stock owned by CICA are combined with the other treasury shares and the aggregate treasury shares are reported at cost in conformity with U.S. GAAP. The Statutory Accounting Practices for these shares prescribed by the National Association of Insurance Commissioners (NAIC) and the State of Colorado are not applicable to the U.S. GAAP consolidated financial statements of Citizens. Those Statutory Accounting Practices are only followed with respect to filings made in accordance with the rules and regulations of the various state insurance departments and the NAIC and require that CICA carry its investment in Citizens shares at market value reduced by the percentage ownership of Citizens by CICA, limited to 2% of admitted assets.
The NAIC has established minimum capital requirements in the form of Risk-Based Capital ("RBC"). Risk-based capital factors the type of business written by a company, the quality of its assets, and various other factors into account to develop a minimum level of capital called "authorized control level risk-based capital" and compares this level to an adjusted statutory capital that includes capital and surplus as reported under Statutory Accounting Principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level risk-based capital fall below 200%, a series of actions by the Company would begin. At December 31, 2001, CICA, CILIC and Excalibur 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 CICA's, CILIC's and Excalibur's operations are domiciled. CICA is domiciled in Colorado and CILIC and Excalibur are domiciled in Illinois. CICA follows certain Colorado state laws that differ from NAIC's codified rules. The primary difference between the Colorado statutes and the codified rules involve the establishment of a liability for future policy dividends payable. Under codification such reserve is mandated; however, Colorado has an exception if the difference between the premium charged and the mortality factor included in the premium on participating policies exceeds the reserve that would be established. Such is the case for CICA. As a result, CICA did not establish the reserve of approximately $3 million in its statutory financial statements as of and for the year ended December 31, 2001 or December 31, 2000. In Illinois, codified rules must be followed unless the Commissioner of Insurance of the State of Illinois permits specific practices that differ from the codified rules. CILIC and Excalibur have not requested explicit permission to deviate from the NAIC codified rules. Overall, the implementation of codification increased the Company's surplus on a statutory accounting basis by 1.0% related to the statutory accounting practices with respect to deferred income taxes.
SEPTEMBER 11, 2001 TERRORIST ATTACKS
The tragedies of September 11, 2001 significantly impacted the life insurance industry's operating results. None of the Company's life insurance subsidiaries have ever written business in New York, Pennsylvania or Washington, D.C. The Company is unaware of any claims related to such events, and therefore, does not expect any adverse effects as a result. The Company may, however, be inadvertently subject to claims from such attacks should they be assessed by various state Guaranty Funds as a result of any insurance company insolvencies triggered by those attacks.
CRITICAL ACCOUNTING POLICIES
The Company's 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 the Company's and 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.
The Company continues 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 closely monitors these assumptions and has determined that a premium deficiency does not exist. Management believes that the Company's policy liabilities and increase in future policy benefit reserves as of and for the years ended December 31, 2001, 2000 and 1999 are based upon assumptions, including a provision for the risk of adverse deviation, that do not warrant revision. The relative stability of these assumptions is discussed below.
In Table II presented earlier, the ratio of lapses and surrenders to mean life insurance in-force has varied between 4.3% to 5.1% for the past five years. Table IV illustrates that during the past five years the ratio of commissions, underwriting and operating expenses to insurance premiums has ranged from 34.2% to 44.6% and the ratio of commissions, underwriting and operating expenses, policy reserves increases, policyholder benefits and dividends to policyholders to insurance premiums has ranged from 106.3% to 119.2%. Table VIII also shows that the ratio of net investment income to mean amount of invested assets has varied from 6.6% to 6.8% during the past five years. As presented above in Management's Discussion and Analysis of Financial Condition and Results of Operations, death benefits for the years ended December 31, 2001, 2000 and 1999 have been $5,613,782, $5,277,284 and $5,135,808, respectively.
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.
The Company utilizes the factor method to determine the amount of costs to be capitalized and the ending asset balance. The factor method is based on the ratio of premium revenue recognized for the policies in force at the end of each reporting period compared to the premium revenue recognized for policies in force at the beginning of the reporting period. The factor method ensures that policies that lapsed or surrendered during the reporting period are no longer included in the deferred policy acquisition costs calculation. The factor method limits the amount of deferred costs to its estimated realizable value, provided actual experience is comparable to that contemplated in the factors.
