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. At December 31, 1998, the occupancy rate of the property was 100%.
CICA also owned 1.10 acres of land with a 13,000 square foot office building which previously served as the Company's executive offices. The property, with a book value of $104,000, was sold for cash in 1998 for $850,000.
Through the acquisition of American Liberty Financial Corporation 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, FHA.
AIN owned a 13,000 square foot building in a suburb of Jackson, Mississippi. In March, 1998, this building was sold for $537,000, a gain of approximately $50,000 with CICA making a $430,000 mortgage loan.
On August 13, 1997, Citizens signed a definitive agreement to acquire 100% of the outstanding shares of National Security Life and Accident Insurance Company ("NSLIC") of Arlington, Texas for $1.7 million in cash and restricted stock. The transaction closed in November, 1997.
Total revenues for the year ended December 31, 1998 were $72,684,915 compared to $65,027,298 in 1997 , an increase of 11.8%. In 1996 revenues were $63,822,160. The inclusion of the revenues from USLIC and NSLIC for the entire year was the primary reason for the increase during 1998. 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. However, economies of scale created by the combination of companies contributed to the increase in 1997 income.
Premium income reached $59,154,329 in 1998, a 6.8% increase over the $55,362,616 in 1997. The 1997 amounts were a 1.9% increase over the previous year when premium income totaled $54,303,445. Declines in the production of international premium by CICA and domestically by ALLIC's former marketing operations during 1997 resulted in a nominal increase in 1997 compared to 1996. Additionally, as stated above, the results for USLIC and NSLIC were not included for the entire year 1997. In January, 1998, CICA introduced a new line of international products known as the Millennia 2000 series. Management believes that these products will be well received in the marketplace; however, in 1998, CICA's international sales were hampered due to the contraction of several Latin American economies as well as increased competition from new local insurance companies who are subsidiaries of large U.S. insurers.
During 1998, management discontinued selling the limited major medical products that NSLIC's prior management had begun to introduce in 1997. Management believes that the level of surplus and asset size of NSLIC are not sufficient to support the potential volatility that is inherent in such types of business. As such, NSLIC's marketing efforts are focused solely on the expansion of existing credit life and credit accident and health business.
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.. 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. 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 1998. Management expects to continue this strategy throughout 1999 as opportunities present themselves.
Claims and surrenders increased to $31,592,740 in 1998, an increase of 13.4% over 1997 when such benefits were $27,852,907. In 1996 claims and surrenders were $25,919,054. The increase in benefits can be attributed to the inclusion of NSLIC and USLIC for an entire year in 1998, as well as increases in accident and health benefits attributable to the respective blocks of business of these companies. Death benefits increased to $5,150,647 in 1998, up from $4,475,083 in 1997, and $3,667,159 in 1996. The 1998 increase can be traced directly to the inclusion of NSLIC and USLIC for an entire year. During 1998, claims on NSLIC were $421,801, while claims from USLIC were $35,570. 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.
Endowment expense grew to $5,258,881 in 1997 from $5,192,607 in 1996. In 1998, such expenses declined to $5,027,937. 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 and the decline in 1998 reflects the decline in production of this policy over the last three years.
In 1998, policy surrenders remained flat at $14,481,335. Policy surrenders were $14,322,593 in 1997, compared to $14,421,683 in 1996. The decrease in 1997 and relative stability in 1998 is, in the opinion of management, the result of a campaign begun in mid-1997 to inform policyowners about the benefits of their policies.
In order to convert a majority of CICA's marketing overhead from fixed to variable, management contracted in early 1997 with an independent international marketing company to serve as managing agent for the Company's international marketing activities. This firm receives an overriding commission on all new business sold internationally in exchange for the absorption of all marketing management and promotion activities. Management has utilized firms such as this in previous periods with great success at obtaining increases in sales and expense reductions.
Amortization of cost of insurance acquired and excess of cost over net assets acquired declined in 1998 to $2,100,433 from $2,305,127 in 1997. In 1996, such amortization was $1,398,859 in 1996. The increase in 1997 was attributable to the goodwill and cost of insurance recorded on the acquisitions of USLIC, NSLIC, ALLIC and IIH. 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.
