The table below sets forth, in summary form, selected data of the Company. This data, which is not covered in the report of our independent auditors, should be read in conjunction with the consolidated financial statements and notes, which are, included elsewhere herein. The per share amounts have been adjusted retroactively for all periods presented to reflect the 15% common stock dividend paid on June 1, 2002 and a 7% common stock dividend paid on December 31, 2003, respectively.
The Company's international life business continued to grow during 2003, despite continuing economic problems in some Latin American markets that historically have been large sources of new premiums. During the year, new marketing organizations were contracted in the Pacific Rim and other locations around the world. Management believes 2004 will see further increases in new production.
Development of our USA marketing operations continued. Changes were made in the management of this program in late 2003 and early 2004, and senior company executives have taken over the development program.
Management continues to seek acquisitions that can add value to the Company. During 2003, two transactions were completed. Because of the growth in the Company's asset base and level of capital, management is exploring opportunities for larger acquisition transactions (those in the $30 million to $75 million purchase price range). During 2003, a $30 million line of credit was negotiated with Regions Bank which should be available during the first quarter of 2004 (upon signing of formal loan documents) in order to permit the Company to pursue larger transactions.
On February 18, 2003, we acquired all the outstanding shares of First Alliance Corporation ("First Alliance"), the parent of First Alliance Insurance Company, a Kentucky life insurer, for approximately 2.6 million shares of our Class A common stock. The aggregate market value of the consideration was approximately $17.2 million.
On November 18, 2003, we acquired all the outstanding shares of Mid-American Alliance Corporation ("Mid-American"), the parent of Mid American Century Life Insurance Company, a Missouri life insurer, for approximately 800,000 shares of our Class A common stock. The aggregate market value of the consideration was approximately $7.2 million.
During late 2002 and into 2003, expansion in the Pacific Rim, particularly in Taiwan, was accomplished. CICA has established relationships with a number of marketing organizations in the Pacific Rim and during 2003 received approximately $2 million in submitted premiums from that region. New submitted premiums for 2003 from the international market totaled more than $13.5 million compared to $13.2 million in 2002.
Additionally, through the 2002 acquisition of Combined Underwriters Life Insurance Company ("Combined"), the Company acquired a unique vehicle for the recruitment and licensure of marketing associates in the state of Texas. Combined's charter creates what is known as a "Stipulated Premium" company which has the capacity to recruit and train marketers and put them into sales efforts based upon a "certificate of authority" issued by the Company. This means that a potential recruit can begin to sell insurance (up to $20,000 per year of premium and face amounts of insurance less than $15,000) immediately without the delays mandated by today's agent licensing requirements. By facilitating a potential marketer's ability to make sales while preparing for his/her Group 1 (standard agent license), the Company believes it can generate a larger population of new agents. Marketing associates under contract to Combined submitted approximately $1 million of new life premium in 2003. Additionally, the Company has a block of Credit
Life and Disability business written through furniture stores in Texas, Louisiana and Arkansas. This business, sold by furniture stores, is typically single premium, and amounted to $851,309 in 2003. Total U.S. life premium income for 2003 amounted to $11,270,015, compared to $6,161,392 in 2002 and $4,506,051 in 2001. Management intends to broaden the portfolio of ordinary whole life products available in the United States to include products similar to those available to overseas clients as well.
For more than 30 years, we have had a small block of USA accident and health business. This block grew through acquisitions in the mid-1990's that brought other books of accident and health business, including some major medical business; however, the acquisition of Combined substantially increased both the amount of accident and health business in force, as well as the volume of new business. The blocks of business acquired in the mid-1990's were initially highly unprofitable. Significant rate increases, coupled with the non-renewal of the major medical business, have over time improved the performance of these acquired blocks of business. The type of accident and health business predominantly written by Combined has historically been easier to manage and more profitable than other, more volatile forms of accident and health coverages.
During 2003, premium revenues from accident and health business were $14,784,958, compared to $13,473,966 in 2002 and $5,059,843 in 2001. During 2003, approximately $6.5 million of new accident and health premiums were submitted. The increase from 2001 to 2002 reflects the acquisition of Combined and Lifeline. Claims expenses for accident and health business totaled approximately $9,110,000 for 2003, $8,615,500 in 2002 and $3,301,300 in 2001. Commission expenses for 2003 were $2,812,600, while 2002 and 2001 totaled $2,472,500 and $877,360, respectively. Administration expenses totaled $4,072,900 in 2003, $3,784,273 in 2002 and $1,113,166 in 2001. During 2002 and 2003, such expenses were greater than we expected due to a longer and more expensive conversion of the computer systems utilized by Combined and Lifeline to those used by the Company and severance costs related to accrued leave time by employees at those companies. Additionally, due to the high lapsation experienced in the books of business of Combined and Lifeline, the amortization of the Cost of Customer Relationships Acquired related to those acquisitions was accelerated. During 2003, more than $3.9 million of such cost was amortized.