Inherent in the capitalization and amortization of deferred policy acquisition costs are certain management judgments about what acquisition costs are deferred, the ending asset balance and the annual amortization. Use of the factor method, as discussed above, limits the amount of unamortized deferred policy acquisition costs to its estimated realizable value provided actual experience is comparable to that contemplated in the factors and results in amortization amounts such that policies that lapse or surrender during the period are no longer included in the ending deferred policy acquisition cost balance. A recoverability test which considers among other things, actual experience and projected future experience, is performed at least annually. Management believes that the Company's deferred policy acquisition costs and related amortization as of and for the years ended December 31, 2001, 2000 and 1999 limits the amount of deferred costs to its estimated realizable value.
ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, was effective January 1, 2001. The Company adopted SFAS No. 133, as amended during 2001. Implementation did not have an impact on the Company's financial statements since it has no derivative instruments and does not participate in any hedging activities. Based on current operations, the Company does not anticipate that SFAS No. 133 will have a material effect on the financial position, results of operation or liquidity of the Company.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - A Replacement of FASB Statement 125" was
effective after March 31, 2001. The Company adopted SFAS No. 140 during 2001. Implementation did not have an impact on the Company's financial statements since it was not involved in any such transfers, servicing or extinguishments. Based on current operations, the Company does not anticipate that SFAS No. 140 will have a material effect on the financial position, results of operation or liquidity of the Company.
In December 2000, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 00-3, "Accounting by Insurance Enterprises for Demutualizations and Formations of Mutual Life Insurance Holding Companies and for Certain Long-Duration Participating Contracts." SOP 00-3 provided guidance on accounting by insurance enterprises for demutualizations and the formation of mutual insurance holding companies. SOP 00-3 also applies to stock insurance enterprises that apply SOP 95-1, "Accounting for Certain Insurance Activities of Mutual Life Insurance Enterprises" to account for participating policies. This SOP is effective for financial statements for fiscal years ending after December 15, 2001. Management does not believe that SOP 00-3 will have any impact on the Company since it is already a stock life insurance company and does not pay dividends based on actual experience of the Company. The Company utilizes contractual life insurance dividend scales as shown in published dividend illustrations at the date the insurance contracts are issued in determining policyholder dividends.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," (SFAS No. 141) and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported separately from goodwill. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of and subsequently, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," after its adoption.
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and SFAS No. 142 is effective January 1, 2002. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 continued to be amortized and tested for impairment in accordance with the appropriate pre-SFAS No. 142 accounting literature prior to the full adoption of SFAS No. 142.
Upon adoption of SFAS No. 142, the Company is required to evaluate its existing intangible assets and goodwill that were acquired in purchase business combinations, and to make any necessary reclassifications in order to conform with the new classification criteria in SFAS No. 141 for recognition separate from goodwill. The Company will be required to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. If an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. Impairment is measured as the excess of carrying value over the fair value of an intangible asset with an indefinite life. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.
In connection with the transitional goodwill impairment evaluation of SFAS No. 142, the Statement requires the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002. The Company will then have up to six months from January 1, 2002 to determine the fair value of each reporting unit and compare it to the carrying amount of the reporting unit. To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit, an indication exists that the reporting unit goodwill may be impaired and the Company must perform the second step of the transitional impairment test. The second step is required to be completed as soon as possible, but no later than the end of the year of adoption. In the second step, the Company must compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill, both of which would be measured as of the date of adoption. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of operations.
