The table below sets forth, in summary form, selected financial data of the Company. This data, which is not covered in the reports of our independent registered public accounting firms, should be read in conjunction with our consolidated financial statements and notes, which are included elsewhere herein. The net income per share amounts have been adjusted retroactively for all periods presented to reflect the 7% common stock dividends paid on December 31, 2005 and 2004.
U.S. Dollar-denominated ordinary whole life insurance policies predominantly to high net worth, high income foreign residents, located principally in Latin America and the Pacific Rim, through approximately 2,200 independent marketing consultants;
ordinary whole life insurance policies to middle income households in the midwest and the southern United States through approximately 300 independent marketing consultants; and
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.
During 2008, revenue from this segment was $42.2 million, which accounted for 28.8% of our total revenue. For the year ended December 31, 2007, revenue from this segment was $52.9 million or 31.2% of our total revenue compared to $51.2 million or 33.2% of our total revenue in 2006. The decrease in revenue in 2008 was primarily due to the write-down of $9.9 million of equity mutual funds during 2008. 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.
As a financial institution and life insurer with significant investment exposure, we have been adversely affected by the volatility and disruption in the global capital markets and face significant financial and capital markets risk in our operations. Corporate bond defaults and credit downgrades, which have resulted in other-than-temporary impairments in the value of some securities, have had a material impact on life insurers in the past few years. The majority of our investment portfolio is held in debt instruments carrying the full faith and credit of the U.S. Government, or in U.S. Government-sponsored enterprises. Most of the municipal bonds we own are privately insured. We have not experienced any material impairments in the value of our debt securities due to the current credit crisis in world financial markets. We intend to manage our investment portfolio conservatively in the future by continuing to utilize these types of debt instruments. During the course of 2008, the significant declines in equity markets have negatively impacted our assets under management. We incurred realized losses relative to limited equity positions we took during 2007 and the first half of 2008 under the current accounting guidance for OTTI analysis. Due to current economic forecasts, we expect continued pressure on our equity positions in 2009.
The following table sets forth our net income for the periods indicated:
As further discussed below, the impairment of $23.5 million of equity securities plus the tax valuation allowance thereon, the property losses incurred by SPFIC from Hurricanes Gustav and Ike and the increase in fair value of the warrants associated with the Company’s Preferred stock contributed to a 194.9% decrease in earnings for 2008.
Total revenues for 2008 were $146.7 million, a 13.5% decrease compared to 2007 revenues of $169.6 million. Total revenues for 2006 were $154.2 million. Total revenues from Home Service were $42.2 million in 2008 and $52.9 million in 2007, compared to $51.2 million in 2006. Total revenues from our Life Insurance segment amounted to $105.5 million during 2008, compared to $114.8 million for 2007 and $101.9 million for 2006.
Premium Income. Premium income during 2008 increased to $141.3 million from $136.7 million in 2007, or 3.3%, and $124.6 million in 2006. The 2008 increase was attributable to the new international business written in 2007 and 2008 in the Life Insurance segment, which had $102.0 million of premium income during 2008. Additionally, we continued to experience improved persistency in our international life business, which contributed largely to the increase. First year premium in the Life Insurance segment in 2008 was up slightly from its 2007 level.
Net Investment Income. Net investment income decreased slightly during 2008 to $30.5 million, compared to $30.7 million during 2007 and $27.0 million in 2006. The decrease was primarily from lower income earned on equity mutual funds. Mutual fund income was $2.2 million in 2007 but only $1.0 million in 2008. Although investments were flat, cash grew substantially during 2008, investment income was only marginally up. Aside from lower mutual fund income, the low interest rate environment coupled with larger amounts invested in lower yielding cash balances reduced income in 2008. We continue to invest primarily in bonds of U.S. Government-sponsored enterprises, such as Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Association (FHLMC), although the Company expects lower investment yields with these instruments due to historically low interest rates.
Realized Gains (Losses) on Investments. As previously mentioned, the Company recognized OTTI write-downs of $23.5 million on its holdings of mutual funds during the fourth quarter of 2008, as these securities experienced an unrealized loss position for more than twelve months. These mutual funds are well diversified and have a history of out-performing the overall market, although past performance is not a guarantee of future results. The Company believes these funds will recover as the overall market recovers. During 2008, the Company also permanently impaired two bonds due to credit quality, recognizing a realized loss of $288,000.
Death benefits increased in 2008 compared to 2007, primarily in the Home Service segment, where death claims were up $1.9 million. However, there was a $650,000 decrease in 2007 to correct an overstatement of prior years claim liability. Death benefits decreased slightly in 2007 compared to 2006.
