CITIZENS, INC.
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 2009
Commission File Number:
000-16509
CITIZENS, INC.
(Exact name of registrant as specified in its charter)
| Colorado | 84-0755371 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) | |
| 400 East Anderson Lane, Austin, Texas | 78752 | |
| (Address of principal executive offices) | (Zip Code) |
(512) 837-7100
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
| Class A Common Stock | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
None
(Title of class)
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
o
Yes
þ
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
o
Yes
þ
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days.
þ
Yes
o
No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files).
o
Yes
o
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. (Check one):
| Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
o
Yes
þ
No
As of June 30, 2009, the aggregate market value of the Class A voting stock held by non-affiliates
of the registrant was approximately $255,000,000.
Number of shares of common stock outstanding as of March 1, 2010:
Class A: 48,686,759
Class B: 1,001,714
Class B: 1,001,714
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report incorporates certain portions of the definitive proxy materials of the
registrant in respect to its 2010 Annual Meeting of Shareholders.
Table of Contents
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| Exhibit 21 | ||||||||
| Exhibit 23 | ||||||||
| Exhibit 31.1 | ||||||||
| Exhibit 31.2 | ||||||||
| Exhibit 32.1 | ||||||||
| Exhibit 32.2 | ||||||||
1
Table of Contents
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on
Form 10-K
are not statements of historical
fact and constitute forward-looking statements within the meaning of the Private Securities
Litigation Reform Act (the
“
Act
”
), including, without limitation, statements specifically
identified as forward-looking statements within this document. Many of these statements contain
risk factors as well. In addition, certain statements in future filings by the Company with the
Securities and Exchange Commission, in press releases, and in oral and written statements made by
us or with the approval of the Company, which are not statements of historical fact constitute
forward-looking statements within the meaning of the Act. Examples of forward-looking statements,
include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per
share, the payment or non-payment of dividends, capital structure, and other financial items, (ii)
statements of our plans and objectives by our management or Board of Directors including those
relating to products or services, (iii) statements of future economic performance and (iv)
statements of assumptions underlying such statements. Words such as
“
believes,
” “
anticipates,
”
“assumes,” “estimates,” “plans,” “projects,” “could,”
“
expects,
” “
intends,
” “
targeted,
” “
may,
”
“
will
”
and similar expressions are intended to identify forward-looking statements but are not the
exclusive means of identifying such statements.
Forward-looking statements are subject to known and unknown risks, uncertainties and other factors
that may cause actual results to differ materially from those contemplated by the forward-looking
statements. Factors that could cause the Company’s future results to differ materially from
expected results include, but are not limited to:
| • |
Changes in foreign and U.S. general economic, market, and political conditions,
including the performance of financial markets and interest rates, particularly in light of
the severe economic conditions and the severe stress experienced by the global financial
markets that began in the second half of 2008 and continued into 2009;
|
| • |
Changes in consumer behavior, which may affect the Company’s ability to sell its
products and retain business;
|
| • |
The timely development of and acceptance of new products of the Company and perceived
overall value of these products and services by existing potential customers;
|
| • |
Fluctuations in experience regarding current mortality, morbidity, persistency and
interest rates relative to expected amounts used in pricing the Company’s products;
|
| • |
Results of litigation we may be involved in;
|
| • |
Changes in assumptions related to deferred acquisition costs and the value of any
businesses we may acquire;
|
| • |
Regulatory, accounting or tax changes that may affect the cost of, or the demand for,
the Company’s products or services;
|
| • |
Our concentration of business from persons residing in Latin America and the Pacific Rim;
|
| • |
Our success at managing risks involved in the foregoing;
|
| • |
Changes in tax laws;
|
| • |
Effects of acquisitions and restructuring, including possible difficulties in
integrating and realizing the projected results of acquisitions;
|
| • |
Changes in statutory or U.S. GAAP accounting principles, policies or practices; and
|
| • |
The
“
risk factors
”
disclosed herein, as well as other risk factors disclosed previously
and from time to time in our filings with the Securities and Exchange Commission.
|
Such forward-looking statements speak only as of the date on which such statements are made, and
the Company undertakes no obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made to reflect the occurrence of
unanticipated events.
We make available, free of charge, through our Internet website (
http://www.citizensinc.com
), our
Annual Report on
Form 10-K
, Quarterly Reports on
Form 10-Q
, Current Reports on
Form 8-K
, Section 16
reports filed by officers and directors, news releases, and, if applicable, amendments to those
reports filed or furnished pursuant to
Section 13(a)
or
15(d)
of the Securities Exchange Act of
1934, as soon as reasonably practicable after we electronically file such reports with, or furnish
such reports to, the Securities and Exchange Commission. We are not including any of the
information contained on our website as part of, or incorporating it by reference into, this Annual
Report on
Form 10-K
.
2
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Overview
Citizens, Inc. is an insurance holding company with approximately $927 million of assets under
management at December 31, 2009 and serving the life insurance needs of individuals in the United
States and in over 30 countries around the world. Through our subsidiaries, we pursue a strategy
of offering ordinary whole life insurance with a focus on cash accumulation and final expense
insurance products in niche markets where we believe we are able to achieve competitive advantages.
Our core operations include issuing and servicing:
| • |
U.S. Dollar-denominated ordinary whole life insurance and endowment policies
predominantly to high net worth, high income foreign residents, principally in Latin
America and the Pacific Rim, through independent marketing consultants;
|
| • |
ordinary whole life insurance policies to middle income households in the midwest and
the southern United States through independent marketing consultants; and
|
| • |
final expense and limited liability property policies to middle and lower income
households in Louisiana, Mississippi and Arkansas through employee and independent agents
in our home service distribution channel.
|
We have provided our insurance products internationally since 1975 and domestically since 1969. We
believe we are one of the leading writers of U.S. Dollar-denominated ordinary whole life insurance
outside of the United States. We also operate a Home Service distribution channel in Louisiana and
Arkansas providing final expense ordinary whole life insurance and limited liability property
insurance.