As of the date of adoption of SFAS No. 142, the Company expects to have unamortized goodwill in the amount of $6,767,244 and unamortized identifiable intangible assets in the amount of $1,368,125, all of which will be subject to the transition provisions of SFAS No. 141 and 142. Amortization expense related to goodwill was $595,410, $658,390 and $658,458 for the years ended December 31, 2001, 2000 and 1999, respectively. In addition, the amortization expense related to intangible assets was $307,200 for each of the years ended December 31, 2001, 2000 and 1999. Because of the extensive effort needed to comply with adopting
SFAS No. 141 and No. 142, it is not practicable to reasonably estimate the impact of adopting the Statements on the Company's financial statements at the date of this report, including whether it will be required to recognize any transitional impairment losses as the cumulative effect of a change in accounting principle.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development or normal operations of a long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Management does not believe SFAS No. 143 will have a significant effect on the financial position, results of operations or liquidity of the Company.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes and amends SFAS No. 121 and relevant portions of SFAS No. 30. SFAS No. 144 is required to be adopted on January 1, 2002. Because of the extensive effort needed to comply with adopting SFAS No. 144, and its close relationship to SFAS No. 141 and 142, it is not practicable to reasonably estimate the impact of adopting the Statement on the Company's financial statements at the date of this report.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The unrealized gains (losses) that could be caused by decreases and increases in the interest rates of 100, 200 and 300 basis points, respectively, on the Company's available-for-sale fixed maturities is as follows at December 31, 2001 and 2000:
There are no fixed maturities or other investments that the Company classifies as trading instruments. At December 31, 2001 and 2000, there were no investments in derivative instruments. Approximately 90.8% of the fixed maturities owned by the Company at December 31, 2001 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. The Company has minimal investment in equity securities. See also Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
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.
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 of the Company included herein, there has been no change of accountants made by the Company, nor has it reported on Form 8-K any disagreements between the Company and its independent accountants.
PART III
Items 10, 11, 12, and 13 of this Report incorporate by reference the information in the Company's definitive proxy material under the headings "Stock and Principal Stockholders," "Control of the Company," "Election of Directors," "Executive Officers," "Executive Officer and Director Compensation" and "Certain Reports" to be filed with the Securities and Exchange Commission within 120 days after December 31, 2001.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 AND 2
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The financial statements and schedules listed on the following index to financial statements and financial statement schedules are filed as part of this Form 10-K.
(a) 3 EXHIBITS
The following exhibits are incorporated by reference herein or filed herewith as indicated.
- ---------- (a) Filed as a part of the Amendment No. 1 to Registration Statement on Form S-4, SEC File No. 33--4753, filed on or about June 19, 1992 and incorporated herein by reference. (b) Filed with or referenced in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. (c) Filed with or referenced in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference. (d) Filed with or referenced in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. (e) Filed with or referenced in the Registrant's Current Report on Form 8-K dated December 9, 1994 and incorporated herein by reference. (f) Filed as a part of the Registration Statement on Form S-4, SEC File No. 33--59039, filed on or about May 2, 1995. (g) Filed as a part of the Registration Statement on Form S-4, SEC File No. 33--63275, filed on or about October 6, 1995 and incorporated herein by reference. (h) Filed as a part of the Registration Statement on Form S-4, SEC File No. 333--16163, filed on or about November 14, 1996 and incorporated herein by reference. (i) Filed with or referenced in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. (j) Filed with or referenced in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. (k) Filed as a part of the Registration Statement on Form S-4, SEC File No. 333--67091, on or about November 10, 1998 and incorporated herein by reference. (l) Filed as a part of the Registration Statement on Form S-4, SEC File No. 333-76926, on or about January 18, 2002 and incorporated herein by reference.
(b) REPORTS ON FORM 8-K
Current Report on Form 8-K dated November 26, 2001 filed under "Item 5. Other Events," regarding the execution of the Plans and Agreements of Exchange with Combined Underwriters Life Insurance Company and Lifeline Underwriters Life Insurance Company.
CITIZENS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
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.
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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, 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.
KPMG LLP /s/ KPMG LLP
Dallas, Texas March 19, 2002
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2001 AND 2000
(Continued)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED
DECEMBER 31, 2001 AND 2000
See accompanying notes to consolidated financial statements.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Continued)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
See accompanying notes to consolidated financial statements.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
See accompanying notes to consolidated financial statements.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Supplemental:
Supplemental disclosures of non-cash investing and financing activities:
The Company issued Class A common stock and cash to purchase all of the capital stock of Investors in 1999. In conjunction with the acquisition, cash and cash equivalents were provided as follows:
See accompanying notes to consolidated financial statements.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF BUSINESS
The consolidated financial statements include the accounts and operations of Citizens, Inc. (Citizens), incorporated in the state of Colorado on November 8, 1977 and its wholly-owned subsidiaries, Citizens Insurance Company of America (CICA), Computing Technology, Inc. (CTI), Funeral Homes of America, Inc. (FHA), Insurance Investors, Inc. (III), Central Investors Life Insurance Company of Illinois (CILIC), First Investors Group, Inc. (Investors), Excalibur Insurance Corporation (Excalibur) and Industrial Benefits, Inc (IBI). Citizens and its consolidated subsidiaries are collectively referred to as "the Company."