Endowment benefits increased 7.6% from $12.8 million in 2007 to $13.8 million in 2008. Endowments totaled $10.8 million in 2006. We have a series of international policies that carry an immediate endowment benefit of an amount elected by the policy owner. These benefits have been particularly popular in the Pacific Rim, where the Company has experienced increased business in recent years. Like policy dividends, endowments are factored into the premium and, as such, the increase has no impact on profitability.
Property claims increased 143.8% in 2008, from $1.1 million in 2007 to $2.7 million in 2008, and were $5.2 million in 2006. In 2008, Hurricanes Gustav and Ike swept through Louisiana resulting in an increase in property claims of $1.6 million over 2007. In 2007, the Company began to experience a dramatic decline in property claims that adversely affected the business in 2006. Hurricane claims in 2007 were a negative $711,000, as the Company released claim liabilities that were no longer required due to the expiration of the statute of limitations. Of the 2006 property claims, $3.0 million were due to Hurricane Katrina.
Reserves. The change in future policy benefit reserves increased from $36.4 million in 2007 to $37.1 million in 2008, predominantly due to an improvement in persistency on our international life business, as well as the continued sale of international policies. 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 $30.7 million in 2006 to $36.4 million in 2007, due predominantly to increased persistency on our business and an increase and change in product mix in new business. Additionally, sales of certain endowment products, which build reserves at a much higher rate, contributed to the increase.
Commissions. Commissions increased slightly during 2008 to $36.0 million from $35.6 million in 2007 and $35.7 million in 2006, primarily due to the new business issued during the period. Commissions were essentially flat all three years, even though premiums were up due to the increased amount of renewal premiums, which pay a lower commission.
Underwriting, Acquisition and Insurance Expense. Underwriting, acquisition and insurance expenses increased to $28.6 million in 2008 from $27.6 million in 2007. The 2008 increase was largely due to an increase in employee compensation and increased fees for international shipping.
Cost of Customer Relationships Acquired and Other Intangibles. Amortization of cost of customer relationships acquired and other intangibles decreased from $4.7 million in 2006, to $3.2 million in 2007 and $2.9 million in 2008.
Federal Income Tax. The federal income tax expense was $3.1 million, $6.9 million and $4.7 million in 2008, 2007 and 2006, respectively, resulting in effective tax rates of 24.7%, 29.5% and 35.0%, respectively. The Company established a tax valuation allowance related to OTTI losses on its mutual funds of $6.9 million in 2008. The establishment of the valuation allowance had the effect of decreasing the effective tax rate. In 2007, our valuation allowance was released, as the CNLIC sale agreement was terminated and the Company’s plan is to now consolidate CNLIC in the Company’s life-nonlife tax return for 2008. CICA had sufficient life income to absorb the CNLIC net operating losses in 2008. In 2006, this release of the valuation allowance reduced our effective tax rate by 4.7%. The 2006 tax rate was higher due to a write-off of $1.0 million of goodwill, which has no resulting tax benefit. The write-off of goodwill added 2.7% to the effective tax rate. (See Note 11 of the “Notes to Consolidated Financial Statements” for additional information on federal income tax.)
At December 31, 2008, 70.5% of our fixed maturity securities were invested in U.S. Government-sponsored enterprises or securities backed by the U.S. Government. We evaluate the carrying value of our fixed maturity and equity securities at least quarterly. The Company monitors all debt and equity securities on an on-going basis relative to changes in credit ratings, market prices, earnings trends and financial performance, in addition to specific region or industry reviews. The Company determines other-than-temporary impairment by reviewing all relevant evidence related to the specific security issuer as well as the Company’s intent and ability to hold the investment for a period of time sufficient for a forecasted recovery. The Company’s intent to hold investments for the long term can be evidenced by security maturities as opposed to sales within the portfolios and the long term nature of our insurance contracts and the strategy of matching assets and liabilities as key business drivers. A decline in the fair value of any fixed maturity or equity 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. The new cost basis is not changed for subsequent recoveries in the fair value of the fixed maturity or equity security. With the exception of Security Plan, virtually all of our subsidiaries fixed maturity investments are in U.S. Government or U.S. Government-sponsored enterprises or U.S. Government instruments. Security Plan has significant investments in corporate and municipal bonds. Based upon our emphasis on investing in fixed maturity securities primarily composed of obligations of U.S. Government-sponsored corporations, our intent and ability to hold temporarily impaired fixed maturities until recovery, and our analysis of whether declines in fair value below cost are temporary or other-than-temporary, management believes that our investments in fixed maturity investments at December 31, 2008 were not impaired, and no other-than-temporary losses needed to be recorded. The Company did impair one Lehman Brothers bond and a Ford Motor Credit bond during 2008, because the Company does not expect these securities to recover in value in the near term. The Company will closely monitor its fixed income portfolio going forward. The Company’s equity securities consist of mutual funds acquired in 2007 and 2008. The recent financial crisis has caused our equity securities to significantly decrease in value. The Company took an other-than-temporary impairment charge on its equity securities in 2008 in the amount of $23.5 million, although the Company does expect these securities to recover in value as the overall financial market recovers.
