CICA owns its principal office in Austin, Texas, consisting of an 80,000 square foot office building. Approximately 45,000 square feet is occupied or reserved for occupancy by CICA and its affiliates with the remainder of the building being leased.
A charge of $9.5 million recorded in the third quarter of 1998 related to the non-recoverability of a portion of the excess of cost over net assets acquired ("goodwill") on the Company's books caused the 1998 loss. The writedown was related to the goodwill recorded in the 1995 acquisition of American Liberty Financial Corporation (ALFC) and was caused by a decline in new production from insurance agents formerly associated with American Liberty. Subsequent to the acquisition, management implemented a 50% reduction in the amount of commission paid to these agents. The commission reductions were necessary to preserve the profitability of the accident and health business which was negatively impacted by changes in state laws that established minimum claims ratios that severely limited profit margins, as well as mandated change in interest rates used to compute reserves on this business. In order to ascertain the recoverability of the goodwill balance, the Company performed an analysis of the relevant cash flows based upon estimated production, net of policy acquisition costs, policyholder benefits and other general expenses. As a result of this analysis, it was determined that the production of future business did not support goodwill of $9.5 million that was charged to earnings during third quarter 1998. Management's estimate of future production was re-evaluated based upon sales activity, the size of the active agency force, and the anticipated future production
to be achieved in subsequent years. Management has continued to monitor production associated with these products. During 1998, management was successful in reviving production from some of the largest producers of American Liberty. During 1999 and 2000, the assumed production levels were met. Should production fall below such estimates, additional write-offs could be necessary. Approximately $2.8 million of goodwill related to ALFC remains at December 31, 2000.
Total revenues for the year ended December 31, 2000 were $66,678,116 compared to $71,877,058 in 1999, a decrease of 7.2%. In 1998 revenues were $72,684,915. The decrease in 2000 revenues was related to a 33.5% decrease in accident and health premiums (a decline from $10,886,317 in 1999 to $7,235,685 in 2000) as a result of the termination of the Company's book of individual major medical and group dental business as well as decreased renewal life premiums resulting from the lower persistency experienced in 1998 and 1999. The decrease in 1999 revenues was related to an 80.7% decrease in realized gains which were $310,890 for 1999 compared to $1,614,388 in 1998.
Premium income decreased by 9.9% from $59,320,357 in 1999 to $53,451,853 in 2000. The 1999 amounts were a 0.3% increase over the previous year when premium income totaled $59,154,329. The 2000 decrease is primarily attributable to a $3,650,632 decrease in accident and health premiums that were $7,235,685 for 2000 compared to $10,886,317 for 1999.
In January, 1998, CICA introduced a new line of international products known as the Millennia 2000 series; however, in 1998 and 1999, CICA's international sales were hampered due to the contraction of several Latin American economies, as well as competition from new local companies, many of whom are subsidiaries of
Net investment income increased 7.9% during 2000 to $12,550,754 from $11,636,940 during 1999. The 1999 results were up 3.2% compared to the $11,279,125 earned in 1998. The 2000 and 1999 results reflect the continuing expansion of the Company's asset base, investment in higher yielding instruments and the actions taken in previous years to change the mix and duration of the Company's invested assets. Management terminated the Company's outside investment advisor effective March 31, 2000. The Company feels it can more effectively achieve its investment objectives by overseeing the investment activities in-house. The increased returns in 2000 relate to more aggressive management of the Company's excess cash balances and a shift in the mix of the portfolio to place less emphasis on government guaranteed mortgage pass-through instruments and more investments in callable instruments issued by U.S. government agencies.
Policyholder dividends increased to $3,037,343 in 2000, up 6.8% over 1999 results of $2,843,681. The 1999 amounts represented a decrease of 6.0% compared to $3,025,746 in 1998. Virtually all CICA's policies that have been sold since 1989 are participating. Participating policies represent a large majority (56.9%) of the Company's business in-force, although the percentage of participating business has declined from approximately 91% in 1995 due to acquisitions in recent years. Additionally, due to the disruption in the Latin American markets 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 persistency and future sales.