We believe the foreign markets we target have a relatively limited number of competitors and that
the domestic markets we target are underserved by the life insurance industry, and these markets
therefore offer attractive opportunities for expansion. We capitalize on the experience of our
management team in marketing operations and achieve economies of scale in administrative
operations. We seek to generate above-average returns using knowledge of our niche markets and our
well-established distribution channels. We believe our underwriting processes, policy terms,
pricing practices and proprietary administrative systems enable us to generate meaningful gross
profit margins.
We were formed in 1969 by our Chairman, Harold E. Riley. Prior to our formation, Mr. Riley had
many years of experience in the international and domestic life insurance business. Our business
has grown significantly, both internationally and domestically, in recent years. Revenues rose
from $139.0 million in 2005 to $189.0 million in 2009. During the five years ended December 31,
2009, our assets grew from $661.9 million to $927.3 million. Total stockholders’ equity increased
from $137.0 million at December 31, 2005 to $216.1 million at December 31, 2009. See Item 6.
“Selected Financial Data” in this Report.
Our Operating Segments
Our business is comprised of three primary operating business segments:
| • |
Life Insurance;
|
| • |
Home Service Insurance; and
|
| • |
Other Non-insurance Enterprises.
|
See Note 9 of the “Notes to Consolidated Financial Statements” for operating results of our
segments for each of the years ended December 31, 2009, 2008 and 2007.
Life Insurance
Our Life Insurance segment consists of issuing ordinary whole life insurance domestically and in
U.S. Dollar-denominated amounts to foreign residents. These contracts are designed to provide a
fixed amount of insurance coverage over the life of the insured. Endowment contracts are also
issued by the Company, which are principally saving contracts that incorporate an element of life
insurance protection. For the majority of our business, we retain only the first $100,000 of risk
on any one life. We operate this segment through our subsidiaries: CICA Life Insurance Company of
America (“CICA”), Citizens National Life Insurance Company, (“CNLIC”) and Integrity Capital
Insurance Company (“ICIC”).
3
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
International
We focus our sales of U.S. Dollar-denominated ordinary whole life insurance and endowment policies
to high net worth, high income residents in Latin America and the Pacific Rim. We have
successfully participated in the foreign marketplace since 1975, and we continue to seek
opportunities for expansion of our foreign operations. We believe positive attributes of our
international insurance business include:
| • |
larger face amount policies typically issued when compared to our U.S. operations, which
results in lower underwriting and administrative costs per policy;
|
| • |
premiums are typically paid annually rather than monthly or quarterly, which saves us
administrative expenses, accelerates cash flow and results in lower policy lapse rates than
premiums with more frequently scheduled payments;
|
| • |
higher persistency than our U.S. policies;
|
| • |
good or better mortality rates than those in the United States, because our foreign
insureds are high net worth individuals in the top income brackets in their respective
countries.
|
We have implemented several policies and procedures to reduce the risks of asset and premium loss
relating to our international business. Approvals for policy issuance are made in our Austin
office and policies are issued and delivered to our independent consultants, who deliver the
policies to the insureds. We have no offices, employees or assets outside of the United States.
Insurance policy applications and premium payments are submitted by the independent consultants to
us and we review the applications in our home offices in Austin, Texas. Premiums are paid in
U.S. Dollars through a U.S. financial institution by check, wire or credit card. The policies we
issue contain limitations on benefits for certain causes of death, such as homicide and careless
driving. We have also developed disciplined underwriting criteria, which include medical reviews
of applicants and background and reference checks. We have a claims policy that requires
investigation of substantially all death claims. Additionally, we perform background reviews and
reference checks of prospective marketing firms and consultants.
We accept applications for international insurance policies submitted by independent marketing
firms and consultants. These persons specialize in marketing life insurance products and generally
have several years of insurance marketing experience. We maintain standard contracts with the
independent marketing firms pursuant to which they provide recruitment, training and supervision of
their managers and associates in the service and placement of our products; however, all associates
of these firms also contract directly with us as independent contractors and receive their
compensation directly from us. Accordingly, should an arrangement between any independent
marketing firm and us be terminated for any reason, we believe we would continue with the existing
marketing arrangements with the associates of these firms without a material loss of sales. Our
standard agreement with independent marketing firms and consultants provides they are independent
contractors responsible for their own operation, expenses and that they are the representative of
the prospective insured. In addition, the marketing firms also guarantee any debts of their
associates to us. The marketing firms receive commissions on all new and renewal policies serviced
or placed by them or their associates. All of these contracts provide that the independent
marketing firms and consultants are aware of and responsible for compliance with local laws.
