We own our principal office in Austin, Texas, consisting of an 80,000 square foot office building and approximately one acre of land nearby that house storage facilities. Approximately 50,000 square feet is occupied or reserved for our operations. We also own a training facility at Lake Buchanan, Texas. In addition, we own other properties in Texas and Louisiana that are incidental to our operations.
ordinary whole life insurance policies to middle income households in the Midwest and the southern United States through approximately 600 independent marketing consultants; and
final expense and limited liability property policies to middle to lower income households in Louisiana through approximately 300 employee agents in our home service distribution channel.
approximately 2,600, and we presently receive applications from more than 35 countries outside of the U.S. Historically, the majority of our international business has come from Latin America. However, in 2004 the Pacific Rim began to represent a meaningful and growing source of new business, and in 2007 was one of the leading sources of new premium income.
Through the domestic market of our Life Insurance segment, we provide ordinary whole life, credit life insurance, and final expense policies to middle income families or individuals in certain markets in the Midwest and southern U.S. The majority of our revenues in this regard are the result of acquisitions of domestic life insurance companies since 1987.
Citizens National Life Insurance Company (“CNLIC”), one of our subsidiaries that markets our domestic products, was previously for sale under a contract entered into in 2005. During 2007, the sales contract was terminated.
During 2007, revenue from this segment was $52.9 million, which accounted for 30.4% of our total revenue. For the year ended December 31, 2006, revenue from this segment was $51.2 million or 32.4% of our total revenue compared to $49.7 million or 34.9% of our total revenue in 2005. Our business strategy in this segment is to continue to serve existing customers in Louisiana as well as expand the business through new marketing management that we put in place in early 2005.
In August and September 2005, Hurricanes Katrina and Rita struck the Louisiana coast, causing significant damage and disruption to the New Orleans area. Management estimates that one-third of SPLIC’s premium income was located in the affected area. SPLIC was not significantly impacted by death claims related to the storms (approximately $660,000); however, because of uncertainty regarding the collectibility of future premiums from the area, we wrote down approximately $2.3 million of cost of customer relationships acquired in the SPLIC acquisition during the third quarter of 2005 because of the decrease in collected premiums during the quarter. Ultimately, SPLIC closed the year with only a 4.5% decline in premium income compared to 2004. In 2006, premium income surpassed the 2005 level, reaching $38.0 million, and was $39.5 million in 2007.
Total revenues for 2007 were $173.8 million, a 10.0% increase over 2006 revenues of $158.1 million. Total revenues for 2005 were $142.1 million. Total revenues from Home Service were $52.9 million in 2007 and $51.2 million in 2006, compared to $49.7 million in 2005. Total revenues from our Life Insurance segment amounted to $119.0 million during 2007, compared to $105.7 million for 2006 and $90.6 million for 2005, reflecting continued growth in new business.
Premium Income. Premium income during 2007 increased to $140.9 million from $128.5 in 2006, or 9.6%, and $116.3 million in 2005. The 2007 increase was attributable to the new international business written in 2006 and 2007 in the Life Insurance segment, which had $101.4 million of premium income during the year. Additionally, we continue to experience improved persistency in our international life business, which contributed largely to the increase. First year premium in the Life Insurance segment was unchanged from its 2006 level. Additionally, property insurance premiums were up $1.1 million in 2007 over 2006, or 30.4%, as rate increases implemented in the fourth quarter of 2006 and third quarter 2007 materialized.
Net Investment Income. Net investment income increased 14.0% during 2007 to $30.7 million, compared to $27.0 million during 2006 and $23.6 million in 2005. The increase was due primarily to the growth in the investment portfolio during 2007. Additionally, during 2007 the Company invested $36.7 million in equity mutual funds, which added $2.1 million to net investment income from fund distributions. The Company expects to increase this number to 10% of invested assets during 2008. We continue to invest primarily in bonds of U.S. Government-sponsored enterprises, such as FNMA and FHLMC.
Reserves. The change in future policy benefit reserves increased from $30.7 million in 2006 to $36.4 million in 2007, predominantly due to an improvement in persistency on our international life business, as well as a change in product mix, which resulted in larger first year reserves. During 2007 and 2006, a shift in products sold occurred with the addition of sales in the Pacific Rim, which resulted in a more rapid rise in reserves. The change in future policy benefit reserves increased from $23.6 million in 2005 to $30.7 million in 2006, due predominantly to increased persistency on our business and an increase and change in product mix in new business. Sales of certain endowment products in the Taiwanese market, which build reserves at a much higher rate, contributed to the increase.
Policyholder Dividends. Policyholder dividends increased 18.9% during 2007 to $6.4 million from $5.4 million in 2006 and $4.8 million in 2005, due to improved persistency and the continued sale of participating ordinary whole life products in the international market. All of our international policies are participating, and the improvement in persistency and increase in new business on our international business have contributed to the growth in dividends. The dividends are factored into the premiums and have no impact on profitability.
Claims and Surrenders. As noted in the table below, claims and surrenders decreased 2.7% from $56.3 million in 2006 to $54.7 million in 2007. The 2007 decrease primarily related to a decline in claims from Hurricane Katrina in 2007, which were a negative $711,000 because of a release of liabilities related to the expiration of the extended claims filing deadline. Hurricane related claims were $3.0 million in 2006 and $1.6 million in 2005.
