Net income of $2,052,741 or $.08 per share was earned during 2000, compared to net income of $1,271,072 or $.05 per share for the year ended December 31, 1999 and a net loss of $6,720,693 or $.27 per share in 1998. Improved claims experience and persistency, coupled with reductions in expenses contributed to the increased earnings in 2000.
During the second half of 1998, the Company began to experience a significant increase in the volume of accident and health claims created by high early utilization by holders of USLIC's group dental certificates. As a result of the substantial increase in the volume of claims plus an increase in the accident and health loss ratio, management moved to cancel a large portion of the existing block of USLIC's group dental business and NSLIC's individual major medical 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. An additional decrease of approximately $1.5 million of annual accident and health premium income in 2001 is expected as policies terminate; however, due to the claims experience as well as the overhead necessary to administer such, management believes this change will enhance near and long-term profitability. Because of the increase in the loss ratio, management implemented significant rate increases beginning April 2000 on several of the supplemental accident and health products that are non-cancelable. These increases became effective on policy anniversaries, many of which were late in 2000.
large U.S. insurers. As a result, there was a decrease in the Company's core book of ordinary life business.
Production of new life insurance premiums by the associates of CICA measured in issued paid annualized premiums increased 21.4% from 1999 to 2000. In addition, management began developing a domestic ordinary life sales program during 1999 for which it received regulatory approval in April of 2000. Recruiting efforts for associates began in the State of Texas for the new product in mid-2000 and sales began late in the second quarter 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. The Company intends to expand sales efforts beyond Texas to other states in which CICA is licensed. Because sales efforts have just begun, management is unable to predict the success of this new program.
result of the termination in 1999 and 2000 contributed to the improvement during the year.
Death benefits increased 2.8% from $5,135,808 in 1999, to $5,277,284 in 2000. Death benefits were $5,150,647 in 1998. 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. Beginning in 1996, 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.
Accident and Health benefits decreased 39.1% from $8,686,218 in 1999 to $5,158,623 in 2000. Such claims were $5,912,411 in 1998. The 1999 increase reflected the volume of Accident and Health business written in previous years. During the second half of 1998, the Company began to experience a significant increase in the volume accident and health claims created by the high early utilization by holders of USLIC's group dental certificates. As a result of the substantial increase in the volume of claims plus an increase in the accident and health loss ratio, management moved to cancel a large portion of the existing blocks of USLIC's group dental and NSLIC's individual major medical business during the third quarter of 1999 in order to curtail both claims and operating expenses. Most of the terminations were effective prior to January 1, 2000. This action contributed to the decrease of $3,650,632 in accident and health premiums and the $3,309,171 decrease in accident and health claims in 2000. It is anticipated an additional decrease of $1.5 million of annual premium income will occur in 2001; however, due to the claims experience as well as the overhead necessary to administer such, management believes this action will enhance near and long-term profitability.
Endowment benefits decreased 3.0% from $5,048,973 in 1999 to $4,895,492 in 2000. In 1998, such expenses were $5,027,937. Beginning in late 1990, CICA introduced a new series of international policies that 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.
Other claim expenses amounted to $915,083 in 2000, $955,496 in 1999 and, $1,020,410 in 1998. These expenses are comprised of supplemental contract benefits, interest on policy funds and assorted other miscellaneous policy benefits.
During 2000, commissions increased slightly to $12,411,053 from $12,234,053 in 1999. In 1998, commission expense was $12,501,426. The increase in 2000 occurred because the issuance of new life policies increased and offset the reduction in accident and health commissions due to the terminations discussed above.
Underwriting, acquisition and insurance expenses decreased slightly to $10,139,539 in 2000 compared to $10,328,996 in 1999 and $11,079,065 in 1998. Because of the increased claims volume mentioned above, management was forced to significantly increase staff size in 1998 and 1999 and thus overhead on a temporary basis. During 2000, overhead expenses were incurred to develop the domestic ordinary life sales program which offset reductions achieved following the termination of the accident and health business described above and the consolidation of NSLIC and USLIC. Due to the consolidation of USLIC's and NSLIC's operations with CICA, management anticipates continued reductions in expenses through economies of scale.
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 issued internationally in exchange for the absorption of all marketing, management and promotion activities. By taking such actions, management believes a significant amount of fixed overhead has been converted to a variable expense. Management has utilized firms such as this in previous periods with success in obtaining increases in new business and expense reductions.
the FASB during 2000. If implemented, annual amortization of such amounts would cease, and a change would occur only if goodwill on the balance sheet became unrecoverable. The Company has approximately $7.4 million of goodwill recorded at December 31, 2000. During 2000, $658,390 was amortized.
Stockholders' equity increased from $72,266,969 at December 31, 1999 to $77,313,031 at December 31, 2000. The increase was attributable to net income of $2,052,741 earned in 2000 and unrealized losses, net of tax decreasing by $2,993,321 during 2000. Increases in the market value of the Company's bond portfolio caused by higher bond prices resulted in the change in unrealized losses. The Company paid a 7% stock dividend on December 31, 2000 to holders of record as of December 1, 2000. A similar 7% dividend was paid on December 31, 1999 to record holders on December 1, 1999. Both dividends were paid using Class A and B shares that were previously authorized but unissued. The dividends had the effect of transferring $11,497,886 and $10,649,736 respectively in 2000 and 1999 from retained earnings to Common Stock and Treasury Stock.
Cash balances of the Company in its primary depository, Chase Bank, were significantly in excess of Federal Deposit Insurance Corporation (FDIC) coverage at December 31, 2000 and 1999. Management monitors the solvency of all financial institutions in which it has funds to minimize the exposure for loss. At December 31, 2000, management does not believe the Company is at significant risk for such a loss. During 2001, the Company intends to utilize callable securities issued by Federal agencies as cash management tools to minimize excess cash balances and enhance return.
CICA owned 2,085,244 shares (1,948,718 in 1999) of Citizens Class A common stock at December 31, 2000. Statutory accounting practices prescribed by the National Association of Insurance Commissioners (NAIC) and the State of 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, 2000 and 1999, 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.
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, 2000, CICA, CILIC and Excalibur were above required minimum levels.
Effective January 1, 2001, the NAIC has implemented codified rules for statutory accounting. These rules are subject to approval and implementation by each state. Colorado has notified CICA that it has adopted the codified accounting rules; however, certain state laws that differ from these rules should be followed. 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 maturity 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 will not establish the reserve of approximately $3 million in its statutory financial statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This SOP provides guidance for determining whether costs of software developed or obtained for internal use should be capitalized or expensed when incurred. In the past, the Company has expensed such costs as they were incurred. This SOP is also effective for fiscal years beginning after December 15, 1998. The Company adopted SOP 98-1 during 1999. Implementation did not have a material impact on the Company's financial statements.
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, is effective January 1, 2001. Management does not believe that SFAS No. 133, as amended, will have a significant effect on the financial position, results of operations or liquidity of the Company.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - A Replacement of FASB Statement 125" revises