CICA owns its principal office in Austin, Texas, consisting of an 80,000 square foot office building. Approximately 33,000 square feet is occupied by CICA and its affiliates with the remainder of the building being leased or for lease. At December 31, 1997, the occupancy rate of the property was 100%.
CICA also owns 1.10 acres of land with a 13,000 square foot office building which previously served as the Company's executive offices. The property has a book value of $104,000. A triple-net lease was executed during 1995 on the building for a term of three years, with a purchase option at a price of $850,000 during the period. The purchase option was not exercised, and in March, 1998, a purchase contract was executed with a third party for $840,000.
See Part I (b) - Financial information regarding the insurance business and
To streamline its corporate structure, ALFC was merged into Citizens in June 1997. Also ALLIC was merged into CICA in June 1997.
Total revenues for the year ended December 31, 1997 were $65,027,298 compared to $63,822,160 in 1996, an increase of 1.9%. Revenues increased from $53,130,172 in 1995 to the $63,822,160 in 1996. Decreased writing of new business by CICA in the international market and by ALLIC domestically was offset by the premium revenues of USLIC and NSLIC, which contributed to the increase in revenue in 1997. Additionally, only six months of revenues of USLIC and only one month of NSLIC's revenues are included in the 1997 results. The substantial revenue growth in 1996 is attributable to the inclusion of ALLIC for the entire year, which contributed approximately $9,200,000 to revenues.
The low yields available in the bond market during the Company's growth period have made it difficult to increase the return on the Company's invested assets without exposing the portfolio to undue risk; however, management believes that as yields change, the Company is positioned to take advantage of the investment opportunities that will present themselves and, thus, enhance future returns. Management hired the investment advisory firm of Asset Allocation and Management, Inc. of Chicago ("AAM"), Illinois in late 1995 to manage the Company's fixed maturity portfolio. It is the belief of management that an overall increase in returns can be achieved by implementing the plans of AAM to provide more diversity in the portfolio without significantly increasing risk. During 1996, a nominal reconfiguration was begun. In lieu of purchasing U.S. Treasury instruments, the Company began to purchase U.S. Government guaranteed mortgage pass-through securities. This program continued throughout 1997. Additionally, approximately $3 million of A to AA rated private placement bonds were acquired. Management expects to continue this strategy throughout 1998 as opportunities present themselves.
Future policy benefit reserves increased $8,958,166 in 1997, compared to $8,198,243 in 1996 and $11,033,763 in 1995. Increased surrender activity was the primary reason for the lower reserve increases in 1997 and 1996. Additionally, in the early years of a policy, the net reserves (benefit reserve less deferred acquisition costs) are small due to the large capitalized costs in the first and second policy years. As the policy matures, the reserve increases. The Company's reserves are certified annually by an independent actuary. Such certification noted no deficiencies for the years presented.
Claims and surrenders increased 7.5% in 1997, reaching $27,852,907 from $25,919,054 in 1996. In 1995, such expenses were $19,282,954. Death benefits increased to $4,475,083 in 1997, compared to $3,667,159 in 1996. In 1995, such benefits were $2,923,339. The increase in such claims in 1997 does not appear to be due to any trend. Rather, it is the result of the growing block of business written by the Company. Additionally, the pre-need and burial policies formerly sold by ALLIC were marketed to an older clientele and as such, higher claims are anticipated and factored into the product. The Company has historically adhered to a 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 initiated 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 lifestyle of the applicant. The Company has developed numerous contacts throughout Latin America with which its underwriters can validate information contained in the application, medical or inspection report.
During 1997, commissions decreased to $11,918,192 from $12,447,664 in 1996. In 1995 commissions were $10,273,173. The majority of such amounts paid relates to first year commissions which were $8,120,748, $8,677,297 and $7,292,264, respectively, in 1997, 1996, and 1995. The 1996 increases relate to improved sales activity in CICA and approximately $1.5 million associated with ALLIC. The decline in first year commissions during 1997 relates to the slowdown in new sales discussed earlier.