American Liberty Financial Corporation (ALFC) and its subsidiaries, American Liberty Life Insurance Company (ALLIC), First American Investment Corp. (FAIC) and American Liberty Exploration Company (ALEC) were acquired by Citizens in September 1995. Effective January 1, 1997, ALFC was merged into Citizens and ALLIC was merged into CICA. American Investment Network (AIN), which was acquired in June 1997, owned United Security Life Insurance Company (USLIC). During 1998, AIN was liquidated into CICA. Insurance Investors and Holding Company (IIH), which was acquired in March 1996, owned CILIC. During 1998, IIH was liquidated and merged into CICA. National Security Life and Accident Insurance Company (NSLIC) was merged into CICA effective January 1, 2000 and USLIC was merged into CICA effective October 1, 2000.
Citizens provides life and health insurance policies through three of its subsidiaries - CICA, CILIC and Excalibur. CICA sells ordinary whole-life policies internationally, and burial insurance, pre-need policies, accident and health specified disease, hospital indemnity and accidental death policies, throughout the southern United States. Excalibur sells life insurance business throughout the State of Illinois. CILIC does not actively market insurance policies, but administers an in-force block of life insurance.
III provides aviation transportation to the Company. CTI provides data processing systems and services to the Company. FHA is a funeral home operator. IBI is inactive and has minimal assets and liabilities.
(b) BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company and its wholly owned subsidiaries have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). All significant intercompany accounts and transactions have been eliminated.
(c) INVESTMENTS, OTHER THAN AFFILIATES
Fixed maturities consist primarily of bonds. Fixed maturities, which the Company has the ability and intent to hold to maturity, are carried at amortized cost. Fixed maturities, which may be sold prior to maturity to support the Company's investment strategies, are considered held as available-for-sale and carried at fair value as of 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, policy loans, and guaranteed student 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, 2001 and 2000 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 minus estimated costs to sell is less than cost, a valuation allowance is provided for the deficiency. Increases in the valuation allowance are charged to income.
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 has assets with a fair value of $9,538,429 at December 31, 2001 and $9,420,063 at December 31, 2000 on deposit with various state regulatory authorities to fulfill statutory requirements.
(d) PREMIUM REVENUE AND RELATED EXPENSES
Premiums on life and accident and health policies are reported as earned when due or, for short duration contracts, over the contract periods. Benefits and expenses are associated with earned premiums so as to result in recognition of profits over the estimated life of the contracts. This matching is accomplished by means of provisions for future benefits and the capitalization and amortization of deferred policy acquisition costs.
Annuities are accounted for in a manner consistent with accounting for interest bearing financial instruments. Premium receipts are not reported as revenues but rather as deposit liabilities to annuity contracts.
(e) DEFERRED POLICY ACQUISITION COSTS AND COST OF INSURANCE 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 insurance acquired calculation. The factor method limits the amount of deferred costs to its estimated realizable value, provided actual experience is comparable to that contemplated in the factors. A recoverability test which considers among other things, actual experience and projected future experience, is performed at least annually.
The value of insurance acquired in the Company's various acquisitions, which is included in cost of insurance acquired in the accompanying consolidated financial statements, was determined based on the present value of future profits discounted at a risk rate of return. The cost of insurance acquired is being amortized over the anticipated premium paying period of the related policies.
Deferred policy acquisition costs on universal life contracts are capitalized and amortized over the life of the contract at a constant rate based on the present value of the estimated gross profit amounts expected to be earned over the life of the universal life contracts.
(f) POLICY LIABILITIES AND ACCRUALS
Future policy benefit reserves have been computed by the net level premium method with assumptions as to investment yields, dividends on participating business, mortality and withdrawals based upon the Company's and industry experience, which provide for possible unfavorable deviation.
Annuity benefits are carried at accumulated contract values based on premiums paid by participants, annuity rates of return ranging from 3.0% to 7.0% (primarily at 4.0% to 5.5%) and annuity withdrawals.
