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 listed for sale in December 1996. Management expects the ultimate realized value of the property to be $250,000 to $300,000.
The table below sets forth, in summary form, selective data of the Company. This data, which is not covered in the report of the independent auditors, should be
read in conjunction with the consolidated financial statements and notes which are included elsewhere herein (amounts in thousands except per share amounts).
In June 1997 Citizens acquired American Investment Network, Inc. (AIN), a life insurance holding company that was the parent of United Security Life Insurance Company, headquartered in Jackson, Mississippi with $7.5 million in assets, $3.4 million of stockholders' equity, annual revenues of $3.2 million and $67 million of life insurance in force. Citizens issued approximately 700,000 Class A shares in connection with the transaction, which was accounted for as a purchase. The companies operate in their respective locations under a combined management team with consolidation of computer data processing on the Citizens' system.
Net income for the year ended December 31, 1997 was $3,425,523 or $.16 per share compared to $2,213,726 or $.11 per share in 1996 and $2,750,212 or $.16 per share in 1995. Decreases in acquisition related expenses associated with ALLIC and economies of scale created by the combination of companies contributed to the increase in 1997 income. Increases in expense associated with the expansion of ALLIC's marketing activities was the primary factor of the decrease in earnings from 1995 to 1996.
Premium income reached $55,362,616 in 1997, a 1.9% increase over the previous year when premium income totaled $54,303,445. The 1996 amount represented a 17.4% increase over 1995 when premiums amounted to $46,244,428. Declines in the production of international premium by CICA and domestically by ALLIC's former marketing operations during 1997 contributed to the nominal increase. Additionally, as stated above, the results for USLIC and NSLIC were not included for the entire year. In January, 1998, CICA introduced a new line of international products known as the Millennia 2000 series. Based on the early reception of these products by the Company's marketing consultants, management believes the production of new premium from this market, which has been flat for the past few years, should experience significant growth, although this result cannot be assured. Additionally, the products previously sold by ALLIC in the United States were not available following the merger of ALLIC into CICA until late in 1997 because of delays in obtaining requisite approval from state insurance regulatory authorities.. Management has been successful in returning the largest producing marketing organization of ALLIC to production and anticipates significant new production in 1998, compared to virtually none in 1997. Premiums for 1996 were boosted by the inclusion of ALLIC, which contributed $3.8 million of accident and health premium and an additional $4.1 million of life premiums.
Net investment income increased 9.29% during 1997 to $10,038,736 from $9,185,506 in 1996. In 1995, such income was $7,026,909. The 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. The 1996 results reflect actions taken during late 1994 and early 1995 to extend the duration of the Company's portfolio slightly to take advantage of higher yields. Overall, the duration was increased to approximately 6 years from 4 to 5 years. Additionally, the acquisition of ALLIC which increased the Company's invested assets by approximately $17.8 million, contributed, along with the Company's own internal growth. ALLIC represented $550,000 of 1995's investment income; however, this amount represented only slightly more than three months of earnings on that asset base. In 1996, the contribution was $1.2 million.
Overall policyholder dividends increased 18% in 1997 amounting to $2,782,215, compared to $2,363,201 in 1996 and $2,422,168 in 1995. The 1997 growth is primarily due to the acquisition of USLIC, which increased the current year results by approximately $397,000. In late 1993, management reduced the dividends paid on various plans to reflect the lower levels of return that were available in the bond market. As a result, the dividends paid in recent years have not been growing as rapidly. Virtually all CICA's policies that have been sold since 1989 are participating. Participating policies represent a large majority (82%) of the Company's business in-force. As a result, management expects continued growth in this item subject to factors such as persistency and future sales; however, dividends are factored into the policies' premiums and thus management does not believe continued increases in dividend expense should impair or dilute future profitability.
Accident and Health benefits grew to $2,948,257 in 1997, compared to $1,719,244 in 1996, and $304,704 in 1995. The increase reflects the growing block of accident and health premium on the Company's books. Additionally, in 1997, the addition of USLIC 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. In 1995, only three months of activity for ALLIC are included.
Endowment expense grew to $5,258,881 in 1997 from $5,192,607 in 1996. In 1995, such expenses were $4,631,261. Beginning in late 1990, Citizens introduced a new series of plans called "Ultra Expansion Plus" which carried 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. The relatively small increase from 1996 to 1997 reflects the decreased production of new business over the last three years. Management does not expect this benefit to adversely impact profitability since it is factored into the cost of the policy.
