The American Liberty acquisition was completed on September 14, 1995 with American Liberty shareholders receiving 1.10 shares of Citizens' Class A Common Stock for each share of American Liberty Common Stock owned and 2.926 shares of Citizens' Class A Common Stock for each share of American Liberty Preferred Stock owned. Citizens issued approximately 2.3 million Class A shares in connection with the transaction, which was accounted for as a purchase.
On October 28, 1996, Registrant announced that it had signed definitive written agreements for the acquisition of American Investment Network, Inc. (American Investment), a life insurance holding company headquartered in Jackson, Mississippi with $7.5 million in assets, $3.4 million of stockholders' equity, revenues of $3.2 million and $67 million of life insurance in force.
The American Investment agreement provides that following the acquisition by Registrant, American Investment shareholders will receive 1 share of Registrant's Class A Common Stock for each 7.2 shares of American Investment Common Stock owned. Citizens expects to issue approximately 700,000 Class A shares in connection with the transaction, which will be accounted for as a purchase. The companies will continue to operate in their respective locations under a combined management team with consolidation of computer data processing on the Citizens' system. The agreement is subject to approval by American Investment's shareholders and regulatory authorities and is expected to close in mid 1997.
Net income for the year ended December 31, 1996 was $2,213,726 or $.11 per share compared to $2,750,212 or $.16 per share in 1995 and $4,174,558 or $.25 per share in 1994. Increases in expenses associated with ALLIC's marketing activities and a minimal increase in the sale of new international life insurance premiums caused the decline in earnings in 1996. Decreased writing of new life insurance premiums contributed to the lower earnings in 1995, coupled with increased operating expenses incurred to acquire and convert ALFC.
Total revenues for the year ended December 31, 1996 were $63,822,160 compared to $53,130,172 in 1995, an increase of 20.1%. The substantial revenue growth in 1996 is attributable to the inclusion of ALLIC for the entire year, which contributed approximately $9,200,000 to revenues. The 1995 revenues were 7.9% greater than 1994 when total revenues were $49,211,998. The smaller increase in revenues during 1995 resulted primarily from a reduction in new premium sales, whose decline offset increased investment income during the year. In 1995, the revenues of ALLIC are included only from the purchase date of September 14, 1995, and as such, only $2.6 million of ALLIC's total revenues of $9 million were included in the Company's results.
During late 1995 and 1996, management made a significant effort to expand the writing of pre-need insurance on the part of ALLIC. Included in this effort was the addition of several field agency managers, the design of new products, and printing of promotional materials. Despite this commitment and incurrence of approximately $700,000 in expenses, management abandoned these efforts late in 1996. It is management's belief that ALLIC is better served to continue to exploit its niche
selling specialty accident and health life products through existing distribution channels although factors such as the reaction of the remaining ALLIC sales representatives to discontinuation of this effort as well as general competitive factors will affect the actual outcome. Because only a nominal amount of new premium was written through the now discontinued expansion efforts, management does not expect the change in focus to have a material effect on new sales. Management does, however, believe that the loss of momentum as a result of withdrawal of the program will cause a disruption in ALLIC's sales. The annual sales of new premiums produced by ALLIC represents less than 10% of total new premiums produced by the Company; therefore management does not believe this will have an adverse effect on the Company.
Net investment income increased 30.7% during 1996 to $9,185,506 from $7,026,909 in 1995. In 1994, such income was $5,295,784. The 1996 results reflect actions taken during late 1994 and early 1995 to extend the duration of the Company's portfolio slightly to take advantage of higher yields. Overall, the duration was increased to approximately 6 years from 4 to 5 years. Additionally, the acquisition of ALLIC which increased the Company's invested assets by approximately $17.8 million, contributed, along with the Company's own internal growth. ALLIC represented $550,000 of 1995's investment income; however, this amount represented only slightly more than three months of earnings on that asset base. In 1996, the contribution was $1.2 million. The low yields available in the bond market during the Company's growth period have made it difficult to increase the return on the Company's invested assets without exposing the portfolio to undue risk; however, management believes that as yields rise (which occurred during 1994 and early 1995 and again in late 1996) the Company is positioned to take advantage of the investment opportunities that will present themselves and, thus, enhance future returns. Management hired the investment advisory firm of Asset Allocation and Management, Inc. of Chicago ("AAM"), Illinois in late 1995 to manage the Company's fixed maturity portfolio. It is the belief of management that an overall increase in returns can be achieved by implementing the plans of AAM to provide more diversity in the portfolio without significantly increasing risk. During 1996, a nominal reconfiguration was begun. In lieu of purchasing U.S. Treasury instruments, the Company began to purchase U.S. Government guaranteed mortgage pass-through securities. Management believes that an approximate 50 basis point increase in return can be achieved through the switch assuming current market yields do not decline.. Additionally, approximately $3 million of A to AA rated private placement bonds were acquired. Management expects to continue this strategy throughout 1997 as opportunities present themselves.