Total revenues for 2003 were $95,102,763 compared to $83,003,898 in 2002, an increase of 14.6%. In 2001 revenues were $67,646,824. The acquisitions of First Alliance and Mid-American increased 2003 revenues by $6,127,555. The acquisitions of Combined and Lifeline increased 2002 revenues by $11,270,166. The 2003 increase in revenues was primarily due to a 5.7% increase in new life premiums and a 17.1% increase in renewal life premiums and a 9.7% increase in accident and health premiums. The 2002 increase in revenues was due primarily to a 17.1% increase in new life premiums, a 4.5% increase in renewal life premiums, a 166.3% increase in accident and health premiums and a 7.2% increase in net investment income. The increase in new life revenues was due to the expansion of countries from which applications have been received, while the increases in accident and health premium relate to Combined and Lifeline.
Premium income increased by 14.4% from $68,210,881 in 2002 to $78,027,413 in 2003. The 2003 increase was comprised of a $8,505,540 increase in life premiums and annuity and universal life considerations and a $1,310,992 increase in accident and health
premiums. The February 2003 acquisition of First Alliance and the November 2003 acquisition of Mid-American increased life premiums by $4,344,761. Additionally, premiums received from new markets, particularly the Pacific Rim, boosted revenues during the year. Production of new life insurance premiums by CICA increased 5.7% from 2002 to 2003 and 17.1% from 2001 to 2002. In addition, management initiated a domestic ordinary life sales program in late 2000 targeting middle-income residents of the U.S. This program's initial results to date have been insignificant; however, with the recent acquisitions, the additional sales forces of the acquisitions should provide expanded sales efforts for our domestic marketing program. (See the discussion of U.S. marketing operations above). Premium income increased by 26.4% from $53,962,937 in 2001 to $68,210,881 in 2002. The 2002 increase was comprised of a $5,833,821 increase in life premiums and an $8,414,123 increase in accident and health premiums. The March 2002 acquisitions of Combined and Lifeline increased life premiums by $1,539,015 and accident and health premiums by $9,186,710. Management continued to implement significant rate increases in supplemental non-cancelable accident and health products and in March and April 2003 did not renew approximately $2.3 million of annual premium related to major medical policies due to increased loss ratios. As set forth above, the Company is moving to cede its entire accident and health premium to another carrier in order to achieve overhead reductions and improve operating results. This course of action will result in elimination of accident and health premiums.
Realized gains for 2003 amounted to $1,883,105 compared to $477 for 2002 and a net loss of $148,415 in 2001. The increase was primarily due to selective sales made by management of securities from earlier acquisitions that did not meet the Company's credit criteria or risk profile. In 2003 we also recognized $563,055 from the early extinguishment of a liability, offset by the related amortization of an intangible asset, as a result of the First Alliance acquisition.
The change in future policy benefit reserves increased from $6,051,671 in 2002 to $7,904,091 in 2003. The change in future policy benefit reserves in 2001 was $6,483,706. CICA's life reserves increased $10.6 million in 2003, which offset decreases in accident and health reserves. This is predominantly due to an increase in persistency on the Company's overseas business. These persistency improvements have led to an increase in policy reserves at an accelerated rate compared to the past. CICA's accident and health reserves decreased approximately $200,000 because of expected lapsation and non-renewal as the Company continued to implement significant rate increases. Accident and health policy reserves for Combined decreased by approximately $3.0 million in 2003. The non-renewal of the major medical block of business accounted for $1.3 million of the $3.0 million decrease. In addition, Combined has experienced high lapsation on new accident and health policies issued. Including the policies terminated from the non-renewal of the major medical business, the policy count for Combined's accident and health policies decreased by approximately 33% during 2003 compared to 2002 resulting in accident and health policy reserves decreasing by approximately $1.7 million. The change in policy reserves for life and annuity policies for Combined resulted in a net decrease of approximately $250,000.
FAIC, purchased on February 18, 2003, had an increase in policy benefit reserves of approximately $580,000 since the date of acquisition. Approximately $380,000 of the increase relates to annuities and approximately $200,000 relates to life insurance.
