CICA owns its principal office in Austin, Texas, consisting of an 80,000 square foot office building. Approximately 45,000 square feet is occupied by CICA and its affiliates with the remainder of the building being leased. At December 31, 1999, the occupancy rate of the property was 100%.
Through the acquisition of American Liberty Financial Corporation described above, the Company also owns a 6,324 square foot funeral home in Baker, Louisiana with a total cost of $473,000. This facility is owned and operated by a subsidiary, FHA.
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 a 7% common stock dividend paid on December 31, 1999.
Net income of $1,271,072 or $.05 per share was earned during 1999, compared to a net loss of $6,720,693 or $0.29 per share for the year ended December 31, 1998 and net income of $3,425,523 or $.15 per share in 1997.
A non-recurring charge of $9.5 million 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 caused the 1998 loss. 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. The commission reductions were necessary to preserve the profitability of the accident and health business which was negatively impacted by changes in state laws that established minimum claims ratios that severely limited profit margins, as well as mandated change in interest rates used to compute reserves on this business.
Decreases in acquisition related expenses associated with American Liberty and economies of scale created by the combination of companies contributed to the increase in 1997 income.
Premium income was $59,320,357 in 1999, a 0.3% increase compared to $59,154,329 of premium income in 1998. The 1998 amounts were a 6.8% increase over the previous year when premium income totaled $55,362,616. There was a significant increase in group dental business sold by the agents of USLIC from July 1998 through March 1999. However, during third quarter 1999, a large portion of the existing blocks of USLIC's group dental and NSLIC's major medical were cancelled. The 1999 cancellation of these blocks coupled with decreased writing of new business by CICA in the international market contributed to the small increase of premium income during 1999. Additionally, during 1999 there was a decrease in the Company's core book of ordinary life business resulting from the continued turmoil in Latin America caused by economic downturns in several countries, as well as increased competition from several U.S. companies entering the market. The comparison of 1998 to 1997 premium income is effected by USLIC and NSLIC not being included for the entire year 1997.
In addition, management began developing a domestic ordinary life sales program during 1999 and filed such with Texas regulatory authorities for approval during the third quarter of 1999. This program, targeting rural areas of the United States, is expected to be a major market for the Company in future years. Management began recruiting efforts for associates in the State of Texas for the new product in early 2000.
The products previously sold by ALLIC in the United States were not available following the merger of ALLIC into CICA until late in 1997 because of delays in obtaining requisite approval from state insurance regulatory authorities. Management has been successful in returning the largest producing marketing organization of the former ALLIC agents (now representing CICA) to production and saw continuing increases in new production in 1999, compared to amounts seen in 1997 and 1998. Due to increases in claims, however, management anticipates implementing significant rate increases on several of these products during 2000. Because of these increases, it is uncertain whether increased production can be maintained.
During 1998, management discontinued selling the major medical products that NSLIC's prior management had begun to introduce in 1997. Management believes that the level of surplus and asset size of NSLIC are not sufficient to support the potential volatility that is inherent in such types of business. As previously discussed, management terminated the majority of such business in 1999. NSLIC's marketing efforts are now focused solely on the expansion of existing credit life and credit accident and health business.
Overall policyholder dividends decreased to $2,843,681 in 1999, down 6.0% over 1998 when such benefits were $3,025,746. The 1998 amounts represented an increase of 8.8% compared to $2,782,215 in 1997. The 1997 growth is primarily due to the acquisition of USLIC, which increased that year's expense by approximately $397,000. Virtually all CICA's policies that have been sold since 1989 are participating. Participating policies represent a large majority (59.1%) of the Company's business in-force, although the percentage of participating business has declined from approximately 91% due to the acquisitions in recent years. Additionally, due to the disruption in the Latin American markets mentioned above and the lower than usual persistency in that market, the growth in overall dividends has been slowed as policies lapse before the dividend amount can grow. Management expects continued growth in this item due to the fact that CICA will continue to focus on participating products internationally, subject to persistency and future sales.
Death benefits decreased to $5,135,808 in 1999, down from $5,150,647 in 1998, and $4,475,083 in 1997. The 1998 increase can be traced directly to the inclusion of NSLIC and USLIC for an entire year. During 1998, claims on NSLIC were $421,801, while claims from USLIC were $35,570. The small decrease in such claims in 1999 does not appear to be due to any trend. Additionally, the pre-need and burial policies formerly sold by ALLIC were marketed to an older clientele and as such, higher claims are anticipated and factored into the product. The Company has historically adhered to a strict 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. For 1996 and future years, 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.
Citizens introduced a new series of plans called "Ultra Expansion Plus" which 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. The decline in 1998 and slight increase in 1999 reflect the decline in production of new business over the last three years.