the lower reserve increase in 1995. Increasing premium income and favorable persistency in relation to premiums are the primary reasons for the increase in 1994. Increases in surrender activity on the block of Universal Life business acquired in the First Centennial Corp. acquisition in 1992 slowed the level of increase, particularly in 1994. These surrenders, which were expected by management, were increased by the relatively low interest rates paid on these plans during 1994 compared to the rates that were in effect several years ago when the plans were sold. Additionally, in the early years of a policy, the net reserves (benefit reserve less deferred acquisition costs) are small due to the large capitalized costs in the first and second policy years. As the policy matures, the reserve increases. The Company's reserves are certified annually by an independent actuary. Such certification noted no deficiencies for the years presented.
Overall policyholder dividends remained relatively stable in 1996 amounting to $2,363,201 from $2,422,168 in 1995 and $2,381,581 in 1994. In late 1993, management reduced the dividends paid on various plans to reflect the lower levels of return that were available in the bond market. As a result, the dividends paid in recent years have not been growing. Virtually all CICA's policies that have been sold since 1989 are participating. Participating policies represent a large majority (87%) of the Company's business in force and over 90% of new issues in 1996 and 1995. As a result, management expects continued growth in this item subject to factors such as persistency and future sales; however, dividends are factored into the policies' premiums and thus management does not believe continued increases in dividend expense will impair or dilute future profitability.
Claims and surrenders increased 34.4% in 1996, reaching $25,919,054 from $19,282,954 in 1995. In 1994, such expenses were $16,635,259. The 1995 increases result primarily from growth in surrenders and endowments.
Endowment expense grew from $4,631,261 in 1995 to $5,192,607 in 1996, a 12.1% increase. In 1994, such expenses were $4,475,462. Beginning in late 1990, 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. Management does not expect this benefit to adversely impact profitability since it is factored into the cost of the policy.
Policy surrenders were $14,421,683 in 1996, compared to $10,611,335 in 1995 and $8,637,306 in 1994. The increase in surrenders is, in the opinion of management, due to acquisitions and the growing block of business in force, as well as representative of the economic problems seen in Argentina during 1995 and early 1996.
Management has utilized firms such as this in previous periods with great success at obtaining increases in sales and expense reductions. Additionally, management undertook the expense reductions associated with ALLIC's marketing operations discussed previously. These actions should result in an additional $700,000 of annual overhead reduction in future periods based upon the 1996 level of
Amortization of cost of insurance acquired and excess of cost over net assets acquired increased to $1,398,859 in 1996 from $678,997 in 1995 and $606,487 in 1994. The increase is attributable to the goodwill and cost of insurance recorded on the acquisitions of ALLIC and IIH.
Stockholders' equity increased to $66,830,016 at December 31, 1996 from $64,712,990 in 1995. The acquisition of IIH and the income earned during the period were the primary reasons for the growth in equity during 1996. The IIH acquisition discussed previously, increased invested assets by $2,995,000 and stockholders' equity by $1,542,501. The increase in equity during the year would have been greater but for a $1,978,000 unrealized loss (net of tax) on the Company's available-for-sale bond portfolio. This unrealized loss was attributable to decreases in prices in the bond market in 1996.