Policy surrenders were $14,322,593 in 1997, compared to $14,421,683 in 1996 and $10,611,335 in 1995. The increase in surrenders in 1996 and 1995 is, in the opinion of management, due to acquisitions and the growing block of business in-force, as well as representative of the economic problems seen in Argentina during 1995 and early 1996. The decrease in 1997 is, in the opinion of management, the result of a campaign begun in mid-1997 to inform policyowners about the benefits of their policy.
Other claim expenses amounted to $848,093 in 1997, $918,361 in 1996 and $812,315 in 1995. These expenses are comprised of supplemental contract benefits, interest on policy funds and assorted other miscellaneous policy benefits.
In order to convert a majority of CICA's marketing overhead from fixed to variable, management began discussions in early 1997 with an independent international marketing company to serve as managing agent for the Company's international marketing activities. This firm will receive an overriding commission on all new business sold internationally in exchange for the absorption of all marketing management and promotion activities. By taking such
Amortization of cost of insurance acquired and excess of cost over net assets acquired increased to $2,305,127 in 1997 from $1,398,859 in 1996 and $678,997 in 1995. The increase is attributable to the goodwill and cost of insurance recorded on the acquisitions of USLIC, NSLIC, ALLIC and IIH. Because of the slowdown in sales activity on the part of the agency operations previously associated with ALLIC, management is monitoring the goodwill associated with the acquisition of ALLIC in 1995. Should actual production levels be less than anticipated production, the potential exists that the Company would have to charge-off the goodwill associated with such decline. Management, in conjunction with its independent actuaries is monitoring this recoverability on a quarterly basis. At December 31, 1997, all goodwill on the Company's balance sheet was recoverable within the period of amortization. Because of the production by former ALLIC agents discussed above, management believes that there should not be future issues associated with such goodwill recovery; however, in the event any such amount proved unrecoverable, a charge in the appropriate period will be booked.
Policy loans comprise 12.6% of invested assets at December 31, 1997 compared to 14.3% at December 31, 1996. 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.
In February 1992, the Company paid cash for an 80,000 square foot office building in Austin, Texas to serve as its primary office. This building will, in the opinion of management, provide adequate space for the Company's operations for many years. Renovation and remodeling of the property began in the third quarter of 1992 and the Company relocated to the building in September 1993. The Company occupies approximately 33,000 square feet of space in the building. The Company's former office property, consisting of approximately 13,000 square feet in Austin, with a carrying value of $104,000 was leased to a third party on a triple-net basis for three years during 1995. The lease provided that the party could purchase the building during the first 18 months of the lease for $850,000 cash, with no lease payments applying to the purchase price. The option period expired in 1996. The property was placed under a contract of sale in March 1998 for $840,000.
The NAIC has established minimum capital requirements in the form of Risk-Based Capital ("RBC"). Risk-based capital factors the type of business written by a company, the quality of its assets, and various other factors into account to develop a minimum level of capital called "authorized control level risk-based capital" and compares this level to an adjusted statutory capital that includes capital and surplus as reported under Statutory Accounting Principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level risk-based capital fall below 200%, a series of actions by the Company would begin. At December 31, 1997, CICA, NSLIC, USLIC and CILIC were well above required minimum levels.
The Company is in the process of identifying all significant applications that will require modification to ensure Year 2000 compliance. Internal resources will be used as necessary to make the required modifications and to test and verify Year 2000 compliance. Due to the nature of the programming of the Company's core processing systems, such date oriented issues are not a problem since the dates are stored as the number of days since the year 1900, rather than as a two-digit field. Accordingly a significant part of the Company's efforts to ensure Year 2000 compliance will be to obtain assurances from vendors that timely upgrades will be made available to make third party software Year 2000 compliant. Additionally, the Company will contact companies with whom it does business and upon whose systems the Company may indirectly rely, to obtain assurances that such systems will be timely modified. The Company anticipates that it will complete this process in early 1999, leaving adequate time to assess and resolve any significant remaining issues. The cost of Year 2000 compliance is not expected to be material to the Company's financial position or results of operations in any one year.
In February 1997, the FASB issued Statement 128 "Earnings per Share" ("Statement 128"). Statement 128 establishes the standards for computing and presenting earnings per share ("EPS"). This statement replaces the presentation of primary EPS with a presentation of basic EPS and requires dual presentation of basic and diluted EPS. Statement 128 is effective for fiscal years ending after December 15, 1997. Implementation did not have a material impact on the Company's earnings per share.
In June 1997, the FASB issued Statement 130 "Reporting Comprehensive Income" ("Statement 130"). Statement 130 establishes the standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Statement 130 is effective for fiscal periods beginning after December 15, 1997. The Company does not believe that this statement will have an impact on future operations or liquidity.