Claims and surrenders decreased 12.6% from $34,747,480 in 1999, to $30,370,996 in 2000. In 1998 claims and surrenders were $31,592,740. Increases in accident and health benefits attributable to the respective blocks of business of National Security Life and Accident (NSLIC) and United Security Life (USLIC) were responsible for the 1999 increase. The decline in claims on these blocks as a
Capitalized deferred policy acquisition costs increased 8.3% from $9,287,457 in 1999 to $10,056,287 in 2000. These costs were $7,941,829 in 1998. The increase in 2000 reflects increased fourth quarter sales of traditional whole life policies internationally. The 1999 increase reflects increased fourth quarter sales activity. Amortization of these costs was $8,521,972, $10,028,806 and $7,789,513, respectively in 2000, 1999 and 1998.
Amortization of cost of insurance acquired, excess of cost over net assets acquired and other intangibles decreased from $2,120,017 in 1999 to $1,995,660 in 2000. In 1998, such amortization was $2,100,433. As discussed above, management wrote off $9.5 million of the goodwill associated with the acquisition of American Liberty during the third quarter of 1998. Should production by the former agents of American Liberty, now representing CICA, not meet expected amounts due to the rate increases described above, additional write-offs could result. There remains approximately $2.8 million of goodwill related to American Liberty. New accounting rules regarding amortization of goodwill were proposed by
Invested assets increased to $194,203,327 in 2000 from $174,338,561 in 1999, an increase of 11.4%. A 14.4% increase in fixed maturities available-for-sale more than offset a 3.1% decrease in policy loans. At December 31, 2000 and 1999, 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 fair market. The Company disposed of a number of bonds as it changed the mix of securities following the termination of its outside investment advisor. Fixed maturities held to maturity, amounting to $5,582,802 at December 31, 2000 consist of U.S. Treasury securities. Management has the intent and believes the Company has the ability to hold the securities to maturity.
At December 31, 2000, decreases in interest rates of 100, 200 and 300 basis points, respectively, would result in increases in market values of investments in fixed maturities of approximately $2,505,000, $5,865,000 and $9,515,000, respectively. Conversely, increases in rates of 100, 200 and 300 basis points would generate losses of $6,502,000, $12,330,000 and $18,141,000, respectively. At December 31, 1999, decreases in interest rates of 100, 200 and 300 basis points, respectively, would result in increases in market values of approximately $385,000, $6,646,000 and $13,800,000, respectively. Increases in rates of 100, 200 and 300 basis points would generate decreases in market values of $10,981,000, $20,232,000 and $26,096,000, respectively.
Policy loans comprise 10.8% of invested assets at December 31, 2000 compared to 12.4% at December 31, 1999. These loans, which are secured by the underlying policy values, have yields ranging from 5% to 10% percent and maturities that are related to the maturity or termination of the applicable policies.
Management believes that the Company maintains more than adequate liquidity despite the uncertain maturities of these loans.
The Company successfully addressed the impact of the Year 2000 on its systems, procedures, customers and business processes. There was no adverse impact on any Company operations for the calendar change from 1999 to 2000. The Company used internal resources to modify, replace and test the Year 2000 modifications. The total cost for the project was negligible. The work was performed with existing staff and the associated costs were expensed as incurred until completion.
the rules to be followed when determining whether a special purpose entity (SPE) is a qualifying SPE (QSPE). SFAS No. 140 requires that a QSPE have at least 10% of its beneficial interests held by parties unrelated to the transferor and limits the amount and type of derivative instruments that a QSPE can hold. SFAS No. 140 requires that for a transfer to a QSPE to be accounted for as a sale, the transferor must not retain effective control over the transferred assets through a removal-of-accounts provision that allows the transferor to unilaterally reclaim specific transferred assets. SFAS No. 140 requires extensive disclosures about securitizations entered into during the period and retained interests in securitized financial assets at the balance sheet date, accounting policies, sensitivity information related to retained interests and cash flows distributed to the transferor. It is effective for transfers occurring after March 31, 2001. However, the expanded disclosures about securitizations and collateral are effective for fiscal years ending after December 15, 2000. Management does not believe that SFAS No. 140 will have a significant effect on the financial position, results of operations or liquidity of the Company.