Accident and health benefits increased 5.7% from $8,615,358 in 2002 to $9,109,965 in 2003. Such claims were $3,301,341 in 2001. The 2003 increase is directly related to the acquisition of Combined, which saw continued increases in claims incurred. The increase in 2002 accident and health benefits is directly related to the acquisition of Combined and Lifeline discussed above, which generated $5,752,048 in claims. During 2003, we did not renew approximately $2.3 million of major medical premiums on the Combined book of accident and health business. In addition, significant rate increases were implemented on the accident and health business remaining in force. As was discussed above, management has negotiated a reinsurance arrangement to cede off all of the accident and health business in force in 2004.
Endowment benefits increased 12.0% from $5,730,463 in 2002 to $6,415,932 in 2003. In 2001, such expenses were $5,389,082. CICA has a series of international policies that carry 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. Like policy dividends, endowments are factored into the premium and as such the increase should have no adverse impact on profitability.
Policy surrenders increased 7.2% from $16,777,391 in 2002 to $17,985,923 in 2003. Surrenders were $14,435,486 in 2001. The 2003 increase is directly related to the acquisitions of First Alliance and Mid-American, discussed above, which generated $2,668,847 in surrenders. The uncertain economic climate in several Latin American countries was the primary reason for the increased 2002 surrender activity. The economies in Argentina and Venezuela in particular were in near-depressions during 2002. However, management is optimistic about the long-term prospects for these countries.
Other claim expenses amounted to $534,560 in 2003, $383,993 in 2002 and $449,441 in 2001. These expenses are comprised of supplemental contract benefits, interest on policy funds and assorted other miscellaneous policy benefits.
During 2003, commissions increased 11.6% to $18,227,851 from $16,339,205 in 2002. In 2001, commission expense was $13,444,270. The 2003 increase was attributable to the acquisition of First Alliance and Mid-American, whose 2003 commissions were $1,063,976. The remainder of the 2003 increase was due to the 5.7% increase in production of new life insurance premiums. The 2002 increase was due to the acquisition of Combined and Lifeline, whose 2002 commissions were $2,160,226 and because of a 17.7% increased production and related increased issuance of new life policies. During 2002, the Company terminated its arrangement with its international marketing manager and transferred the responsibilities to the home office. As a result, commission expense declined approximately $400,000 and home office marketing and operating expenses increased.
Capitalized deferred policy acquisition costs increased 14.6% from $14,442,757 in 2002 to $16,557,855 in 2003. These costs were $11,112,096 in 2001. The 2003 increase related to the 5.7% increase in new life production. The 2002 increase included $1,518,389 of deferred policy acquisition costs that have been capitalized by Combined and Lifeline since their acquisition. The remainder of the increase related to the 17.1% increase in new life production. Amortization of these costs was $11,806,640, $10,039,403 and $8,568,455, respectively in 2003, 2002 and 2001. Most of the 2002 increase related to the increased surrender activity caused by the uncertain economic climate in several Latin American countries.
We paid a 7% stock dividend on December 31, 2003 to holders of record as of December 1, 2003. A similar 15% dividend was paid on June 1, 2002. Both dividends were paid using Class A and B shares that were previously authorized but unissued. The dividends had the effect of transferring $23,315,572 and $35,416,772, respectively, in 2003 and 2002 from retained earnings to our common stock and treasury stock.
Invested assets increased to $275,188,132 at December 31, 2003 from $226,008,600 at year-end 2002, an increase of 21.8%. The acquisition of First Alliance and Mid-American discussed above were the primary reasons for the increase adding $30.6 million to invested assets. In addition, $21.3 million of excess cash was invested in fixed maturities as interest rates began to gradually increase in late 2003. Increases in fixed maturities available-for-sale (23.8%), fixed maturities held-to-maturity (2.8%) and policy loans (6.2%) were the primary categories of invested assets that increased. Fixed maturities are categorized into two classifications: fixed maturities held-to-maturity, which are valued at amortized cost,
We have a profit sharing plan designed to provide a retirement program for the exclusive benefit of our eligible employees. The plan is designed to comply with the Employee Retirement Income Security Act of 1974 (ERISA). Our Board of Directors determines if a contribution will be made and the amount to be made. The contribution, if any, is allocated based upon the total number of employees participating in the plan and their years of service. We made contributions of $300,000 in 2003, $300,000 in 2002, and $250,000 in 2001. The profit
Effective January 1, 2001, the NAIC implemented codified rules for statutory accounting. These rules were approved and implemented by each state in which all of our insurance subsidiaries operations are domiciled. CICA is domiciled in Colorado, Combined is domiciled in Texas, FAIC in Kentucky, MACLIC in Missouri, SAIC in Arkansas and CUSA 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 a reserve of approximately $3 million in its statutory financial statements as of and for the year ended December 31, 2003 or December 31, 2002. Texas, Illinois, Kentucky, Missouri and Arkansas codified rules must be followed unless the Commissioner of Insurance permits specific practices that differ from codified rules. None of our insurance subsidiaries has requested any permission to deviate from NAIC codified rules.