The following table sets forth, by territory, our total percentages of direct collected premiums
from our international life insurance business for the periods indicated. The information is
presented in accordance with statutory accounting practices prescribed by the state of Colorado,
the state of domicile of our subsidiary that writes all of our international business, CICA.
| Year ended December 31, | ||||||||||||||||||||||||
| Country | 2009 | 2008 | 2007 | |||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
Colombia
|
$ | 23,755 | 23.8 | % | $ | 19,473 | 20.6 | % | $ | 24,352 | 26.2 | % | ||||||||||||
|
Taiwan
|
14,316 | 14.4 | 13,793 | 14.6 | 12,567 | 13.5 | ||||||||||||||||||
|
Venezuela
|
14,209 | 14.2 | 12,594 | 13.4 | 11,631 | 12.5 | ||||||||||||||||||
|
Ecuador
|
10,922 | 11.0 | 10,889 | 11.5 | 9,641 | 10.4 | ||||||||||||||||||
|
Argentina
|
8,669 | 8.7 | 9,580 | 10.2 | 9,099 | 9.8 | ||||||||||||||||||
|
Other Non-U.S.
|
27,843 | 27.9 | 27,988 | 29.7 | 25,525 | 27.6 | ||||||||||||||||||
|
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||||||||||||||||||||||||
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Total
|
$ | 99,714 | 100.0 | % | $ | 94,317 | 100.0 | % | $ | 92,815 | 100.0 | % | ||||||||||||
|
|
||||||||||||||||||||||||
The ordinary whole life policies issued to residents of foreign countries during 2009 had an
average face amount of approximately $73,000.
4
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
International Products
We offer several ordinary whole life insurance and endowment products designed to meet the needs of
our non-U.S. policy owners. These policies have been structured to provide:
| • |
U.S. Dollar-denominated cash values that accumulate, beginning in the first policy year,
to a policyholder during his or her lifetime;
|
| • |
premium rates that are competitive with or better than most foreign local companies;
|
| • |
a hedge against local currency inflation;
|
| • |
protection against devaluation of foreign currency;
|
| • |
capital investment in a more secure economic environment (i.e., the United States); and
|
| • |
lifetime income guarantees for an insured or for surviving beneficiaries.
|
Our international products have living benefit features. Every policy contains guaranteed cash
values and is participating (i.e., provides an annual cash dividend). The major portion of each
premium payment is used to provide insurance protection and build guaranteed cash values, while a
lesser portion is used for retirement benefit accumulation. Once a policy owner pays the annual
premium and the policy is issued, we immediately pay a cash dividend to the owner. The policy
owner has several options with regard to the dividend, including the right to assign dividends to
our stock investment plan, registered under the Securities Act of 1933 (the “Securities Act”), and
administered in the United States by our unaffiliated transfer agent.
International Competition
The life insurance business is highly competitive. We compete with a large number of stock and
mutual life companies internationally and domestically, as well as with financial institutions that
offer insurance products. There are more than 1,000 life insurance companies in the United States,
some of which also provide insurance to foreign residents.
Given the variety of foreign markets in which we provide ordinary whole life insurance, it is not
possible to ascertain our competitive position. We face competition primarily from companies
formed and operated in the country in which the insureds reside, from companies that operate in the
same manner as we do and from companies that are foreign to the countries in which policies are
sold, but issue insurance policies denominated in the local currency of those countries. A
substantial number of companies may be deemed to have a competitive advantage over us due to their
significantly greater financial resources, histories of successful operations and larger marketing
forces. We believe that our experience, combined with the special features of our policies, allow
us to compete effectively in pursuing new business.
Because premiums on our international policies are paid in U.S. Dollars drawn on U.S. financial
institutions, and we pay claims in U.S. Dollars, we provide a product that is different from the
products provided by foreign-domiciled companies. Our international policies are usually acquired
by significant net worth persons in the top income brackets of their respective countries. The
policies sold by our local competitors are generally offered broadly and are priced using the
mortality of the entire population of the geographic region. Our mortality charges are therefore
typically lower, which provides a competitive advantage. Additionally, the assets backing the
reserves for our local competitors’ policies must be substantially invested in their respective
countries and, therefore, are exposed to the inflationary risks and social or economic crises that
tend to impact many foreign countries.
Due to the global economic downturn and turbulent financial markets, CICA has experienced an
increase in surrenders from international policyholders, as well as a reduction in new policy
sales. These negative events are believed to be related to adverse economic factors facing
policyholders, and we anticipate these items will improve as the overall economic conditions
improve.
Domestic
In the midwest and the southern United States, we seek to serve middle income households through
the sale of cash accumulation ordinary whole life insurance products. The majority of our inforce
business results from blocks of business of insurance companies we have acquired over the past
15 years.
5
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Our distribution strategy is geared towards attracting marketing consultants, comprised primarily
of part-time, second-career sales associates (such as teachers, coaches, community leaders and
others) in rural and urban areas, although we have seen an increased interest for our products from
career distribution networks. In the United States, our domestic sales and marketing is conducted
predominantly through independent marketing consultants. Over the past three years, new product
sales have trended downward as we have tightened underwriting on business that did not meet our
profitability objectives. Our product strategy focuses on the introduction of our cash
accumulation ordinary whole life products to independent marketing consultants associated with
companies we have acquired, while continuing to service the needs of acquired policyholders.
The following table sets forth our direct collected premiums by state for the periods indicated, in
accordance with statutory accounting practices prescribed by the states of domicile of our
insurance company subsidiaries.
| Year Ended December 31, | ||||||||||||||||||||||||
| State | 2009 | 2008 | 2007 | |||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
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Texas
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$ | 6,501 | 37.3 | % | $ | 7,306 | 41.6 | % | $ | 7,481 | 39.6 | % | ||||||||||||
|
Indiana
|
2,125 | 12.1 | 99 | 0.6 | 100 | 0.5 | ||||||||||||||||||
|
Missouri
|
1,877 | 10.7 | 2,073 | 11.8 | 2,309 | 12.2 | ||||||||||||||||||
|
Kentucky
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1,525 | 8.7 | 1,838 | 10.5 | 2,224 | 11.8 | ||||||||||||||||||
|
Oklahoma
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1,475 | 8.4 | 1,920 | 10.9 | 2,136 | 11.3 | ||||||||||||||||||
|
Other States
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3,992 | 22.8 | 4,316 | 24.6 | 4,535 | 24.6 | ||||||||||||||||||
|
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Total
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$ | 17,495 | 100.0 | % | $ | 17,552 | 100.0 | % | $ | 18,785 | 100.0 | % | ||||||||||||
|
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||||||||||||||||||||||||
The current year increase in Indiana resulted from the acquisition of Integrity Capital Insurance
Company, which is domiciled in Indiana. This company was acquired in February of 2009, and we
reported year-to-date premiums totaling approximately $1.6 million in 2009.
