The American Liberty acquisition was completed on September 14, 1995 with American Liberty shareholders receiving 1.10 shares of Citizens' Class A Common Stock for each share of American Liberty Common Stock owned and 2.926 shares of Citizens' Class A Common Stock for each share of American Liberty Preferred Stock owned. Citizens issued approximately 2.3 million Class A shares in connection with the transaction, which was accounted for as a purchase
Net income for the year ended December 31, 1995 was $2,750,212 or $.16 per share compared to $4,174,558 or $.25 per share in 1994 and $5,526,393 or $.34 per share in 1993. Decreased writing of new life insurance premiums contributed to the lower earnings in 1995, coupled with increased operating expenses incurred to acquire and convert ALFC. The smaller amount of capital gains on the Company's fixed maturity portfolio in 1994 compared to prior years was the primary reason for the reduction in net income compared to 1993. Realized losses in 1994 were $9,356, compared to gains of $2,120,837 in 1993.
Overall policyholder dividends remained relatively stable in 1995 amounting to $2,422,168 from $2,381,581 in 1994 and $2,418,456 in 1993. In late 1993, management reduced the dividends paid on various domestic plans to reflect the lower levels of return that were available in the bond market. As a result, the dividends paid in 1994 were less than those paid in 1993 and 1995 was only slightly larger than 1994. Virtually all CICA's policies that have been sold since 1989 are participating. Participating policies represent a large majority (87%) of the Company's business in force and 91.3% of new issues in 1995. As a result, management expects continued growth in this item; however, dividends are factored into the policies' premiums and thus management does not believe continued increases in dividend expense will impair or dilute future profitability.
Death benefits increased to $2,923,339 in 1995, compared to $2,533,569 in 1994. In 1993, such benefits were $3,115,247. A large portion of the 1995 increase ($290,945) is attributable to the acquisition of ALFC in September. The remaining increase in 1995 is due to the growth in the Company's in force business. During 1994, the claims incurred on the Servicemen's Group Life Insurance program ("Segli") returned to levels seen prior to 1993, declining by approximately $500,000. Additionally, during 1994 claims on the Company's in force business remained static with those incurred in 1993, despite the increasing block of business in force. The 1993 results were impacted by an approximately $500,000 increase in claims assumed under the Segli program which were incurred as a result of an increase in the amount of insurance provided to participants in the program and the increased level of participation that the Company obtained due to its growth in recent years. An increase in premium income received from the program offset such increase. The Company has continued to adhere to its strict underwriting policy which requires complete medical examinations on all applicants who are foreign residents, except children, regardless of age or face amount of the policy applied for. For 1996 and future years, management expects to initiate a change to more selective medical examinations in conjunction with dry spot blood tests and extensive medical questions on the application in order to lower the cost of new business without sacrificing necessary information for the underwriter. Additionally, X-rays and electrocardiograms are required depending on age and face amount of the policy. On all policies of $150,000 or more, inspection reports are required which detail the background resources and
Underwriting, acquisition and insurance expenses increased to $7,102,401 in 1995 from $5,079,538 in 1994 and $4,331,669 in 1993. The 1995 expense increase reflects the growth experienced by the Company in recent years, particularly in the marketing area. As a result of a change in late 1993 in the management of marketing efforts, the Company absorbs a greater portion of the expense in exchange for paying lower first year commissions. The growth in expense in 1994 is primarily related to the increased home office marketing costs. Additionally, a portion of the 1993 increase relates to a one-time charge of $425,000 related to an extension of exercise periods for options to purchase 100,000 shares of the Company's Class A common stock. The charge represents the difference between the exercise price and the fair market value of the shares as of the extension date.
Realized losses on investments were $109,096 in 1995 and $9,356 in 1994, compared to gains of $2,120,837 in 1993. The majority ($63,000) of the 1995 loss relates to the disposal of a parcel of real estate acquired in the acquisition of First Centennial
On October 27, 1994, Citizens completed the offering of 916,375 shares of its Class A Common Stock under an exemption from registration under the Securities Act of 1933. The offering was made under Regulation S, which permits shares offered outside of the United States to non-United Stated persons pursuant to its guidelines may be resold in the United States by persons who are not an issuer, underwriter or dealer following a certain period after the close of the offering period. The offering price was $7.00 per share. The closing market price of the Class A common shares on the date of the offering commencement was $7.75 per share (as reported by the American Stock Exchange). The Company sold 916,375 shares, generating gross proceeds of more than $6.4 million, and net proceeds of approximately $5.4 million. Management was pleased with the amount of capital generated through the offering; however, it believes that the offering period was too short in light of the manner in which business is typically transacted overseas. Because of the success of the offering in the limited time period, a second offering was initiated in May 1995. As of December 31, 1995, approximately 95,500 shares had been purchased through the second Reg. S offering, resulting in a net increase to capital of $638,980.
Invested assets grew to $130,024,739 in 1995 from $93,828,650 at December 31, 1994, an increase of 38.6%. The acquisition of ALFC contributed approximately $17 million to said increase. The balance of the growth is attributable to the internal growth achieved by the Company. At December 31, 1995, 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 market. The Company does not have a plan to make material dispositions of fixed maturities during 1996; however, because of continued uncertainty regarding long-term interest rates, management cannot rule out sales during 1996. Fixed maturities held to maturity, amounting to $5,636,785 consist primarily of U.S. Treasury securities. Management has the intent and believes the Company has the ability to hold the securities to maturity.
Policy loans comprise 14.5% of invested assets at December 31, 1995 compared to 16.2% at December 31, 1994. 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 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 insurance regulators begins. At December 31, 1995 and 1994, CICA's ratios were 700.6% and 560.6%, respectively, well above minimum levels. ALLIC's ratios were 939.6% and 1,000.8%, respectively, also well above minimum levels.
The formula approach used in computing the reserve consists of the following:
(3) The most recent commissioner's standard table permitted under the insurance laws of 26 states at the time the contract is issued.
required use of higher interest rates results in substantially lower tax reserves and lower increases in reserves, and thereby higher levels of taxable income and tax.
The enactment of the two provisions above has had a severe impact upon the effective tax rate paid by CICA, resulting in effective tax rates exceeding 100% in each of the last three years. The impact of such high effective tax rates is that CICA is forced to pay Federal income taxes out of surplus, rather than income, thereby limiting the statutory surplus available for use in writing new business. Although these provisions have little effect on the Company's overall results on a GAAP basis as a result of the recognition of deferred taxes, they do have a considerable impact on the results under Statutory Accounting Principles which do not recognize such items. For 1995, CICA incurred tax expense on a Statutory basis at an effective tax rate of 74% (eliminating intercompany capital gains). For the year ended December 31, 1994, taxes were incurred at an effective rate of approximately 289% of income before tax. For 1993, the incurred rate was 131%. In the event that CICA was unable to attract additional capital, as it did in 1994, its ability to write new business would be severely limited due to the ongoing drain on Statutory surplus. Management believes the Company has adequate levels of capital on hand with the additional capital infused during 1994 and 1995 to continue to expand the Company's writing of new business.
for years beginning after December 15, 1994 Implementation did not have a material impact on the Company's financial statements.