Gross unrealized losses on fixed maturities available-for-sale amounted to $16.0 million as of December 31, 2008 and $4.7 million as of December 31, 2007. The increase in unrealized losses from year end 2007 to year end 2008 was primarily due to the substantial decline in the overall financial markets, which put downward pricing pressure on the fair values of our corporate and municipal bonds. There were no gross unrealized losses on equity securities as of December 31, 2008, as all of these securities were deemed impaired and have been written down to their fair value as of the reporting date. Information on unrealized gains and losses by category is set forth in our consolidated financial statements, Note 2 - Investments, in the “Notes to the Consolidated Financial Statements.”
The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of December 31, 2008.
CICA monitors the solvency of its reinsurers in seeking to minimize the risk of loss in the event of default by a reinsurer. The primary reinsurers of CICA are large, well capitalized entities.
Virtually all of the Company’s non-credit accident and health insurance is reinsured with and administered by Texas International Life Insurance Company (TILIC), an unaffiliated party. The reinsurance recoverables under this agreement are collateralized by assets held in a trust for the benefit of the reinsured policies.
Cash flows from our insurance operations historically have been sufficient to meet current needs. Cash flows from operating activities were $46.4 million, $37.9 million and $39.1 million for the years ended December 31, 2008, 2007 and 2006, respectively. We have traditionally also had significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows, for the most part, are reinvested in fixed income securities. Net cash outflows from investment activity totaled $14.3 million, $58.8 million and $33.6 million for the years ended December 31, 2008, 2007 and 2006, respectively. The outflows from investing activities for the year ended December 31, 2008, primarily related to the investment of excess cash and cash equivalents generated from operations during 2008 plus the $8.2 million used to acquire ONLIC. The Company has had significant cash flows from financing activities in the last two years, $10.6 million in 2008 and $17.5 million in 2007. In 2008, the Company received $9.4 million from capital contributions relating to our Series A-1 preferred stock. In 2007, the Company sold approximately 2.7 million shares of Class A common stock in a registered direct public offering. The sale resulted in gross proceeds of $18.8 million and net proceeds of $17.1 million after broker commissions and offering related expenses.
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 our 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.
We continue 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 monitors these assumptions and has determined a premium deficiency does not exist at December 31, 2008. Management believes our policy liabilities and increase in future policy benefit reserves as of and for the years ended December 31, 2008 and 2007 are based upon assumptions, including a provision for the risk of adverse deviation, that do not warrant revision for policies issued in 2008 or 2007. The relative stability of these assumptions and management’s analysis is discussed below.
Acquisition costs, consisting of commissions and policy issuance, underwriting and agency expenses, that relate to and vary with the production of new business are deferred. These deferred policy acquisition costs are amortized primarily over the estimated premium paying period of the related policies in proportion to the ratio of the annual premium recognized to the total premium revenue anticipated, using the same assumptions as were used in computing liabilities for future policy benefits.
The American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts (SOP 05-1), which defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. Under SOP 05-1, modifications that result in a substantially unchanged contract will be accounted for as a continuation of the replaced contract. A replacement contract that is substantially changed will be accounted for as an extinguishment of the replaced contract resulting in a release of unamortized deferred acquisition costs and unearned inducements associated with the replaced contract. Also under SOP 05-1, the unamortized deferred acquisition cost is written off when a policy is reinstated that had previously lapsed. We implemented SOP 05-1 in the first quarter of 2007, and as a result, the Company wrote off $917,000 of DAC on reinstated policies during the year ended December 31, 2007.
SFAS No. 142, Goodwill and Other Intangible Assets, (SFAS 142) requires that goodwill balances be reviewed for impairment at least annually or more frequently if events occur or circumstances change that would indicate that a triggering event, as defined in SFAS 142, has occurred. A reporting unit is defined as an operating segment or one level below an operating segment. Most of the Company’s reporting units, for which goodwill has been allocated, are equivalent to the Company’s operating segments as there is no discrete financial information available for the separate components of the segment or all of the components of the segment have similar economic characteristics. As of December 31, 2008, the Company had goodwill allocated to the both the Life Insurance segment as well as the Home Service segment.
The goodwill impairment test follows a two step process as defined in SFAS 142. In the first step, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. If the carrying amount of the reporting unit goodwill exceeds the implied goodwill value, an impairment loss is recognized in an amount equal to that excess.
The Company completed its annual goodwill assessment for the individual reporting units within the Life Insurance segment and Home Service segment as of December 31, 2008 and December 31, 2007 and no impairment of goodwill was identified.
All other schedules have been omitted as the required information is inapplicable or the information required is presented in the financial statements or the notes thereto filed elsewhere herein.