Death benefits declined in 2007 compared to 2006, despite the growth in our business written, because of more restrictive underwriting rules, as well as strict claims adjudication procedures that the Company has developed over its history. Death benefits also decreased in 2006 compared to 2005.
Property claims decreased 79.0% in 2007, from $5.2 million in 2006 to $1.1 million in 2007, and were $3.7 million in 2005. In 2007, the Company began to experience a dramatic decline in property claims that adversely affected the business in 2006 and 2005. Hurricane claims in 2007 were a negative $711,000. Of the 2006 property claims, $3.0 million were due to Hurricane Katrina, while in 2005, $1.6 million were due to Hurricanes Katrina and Rita.
Commissions. Commissions decreased slightly during 2007 to $35.6 million from $35.7 million in 2006 and $33.0 million in 2005, primarily due to the new business issued during the period. Commissions were flat in 2007 compared to 2006, even though premiums were up 10.0%, due to the increased amount of renewal premiums, which pay a lower commission.
Cost of Customer Relationships Acquired and Other Intangibles. Amortization of cost of customer relationships acquired and other intangibles decreased from $5.9 million in 2005, to $4.7 million in 2006 and $3.2 million in 2007. Amortization of these items related to Security Plan was $3.8 million in 2005, $2.3 million in 2006 and $2.0 million in 2007. The decrease resulted from an increase in amortization of $2.3 million in 2005 related to the Louisiana hurricanes. In conjunction with this loss recognition, we revised our amortization methodology to (i) reduce projections of future collected premiums by approximately 4.0% and (ii) to amortize the acquired paid-up block over inforce balances, which resulted in a $400,000 decrease in amortization expense in 2006. This change also reduced 2007 amortization.
The goodwill of CNLIC, a reporting unit within the Life Insurance segment, showed that it was impaired at December 31, 2006. Due to significant declines in new business issued by CNLIC, the fair value of this reporting unit was below its carrying value. As a result, an impairment loss of $1,016,000 was recognized in the fourth quarter of 2006. The fair value of that reporting unit was estimated using the present value of estimated future cash flows. The remaining goodwill is associated with CICA. At December 31, 2007, there was no impairment of this goodwill.
A primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals. We include provisions within our insurance policies, such as surrender charges, that help limit and discourage early withdrawals. Since these contractual withdrawals, as well as the level of surrenders experienced, were largely consistent with our assumptions in asset liability management, our associated cash outflows have, to date, not had an adverse impact on our overall liquidity. Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy. Cash flow projections
Stockholders’ equity at December 31, 2007 was $176.2 million compared to $139.6 million at December 31, 2006. The 2007 increase was largely due to income earned during the period, a decrease in unrealized investment gains of $4.2 million, and the accretion of deferred issuance costs and discounts on preferred stock of $1.3 million. Also, in the fourth quarter of 2007, the Company completed a registered direct offering of approximately 2.7 million shares of its Class A common stock, netting proceeds of $17.1 million.
Investments increased to $585.3 million at December 31, 2007 from $515.1 million at December 31, 2006. Invested assets grew by 13.6% during 2007. Fixed maturities are categorized into fixed maturities available-for-sale, which are carried in our consolidated financial statements at fair value. Fixed maturities available-for-sale were 85.5% of investments at December 31, 2007.
Policy loans comprised 4.4% of invested assets at December 31, 2007 compared to 4.6% at December 31, 2006. These loans, which are secured by the underlying policy values, have yields ranging from 5% to 12% and maturities that are related to the maturity or termination of the applicable policies. Management believes that we maintain adequate liquidity despite the uncertain maturities of these loans.
In the wake of bankruptcy filings by large corporations several years ago, concern was raised regarding the use of certain off-balance sheet special purpose entities such as partnerships to hedge or conceal losses related to investment activity. We do not utilize special purpose entities as investment vehicles, nor are there any such entities in which we have an investment that engage in speculative activities of any nature, and we do not use such investments to hedge our investment positions. The Company has no subprime or collateralized debt obligations.
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 an insurance company, the quality of its assets, and various other aspects of an insurance company’s business 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 affected company would begin. At December 31, 2007 and 2006, all of our insurance subsidiaries were above required minimum levels.
We are a holding company and have had minimal operations of our
At December 31, 2007, Security Plan’s paid-up policies did not convert to our new policy administration system. Because of this, reserves related to these policies were estimated based on the ratio of statutory reserves at December 31, 2007 compared to September 30, 2007, multiplied by the GAAP reserves at September 30, 2007.
Inherent in the capitalization and amortization of deferred policy acquisition costs are certain management judgments about what acquisition costs are deferred, the ending asset balance and the annual amortization. Approximately 80% of our capitalized deferred acquisition costs are attributed to first year excess commissions. The remaining 20% are attributed to costs that vary with and are directly related to the acquisition of new and renewal insurance business. Those costs generally include costs related to the production, underwriting and issuance of new business.
Our fixed maturities consist primarily of bonds. Prior to December 31, 2006, fixed maturities that the Company had the ability and intent to hold to maturity were carried at amortized cost. Fixed maturities that may be sold prior to maturity to support the Company’s investment strategies are considered held as available-for-sale and carried at fair value as of the balance sheet date. Equity securities (including non-redeemable preferred stock) are considered available-for-sale and are reported at fair value.