The Registrant and its two subsidiaries share a common office located at 2512 North Knoxville, Peoria, Illinois. The lease for this office is in the name of Central and the total monthly rental is $800 for approximately 2,900 square feet of space. During 1994, CI reimbursed Central $1,200 for its share of space occupied.
C I owns miscellaneous data processing equipment and office equipment with a year-end net book value of $921 and $527, respectively. During the year, C I received $6,000 from Central for use of the equipment.
On November 28, 1994, the Registrant and its life subsidiary, Central Investors Life Insurance Company of Illinois (Central), signed a definitive written agreement with Citizens, Inc., a Colorado life insurance holding company based in Austin, Texas for the acquisition of the stock of the Registrant and Central by Citizens, Inc. The agreement provides that shareholders of the Registrant will receive one (1) share of Citizens, Inc. Class A common stock for each eight (8) shares of the Registrant's Class A or B stock owned. Shareholders of Central other than the Parent will receive one (1) share of Citizens, Inc. Class A common stock for each four (4) shares of Central stock owned. The companies will continue to operate in their respective locations under a combined management team with consolidation of computer data processing on Citizens, Inc.'s system. The agreement is subject to the approval of regulatory authorities and stockholders of the Registrant and Central. On March 10, 1995, the Illinois Department of Insurance indicated that the companies could proceed with the merger and Citizens, Inc.'s acquisition of control of Central.
Investment income was down $16,566 in 1994 compared to decreases of $24,564 in 1993 and $18,363 in 1992. The 1994 and 1993 decreases in investment income were the result of falling interest rates during the past three years, which lead to the Company experiencing almost all of its bonds with over 7% yield being called in for redemption. Investment income was further affected by a 1993 change in the Illinois statutory deposit law requiring the Company to maintain a trust deposit of U. S. Government obligations with a market value of $1,200,000. This change required the Company to increase its U. S. Government investments by $900,000 in late 1993, a time of very low interest yields which negatively affected investment income, approximately $25,000 to $30,000 from late 1993 to late 1994. The market value requirement and the Company's small asset base made it necessary to choose short term U. S. Governments to insure less market price volatility, further penalizing yields.
The realized investment gains of $1,081 in 1994, and $24,350 in 1993 and $20,208 in 1992 were the result of early calls plus adjustments in stock and U. S. Treasury Note holdings. The Company's bond investments have always been limited to investment grade bonds, but two bonds have been reduced by Moody's Investment Service to a rating of Ba1 or lower. These two bonds represent less than 1.2% of total assets and were current with interest payments at the end of the year. The Company has no direct investments in mortgages or real estate.
The Financial Accounting Standards Board (FASB) has issued a Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities". In 1994, this required the Company to classify its debt and marketable equity securities in one of three categories: trading, held-to-maturity, or available-for-sale. Securities which qualify for the held-to-maturity category are to be stated at amortized cost. Since the Company's practice has been to purchase U. S. Treasuries and other bonds with the intent to hold-to-maturity, there was no significant change in the stated value of these investments.
In 1994, death claim expenses were $30,020, compared to $29,548 in 1993 and $76,617 in 1992. The death claim expense in 1992 was the highest in the Company's history and developed from Modified Whole Life (MWL) policies written in the early "80's. During 1993, the lapsing of these policies accelerated as a large block of 1983 MWL policies were subject to a premium increase and deposit refund on their tenth anniversary date. The amount of cash surrenders decreased by $25,719 in 1994 compared to an increase of $15,474 in 1993 and a decrease of $8,235 in 1992. Since the Company is not selling policies with annual endowments or dividends, these policy benefits will also decrease from time to time at a rate determined by cash surrenders. As a result of decreased lapses and cash surrenders in 1994, expenses for future life policy benefits and deferred
premium increased while amortization of deferred acquisition cost decreased. The recovery of $1,309 in uncollectible agents balances was a result of contractual changes in MWL policies which continued into their eleventh year. Recovery of uncollectible agents balances decreased significantly in 1994, as expected, and will remain low in 1995.
During the Spring of 1993, the Illinois Insurance Department conducted an in-house audit of the books and records of the Company's life insurance subsidiary. Their financial examination report confirmed the subsidiary's statutory reports, found no regulatory violations and was adopted and filed October 13, 1993. This report is available for public examination at the Illinois Insurance Department's offices in Chicago or Springfield, Illinois.
