CICA owns its principal office in Austin, Texas, consisting of an 80,000 square foot office building. Approximately 27,000 square feet is occupied by CICA and its affiliates with the remainder of the building being leased or for lease. At December 31, 1995, the occupancy rate of the property was approximately 99%.
Additionally, the Company owns two parcels of commercial property acquired in 1991. In March, 1996, a sale contract was executed on one of the properties, which has a book value of $134,700, for $200,000. The remaining property, with a book value of $107,234, has a sale contract pending for $185,000.
Through the acquisition of ALFC described above, the Company also owns a 6,324 square foot funeral home in Baker, Louisiana with a total cost of $473,000. This facility is owned and operated by a subsidiary, FHL. Additionally, ALFC leases approximately 9,345 square feet of office space in Baton Rouge, Louisiana for $5,000 per month. This space was used by ALFC for its corporate offices and is on a month-to-month lease.
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).
The Insurance Investors agreement provides that, following the acquisition by Citizens, Investors' shareholders will receive one share of Citizens' Class A Common Stock for each eight shares of Investors Common Stock owned. Additionally, Citizens will acquire all shares of Central Investors Life Insurance Company, a 95% owned subsidiary of Insurance Investors & Holding, based upon an exchange ratio of one share of Citizens' Class A common stock for each four shares of Central Investors owned. The transaction was completed on March 12, 1996 following approval by shareholders of Investors and Central and involves issuance of approximately 171,000 of Citizens' Class A shares. The transaction will be accounted for as a purchase.
Premium income reached $46,125,093 in 1995, a 5.3% increase over the previous year when premium income totaled $43,785,361. The 1994 amount represented a 15.6% increase over 1993 when premiums amounted to $37,883,061. The increase through 1994 is attributable to the success of the Company's Ultra Expansion products that were introduced to the market in late 1987. Sales of the products were relatively insignificant until mid-1988 at which time the sales force obtained a thorough understanding of the features of the products and how to market them. New business began to increase almost immediately after the second calendar quarter of 1988 and grew each year from the $4 million produced in 1988, reaching $11.3 million in 1993 and in 1994 exceeded $11.8 million. During 1995, production dipped to $9.5 million. In 1994 and 1995, management did not emphasize new business production due to its desire to increase Company capitalization before further expanding its premium writing. Additionally, during 1995, the Company saw significant disruption in the Argentine economy, lowering sales from that region which had been a major contributor to the Company's overall sales in recent years. Management believes the disruption has passed in that market and expects to see improved production from that area in 1996. Additionally, only a small portion of the premium revenues of ALFC are included in the 1995 results as described above. Management expects ALFC to continue to make significant contributions to the Company's premium income in future years. However, as the Company grows and the size of its premium base expands, it will be more difficult to achieve the dramatic
increases in premium levels seen in earlier years when the Company was smaller. During 1995, insurance in force, measured in face amount, exceeded $2.15 billion.
Net investment income increased 32.7% during 1995 to $7,026,909 from $5,295,784 in 1994. In 1993, such income was $4,771,079. The 1995 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 ALFC, which increased the Company's invested assets by approximately $17 million, contributed, along with the Company's own internal growth. ALFC represented $550,000 of 1995's investment income; however, this amount represented only slightly more than three months of earnings on ALFC's asset base. Management expects ALFC to contribute approximately $2 million to investment income in 1996. The increase in 1994 reflects the growth in the Company's invested asset base, which grew by 9.5%. The 1993 results were impacted by actions taken by management during the first and fourth quarters of that year to take advantage of volatility in the bond market. During those quarters management made substantial sales of bonds to realize gains of approximately $800,000 which are included in other income. The proceeds were temporarily invested in short-term Treasury Bills until the volatility subsided at which time the funds were reinvested in longer term instruments. Management estimates that the reduction in investment income during the period the funds were invested in such short-term instruments to be approximately $400,000; however, management believes the transactions to be beneficial in that the net effect was to increase net income for 1993 by approximately $800,000. 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 rise (which occurred during 1994 and early 1995) 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.
Claims and surrenders increased 15.9% in 1995, reaching $19,282,954 from $16,635,259 in 1994. In 1993, such expenses were $14,166,018. The 1995 and 1994 increases result primarily from growth in surrenders and endowments.
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.
Endowment expense grew from $4,475,462 in 1994 to $4,631,261 in 1995, a 3.4% increase. 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. Management does not expect this benefit to adversely impact profitability since it is factored into the cost of the policy.
Policy surrenders were $10,611,335 in 1995, compared to $8,637,306 in 1994 and $5,761,190 in 1993. The increase in surrenders 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.
During 1995, commissions declined to $10,273,173. Commissions increased 3.1% in 1994 to $12,382,372 from $12,011,822 in 1993. The majority of such amounts paid relates to first year commissions which were $7,292,264, $9,925,028 and $10,423,648, respectively, in 1995, 1994, and 1993. The decline in first year commissions during 1995 relates to the slowdown in new sales discussed earlier.