Premium deposits accrue interest at rates ranging from 3.5% to 8.25% per annum. Cost of insurance is included in premium when collected and interest is credited annually to the deposit account.
Policy and contract claims are based on case-basis estimates for reported claims, and on estimates, based on experience, for incurred but unreported claims and loss expenses.
Premiums collected on universal life contracts are not reported as revenues in the statement of operations but are included in the liability for policy benefits for universal life contracts based on policyholders' account balances. Revenues from universal life contracts are amounts assessed the policyholder for mortality and expenses and are reported when assessed based upon one-year service periods. Amounts assessed for services to be provided in future periods are reported as unearned revenue and are recognized in income over the benefit period.
The liability for policy benefits for universal life contracts is based on the balance that accrues to the benefit of policyholders. It includes any amounts assessed to compensate the Company for services to be performed over future periods, any amounts previously assessed by the Company against the policyholders that are refundable at termination of the contract and any premium deficiency.
(g) EXCESS OF COST OVER NET ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS
The excess of cost over the fair value of net assets acquired in mergers and acquisitions is amortized on a straight-line basis ranging from 5 to 20 years. Other intangible assets, primarily the value of state licenses, are amortized on a straight-line basis ranging from 10 to 20 years.
The Company continually monitors long-lived assets and certain intangible assets, such as excess of cost over net assets acquired and cost of insurance acquired, for impairment. An impairment loss is recorded in the period in which the carrying value of the assets exceeds the fair value or 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.
(h) PARTICIPATING POLICIES
At December 31, 2001 and 2000, participating business approximated 54% and 57%, 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, 2001, 2000 and 1999 were 25,128,158, 25,128,158 and 25,057,913, respectively. The per share amounts have been adjusted retroactively for all periods presented to reflect the change in capital structure resulting from a 7% stock dividend paid in 2000 and a 7% stock dividend paid in 1999. The 2000 stock dividend resulted in the issuance of 1,887,265 Class A shares (including 145,613 shares in treasury) and 46,517 Class B shares and the 1999 stock dividend resulted in the issuance of 1,763,805 Class A shares (including 136,091 shares in treasury) and 43,474 Class B shares.
(j) INCOME TAXES
For the year ended December 31, 2001, the Company plans to file three separate tax returns as follows: 1) Citizens, Inc., CICA and all direct non-life subsidiaries, 2) Excalibur and 3) CILIC.
For the year ended December 31, 2000, the Company filed three separate tax returns as follows: 1) Citizens, Inc., CICA and all direct non-life subsidiaries, 2) Excalibur and 3) CILIC.
For the year ended December 31, 1999, the Company filed five separate tax returns as follows: 1) Citizens, Inc., CICA and all direct non-life subsidiaries, 2) Excalibur, 3) USLIC, 4) NSLIC and 5) CILIC.
Deferred tax asset and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(k) ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, was effective January 1, 2001. The Company adopted SFAS No. 133, as amended during 2001. Implementation did not have an impact on the Company's financial statements since it has no derivative instruments and does not participate in any hedging activities. Based on current operations, the Company does not anticipate that SFAS No. 133 will have a material effect on the financial position, results of operation or liquidity of the Company.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - A Replacement of FASB Statement 125" was effective after March 31, 2001. The Company adopted SFAS No. 140 during 2001. Implementation did not have an impact on the Company's financial statements since it was not involved in any such transfers, servicing or extinguishments. Based on current operations, the Company does not anticipate that SFAS No. 140 will have a material effect on the financial position, results of operation or liquidity of the Company.
In December 2000, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 00-3, "Accounting by Insurance Enterprises for Demutualizations and Formations of Mutual Life Insurance Holding Companies and for Certain Long-Duration Participating Contracts." SOP 00-3 provided guidance on accounting by insurance enterprises for demutualizations and the formation of mutual insurance holding companies. SOP 00-3 also applies to stock insurance enterprises that apply SOP 95-1, "Accounting for Certain Insurance Activities of Mutual Life Insurance Enterprises" to account for participating policies. This SOP is effective for financial statements for fiscal years ending after December 15, 2001. Management does not believe that SOP 00-3 will have any impact on the Company since it is already a stock life insurance company and does not pay dividends based on actual experience of the Company. The Company utilizes contractual life insurance dividend scales as shown in published dividend illustrations at the date the insurance contracts are issued in determining policyholder dividends.