Underwriting, acquisition and insurance expenses decreased to $6,992,402 in 1997 from $9,500,973 in 1996 and $7,102,401 in 1995. The 1996 expenses include approximately $3.2 million associated with ALLIC. Due to the consolidation of ALLIC's operations with CICA, management believes significant reductions have been achieved through economies of scale which are reflected in the 1997 results. It should be noted that only six months of expense associated with USLIC and one month from NSLIC are included. Management believes that through economies of scale which can be achieved in the future after conversion of systems of these companies, additional expense reductions can be made.
actions, management believes a significant amount of fixed overhead can be converted to a variable expense in 1998 and thereafter. Management has utilized firms such as this in previous periods with great success at obtaining increases in sales and expense reductions. Additionally, management undertook the expense reductions associated with ALLIC's marketing operations discussed previously. These actions should result in additional annual overhead reduction in future periods based upon the 1996 level of expenditures.
Capitalized deferred policy acquisition costs were $9,804,022 in 1997, compared to $10,531,222 in 1996 and $10,579,704 in 1995. The decline in amounts in 1997 reflects the lower level of new sales experienced during the year, as well as the lower interest rate environment. There was an adjustment of capitalization for 1994 and after issued policies to reflect the lower interest rates available to be earned on the Company's investment portfolio compared to earlier years. Amortization of these costs was $9,630,705, $10,221,917 and $8,511,876 respectively in 1997, 1996, and 1995. The increased surrender activity discussed above contributed to the increased amortization in 1996.
Stockholders' equity increased to $79,581,698 at December 31, 1997 from $66,883,016 in 1996. The acquisition of USLIC and NSLIC and the income earned during the period were the primary reasons for the growth in equity during 1997. The increase in equity during the year was enhanced by the improvement in the market value (approximately $2.3 million, net of tax) on the Company's available-for-sale bond portfolio. This unrealized gain was attributable to increases in prices in the bond market in 1997.
The Company's second offering of Class A common stock pursuant to Regulation S was initiated in May 1995. The second offering, to the Company's international policyholders, originally was planned to expire on October 31, 1997. Shares were priced at $7.50 and purchasers were required to agree to a three-year holding period. The offering was terminated in June, 1997. Approximately $1 million of additional capital was raised through the offering.
Invested assets grew to $162,651,692 in 1997 from $138,311,136 at December 31, 1996, an increase of 17.6%. The acquisition of USLIC and NSLIC contributed to said increase. The balance of the growth is attributable to the internal growth achieved by the Company. At December 31, 1997, 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 1998; however, because of continued uncertainty regarding long-term interest rates, management cannot rule out sales during 1998. Fixed maturities held to maturity, amounting to $5,617,131 consist of U.S. Treasury securities. Management has the intent and believes the Company has the ability to hold the securities to maturity.
The Company's mortgage loan portfolio, which constitutes 0.8% of invested assets at December 31, 1997, (1.2% at December 31, 1996) has historically been composed of small residential loans in Texas. At December 31, 1997, one mortgage loan with a principal balance of approximately $38,400 was in default. At December 31, 1996, no loans were in default. Management has established a reserve of $50,000 at December 31, 1997 and 1996 (approximately 3% of the mortgage portfolio's balance) to cover potential unforeseen losses in the Company's mortgage portfolio.
CICA owned 1,821,332 and 1,955,457 shares of Citizens Class A common stock at December 31, 1997 and 1996, respectively. For statutory accounting purposes, CICA received written approval from the Colorado Insurance Department to carry its investment in Citizens in 1996 at 50% of the fair market value limited to 7% of admitted assets, which differs from prescribed statutory accounting practices. Statutory accounting practices prescribed by Colorado require that the Company carry its investment at market value reduced by the percentage ownership of Citizens by CICA, limited to 2% of admitted assets. As of December 31, 1997, the Company valued the shares in accordance with prescribed statutory accounting practices. In the Citizens' consolidated financial statements, this stock is shown as treasury stock.
CICA had outstanding at December 31, 1997, a $400,000 surplus debenture payable to Citizens. For statutory accounting purposes, this debenture is a component of surplus, while for GAAP it is eliminated in consolidation. Citizens has recognized a liability for its related obligation to a bank in a like amount.