Capitalized deferred policy acquisition costs were $10,579,704 in 1995, compared to $13,128,049 in 1994 and $13,472,064 in 1993. The decline in amounts in 1995 reflects the lower level of new sales experienced during the year, as well as the lower interest rate environment. The decrease from 1993 to 1994 relates to the adjustment of capitalization for 1994 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 $8,511,876, $7,203,593 and $6,455,401, respectively in 1995, 1994, and 1993.
Corporation and foreclosed on several years ago. Management made several moves during 1993 to take advantage of the price volatility in the bond market to achieve gains.
Stockholders' equity increased substantially in 1995 to $64,712,990 from $35,055,373 in 1994. The acquisition of ALFC was the primary reason for the growth in equity during 1995 amounting to $27 million of the increase.
the amount of $112,794, and another in the principal amount of $30,665. Management believes that in the event of foreclosure there is more than adequate collateralization on both loans to avoid exposure to loss. Management has established a reserve of $145,080 (approximately 7.5% of the mortgage portfolio's balance) to cover potential unforeseen losses in the Company's mortgage portfolio.
Cash balances of the Company in its primary depository, Texas Commerce Bank Austin, Texas, were significantly in excess of Federal Deposit Insurance Corporation (FDIC) coverage at December 31, 1995. Management monitors the solvency of all financial institutions in which it has funds to minimize the exposure for loss. At December 31, 1995, management does not believe the Company is at risk for such a loss. During 1996, the Company intends to utilize short-term Treasury Bills and highly-rated commercial paper as cash management tools to minimize excess cash balances and enhance return.
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 27,000 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 $158,000 was leased to a third party on a triple-net basis for three years during 1995. The lease provides that the party can purchase the building during the first 18 months of the lease for $850,000 cash, with no lease payments applying to the purchase price.
CICA owned 1,955,457 shares of Citizens Class A common stock at December 31, 1995 (2,075,685 shares at December 31, 1994). For statutory accounting purposes, CICA received written approval from the Colorado Insurance Department to carry its investment in Citizens at 50% of the fair market value limited to 8% of admitted assets ($8,976,000), 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, 1995, that permitted transaction increased statutory surplus by $4,077,000 over what it would have been had prescribed accounting practice been followed. In the Citizens' consolidated financial statements, this stock is shown as treasury stock. During 1995, Citizens re-acquired 115,943 of these shares and retired them.
CICA had outstanding at December 31, 1995, a $533,000 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.
The Deficit Reduction Act of 1984 added Section 807 to the Internal Revenue Code ("IRC") which mandated the use of a new method for computing tax reserves. In general, Section 807 provides that tax reserves can never exceed the amount taken into account in computing statutory reserves. The applicable reserve is the higher of the net surrender value of the contract or the reserve determined by means of a formula. The term "net surrender value" means the cash value of the policy reduced by any penalty or charge imposed upon surrender.
(1) The tax reserve method applicable to the contract - generally the Commissioners' Reserve Valuation Method (CRVM) for life insurance contracts, the Commissioners' Annuities Reserve Valuation Method (CARVM) for annuity contracts, and the two-year full preliminary term method for non-cancelable accident and health contracts;
Generally, under prior law, a life insurance company's deduction for increases in its reserves was based upon reserves required for state law purposes which were computed using lower conservative interest rate assumptions. The 1984 Act's
The Budget Reconciliation Act of 1990 added IRC Section 848 which requires insurance companies, beginning in 1990, to capitalize and amortize policy acquisition expenses. For statutory accounting purposes, these acquisition expenses are deducted in the year incurred.
In December 1992, the FASB issued Statement 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" ("Statement 113"). Statement 113 eliminated the net reporting of reinsurance amounts in the balance sheet previously required by Statement 60 "Accounting by Insurance Enterprises." Statement 113 also provides accounting guidance for ceding enterprises as well as disclosure requirements and guidance on assessing transfer of risk in reinsurance contracts. Furthermore, it precludes immediate recognition of gains related to reinsurance contracts unless the ceding enterprise's liability to its policyholders is extinguished.
The Company adopted Statement 113 in the first quarter of 1993. There was no impact on the consolidated financial statements due to implementation of the risk transfer provisions.
In May 1993, the FASB issued Statement 114 "Accounting by Creditors for Impairment of a Loan" ("Statement 114"). Statement 114 requires impaired loans to be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Statement 114 is effective
Also in 1993, the FASB issued Statement 115 "Accounting for Certain Investments in Debt and Equity Securities" ("Statement 115"). Statement 115 requires the classification of debt and equity securities as held to maturity, trading or available for sale based on established criteria. Trading securities are bought and held principally for the purpose of resale in the near term. The Company had no investment securities classified as trading at January 1, 1994, December 31, 1994 or December 31, 1995. Held-to-maturity securities are those in which the Company has the ability and intent to hold the security until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale.
A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale and held-to-maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold. The Company adopted Statement 115 at January 1, 1994. The impact on the consolidated stockholders' equity due to the implementation was $690,388 relating to the unrealized gains on the available-for-sale portfolio, net of deferred tax.