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 per share amounts have been adjusted retroactively for all periods presented to reflect the change in capital structure resulting from 7% common stock dividends paid on December 31, 1999 and December 31, 2000, respectively.
On November 20, 2001, Citizens announced agreements to acquire all outstanding shares of Combined Underwriters Life Insurance Company ("Combined") and Lifeline Underwriters Life Insurance Company ("Lifeline") for shares of Citizens Class A Common stock. Both Combined and Lifeline are members of the Walden P. Little Group of Tyler, Texas.
The agreement was approved by shareholders of Combined and Lifeline and insurance regulatory authorities in Texas in March, 2002. The exchange was based upon a market value of $8.64 per share for Combined and $5.00 per share for Lifeline. The price for Citizens shares of $11.479 was based upon its average closing price for the 20-days preceding closing, which occurred on March 19, 2002. The total aggregate consideration issued by Citizens amounted to approximately 1.1 million shares of Class A common stock.
Lifeline had revenues of $838,000 for the year ended December 31, 2000 and assets and stockholders' equity as of December 31, 2000 were $4.1 million and $3.4 million, respectively.
Combined and Lifeline will continue to operate from their offices in Tyler, with a combined management team. Management believes that the acquisitions should enhance premium income and total revenue and provide the Company an established domestic marketing program. It is expected that the marketing operations of these companies will continue to write the supplemental accident and health products that have historically been the foundation of their new business, but will also provide a new division to offer the domestic ordinary life products developed by CICA.
business during the third quarter of 1999 in order to curtail both claims and operating expenses. This action contributed to the $3,650,632 decrease in accident and health premiums in 2000 and an additional $2,175,842 decrease in 2001. Because of the increase in the loss ratio, management has implemented significant rate increases on the remaining supplemental non-cancelable accident and health products which has also contributed to the decrease in accident and health premiums, as some policyholders have elected to cancel their policies.
Production of new life insurance premiums by the associates of CICA measured in issued and paid annualized premiums increased 21.4% from 1999 to 2000 and 14.9% from 2000 to 2001. In addition, management initiated a domestic ordinary life sales program in late 2000. This program, targeting rural areas of the United States, is expected to provide a new entree into the domestic life market for the Company in future years. Due to changes in agency management, this program's initial results have not been as successful as management had anticipated; however, the Company believes the program will ultimately be successful. The Company intends to expand sales efforts beyond Texas to other states in which CICA is licensed.
Net investment income increased 5.9% during 2001 to $13,296,481 from $12,550,754 during 2000. The 2000 results were up 7.9% compared to the $11,636,940 earned in 1999. The 2001, 2000 and 1999 results reflect the continuing expansion of the Company's asset base, and the actions taken in previous years to change the mix and duration of the Company's invested assets to place less emphasis on government guaranteed mortgage pass-through instruments and more emphasis on investments in callable instruments issued by U.S. government agencies. Management terminated the Company's outside investment advisor effective March 31, 2000. The Company feels it can more effectively achieve its investment objectives by overseeing the investment activities in-house. During 2001, significant decreases in interest rates occurred. As a result, management expects returns on newly invested funds to decline in the short-term. Management does not believe such declines will have a materially adverse effect on future operating results, and believes the yield earned on newly invested money to be reasonable and in line with assumptions utilized in new-product development.
During the fourth quarter of 2001, the Company realized losses of approximately $390,000 before tax on the disposal of approximately $9 million of U.S. Treasury notes which were purchased in the early 1990s. The entire principal portion of the notes could have been called in February of 2002, at par. Management disposed
of the notes in order to reduce any potential loss in the event the notes were called. This avoided an additional $100,000 in losses when the notes were called in February 2002. The Company typically avoids investments in bonds and notes at significant premiums in order to minimize the potential for loss on early calls such as the situation described above. Management does not believe any similar condition exists within the Company's bond portfolio which could result in any significant future losses. An analysis of the Company's portfolio indicates that the total remaining exposure from such calls in the future is approximately $30,000.