In June 2001, The Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations," (SFAS No. 141) and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported separately from goodwill. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and subsequently, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," after its adoption.
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and SFAS No. 142 is effective January 1, 2002. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 continued to be amortized and tested for impairment in accordance with the appropriate pre-SFAS No. 142 accounting literature prior to the full adoption of SFAS No. 142.
Upon adoption of SFAS No. 142, the Company is required to evaluate its existing intangible assets and goodwill that were acquired in purchase business combinations, and to make any necessary reclassifications in order to conform with the new classification criteria in SFAS No. 141 for recognition separate from goodwill. The Company will be required to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. If an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. Impairment is measured as the excess of carrying value over the fair value of an intangible asset with an indefinite life. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.
In connection with transitional goodwill impairment evaluation of SFAS No. 142, the Statement requires the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002. The Company will then have up to six months from January 1, 2002 to determine the fair value of each reporting unit and compare it to the carrying amount of the reporting unit. To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit, an indication will exist that the reporting unit goodwill may be impaired and the Company must perform the second step of the transitional impairment test. The second step is required to be completed as soon as possible, but no later than the end of the year of adoption. In the second step, the Company must compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill, both of which would be measured as of the date of adoption. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of operations.
As of the date of adoption of SFAS No. 142, the Company expects to have unamortized goodwill in the amount of $6,767,244 and unamortized identifiable intangible assets in the amount of $1,368,125, all of which will be subject to the transition provisions of SFAS No. 141 and 142. Amortization expense related to goodwill was $595,410, $658,390 and $658,458 for the years ended December 31, 2001, 2000 and 1999, respectively. In addition, the amortization expense related to intangible assets was $307,200 for each of the years ended December 31, 2001, 2000 and 1999. Because of the extensive effort needed to comply with adopting SFAS No. 141 and No. 142, it is not practicable to reasonably estimate the impact of adopting the Statements on the Company's financial statements at the date of this report, including whether the Company will be required to recognize any transitional impairment losses as the cumulative effect of a change in accounting principle.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and for obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development or normal operations of a long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Management does not believe SFAS No. 143 will have a significant effect on the financial position, results of operations or liquidity of the Company.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes and amends SFAS No. 121 and relevant portions of SFAS No. 30. SFAS No. 144 is required to be adopted on January 1, 2002. Because of the extensive effort needed to comply with adopting SFAS No. 144, and its close relationship to SFAS No. 141 and 142, it is not practicable to reasonably estimate the impact of adopting the statement of the Company's financial statements at the date of this report.
(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 2000 and 1999 amounts to conform to the 2001 presentation.
(2) INVESTMENTS
The cost, gross unrealized gains and losses and fair value of investments of fixed maturities and equity securities available-for-sale, as of December 31, 2001 and 2000, are as follows:
The amortized cost and fair value of fixed maturities at December 31, 2001 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
FIXED MATURITIES HELD-TO-MATURITY
FIXED MATURITIES AVAILABLE-FOR-SALE
The Company had no investments in any one entity that exceeded 10% of stockholders' equity at December 31, 2001 other than investments guaranteed by the U.S. Government.
The Company's investment in mortgage loans is concentrated 28% in Colorado, 41% in Texas and 31% in Mississippi as of December 31, 2001.
Major categories of net investment income are summarized as follows:
Proceeds and gross realized gains (losses) from sales and maturities of fixed maturities available-for-sale for 2001, 2000 and 1999 are summarized as follows:
Proceeds and gross realized gains (losses) from sales of equity securities available-for-sale for 2001, 2000 and 1999 are summarized as follows:
Realized gains (losses) are as follows:
(3) COST OF INSURANCE ACQUIRED AND EXCESS OF COST OVER NET ASSETS ACQUIRED
Cost of insurance acquired is summarized as follows:
Accretion of interest on cost of insurance acquired is calculated based on the rates of interest used in setting the related policy reserves. These rates range from 6.5% to 8.5%. Estimated amortization in each of the next five years is as follows. These amounts are equal to the carrying value due and exclude interest accretion at rates ranging from 6.5% to 8.5%. Actual future amortization will differ from these estimates due to variances from estimated future withdrawal assumptions.