On October 27, 1994, Citizens completed the offering of 916,375 shares of its Class A Common Stock under an exemption from registration under the Securities Act of 1933. The offering was made under Regulation S, which permits shares offered outside of the United States to non-United Stated persons pursuant to its guidelines may be resold in the United States by persons who are not an issuer, underwriter or dealer following a certain period after the close of the offering period. The offering price was $7.00 per share. The closing market price of the Class A common shares on the date of the offering commencement was $7.75 per share (as reported by the American Stock Exchange). The Company sold 916,375 shares, generating gross proceeds of more than $6.4 million, and net proceeds of approximately $5.4 million. Management was pleased with the amount of capital generated through the offering; however, it believes that the offering period was too short in light of the manner in
Invested assets grew to $138,311,136 in 1996 from $130,024,739 at December 31, 1995, an increase of 6.4%. The acquisition of IIH contributed approximately $2 million to said increase. The balance of the growth is attributable to the internal growth achieved by the Company. At December 31, 1996, 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 market. The Company does not have a plan to make material dispositions of fixed maturities during 1997; however, because of continued uncertainty regarding long-term interest rates, management cannot rule out sales during 1997. Fixed maturities held to maturity, amounting to $5,627,256 consist primarily of U.S. Treasury securities. Management has the intent and believes the Company has the ability to hold the securities to maturity.
The Company's mortgage loan portfolio, which constitutes 1.2% of invested assets at December 31, 1996, (1.5% at December 31,1995) has historically been composed of small residential loans in Texas. At December 31, 1996, no mortgage loans were in default. At December 31, 1995, one mortgage loan was in default with a principal balance of approximately $92,000. During 1995, the loan to an affiliate described below was foreclosed. Management has established a reserve of $50,000 at December 31, 1996 (approximately 3% of the mortgage portfolio's balance) to cover potential unforeseen losses in the Company's mortgage portfolio.
In February 1992, the Company paid cash for an 80,000 square foot office building in Austin, Texas to serve as its primary office. This building will, in the opinion of management, provide adequate space for the Company's operations for many years. Renovation and remodeling of the property began in the third quarter of 1992 and the Company relocated to the building in September 1993. The Company occupies approximately 27,000 square feet of space in the building. The Company's former office property, consisting of approximately 13,000 square feet in Austin, with a carrying value of $158,000 was leased to a third party on a triple-net basis for three years during 1995. The lease provided that the party can purchase the building during the first 18 months of the lease for $850,000 cash, with no lease payments applying to the purchase price. The option period expired in 1996. The property is being re-marketed with a $1.5 million asking price. The tenant retains a right of first refusal for the remainder of the lease.
CICA owned 1,955,457 shares of Citizens Class A common stock at December 31, 1996 and 1995. For statutory accounting purposes, CICA received written approval from the Colorado Insurance Department to carry its investment in Citizens at 50% of the fair market value limited to 7% of admitted assets ($8,310,000), which differs from prescribed statutory accounting practices. Statutory accounting practices prescribed by 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, 1996, that permitted transaction increased statutory surplus by $4,000,000 over what it would have been had prescribed accounting practices been followed. In the Citizens' consolidated financial statements, this stock is shown as treasury stock. During 1995, Citizens re-acquired 115,943 of these shares and retired them.
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, 1996 and 1995, CICA, ALLIC and CILIC were well above required minimum levels.
Also in 1993, the FASB issued Statement 115 "Accounting for Certain Investments in Debt and Equity Securities" ("Statement 115"). Statement 115 requires the classification of debt and equity securities as held to maturity, trading or available for sale based on established criteria. Trading securities are bought and held principally for the purpose of resale in the near term. The Company had no investment securities classified as trading at January 1, 1994, December 31, 1996 or December 31, 1995. Held-to- maturity securities are those in which the Company has the ability and intent to hold the security until maturity. All other securities not included in trading or held-to-maturity are classified as available- for-sale.
Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized. Transfers of securities between categories are recorded at fair value at the date of transfer. Unrealized holding gains and losses are recognized in earnings for transfers into trading securities. Unrealized holding gains or losses associated with transfers of securities from held-to-maturity to available-for-sale are recorded as a separate component of stockholders' equity. The unrealized holding gains or losses included in the separate component of equity for securities transferred from available-for-sale to held-to-maturity are maintained and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistent with the amortization or accretion of premium or discount on the associated security.