During the third quarter of 2003, management determined to transfer the hardware platform that the Company's legacy computer system operates on from the Wang environment to an IBM mainframe environment. This decision was prompted by the need
to migrate to hardware that is widely available and supported. Delivery of the new hardware occurred in October 2003, and management estimates that the transition will take 12 to 18 months. The Company's existing Data Processing staff will oversee the conversion. The overall cost of the new hardware was less than $1 million. Management expects to achieve an environment that the Company can operate in for many years to come through this move.
The Company has committed to the following contractual obligations as of December 31, 2003 with the payments due by the period indicated below:
In Table II in Item 1, the ratio of lapses and surrenders to mean life insurance in-force has varied between 4.9% to 5.1% for three of the past five years, with 2003 being impacted by the acquisition of First Alliance. The 2002 ratios of 8.2% and 7.3% relate to surrenders caused by the current uncertain economic conditions in several Latin American countries. In addition, the 2003 ratio of 8.2% includes First Alliance surrenders and lapses of approximately $32.2 million (approximately 1.2% of the total). After review of the surrender and lapse detailed information, management does not believe the 2002 and 2003 increases reflect a negative trend in lapses and surrender activity but rather an aberration in the historical experience and no adjustment to persistency and lapsation assumptions are needed in the computation of future policy benefit reserves. Management believes that our conservation program whereby policyholders that are considering surrendering their policies are informed and counseled about the benefits of their policies, should return surrenders to our historical levels.
A recoverability test that considers among other things, actual experience and projected future experience, is performed at least annually by third party actuarial consultants. These annual recoverability tests initially calculate the available premium (gross premium less benefit net premium less percent of premium expense) for the next 30 years. The available premium per policy and the deferred policy acquisition costs per policy are then calculated. The deferred policy acquisition costs are then amortized over two methods utilizing reasonable assumptions and two other methods using pessimistic assumptions. The two methods using reasonable assumptions illustrate an early-deferred policy acquisition recoverability period. The two methods utilizing pessimistic assumptions still support early recoverability of the aggregate deferred policy acquisition costs. Based upon the analysis done to only capitalize expenses that vary with and are directly related to the acquisition of new and renewal insurance business, utilization of the factor method and extensive, annual recoverability testing, management believes that our deferred policy acquisition costs and related amortization as of and for the years ended December 31, 2003, 2002 and 2001 limits the amount of deferred costs to its estimated realizable value.
At December 31, 2003, investments in fixed maturity and equity securities were 90.6% and .4%, respectively, of total investments. Approximately 95.3% of our fixed maturities were classified as available-for-sale securities at December 31, 2003 with the remaining 4.7% classified as held-to-maturity securities based upon our intent and ability to hold these securities to maturity. All equity securities at December 31, 2003 are classified as available-for-sale securities. We have no fixed maturity or equity securities that are classified as trading securities at December 31, 2003.
maturity securities primarily composed of U.S. Treasury securities and obligations of U.S. government corporations and agencies, including U.S. government guaranteed mortgage-backed securities and callable instruments issued by U.S. government agencies and its analysis whether any declines in fair value below cost are temporary or other than temporary, management believes that our investments in fixed maturity and equity securities at December 31, 2003 are not impaired and no other than temporary losses need to be recorded.
Approximately $2,474,000 of the fixed maturities available-for-sale that have been in a continuous unrealized loss situation for less than 12 months are investments in callable instruments issued by U.S. government agencies. These fixed maturities available-for-sale are backed by the full faith and credit of the U.S. or bear the implied full faith and credit of the U.S. government. Management believes it is remote that unrealized losses on these instruments will result in realized losses since the Company has the intent and believes it has the ability to hold these securities to the call date or maturity date. The remaining $39,079 of fixed maturities available-for-sale that have been in a continuous unrealized loss situation for less than 12 months are investments in fixed maturities available-for-sale issued by corporations. The investments in callable instruments issued by U.S. government agencies and in fixed maturities available-for-sale of corporations that have been in an unrealized loss position for less than 12 months are primarily in an unrealized loss position because their coupon interest rate was less than the prevailing market interest rates as of December 31, 2003. As of December 31, 2003, the Company has determined that there is no need to establish a new cost basis for these debt securities that have been in a continuous loss situation for less than 12 months since a loss has not occurred. See also