YEAR AMOUNT ---- ------ 2002 $1,043,703 2003 756,874 2004 674,825 2005 597,711 2006 555,132 Thereafter 1,522,106
Excess of cost over net assets acquired is summarized as follows:
(4) POLICY LIABILITIES
Various assumptions used to determine the future policy benefit reserves include the following: a) valuation interest rates from 4 to 9%, b) mortality assumptions are from the 1955 to 1960, 1965 to 1970, and 1975 to 1980 Select and Ultimate mortality tables and c) withdrawals are based primarily on actual historical termination rates.
The following table presents information on changes in the liability for accident and health policy and contract claims for the years ended December 31, 2001 and 2000.
The development of prior year claim reserves reflects normal changes in actuarial estimates.
A summary of the policy claims payable is as follows:
(5) REINSURANCE
In the normal course of business, the Company reinsures portions of certain policies that it underwrites to limit disproportionate risks. During 2001, the Company retained varying amounts of individual insurance up to a maximum retention of $100,000 on any life. On health policies there are varying retention limits ranging from $25,000 to $75,000 depending on the product with some of the supplemental hospital and surgical policies reinsured on a quota share basis. The Company's share of risk on the quota share reinsurance is 50%. The Company remains contingently liable to the extent that the reinsuring companies cannot meet their obligations under these reinsurance treaties.
Assumed and ceded reinsurance activity for 2001 and 2000 is summarized as follows:
Premiums and claims and surrenders assumed and ceded for the years ended December 31, 2001, 2000 and 1999:
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 stock of Citizens 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 Citizens 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, 2001 approximately $6,100,000 of dividends could be paid to Citizens without prior regulatory approval.
CICA, CILIC and Excalibur have calculated their risk based capital (RBC) in accordance with the National Association of Insurance Commissioners' Model Rule and the RBC rules as adopted by their respective state of domicile. The RBC as calculated for CICA, CILIC and Excalibur as of December 31, 2001 exceeded levels requiring company or regulatory action.
(7) MERGERS AND ACQUISITIONS
On January 26, 1999 Citizens acquired Investors in exchange for 609,269 shares of its Class A Common stock. The excess of cost over net assets acquired amounted to $303,703 and is being amortized over 10 years.
Effective January 1, 2000, NSLIC was merged with and into CICA. Additionally, effective October 1, 2000, USLIC was merged with and into CICA.
On November 20, 2001, Citizens announced that definitive agreements had been reached between Citizens and Combined Underwriters Life Insurance Company (Combined) and between Citizens and Lifeline Underwriters Life Insurance Company (Lifeline), whereby Citizens would acquire 100% of the outstanding shares of both Combined and Lifeline.
Pursuant to the terms of the agreements, which were approved by Combined's and Lifeline's shareholders and regulatory authorities, Citizens issued approximately 753,000 shares of its Class A Common Stock to acquire Combined and approximately 305,000 shares of its Class A Common Stock to acquire Lifeline. The transactions closed on March 19, 2002 and were accounted for as purchases.
(8) CONTINGENCIES
The Company is a party to various legal proceedings incidental to its business. The Company has been named as a defendant in various legal actions seeking payments for claims denied by the Company and other monetary damages. In the opinion of management, the ultimate liability, if any, resulting from any contingent liabilities that might arise from litigation are not considered material in relation to the financial position or results of operations of the Company.
Reserves for claims payable are based on the expected claim amount to be paid after a case by case review of the facts and circumstances relating to each claim. A contingency exists with regard to these reserves until such time as the claims are adjudicated and paid.
(9) SEGMENT INFORMATION
The Company has two reportable segments identified by geographic area: International Business and Domestic Business. International Business, consisting of ordinary whole-life business, is sold primarily throughout Central and South America. The Company has no assets, offices or employees outside of the United States of America (U.S.) and requires that all transactions be in U.S. dollars paid in the U.S. Domestic Business, consisting of traditional life and burial insurance, pre-need policies, accident and health specified disease, hospital indemnity and accidental death policies, is sold throughout the southern U.S. The accounting policies of the segments are in accordance with U.S. GAAP and are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on U.S. GAAP net income before federal income taxes for its two reportable segments.
Geographic Areas - The following summary represents financial data of the Company's continuing operations based on their location.