A number of domestic life insurance companies we have acquired also had issued blocks of accident
and health insurance policies, which we did not consider to be a core part of our business. We
ceded virtually all of such business under a coinsurance agreement with an unaffiliated insurance
company under which it assumes substantially all of our accident and health policies. The premium
amounts ceded under the coinsurance agreement in the years ended December 31, 2009, 2008, and 2007
were $6.3 million, $7.5 million and $8.2 million, respectively.
Domestic Products
The life insurance products we sell domestically focus primarily on living needs and provide
benefits focused toward accumulating money for the insured. The features of our domestic life
insurance products include:
| • |
cash accumulation/living benefits;
|
| • |
tax-deferred interest earnings;
|
| • |
guaranteed lifetime income options;
|
| • |
monthly income for surviving family members;
|
| • |
accidental death benefit coverage options; and
|
| • |
an option to waive premium payments in the event of disability.
|
Our life insurance products are principally designed to address the insured’s concern about
outliving his or her monthly income, while at the same time providing death benefits. The primary
purpose of our product portfolio is to help the insured create capital for needs such as retirement
income, children’s higher education funds, business opportunities, emergencies and health care
needs.
6
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Domestic Competition
The U.S. life insurance industry is a mature industry that, in recent years, has experienced little
to no growth. Competition is intense because the life insurance industry is consolidating, with
larger, more efficient and more effective organizations emerging from consolidation. Additionally,
legislation became effective in the United States in the year 2000 that permits commercial banks,
insurance companies and investment banks to combine. These factors have increased competitive
pressures in general.
Many domestic life insurance companies have significantly greater financial, marketing forces and
other resources, longer business histories and more diversified lines of insurance products than we
do. We also face competition from companies marketing in person as well as with direct mail and
Internet sales campaigns. Although we may be at a competitive disadvantage to these entities, we
believe that our premium rates and policy features are generally competitive with those of other
life insurance companies selling similar types of ordinary whole life insurance.
Home Service Insurance
We operate in the Home Service market through our subsidiaries: Security Plan Life Insurance
Company (“SPLIC”) and Security Plan Fire Insurance Company (“SPFIC”). We focus on the life
insurance needs of the middle and lower income market in Louisiana, Mississippi and Arkansas. Our
policies are sold and serviced through a home service marketing distribution system of
approximately 330 employee-agents who work full time on a route system and through funeral homes to
sell policies, collect premiums and service policyholders.
Home Service Products
Our home service insurance products consist primarily of small face amount ordinary whole life and
pre-need policies, which are designed to fund final expenses for the insured, primarily consisting
of funeral and burial costs. The average life insurance policy face amount was approximately
$7,300 in 2009; therefore, the underwriting performed on these applications is limited. To a much
lesser extent, our Home Service Insurance segment sells limited-liability, named peril property
policies covering dwellings and contents. We provide $30,000 maximum coverage on any one dwelling
and contents, while content only coverage and dwelling only coverage is limited to $20,000. We
intend to continue emphasis upon growth within this segment via direct sales and acquisitions.
Home Service Competition
In the Home Service segment, we face competition in Louisiana, Mississippi and Arkansas from other
companies that specialize in home service distribution of insurance. We seek to compete based upon
our emphasis on personal service to our customers.
Other Non-Insurance Enterprises
Other Non-insurance Enterprises includes Computing Technology, Inc., which provides data processing
services to the Company, Insurance Investors, Inc., which provides aviation transportation to the
Company, and Funeral Homes of America. This segment also includes the results of Citizens, Inc.,
the parent Company.
Revenues derived from any single customer did not exceed 10% of consolidated revenues in any of the
last three years.
Operations and Technology
Our administrative operations are conducted primarily at our executive offices in Austin, Texas
through approximately 105 administrative, operating and underwriting personnel. Our Home Service
operations are conducted to a large degree from our district offices and support center in
Donaldsonville, Louisiana through approximately 50 operations personnel, and Little Rock, Arkansas.
At our executive offices, we perform policy design, marketing oversight, underwriting, accounting
and reporting, customer service, administration and investing activities.
Our senior management has significant experience in insurance company application system design and
implementation. Since the mid-1960’s, our senior management has been leading development of
evolving insurance applications. We have a single integrated system for our entire Company, which
is a centrally-controlled, mainframe-based administrative system. Functions of our administrative
system include policy set up, administration, billing and collections, commission calculation,
valuation, automated internal audit functions, storage backup and other related functions. Each
company we acquire is converted onto our administrative system. This system has been in place for
many years, and we believe it is a significant asset to us. We update our administrative system on
an ongoing basis. This system is also capable of significant expansion without substantial capital
outlay or increase in staff. Therefore, we believe we can achieve additional growth without costly
administrative system expenditures, delays, failures or the addition of substantial staffing.