In 1999, policy surrenders increased 3.0% to $14,920,985. Policy surrenders were $14,481,335 in 1998, compared to $14,322,593 in 1997. The relative stability in 1999, 1998 and 1997 is, in the opinion of management, the result of a campaign begun in mid-1997 to inform policyowners about the benefits of their policies.
Underwriting, acquisition and insurance expenses decreased to $10,328,996 in 1999 compared to $11,079,065 in 1998 and $6,992,402 in 1997. Approximately $2.5 million of the increase in 1998 relates to the inclusion of NSLIC and USLIC for the entire year. Additionally, because of the increased claims volume mentioned above, management was forced to significantly increase staff size in 1998 and 1999 and thus overhead on a temporary basis. Due to the consolidation of ALLIC's operations with CICA, management was able to achieve significant reductions in expenses through economies of scale which were reflected in the 1997 results.
Capitalized deferred policy acquisition costs were $9,287,457 in 1999, $7,941,829 in 1998, and $9,804,022 in 1997. The increase in 1999 reflects increased fourth quarter sales of a twenty-year endowment policy. The drop in 1998 reflects the sale of accident and health products described above which carry lower levels of commission and thus capitalization. Amortization of these costs was $9,236,020 $7,789,513 and $9,630,705, respectively in 1999, 1998 and 1997.
Amortization of cost of insurance acquired, excess of cost over net assets acquired and other intangibles increased in 1999 to $2,120,017 from $2,100,433 in 1998. In 1997, such amortization was $2,305,127. As discussed above, management wrote off $9.5 million of the goodwill associated with the acquisition of American Liberty during the third quarter of 1998. 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. There remains approximately $3 million of goodwill related to American Liberty.
Stockholders' equity decreased to $72,266,969 at December 31, 1999 from $74,903,679 in 1998. The decrease was attributable to unrealized gains declining by $7,334,920 during 1999 resulting in an unrealized loss of $3,711,456, net of tax at December 31, 1999. Declines in the market value of the Company's bond portfolio caused by lower bond prices resulted in the change in unrealized gains (losses), net of tax.
At December 31, 1999, decreases in interest rates of 100, 200 and 300 basis points, respectively, would result in increases in market values of approximately $385,000, $6,646,000 and $13,800,000, respectively. Conversely, increases in rates of 100, 200 and 300 basis points would generate decreases in market values of $10,981,000, $20,232,000 and $26,096,000, respectively. Additionally, at December 31, 1998, decreases in interest rates of 100, 200 and 300 basis points, respectively, would result in increases in market values of approximately $12,402,000, $19,666,000 and $23,588,000, respectively. Conversely, increases
in rates of 100, 200 and 300 basis points would generate losses of $1,041,000, $7,484,000 and $13,738,000, respectively.
Policy loans comprise 12.4% of invested assets at December 31, 1999 compared to 11.9% at December 31, 1998. 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 of Texas, were significantly in excess of Federal Deposit Insurance Corporation (FDIC) coverage at December 31, 1999 and 1998. Management monitors the solvency of all financial institutions in which it has funds to minimize the exposure for loss. At December 31, 1999, management does not believe the Company is at significant risk for such a loss. During 2000, the Company intends to utilize short-term Treasury Bills and highly-rated commercial paper as cash management tools to minimize excess cash balances and enhance return.
CICA owned 1,821,332 shares of Citizens Class A common stock at December 31, 1999 and 1998. Statutory accounting practices prescribed by the National Association of Insurance Commissioners (NAIC) and the State of Colorado require that the Company carry its investment at market value reduced by the percentage ownership of Citizens by CICA, limited to 2% of admitted assets. As of December 31, 1999 and 1998, the Company valued the shares in accordance with prescribed Statutory Accounting Practices. In the Citizens' consolidated financial statements, this stock is shown as treasury stock.
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, 1999, CICA, NSLIC, USLIC, CILIC and Excalibur were above required minimum levels.
The Company successfully addressed the impact of the Year 2000 on its systems, procedures, customers and business processes. There was no adverse impact on any Company operations for the calendar change from 1999 to 2000. The Company used internal resources to modify, replace and test the Year 2000 modifications. The total cost for the project was negligible. The work was
In December 1997, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 97-3 "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments." SOP 97-3 provides: 1) guidance for determining when an entity should recognize a liability for guaranty fund and other insurance-related assessments, 2) guidance on how to measure a liability, 3) guidance on when an asset may be recognized for a portion or all of the assessment liability or paid assessment that can be recovered through premium tax offsets or policy surcharges and 4) requirements for disclosure of certain information. This SOP is effective for financial statements for fiscal years beginning after December 15, 1998. The Company adopted SOP 97-3 during 1999. Implementation did not have a material impact on the Company's financial statements.
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," is effective January 1, 2001. Management does not believe that SFAS No. 133 and SFAS No. 137 will have a significant effect on the financial position, results of operations or liquidity of the Company.