During 1995, CICA acquired through foreclosure, a 7,500 square foot office property in Wheatridge, Colorado for $116,000. Subsequently, the Company renovated the property, bringing its investment to $230,000. The property was sold for $275,000 in 1998, with the Company retaining a $240,000 first lien.
On October 28, 1996, Citizens announced that it had signed definitive written agreements for the acquisition of American Investment Network, Inc. ("American"), a Jackson, Mississippi, based life insurance holding company and parent of United Security Life Insurance Company ("USLIC") 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. Approximately 700,000 Citizens' Class A common shares were issued in connection with the transaction, which was accounted for as a purchase. The transaction closed on June 19, 1997.
On September 15, 1998 Citizens and First Investors Group, Inc. ("Investors") of Springfield, Illinois reached an agreement wherein Citizens would acquire 100% of the outstanding preferred and common shares of Investors for shares of Citizens' Class A Common stock. Investors is the parent of Excalibur Insurance Corporation, also of Springfield, Illinois ("Excalibur"), and has consolidated assets of approximately $3.2 million, annual revenues of $201,000 and capital of
A net loss of $6,720,693, or $0.31 per share was incurred during 1998, compared to net income of $3,425,523 or $.16 per share in 1997 and net income of $2,213,726 or $.11 per share in 1996.
A non-recurring charge to goodwill of $9.5 million recorded in the third quarter of 1998 caused the 1998 loss. The writedown was related to goodwill recorded in the 1995 acquisition of American Liberty Financial Corporation. The writedown was caused by a decline in new production from insurance agents formerly associated with American Liberty. Subsequent to the 1995 acquisition, management implemented a 45% reduction in commissions paid to these agents in order to preserve profitability of the accident and health business which was negatively impacted by (i) changes in state laws that established minimum claims ratios, and (ii) a mandated change in interest rates used to compute reserves. In addition, as a result of a merger of American Liberty into CICA during 1997, new policy sales were delayed because CICA had to resubmit policies formerly sold by American Liberty for approval in each of the states in which the policies were sold by American Liberty. Accordingly, the Company experienced what was believed to be a temporary decline in new production of American Liberty. The Company continued to monitor production associated with these products, for which the primary marketing efforts occur during the months of June to September, due to the nature of the policies sold. As a result of obtaining the necessary policy approval and increased sales efforts during 1998, management was successful in reviving production from some of the largest producers of American Liberty. However, management's estimate of future production was reevaluated during the quarter ended September 30, 1998 based upon the sales activity of the products sold during that quarter, the size of the active agency force, and the anticipated future production to be achieved in subsequent years. As a result of this evaluation, the writedown was recognized.
It is management's belief that CICA, utilizing the marketing representatives who previously represented ALLIC, is better served to continue to exploit its niche selling specialty accident and health life products through existing distribution channels. The acquisition of USLIC also brings capable sales forces that have historically sold similar products; therefore, management believes that the ability to "cross-sell" products between companies is high.
Net investment income increased 12.4% during 1998 to $11,279,125 from $10,038,736 during 1997. The 1997 results were up 9.29% compared to the $9,185,506 earned in 1996. The 1998 and 1997 results reflect the continuing expansion of the Company's asset base as well as the actions taken in previous years to change the mix and duration of the Company's invested assets. Overall, the duration was increased to approximately 5.19 years from 4 years.
Overall policyholder dividends increased to $3,025,746 in 1998, up 8.7% over 1997 when such benefits were $2,782,215. The 1997 amounts represented an increase of 18% compared to $2,363,201 in 1996. The 1997 growth is primarily due to the acquisition of USLIC, which increased the current year results by approximately $397,000. Virtually all CICA's policies that have been sold since 1989 are participating. However, sales of credit life by NSLIC are non-participating and have had the effect of lowering the overall growth in dividends. Participating policies represent a large majority (71%) 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 Argentine market 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 factors such as persistency and future sales, although dividends are factored into the policies, although dividends are factored into the policies.