Later in 1993, the Registrant increased its borrowings by $58,000 as income declined and expense reductions failed to keep pace. The Registrant borrowed $87,400 additional in 1994. On November 28, 1994, the Registrant and Central signed a definitive written agreement with Citizens, Inc., a Colorado life insurance holding company based in Austin, Texas for the acquisition of the stock of the Registrant and Central by Citizens, Inc. The agreement provides that shareholders of the Registrant will receive one (1) share of Citizens, Inc., Class A common stock for each eight (8) shares of the Registrant's Class A or B stock owned. Shareholders of Central, other than the Parent, will receive one (1) share of Citizens, Inc. Class A common stock for each four (4) shares of Central stock owned. The companies will continue to operate in their respective locations under a combined management team with consolidation of computer data processing on Citizens, Inc. system. The agreement is subject to the approval of regulatory authorities and stockholders of the Registrant and Central. On March 10, 1995, the Illinois Department of Insurance indicated that the companies could proceed with the merger and Citizens, Inc.'s acquisition of control of Central.
Funds from premium income, interest income, bond maturities and redemptions, and a loan increase of $87,400 were used to meet 1994 liquidity and capital requirements. The company's total assets and liabilities decreased between 1994 and 1993 as a result of decreased investment income and premium income. Although the Company has a substantial amount of liquidity in interest earning cash accounts and short term investments totaling $207,500 and anticipates the maturing of $1,038,000 of bonds in 1995, the requirement to maintain $1,200,000 of capital and surplus in the life subsidiary and to maintain two complex accounting systems for different regulatory layers of government has imposed severe limits on the use of these funds. None of the funds can be applied
toward loan repayments due in 1995. The Company will need to secure an extension of its loans or a new loan, an effort which will not be enhanced by the Company's record or previous earnings trends unless regulatory and stockholder approval is secured implementing the previously described definitive written agreement between Citizens, Inc. and the Company. Progress on product development continues to be postponed by concern for the rising cost of supporting the regulatory reporting system, claim experience and maintaining the current capital and surplus requirements for the life insurance subsidiary.
During the early part of 1993, the Company sought approval from the Illinois Insurance Department for a reinsurance contract designed to reduce the Company's exposure to claims while injecting additional capital and permitting the Company to earn a fee servicing the business reinsured. In a letter dated March 25, 1993, the Department requested the contract be withdrawn. Once the computer system, which has been adjusted to service the reinsured business, was readjusted, the decision developed reasonably well for the Company. Death claim expense for 1993 and 1994 returned to near average levels, policy terminations in the block of policies generating claims reduced potential claim expense and, in 1994 the lapse rate dropped to 4.9% from 18.4% in 1993 and 17.3% in 1992.
At the end of 1994 the life subsidiary had $1,202,323 of statutory capital and surplus. This was a decrease of $11,924 compared to an increase of $4,628 in 1993 and a decrease of $24,799 in 1992. The Illinois Legislature established $1,200,000 as the minimum statutory capital and surplus for an Illinois domiciled life insurance company after December 31, 1990. On December 31, 1995, the
requirement changes to $1,500,000 capital and surplus. The normal "grandfather" provision was not allowed, and life insurance companies which were in existence before the changes were established are required to meet the new minimums as they come into effect.
The cost of maintaining and reporting under two complex standards of accounting, GAAP for Federal Regulators and statutory accounting for State Regulators, continues to drain resources from more productive efforts. Statutory accounting has always been required of the Company, but GAAP accounting was not required until 1973. In 1994, GAAP accounting was estimated to have cost $34,150 or 21.2% of 1994 GAAP general insurance expenses. From the start of GAAP accounting in 1973, the Company estimates, exclusive of internal expenses, that $377,518 has been spent with independent actuarial and accounting firms to assist in maintaining the GAAP accounting system. In the opinion of management, statutory accounting will remain the primary accounting method determining the Company's solvency, and ability to make expenditures and pay dividends.
Independent Auditor's Report Consolidated Balance Sheets - December 31, 1994 and 1993 Consolidated Statements of Operations - Three Years Ended December 31, 1994 Consolidated Statements of Changes in Stockholders Equity - Three Years Ended December 31, 1994 Consolidated Statements of Cash Flows - Three Years Ended December 31, 1994 Notes to Consolidated Financial Statements
The Board of Directors and Stockholders Insurance Investors & Holding Co.:
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, C I Agency, Inc. and its 93.0% owned subsidiary, Central Investors Life Insurance Company of Illinois. All significant intercompany balances and transactions have been eliminated in consolidation. The significant accounting policies are as follows:
The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles prescribed for stock life companies for all years presented.