Policyholder dividends increased to $3,294,899 in 2001, up 8.5% over 2000 dividends of $3,037,343. The 2000 amounts represented an increase of 6.8% compared to $2,843,681 in 1999. Virtually all of CICA's policies that have been sold since 1989 are participating. Participating policies represent a large majority (53.9%) of the Company's business in-force, although the percentage of participating business has declined from approximately 91% in 1995 due to acquisitions in recent years. Management expects continued growth in participating policies because CICA will continue to focus on sales of participating products internationally.
Accident and health benefits decreased 36.0% from $5,158,623 in 2000 to $3,301,341 in 2001. Such claims were $8,686,218 in 1999. As indicated above, as a result of the substantial increase in the volume of USLIC's accident and health claims plus an increase in the accident and health loss ratio, management cancelled a large portion of the existing blocks of USLIC's group dental and
Policy surrenders increased 2.2% from $14,124,514 in 2000 to $14,435,486 in 2001. Surrenders were $14,920,985 in 1999. The relative stability in 2001, 2000 and 1999 is, in the opinion of management, the result of a campaign begun in mid-1997 to inform policyowners about the benefits of their policies.
Capitalized deferred policy acquisition costs increased 10.5% from $10,056,287 in 2000 to $11,112,096 in 2001. These costs were $9,287,457 in 1999. The increase in 2001 reflects increased sales throughout the year of traditional whole life policies internationally. The 2000 increase reflects increased fourth quarter sales activity. Amortization of these costs was $8,568,445, $8,521,972 and $10,028,806, respectively in 2001, 2000 and 1999.
Amortization of cost of insurance acquired, excess of cost over net assets acquired and other intangibles decreased from $1,995,660 in 2000 to $1,908,683 in 2001. In 1999, such amortization was $2,120,017.
A charge of $9.5 million was recorded in the third quarter of 1998 related to the non-recoverability of a portion of the excess of cost over net assets acquired ("goodwill") on the Company's books. The writedown was related to the goodwill recorded in the 1995 acquisition of American Liberty Financial Corporation (ALFC) and was caused by a decline in new production from insurance agents formerly associated with American Liberty. Subsequent to the acquisition, management implemented a 50% reduction in the amount of commission paid to these agents in order to preserve the profitability of the accident and health business which was negatively impacted by changes in state laws that severely limited profit margins, as well as mandated change in interest rates used to compute reserves on this business. In order to ascertain the recoverability of the goodwill balance, the Company performed an analysis of the relevant cash flows based upon estimated production, net of policy acquisition costs, policyholder benefits and other general expenses. As a result of this analysis, it was determined that an impairment of goodwill had occurred and a write-down to goodwill was necessary.
Stockholders' equity increased from $77,313,031 at December 31, 2000 to $82,721,798 at December 31, 2001. The increase was attributable to net income
of $3,963,113 earned in 2001 and unrealized gains (losses), net of tax, changing by $1,445,654 during 2001. Increases in the market value of the Company's bond portfolio caused by higher bond prices resulted in the change in unrealized (losses).
In the wake of recent bankruptcy filings by large corporations, concern has been raised regarding the use of certain off-balance sheet special purpose entities such as partnerships to hedge or conceal losses related to investment activity. The Company does not utilize special purpose entities as investment vehicles. Nor are there any such entities which the Company has an investment in that engage in speculative activities of any description, and the Company does not use such investments to hedge the Company or CICA positions. Furthermore, there are no commitments nor guarantees that provide for the potential issuance of the Company's stock.
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, 2001, CICA, CILIC and Excalibur were above required minimum levels.
