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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.