7
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Regulation
Our U.S. insurance operations are subject to a wide variety of laws and regulations. State
insurance laws establish supervisory agencies with broad regulatory authority to regulate most
aspects of our U.S. insurance businesses, and our insurance subsidiaries are regulated by the
insurance departments of each state in which they are licensed. In addition, U.S. laws, such as
the U.S.A. Patriot Act of 2001, the Gramm-Leach-Bliley Act of 1999, the International Money
Laundering Abatement and Financial Anti-Terrorism Act of 2001, and the Sarbanes-Oxley Act of 2002,
are examples of U.S. regulation that affect our business. We are subject to comprehensive
regulations under the U.S. Patriot Act with respect to money laundering, as well as federal
regulations regarding privacy and confidentiality. In addition, other federal laws and regulations
apply to us in areas such as pension regulations, privacy, tort reform and taxation. Also, various
forms of direct federal regulation of insurance have been proposed from time to time. Our
insurance products and thus our businesses also are affected by U.S. federal, state and local tax
laws.
The purpose of the laws and regulations that affect our insurance business is primarily to protect
our insureds and not our stockholders. Many of the laws and regulations to which we are subject
are regularly re-examined, and existing or future laws and regulations may become more restrictive
or otherwise adversely affect our operations. In addition, insurance regulatory authorities
(including state law enforcement agencies and attorneys general) periodically make inquiries and
regularly conduct examinations regarding compliance by us and our subsidiaries with insurance, and
other laws and regulations regarding the conduct of our insurance businesses. We cooperate with
such inquiries and examinations and take corrective action when warranted.
Our insurance subsidiaries are collectively licensed to transact business in 33 states. We have
insurance subsidiaries domiciled in the states of Colorado, Louisiana, Indiana and Texas. Our U.S.
insurance subsidiaries are licensed and regulated in all U.S. jurisdictions in which they conduct
insurance business. The extent of this regulation varies, but most jurisdictions have laws and
regulations governing the financial condition of insurers, including standards of solvency, types
and concentration of investments, establishment and maintenance of reserves, credit for reinsurance
and requirements of capital adequacy, and the business conduct of insurers, including marketing and
sales practices and claims handling. In addition, statutes and regulations usually require the
licensing of insurers and their agents, the approval of policy forms and related materials and the
approval of rates for certain types of insurance products.
All U.S. jurisdictions in which our U.S. insurance subsidiaries conduct insurance business have
enacted legislation that requires each U.S. insurance company in a holding company system, except
captive insurance companies, to register with the insurance regulatory authority of its
jurisdiction of domicile and to furnish that regulatory authority financial and other information
concerning the operations of, and the interrelationships and transactions among, companies within
its holding company system that may materially affect the operations, management or financial
condition of the insurers within the system. These laws and regulations also regulate transactions
between insurance companies and their parents and affiliates. Generally, these laws and
regulations require that all transactions within a holding company system between an insurer and
its affiliates be fair and reasonable and that the insurer’s statutory capital and surplus
following any transaction with an affiliate be both reasonable in relation to its outstanding
liabilities and adequate to its financial needs. Statutory surplus is the excess of admitted
assets over the sum of statutory liabilities and capital. For certain types of agreements and
transactions between an insurer and its affiliates, these laws and regulations require prior
notification to, and non-disapproval or approval by, the insurance regulatory authority of the
insurer’s jurisdiction of domicile.
The payment of dividends or other distributions to us by our insurance subsidiaries is regulated by
the insurance laws and regulations of their respective states of domicile. The laws and
regulations of some of these jurisdictions also prohibit an insurer from declaring or paying a
dividend except out of its earned surplus or require the insurer to obtain regulatory approval
before it may do so. In addition, insurance regulators may prohibit the payment of ordinary
dividends or other payments by our insurance subsidiaries to us (such as a payment under a tax
sharing agreement or for employee or other services) if they determine that such payment could be
adverse to our policyholders or contract holders of the subsidiary.
The laws and regulations of the jurisdictions in which our U.S. insurance subsidiaries are
domiciled require that a controlling party obtain the approval of the insurance commissioner of the
insurance company’s jurisdiction of domicile prior to acquiring control of the insurer and may
delay, deter or prevent a transaction that our shareholders might consider desirable.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Risk-based capital (“RBC”) requirements are imposed on life and property and casualty insurance
companies. The risk-based capital ratio is determined by dividing an insurance company’s total
adjusted capital, as defined, by its authorized control level risk-based capital. Companies that
do not meet certain minimum standards require specified corrective action. The risk-based capital
ratios for all our insurance subsidiaries exceeded such minimum ratios as of December 31, 2009. At
December 31, 2008, Security Plan Fire Insurance Company (“SPFIC”) and Ozark National Life Insurance
Company (“ONLIC”) had total adjusted capital below minimum standards. The Company was able to
remediate these issues during 2009, which resulted in capital contributions being made to these
entities by their parent, and the merger of ONLIC into Security Plan Life Insurance Company
(“SPLIC”). The capital contributions had no effect on consolidated operations of the Company.
Effective with the annual reporting period ending December 31, 2010, the National Association of
Insurance Commissioners, or the NAIC, adopted revisions to the Annual Financial Reporting Model
Regulation, or the Model Audit Rule, related to auditor independence, corporate governance and
internal control over financial reporting. The adopted revisions require that we file reports with
state insurance departments regarding our assessment of internal control over financial reporting.
In late 2009, the NAIC issued Statement of Statutory Accounting Principles (“SSAP”) 10R (“SSAP
10R”). SSAP 10R increased the amount of deferred tax assets that may be admitted on a statutory
basis. The admission criteria for realizing the value of deferred tax assets was increased from a
one year to a three year period. Further, the aggregate cap on deferred tax assets that may be
admitted was increased from 10% to 15% of surplus. These changes increased the capital and surplus
of our insurance subsidiaries, thereby positively impacting RBC at December 31, 2009. To temper
this positive RBC impact, and as a temporary measure at December 31, 2009 only, a 5% pre-tax RBC
charge must be applied to the additional admitted deferred tax assets generated by SSAP 10R.