Effective January 1, 2001, the NAIC implemented codified rules for statutory accounting. These rules were approved and implemented by each state in which CICA's, CILIC's and Excalibur's operations are domiciled. CICA is domiciled in Colorado and CILIC and Excalibur are domiciled in Illinois. CICA follows certain Colorado state laws that differ from NAIC's codified rules. The primary difference between the Colorado statutes and the codified rules involve the establishment of a liability for future policy dividends payable. Under codification such reserve is mandated; however, Colorado has an exception if the difference between the premium charged and the mortality factor included in the premium on participating policies exceeds the reserve that would be established. Such is the case for CICA. As a result, CICA did not establish the reserve of approximately $3 million in its statutory financial statements as of and for the year ended December 31, 2001 or December 31, 2000. In Illinois, codified rules must be followed unless the Commissioner of Insurance of the State of Illinois permits specific practices that differ from the codified rules. CILIC and Excalibur have not requested explicit permission to deviate from the NAIC codified rules. Overall, the implementation of codification increased the Company's surplus on a statutory accounting basis by 1.0% related to the statutory accounting practices with respect to deferred income taxes.
The tragedies of September 11, 2001 significantly impacted the life insurance industry's operating results. None of the Company's life insurance subsidiaries have ever written business in New York, Pennsylvania or Washington, D.C. The Company is unaware of any claims related to such events, and therefore, does not expect any adverse effects as a result. The Company may, however, be inadvertently subject to claims from such attacks should they be assessed by various state Guaranty Funds as a result of any insurance company insolvencies triggered by those attacks.
Future policy benefit reserves have been computed by the net level premium method with assumptions as to investment yields, dividends on participating business, mortality and withdrawals based upon the Company's and industry experience. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of policy liabilities and the increase in future policy benefit reserves. Management's judgments and estimates for future policy benefit reserves provide for possible unfavorable deviation.
The Company continues to use the original assumptions (including a provision for the risk of adverse deviation) in subsequent periods to determine the changes in the liability for future policy benefits (the "lock-in concept") unless a premium deficiency exists. Management closely monitors these assumptions and has determined that a premium deficiency does not exist. Management believes that the Company's policy liabilities and increase in future policy benefit reserves as of and for the years ended December 31, 2001, 2000 and 1999 are based upon assumptions, including a provision for the risk of adverse deviation, that do not warrant revision. The relative stability of these assumptions is discussed below.
effective after March 31, 2001. The Company adopted SFAS No. 140 during 2001. Implementation did not have an impact on the Company's financial statements since it was not involved in any such transfers, servicing or extinguishments. Based on current operations, the Company does not anticipate that SFAS No. 140 will have a material effect on the financial position, results of operation or liquidity of the Company.
In December 2000, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 00-3, "Accounting by Insurance Enterprises for Demutualizations and Formations of Mutual Life Insurance Holding Companies and for Certain Long-Duration Participating Contracts." SOP 00-3 provided guidance on accounting by insurance enterprises for demutualizations and the formation of mutual insurance holding companies. SOP 00-3 also applies to stock insurance enterprises that apply SOP 95-1, "Accounting for Certain Insurance Activities of Mutual Life Insurance Enterprises" to account for participating policies. This SOP is effective for financial statements for fiscal years ending after December 15, 2001. Management does not believe that SOP 00-3 will have any impact on the Company since it is already a stock life insurance company and does not pay dividends based on actual experience of the Company. The Company utilizes contractual life insurance dividend scales as shown in published dividend illustrations at the date the insurance contracts are issued in determining policyholder dividends.
In connection with the transitional goodwill impairment evaluation of SFAS No. 142, the Statement requires the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002. The Company will then have up to six months from January 1, 2002 to determine the fair value of each reporting unit and compare it to the carrying amount of the reporting unit. To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit, an indication exists that the reporting unit goodwill may be impaired and the Company must perform the second step of the transitional impairment test. The second step is required to be completed as soon as possible, but no later than the end of the year of adoption. In the second step, the Company must compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill, both of which would be measured as of the date of adoption. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of operations.