The following table presents selected financial data of the Company. This should be read in conjunction with
We conduct operations as an insurance holding company emphasizing ordinary life insurance products in niche markets where we believe we can achieve competitive advantages. As an insurance provider, we collect premiums on an ongoing basis to pay future benefits to our policy and contract holders. Our core operations include issuing:
Life Insurance. For over the past 30 years, CICA and its predecessors have accepted policy applications from foreign nationals for U.S. Dollar-denominated ordinary whole life insurance and endowment policies. We make our insurance products available using third-party marketing organizations and independent marketing consultants.
Described below are some of the significant trends affecting the life insurance industry and the possible effects they may have on our future operations.
As an increasing percentage of the world population reaches retirement age, we believe we will benefit from increased demand for living products rather than death products, as aging baby boomers will require cash accumulation to pay expenses to meet their lifetime needs. Our ordinary life products are designed to accumulate cash values to provide for living expenses in a policy owner’s later years, while continuously providing a death benefit.
While our management has more than 40 years of experience in writing life insurance policies for foreign residents, changes related to foreign government laws and regulations and application of them, along with currency controls affecting our foreign resident insureds could adversely impact our revenues, results of operations and financial condition.
Premium Income. Premium income derived from life, accident and health, and property insurance sales, increased 3.2% during 2010 to $152.1 million from $147.3 million in 2009. The increase resulted primarily from renewal premiums, which totaled $127.1 million, $123.2 million and $116.6 million in 2010, 2009 and 2008, respectively. Endowment sales represent a significant portion of new business sales internationally, as these products have gained in popularity over the past several years. In addition, most of our life insurance policies contain a policy loan provision, which allows the policyholder to use cash value of a policy to pay premiums. The policy loan asset balance increased 10.9% year over year.
Included in this component are other-than-temporary impairments on securities recorded related to credit losses. One security which had been previously impaired was written down with a charge to income of $27,000 during 2010. In 2009, the Company recorded $0.3 million in realized losses related to other-than-temporary impairments due to market declines and issuer credit deterioration. In 2008, the Company recognized other-than-temporary impairment write-downs of $23.5 million on its holdings of equity mutual funds. In addition, we also impaired two bonds due to credit quality, recognizing a realized loss of $0.3 million.
Reserves. The change in future policy benefit reserves has increased over the past several years. Sales of certain endowment products, which build reserves at a much higher rate, have gained popularity in our international markets and have contributed to the increasing reserves over the past several years. Endowment sales totaled approximately $9.4 million, $8.5 million and $7.4 million in 2010, 2009 and 2008, respectively.
Underwriting, Acquisition and Insurance Expense. Underwriting, acquisition and insurance expenses decreased over the past several years as management has eliminated inefficiencies and improved processes. The decrease year to year was primarily related to lower audit and consulting fees.
Deferred Policy Acquisition Costs. Capitalized deferred policy acquisition costs (“DAC”) were $28.0 million, $27.1 million and $29.2 million in 2010, 2009 and 2008. These costs will vary based upon new and renewal business. Significantly lower amounts are capitalized related to renewal business. Amortization of deferred policy acquisition costs has decreased from the 2009 level of $20.7 million to $17.8 million in 2010, as policy persistency improved. Amortization amounts increased in 2009 to $20.7 million compared to $20.8 million in 2008 due to policy surrenders the Company experienced in the latter part of 2008 and throughout 2009.
Our Life Insurance segment consists of issuing primarily ordinary whole life insurance in U.S. Dollar-denominated amounts to foreign residents in approximately 30 countries through over 2,400 independent marketing consultants, and domestically through 275 independent marketing firms and consultants throughout the United States.
Net Investment Income. Net investment income decreased to $16.5 million in 2010 compared to $16.7 million and $17.0 million in 2008. The decrease is related to lower investment rates available in 2010 on new business funds invested, as well as on reinvested funds caused by the significant call activity the Company experienced in the last two years. Approximately $263.6 million and $215.0 million in bonds matured or were called by issuers in 2010 and 2009 on a total life segment portfolio of $346.2 million and $289.6 million.
Our Home Service Insurance segment provides pre-need and final expense ordinary life insurance and annuities to middle and lower income individuals primarily in Louisiana, Mississippi and Arkansas. Our policies in this segment are sold and serviced through funeral homes and a home service marketing distribution system utilizing approximately 600 employee and independent agents.
Includes $13.2 million and $16.2 million of U.S. Government agencies and government-sponsored enterprises in 2010 and 2009, respectively.
The current year decline in U.S. government-sponsored securities is due to call activity from this sector and reinvestment into fixed maturity bond categories. The Company has increased investments in the current year in municipals primarily related to Build America taxable bonds and corporate issuer holdings in the utility sector.
The credit rating distribution has changed in the current year as AAA government-sponsored issues were called during the year and reinvested in municipal and corporate bond holdings with ratings of AA and BBB. The Company purchases exclusively investment grade securities, and the increase in the below investment grade category is due to municipals that were rated investment grade at December 31, 2009 and as of December 31, 2010 were no longer rated.
When an other-than-temporary impairment has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis, an other-than-temporary impairment is recognized in earnings equal to the entire difference between the investment’s cost and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company is required to sell the security before recovery of its amortized cost basis, the other-than-temporary impairment will be separated into the following: a) the amount representing the credit loss; and b) the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the other-than-temporary impairment recognized in earnings becomes the new amortized cost basis of the investment. The new amortized cost is not adjusted for subsequent recoveries in fair value.