Stockholders' equity decreased to $74,903,679 at December 31, 1998 from $79,581,698 in 1997. The loss from operations caused by the non-recurring charge offset improvement in the market value of the Company's fixed maturity portfolio and caused the decline in equity.
Invested assets grew to $176,572,123 in 1998 from $162,651,692 in 1997, an increase of 8.6%. The growth is attributable to the internal growth achieved by the Company. At December 31, 1998 and 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 1999; however, because of continued uncertainty regarding long-term interest rates, management cannot rule out sales during 1999. Fixed maturities held to maturity, amounting to $5,606,374 at December 31, 1998 consist 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 11.9% of invested assets at December 31, 1998 compared to 12.6% at December 31, 1997. 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.
Corporation coverage at December 31, 1998 and 1997. Management monitors the solvency of all financial institutions in which it has funds to minimize the exposure for loss. Management does not believe the Company is at risk for such a loss. During 1999, the Company intends to utilize highly-rated commercial paper as a cash management tool 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. 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 sold during 1998 for $850,000.
CICA owned 1,821,332 shares of Citizens Class A common stock at December 31, 1998 and 1997. 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 and 1998, 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, 1998, a $333,333 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 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 practices, 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, and CILIC were well above required minimum levels. NSLIC and USLIC fell below the 200% level as reported on their December 31, 1998 Annual Statement to insurance regulatory authorities. Management immediately made capital contributions to both companies to raise them above the minimum levels. Additionally, during the 1998 annual audit, it was discovered that the provisions for pending claims in both companies were overstated. Management expects to amend the 1998 statutory financial statements of USLIC and NSLIC to increase surplus by approximately $250,000 and $1,000,000, respectively as a result of the overstatement, bringing both companies further above the 200% level of RBC.
During the past 15 years, the Company has undertaken numerous major systems projects, including but not limited to, development of interactive, simulated-real-time transaction collection and user inquiry programs, conversion from CSC/Continuum's Life/70 to in-house developed core processing systems, transition from a Harris minicomputer to a Wang VS, transition from an IBM plug-compatible mainframe to a Wang VS and conversion of at least seven life and health insurance company operations to its systems. During 1998, Company personnel have successfully completed conversion of two insurance company operations, namely United Security Life Insurance Company and National Security Life and Accident Insurance Company, from non-compliant UNIX and IBM systems to systems designed and operated by Citizens. The Company's electronic systems department ("ESD") staff believes year 2000 issues will continue to be addressed as a top priority until the Company can certify its systems are Year 2000 compliant. The effort needed to complete the task is expected to be effected with existing staff by June 30, 1999, thus leaving ample time to assess and resolve any significant remaining issues.
In the late 1980's, the Company began developing software to routinely audit its data bases and its source code. These internal audit tools run daily and provide perpetual balancing of the Company's policy and agency master files to its general ledger. The source code audit tool has been an instrumental key to identifying system code that may need year 2000 remediation. By using this automated "bloodhound" combined with visual review of record and screen layouts/documentation, the Company's ESD staff have identified the "worst case" scenario for a year 2000 impact. Under this scenario, the Company does not expect material costs, because the remaining functions that could be non-compliant can be handled manually.
The Company utilizes a Wang VS 7160 for providing core processing and on-line support in conjunction with a local-area-network (LAN) based upon CISCO 5500 and 2900 intelligent switching components. The Company's Mitel telephone system was replaced during 1998 with a Mitel 2000 Light, nodal, fiber-optic system which is year 2000 compliant.
In February 1997, the Financial Accounting Standards Board ("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.
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. Implementation has not had a material impact on the Company.
Also in June, 1997, Statement 131, "Disclosures about Segments of an Enterprise and Related Information," was issued by the Financial Accounting Standards Board. This Statement requires that companies disclose segment data on the basis that is used internally by management for evaluating segment performance and allocating resources to segments. This Statement requires that a company report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets. It also requires various reconciliations of total segment information to amounts in the consolidated financial statements. The Company's current definition of its business segments, significant lines of business (life and health products), will be expanded to significant lines of business by geographic location of policyholder (international and domestic).