Potential Changes in Regulation
Government actions in response to the recent financial crisis and market volatility could
significantly impact our current regulations. As part of a comprehensive reform of financial
services regulation known as H.R. 3173, Congress is considering the creation of an office within
the federal government to collect information about the insurance industry, recommend standards,
and represent the United States in dealing with foreign insurance regulators.
Investing in our Company involves certain risks. Set forth below are certain risks with respect to
our Company. Readers should carefully review these risks, together with the other information
contained in this report. The risks and uncertainties we have described in this report are not the
only ones we face. Additional risks and uncertainties not presently known to us, or that we
currently deem not material, may also adversely affect our business. Any of the risks discussed in
this report or that are presently unknown or not material, if they were to actually occur, could
result in a significant adverse impact on our business, operating results, prospects or financial
condition. References in the risk factors below to “we,” “us,” “our,” “Citizens” and like terms
relate to Citizens, Inc. and its subsidiaries on a U.S. GAAP consolidated financials basis, unless
specifically identified otherwise. We operate our subsidiaries as separate and distinct entities
with respect to corporate formalities.
Risks Relating to Our Business
A substantial amount of our revenue comes from foreign residents and is subject to risks associated
with the possible application of foreign insurance and securities laws and regulations to our
business, as well as risks from political and economic instability and currency or asset transfer
restrictions.
A substantial part of our insurance policy sales are from foreign countries, primarily those in
Latin America and the Pacific Rim. There is a risk that we may lose a significant portion of these
sales should adverse events occur in these countries.
We do not accept insurance applications outside of the United States. All of our assets are in the
United States and all policy premiums must be paid to us in U.S. Dollars drawn on U.S. financial
institutions. As a result, we have never qualified to do business in any foreign country and have
never submitted our insurance policies issued to foreign residents for review by any insurance
regulatory agency. We sell our policies to foreign residents using foreign independent marketing
firms and independent consultants, and we rely on those persons to comply with applicable laws in
selling our insurance products.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
The government of a foreign country could determine that its residents may not buy life insurance
from us unless we became qualified to do business in that country or unless our policies purchased
by its residents receive prior approval from its insurance regulators. If this were to occur, our
policy sales to that country’s residents would cease before any such approvals could be obtained.
Also, there is no assurance that we would be able to qualify to do business in any foreign country
or that its insurance regulatory authorities would approve our policies. We could also face
sanctions, including fines and penalties, if a country’s authorities determined any failure to
qualify or otherwise comply with its laws was willful or ongoing. Any of the foregoing could
reduce our revenues and materially adversely affect our results of operations and financial
condition. Additionally, we do not determine whether our independent consultants are required to
be licensed to sell insurance in the countries in which they make insurance sales. If our
independent consultants were not in compliance with applicable laws, including licensing laws, they
could be required to cease operations, which would reduce our revenues. We have not obtained any
advice of counsel in any foreign jurisdictions with respect to these matters. We are unable to
quantify the effect of foreign regulation on our business if regulation were to be imposed on us,
but we believe we could expend substantial amounts of time and incur substantial expense in
complying with any foreign regulation, and we may decide to withdraw from or avoid a market if
foreign regulation were imposed.
The offer and sale of our Class A common stock through our Stock Investment Plan (the “Plan”) is
registered under the Securities Act of 1933. Most all of our foreign policyholders choose to
invest certain cash dividends they receive with respect to their life insurance policies in our
Class A common stock through the Plan, which is not registered under the securities laws of any
foreign jurisdiction. We have not obtained any advice of counsel in any foreign jurisdiction as to
whether such participation by foreign residents in the Plan is subject to foreign securities laws
or regulations or whether our independent consultants in these jurisdictions are subject to
licensing requirements in connection with foreign policyholder participation in the Plan. If a
securities regulatory authority were to determine the offer and sale of our Class A common stock
through the Plan were contrary to applicable laws and regulations, we could be faced with cease and
desist orders, fines and penalties, or reduced participation in the Plan by our foreign
policyholders. This could materially reduce the amount of our Class A common stock purchased in
the open market under the Plan, as historically a significant volume of shares have been purchased
under the Plan through insurance policy cash dividends assigned to the Plan. We could also be
faced with private disputes relating to the Plan, including the possibility of securities law
claims within the United States. In the absence of countervailing considerations, we would expect
to defend any such claims and we could incur significant defense costs, including not only
attorneys’ fees and other direct litigation costs, but also the expenditure of substantial amounts
of management time that otherwise would be devoted to our business. This could materially,
adversely affect our results of operations and financial condition.
Additionally, if economic or political crises were to occur in any of the countries where our
foreign policyowners reside, our revenues could be adversely affected. Also, currency control
laws, regulations and decrees in foreign countries, if implemented, could materially adversely
affect our revenues by imposing restrictions on asset transfers outside of a country where our
insureds reside.
While our management has more than 40 years of experience in writing life insurance policies for
foreign residents without any significant regulatory action or any lengthy currency controls
relating to our foreign resident insureds, there can be no assurance that such situations will not
occur and that our revenues, results of operations and financial condition will not be materially,
adversely affected if they do occur.
The United States and global financial markets experienced extreme volatility and disruption in
2008 and 2009. We continue to be exposed to significant financial and capital markets risk,
including changes in equity prices, which may have a material adverse effect on our results of
operations, financial condition and liquidity.