Gross unrealized losses on fixed maturities available-for-sale amounted to $13.7 million as of December 31, 2010 and $9.7 million as of December 31, 2009. This increase was primarily due to a lower interest rate environment, which put downward pricing pressure on the fair values of our U.S. Government, municipal and agency bonds. There were no gross unrealized losses on equity securities as of December 31, 2010. In 2010 and 2009, the Company sold equity mutual fund holdings from the Life and Home Service segments and recorded realized gains of $6.4 million and $4.9 million due to market recovery since impairment at December 31, 2008. Information on unrealized gains and losses by category is set forth in our consolidated financial statements, Note 2 - Investments, in the “Notes to the Consolidated Financial Statements.”
SPFIC elected to increase the amount of first and second event catastrophe reinsurance in 2006 to $10.0 million per event from $7.1 million and raise its retention level to $500,000 per event from $250,000, after the negative effects from Hurricane Katrina in 2005. Thus, the first $500,000 of incurred claims and any claims in excess of $10.0 million were SPLIC’s responsibility. The same reinsurance levels were in place for 2008 through 2010. The reinsurance premium for first event catastrophe reinsurance was $1,130,000, $1,075,000 and $750,000 in 2010, 2009 and 2008, respectively. In 2008, SPFIC also paid reinsurance premiums in the amount of $478,000 for second and third event coverage due to Hurricanes Gustav and Ike in 2008.
Our liquidity requirements are met primarily by funds provided from operations. Premium deposits and revenues, investment income and investment maturities are the primary sources of funds, while investment purchases, policy benefits, and operating expenses are the primary uses of funds. We historically have not had to liquidate investments to provide cash flow, but in 2008 SPFIC needed to sell $237,000 of bonds because of liquidity needs as a result of Hurricanes Gustav and Ike. There were no such liquidity issues in 2010 or 2009. Our investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs. See Note 8 of the “Notes to Consolidated Financial Statements” for a table disclosing our contractual obligations.
A primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals. We include provisions within our insurance policies, such as surrender charges, that help limit and discourage early withdrawals. Since these contractual withdrawals, as well as the level of surrenders experienced, have been largely consistent with our assumptions in asset liability management, our associated cash outflows have, historically, not had an adverse impact on our overall liquidity. Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy. Cash flow projections and cash flow tests under various market interest rate scenarios are also performed annually to assist in evaluating liquidity needs and adequacy. We currently anticipate that available liquidity sources and future cash flows will be adequate to meet our needs for funds.
Stockholders’ equity at December 31, 2010 was $227.6 million compared to $216.1 million at December 31, 2009. The 2010 increase was largely due to income earned during the period offset by a decrease in net unrealized gains on securities available-for-sale.
Investments increased to $725.7 million at December 31, 2010 from $671.3 million at December 31, 2009, resulting in an 8.1% increase, mainly due to the increase in fixed income holdings in the Company’s portfolio. The asset increased primarily from new and renewal premium income. Fixed maturities are categorized as fixed maturities available-for-sale, which are carried in our consolidated financial statements at fair value and held-to-maturity, which are carried at amortized cost. Fixed maturities available-for-sale were 79.3% of investments at December 31, 2010, and fixed maturities held-to-maturity were 11.1% of investments at December 31, 2010.
Effective September 1, 2010, CICA contributed 150,000 shares of Citizens, Inc. Class A common stock to CNLIC as a capital contribution. The contributed shares had a fair market contributed value of $1,032,000. These shares were subsequently purchased by Citizens, Inc., the ultimate parent, on September 13, 2010 for $1,041,000 cash. The transaction has been eliminated under consolidation accounting rules. Management is currently evaluating CNLIC’s operations and strategy for the future, but does not anticipate any material change relative to the consolidated financial condition of the Company.
The Company does not have off-balance sheet arrangements at December 31, 2010 and, therefore, does not expect any future effects on the Company’s financial condition related to any such arrangements. We do not utilize special purpose entities as investment vehicles, nor are there any such entities in which we have an investment that engages in speculative activities of any nature, and we do not use such investments to hedge our investment positions.
We are a holding company and have had minimal operations of our own. Our assets primarily consist of the capital stock of our subsidiaries. Accordingly, our cash flows depend upon the availability of statutorily permissible payments, primarily payments under management agreements from our two primary life insurance subsidiaries, CICA and SPLIC. The ability to make payments is limited by applicable laws and regulations of Colorado, CICA’s state of domicile, and Louisiana, SPLIC’s state of domicile, which subject insurance operations to significant regulatory restrictions. These laws and regulations require, among other things, that these insurance subsidiaries maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay to the holding company. We historically have not relied upon dividends from subsidiaries for our cash flow needs and we do not intend to do so in the future.
Additionally, a substantial portion of our international policyholders invest their policy cash dividends in our Class A common stock through our Stock Investment Plan (the “Plan”). Once a policyholder elects to participate in the Plan, their policy dividends are assigned to purchase Citizens Class A common stock. In 2010, this represented stock investment in the Company of approximately $23 million. If fewer policyholders elect to participate in the Plan, or if our international premium collections were to decrease as a result of regulatory or marketing impediments, the trading volume of our Class A stock may decline from its present levels.
Inherent in the capitalization and amortization of deferred policy acquisition costs are certain management judgments about what acquisition costs are deferred, the ending asset balance and the annual amortization. Approximately 80% of our capitalized deferred acquisition costs are attributed to first year excess commissions. The remaining 20% are attributed to costs that vary with and are directly related to the acquisition of new insurance business. Those costs generally include costs related to the production, underwriting and issuance of new business.