Accident and health benefits grew to $6,160,966 in 1998 from $2,963,636 in 1997. Such claims were $1,719,244 in 1996. The increase reflects the growing block of accident and health premium on the Company's books, and more specifically the inclusion of NSLIC and USLIC for the entire year. Claims on USLIC's A&H benefits were $2,513,680, while NSLIC's were $1,653,367. In 1997, the addition of USLIC and NSLIC contributed approximately $740,000 to the benefit amounts. In 1996, the acquisition of ALLIC caused such benefits to increase sharply because of the volume of A&H premium on ALLIC's books compared to the amount on CICA's books. During the second half of 1998, the Company experienced a significant increase in the volume of claims which resulted in a backlog. During the fourth quarter of 1998, management increased the number of individuals processing claims from approximately 13 to 30. Management believes the Company will be current on its claims processing in the second quarter of 1999. In the meantime, significant effort has been made to ensure that the pending claims reserve and provisions for incurred but not reported claims are conservative and reasonable.
During 1998, commissions increased to $12,501,426 from $11,918,192. In 1996, commission expense was $12,447,664. The majority of such amounts paid relates to first year commissions which were $8,169,835, $8,120,748, and $8,677,297 in 1998, 1997, and 1996, respectively. The 1996 increases relate to improved sales activity in CICA and approximately $1.5 million associated with ALLIC. The decline in first year commissions reflected in 1998 and 1997 compared to 1996 relates to the slowdown in new sales discussed earlier. Additionally, the increase in new sales of accident and health and credit business contributed to the decline. These products typically carry lower commissions than do ordinary life products.
Capitalized deferred policy acquisition costs were $7,941,829 in 1998, $9,804,022 in 1997, and $10,531,222 in 1996. The large drop in 1998 reflects the sale of accident and health products described above which carry lower levels of commission and thus capitalization. The decline in amounts in 1997 reflects the lower level of new sales experienced during the year, as well as the lower interest rate environment. Amortization of these costs was $7,789,513, $9,630,705 and $10,221,917, respectively in 1998, 1997 and 1996.
In order to monitor the market risk associated with the Company's investment policy, management measures the sensitivity of the portfolio to instantaneous interest rate changes. 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. Under either interest rate scenario the portfolio carries positive convexity.
Cash balances of the Company in its primary depository, Chase Bank of Texas, Austin, Texas, were significantly in excess of Federal Deposit Insurance
Company management has been actively involved in life and health insurance software development since the 1960's. The Company continues to develop and maintain its core information systems with a professional staff of program designers, analysts and programmers through its wholly-owned subsidiary Computing Technology, Inc.
The overall expenditure for addressing year 2000 issues is minimal because all planning, remediation and testing have been, and will continue to be, performed with existing staff during normal business hours.
Wang has certified the 7.53.00 operating system to be year 2000 compliant and the Company successfully completed installation and testing of this system in July, 1998. The Company uses Microsoft's WFW 3.11 and NT Server 3.51 (SP5), for its LAN, both of which are certified by Microsoft to be year 2000 compliant. The Company uses Word 6.0, EXCEL 5.0, and Notes 3.3 as applications on the LAN which are certified to be compliant except for the Notes product which is not compliant, but is reported to have no loss of data or functionality. However, only the Wang system is mission-critical with the in-house developed code for Host Daily Cycle systems being considered a part thereof.
As for electronic data exchanges, the Company interacts with Chase Bank, Rudd and Wisdom, Dataplex, PCS Health Systems and certain reinsurance companies. The Chase Bank relationship is the only third-party interface that could be considered mission-critical and it can be circumvented (in less than one man-hour) by using paper drafts instead of electronic transactions should the Company find such to be desirable. Other vendor interfaces can be circumvented with hard-copy reporting should an electronic interface become untenable for some reason.
The Company believes it has addressed its Year 2000 concerns. The Company has developed contingency and recovery plans aimed at ensuring the continuity of critical business functions before, on and after December 31, 1999. The contingency and recovery planning is substantially complete. The Year 2000 contingency plans will be reviewed periodically throughout 1999 and revised as needed. The Company believes its Year 2000 contingency plan, coupled with existing "disaster recovery" and "business resumption" plans, minimize the impact Year 2000 issues may have on the organization
In June 1997, the FASB issued Statement 130 "Reporting Comprehensive Income" ("Statement 130"). Statement 130 establishes the standards for reporting