Markets in the United States and elsewhere experienced extreme volatility and disruption during
2008 and 2009, due largely to the stresses affecting the global banking system The global economy
is in the midst of a severe recession, the effects of which are likely to persist beyond 2009,
despite significant past and expected future governmental intervention in the world’s major
economies. These circumstances exerted significant downward pressure on prices in the fourth
quarter of 2008 and during 2009 on debt and equity securities and virtually all other asset classes
and resulted in substantial increased market volatility, severely constrained credit and capital
markets, particularly for financial institutions, and an overall loss of investor confidence.
As an insurance holding company with significant investment exposure, we face material financial
and capital markets risk in our operations. Due to the low interest rate environment in 2009, the
Company experienced significant call activity on our fixed income portfolio. We recorded
other-than-temporary impairments (“OTTI”) in 2008 and 2009 due to market and credit decline. In
addition, the current severe recession and the significant increase in the unemployment rate could
result in decreased persistency of our insurance policies in force, as well as reduced new
insurance policy sales, which may materially, adversely affect our results of operations and
financial condition.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Changes in market interest rates may significantly affect our profitability.
Some of our products, principally traditional whole life insurance and guaranteed interest
contracts, expose us to the risk that changes in interest rates will reduce our “spread,” or the
difference between the amounts that we are required to pay under our contracts to policyholders and
the rate of return we are able to earn on our investments intended to support obligations under the
contracts. Our spread is a key component of our net income.
As interest rates decrease or remain at low levels, we may be forced to reinvest proceeds from
investments that have matured, prepaid, been sold, or called at lower yields, reducing our
investment margin. Our fixed income bond portfolio is exposed to interest rate risk as a
significant portion of the portfolio is callable. Lowering interest crediting rates can help
offset decreases in investment margins on some products. However, our ability to lower these
rates could be limited by competition or contractually guaranteed minimum rates, and may not match
the timing or magnitude of changes in asset yields. Our expectation of future spreads is an
important component in amortization of deferred acquisition costs and significantly lower spreads
may result in increasing amortization, thereby reducing net income for the period. See Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” —
Consolidated Results of Operations — Realized Gains (Losses) on Investments.
Gross unrealized losses on fixed maturity and equity securities may be realized or result in future
impairments, resulting in a reduction in our net income.
Fixed maturity and equity securities classified as available-for-sale are reported at fair value.
Unrealized gains and losses on available-for-sale securities are recognized as a component of other
comprehensive income (loss) and are, therefore, excluded from net income. Our total gross
unrealized losses on our available-for-sale securities portfolio at December 31, 2009 were $9.7
million. The accumulated change in estimated fair value of these securities is recognized in net
income when the gain or loss is realized upon sale of the security or in the event that the decline
in estimated fair value is determined to be other-than-temporary and an impairment charge to
earnings is taken. Realized losses or impairments may have a material adverse effect on our net
income in a particular quarterly or annual period.
Our actual claims losses may exceed our reserves for claims and we may be required to establish
additional reserves, which in turn may adversely impact our results of operations and financial
condition.
We maintain reserves to cover our estimated exposure for claims relating to our issued insurance
policies. Reserves, whether calculated under U.S. generally accepted accounting principles (“U.S.
GAAP”) or statutory accounting practices prescribed by various state insurance regulators, do not
represent an exact calculation of exposure, but instead represent our best estimates, generally
involving actuarial projections, of what we expect claims will be based on mortality assumptions
that are determined by various regulatory authorities. Many reserve assumptions are not directly
quantifiable, particularly on a prospective basis. In addition, when we acquire other domestic
life insurance companies, our assessment of the adequacy of acquired policy liabilities is subject
to our estimates and assumptions. Reserve estimates are refined as experience develops, and
adjustments to reserves are reflected in our statements of operations for the period in which such
estimates are updated. Because establishing reserves is an inherently uncertain process involving
estimates of future losses, future developments may require us to increase claims reserves, which
may have a material adverse effect on our results of operations and financial condition in the
periods in which such increases occur.
See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” — Critical Accounting Estimates — Policy Liabilities.
Unexpected losses in future reporting periods may require us to adjust the valuation allowance
against our deferred tax assets.
The Company’s valuation allowance relative to our deferred tax asset (“DTA”) was $2.5 million at
December 31, 2009. The valuation allowance was established based on facts, circumstances and
information available at the reporting date, which indicated it was more likely than not that some
or all of the DTA would not be realized.
Currently, we evaluate our DTA quarterly for recoverability based on available evidence. This
process involves management’s judgment about assumptions, which are subject to change from period
to period due to tax rate changes or variances between our projected operating performance and our
actual results. Ultimately, future adjustments to the DTA valuation allowance, if any, will be
determined based upon changes in the expected realization of the net deferred tax assets. The
realization of the deferred tax assets depends on the existence of sufficient taxable income in
either the carry back or carry forward periods under applicable tax law. Due to significant
estimates utilized in establishing the valuation allowance and the potential for changes in facts
and circumstances, it is reasonably possible that we will be required to record adjustments to the
valuation allowance in future reporting periods. Such an adjustment could have a material adverse
effect on our results of operation, financial condition and capital position.
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See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” — Critical Accounting Estimates — Tax Accounting.
We may be required to accelerate the amortization of deferred acquisition costs and the costs of
customer relationships acquired, which would increase our expenses and adversely affect our results
of operations and financial condition.
At December 31, 2009, we had $115.6 million of deferred policy acquisition costs, or DAC. DAC
represents costs that vary with and are primarily related to the sale and issuance of our insurance
policies and are deferred and amortized over the estimated life of the related insurance policies.