(a) Premiums Gross premium received in excess of the net premium on limited-payment contracts is deferred and recognized in income over the expected life of the business. Other premium income is recognized as revenue ratably over the terms of the respective policies calculated on the monthly pro rata basis and are stated after deduction for reinsurance with other insurers.
(e) Federal Income Taxes Effective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are
recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases (temporary differences) and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(f) Earnings Per Share Earnings per share have been computed using weighted average number of shares of common stock outstanding during each period.
Held-to-maturity securities are stated at amortized cost which represents actual cost adjusted for amortization of premium and accretion of discount using methods that generally approximate the effective interest method. Trading and available-for-sale securities are stated at fair value. Unrealized holding gains and losses, net of related taxes, on available-for-sale securities are excluded from earnings and reported as a separate component of stockholders' equity until realized, while unrealized gains and losses for trading securities are included in earnings. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security.
The Company adopted SFAS 115 effective January 1, 1994 on a prospective basis. There was no impact of adoption of SFAS 115 to the consolidated financial statements as all the debt securities of the Company are classified as held to maturity.
(a) Bonds and U.S. Treasury bills are included in the consolidated financial statements at amortized cost, as the Company intends to hold all bond until maturity. The non-redeemable preferred stocks are carried at market.
The following information summarizes the components of investment income and changes in realized and unrealized gains (losses):
Gross unrealized gains and gross unrealized losses at December 31 were as follows:
(c) Net realized gain or loss on investments is determined on the basis of specific identification.
(3) ACTUARIAL ASSUMPTIONS - DEFERRED ACQUISITION COSTS AND FUTURE LIFE POLICY BENEFITS
Policy reserves for most ordinary policies in force are computed on the basis of interest rates for the first year of 6% graded over 20 years to 4%. Other policies use 4%.
Capitalized expenses include commissions, underwriting and policy issue expenses, but exclude expenses which do not vary with the sales of new business, such as developmental, advertising and sales promotion expenses. Amortization of expenses is accomplished principally by using actuarial techniques incorporating assumptions for interest, mortality and withdrawals.
Withdrawal rates for most policies in force are based upon Company experience. Other policies use the Linton A Table.
Class B stockholders are not entitled to a cash dividend in any year until Class A stockholders have been paid $.12 a share. In that event, Class B stockholders are entitled to a dividend up to $.12 a share in that year. Thereafter, any remaining distribution during that year is on a share-for-share basis.
The Class B common shares are automatically convertible into Class A common shares if, and when, the Company has had average net earnings of $.12 a share per year (on the total number of Class A and Class B common shares outstanding at time of conversion) for a period of not less than 36, nor more than 60, consecutive months. Such conversion is to be made on a share-for-share basis.
Under the Illinois Insurance Code, dividends may be paid only from unassigned surplus, as restricted by the provisions of the Code. As defined by the Illinois Insurance Code provisions, no dividends or other distributions can be paid by the insurance subsidiary unassigned surplus reflects a statutory deficit at December 31, 1994, 1993 and 1992 (see note 7).
(6) Reconciliation Between GAAP and Statutory Financial Statements for Net Earnings (Loss) and Retained Deficit
Total income tax benefit is less than the amount computed by applying the applicable federal income tax rate to losses from operations before income taxes for the following reasons:
Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 1994 will be allocated to income tax benefit that would be reported in the consolidated statement of operations.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income of approximately $637,000 in future years.
For federal income tax purposes, the Company's life insurance subsidiary at December 31, 1994 had net operating loss carryforwards of approximately $305,000 available to offset future taxable income. These carryforwards expire as follows: $28,000 in 1995, $3,000 in 1996, $38,000 in 1997, $63,000 in 1998, $19,000 in 1999, $9,000 in 2002, $51,000 in 2003, $23,000 in 2004, $5,000 in 2006, $39,000 in 2007, $24,000 in 2008 and $6000 in 2009.
Minority interest in the equity of the consolidated subsidiary, Central Investors Life Insurance Company of Illinois, is comprised of the following:
Net income (loss) for each of the years in the three years ended December 31, 1994 was $(25,886), $1,736,and $(37,632), respectively.
The Company does not retain more than a $20,000 liability on any one life. To the extent that any reinsuring companies are unable to meet their obligations under the reinsurance agreements, the Company would remain liable.
Effective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases (temporary differences) and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The cumulative effect of the change in accounting for income taxes was $-0- and has therefore not been separately stated in the 1993 Condensed Statement of Operations.