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, 2001, 2000 and 1999, is as follows:
Major categories of premiums are summarized as follows:
(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:
Income tax expense (benefit) for the years ended December 31, 2001, 2000 and 1999 consists of:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2001 and 2000 are presented below.
During 1999, the Company released the valuation allowance associated with NSLIC net operating losses. These losses have been utilized in 2001 by the Company and CICA.
The Company and its subsidiaries had net operating losses at December 31, 2001 available to offset future taxable income of approximately $87,000 for Federal income tax substantially all of which expire through 2020. A portion of the net operating loss carryforward is subject to limitations under Section 382 of the Internal Revenue Code.
At December 31, 2001, 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, 2001 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.
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, 2001 and 2000, were approximately 8.7% and 8.6%, respectively, with maturities ranging from one to fifteen years. Management believes that reported amounts approximate fair value.
The carrying value and fair values for the Company's liabilities under annuity contract policies are the same as the interest rates credited to these products and are periodically adjusted by the Company to reflect market conditions. The fair value of liabilities under all insurance contracts are taken into consideration in the overall management of interest rate risk, which minimizes exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.
Policy loans have a weighted average interest rate of 7.6% and 7.5% as of December 31, 2001 and 2000, 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 which the Company has in-force and cannot be valued separately.
For cash, accrued investment income, amounts recoverable from reinsurers, other assets, federal income tax payable and receivable, dividend accumulations, commissions payable, amounts held on deposit, and other liabilities, the carrying amounts approximate fair value because of the short maturity of such financial instruments.
(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:
(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table contains selected unaudited consolidated financial data for each calendar quarter.
SCHEDULE II
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2001 AND 2000
(1) Eliminated in consolidation.
See accompanying independent auditors' report.
SCHEDULE II, CONTINUED
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND 1999
- ---------- (1) Eliminated in consolidation.
See accompanying independent auditors' report.
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, 2001, 2000 AND 1999
See accompanying independent auditors' report.
SCHEDULE III
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
AS OF DECEMBER 31, 2001 AND 2000
See accompanying independent auditors' report.
SCHEDULE III, CONTINUED
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION, CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
See accompanying independent auditors' report.
SCHEDULE IV
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
REINSURANCE
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
See accompanying independent auditors' report.
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 26, 2002 By: /s/ MARK A. OLIVER ------------------------------------ Mark A. Oliver, President
By: /s/ JEFFREY J. WOOD ------------------------------------ Jeffrey J. Wood, Executive Vice President, Chief Financial Officer and Secretary / Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Each individual whose signature appears below hereby designates and appoints Harold E. Riley and Mark A. Oliver, and each of them, as such person's true and lawful attorney's-in-fact and agents (the "Attorneys-in-Fact") with full power of substitution and resubstitution, for each person and in such person's name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Annual Report on Form 10-K, which amendments may make such changes in this Annual Report on Form 10-K as either Attorney-in-Fact deems appropriate and to file therewith, with the Securities and Exchange Commission, granting unto such Attorneys-in-Fact and each of them, full power and authority to do and perform each and every act and think requisite and necessary to be done in and about the premises, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that such Attorneys-in-Fact or either of them, in their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
/s/ MARK A. OLIVER March 26, 2002 - ---------------------------------------- Mark A. Oliver, Director
/s/ RALPH M. SMITH March 26, 2002 - ---------------------------------------- Ralph M. Smith, Director
/s/ DR. RICHARD C. SCOTT March 26, 2002 - ---------------------------------------- Dr. Richard C. Scott, Director
/s/ RICK D. RILEY March 26, 2002 - ---------------------------------------- Rick D. Riley, Director
/s/ DR. E. DEAN GAGE March 26, 2002 - ---------------------------------------- Dr. E. Dean Gage, Director
/s/ HAROLD E. RILEY March 26, 2002 - ---------------------------------------- Harold E. Riley, Chairman of the Board and Director
/s/ WALDEN P. LITTLE March 26, 2002 - ---------------------------------------- Walden P. Little, Director
/s/ TIMOTHY T. TIMMERMAN March 26, 2002 - ---------------------------------------- Timothy T. Timmerman
/s/ STEVE SHELTON March 26, 2002 - ---------------------------------------- Steve Shelton, Director
INDEX TO EXHIBITS