These costs include commissions in excess of ultimate renewal commissions, solicitation and
printing costs, sales material costs and some support costs, such as underwriting and contract and
policy issuance expenses. Under U.S. GAAP, DAC is amortized to income over the lives of the
underlying policies, in relation to the anticipated recognition of premiums.
In addition, when we acquire a block of insurance policies, we assign a portion of the purchase
price to the right to receive future net cash flows from existing insurance and investment
contracts and policies. This intangible asset, called the cost of customer relationships acquired,
or CCRA, represents the actuarially estimated present value of future cash flows from the acquired
policies. At December 31, 2009, we had $34.7 million of CCRA. We amortize the value of this
intangible asset in a manner similar to the amortization of DAC.
Our amortization of DAC and CCRA generally depends upon anticipated profits from investments,
surrender and other policy charges, mortality, morbidity, persistency and maintenance expense
margins. For example, if our insurance policy lapse and surrender rates were to exceed the
assumptions upon which we priced our insurance policies, or if actual persistency proves to be less
than our persistency assumptions, especially in the early years of a policy, we would be required
to accelerate the amortization of expenses we deferred in connection with the acquisition of the
policy. We regularly review the quality of our DAC and CCRA to determine if they are recoverable
from future income. If these costs are not recoverable, they are charged to expenses in the
financial period in which we make this determination.
Unfavorable experience with regard to expected expenses, investment returns, surrender and other
policy changes, mortality, morbidity, lapses or persistency may cause us to increase the
amortization of DAC or CCRA, or both, or to record a current period expense to increase benefit
reserves, any of which could have a material adverse effect on our results of operations and
financial condition.
See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” — Critical Accounting Estimates — Deferred policy acquisition cost and cost of customer
relationships acquired.
We may be required to recognize an impairment on the value of our goodwill, which would increase
our expenses and materially adversely affect our results of operations and financial condition.
Goodwill represents the excess of the amount paid by us to acquire various life insurance companies
over the fair value of their net assets at the date of the acquisition. Under U.S. GAAP, we test
the carrying value of goodwill for impairment at least annually at the “reporting unit” level,
which is either an operating segment or a business that is one level below the operating segment.
Goodwill is impaired if its carrying value exceeds its implied fair value. This may occur for
various reasons, including changes in actual or expected earnings or cash flows of a reporting
unit, generation of earnings by a reporting unit at a lower rate than similar businesses or
declines in market prices for publicly traded businesses similar to our reporting units. If any
portion of our goodwill becomes impaired, we would be required to recognize the amount of the
impairment as a current-period expense, which could have a material adverse effect on our results
of operations and financial condition.
See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” — Critical Accounting Estimates — Goodwill.
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We are a defendant in lawsuits, which may adversely affect our financial condition and detract from
the time our management is able to devote to our business, and we are subject to risks related to
litigation and regulatory matters.
We are a defendant in a lawsuit originally filed on August 6, 1999 in the Texas District Court,
Austin, Texas, now styled
Citizens Insurance Company of America, Citizens, Inc., and Harold E.
Riley v. Fernando Hakim Daccach
, in which a class was originally certified by the trial court and
affirmed by the Court of Appeals for the Third District of Texas. We appealed the grant of class
status to the Texas Supreme Court, which on March 2, 2007, reversed the Court of Appeal’s
affirmation of the trial court’s class certification order, decertified the class and remanded the
case to the trial court for further proceedings consistent with the Texas Supreme Court’s opinion.
The underlying lawsuit alleged that certain life insurance policies we made available to
non-U.S. residents, when combined with a policy feature that allowed certain cash benefits to be
assigned to two non-U.S. trusts for the purpose of accumulating ownership of our Class A common
stock, along with allowing the policyholders to make additional contributions to the trusts, were
actually offers and sales of securities that occurred in Texas by unregistered dealers in violation
of the Texas securities laws. The remedy sought was rescission and return of the insurance premium
payments. On November 16, 2009, the trial court conducted further proceedings on the case, in
order to determine whether the class should be recertified. On December 9, 2009, the trial court
denied the recertification of the class. The remaining plaintiffs must now proceed individually,
and not as a class, if they intend to pursue their cases against Citizens. Citizens intends to
maintain a vigorous defense in any remaining proceedings.
Security Plan Fire Insurance Company (“SPFIC”) is a defendant in a suit styled
The State of
Louisiana v. AAA Insurance
, or
Road Home Litigation
, which was filed in the Civil District Court
for the Parish of Orleans on August 23, 2007 by the state of Louisiana as subrogee/assignee of the
insureds of more than 200 different insurance companies. The suit was filed to recover money that
the state of Louisiana paid to certain insureds under the Louisiana Road Home Program for damages
resulting from Hurricanes Katrina and Rita. The suit was removed to the United States District
Court for the Eastern District of Louisiana on September 11, 2007. In March 2009, the trial court
judge dismissed all bad faith claims asserted against the defendants, including SPFIC. The judge
also dismissed all claims for flood damage and all claims asserted under Louisiana’s Valued Policy
Law. Due to the District Court’s recent rulings noted above, we no longer believe an adverse
ruling in the
Road Home Litigation
would have a material impact on our financial statements.
In addition to these lawsuits, we may from time to time be subject to a variety of legal and
regulatory actions relating to our current and past business operations, including, but not limited
to, other possible disputes relating to the non-U.S. trusts or the Plan referred to above and the
investment by many of our foreign policyholders in our Class A common stock of certain cash
dividends they receive from their insurance policies. If allegations similar to those made in
certain of these lawsuits regarding the application of Texas or other securities laws to the
assignment of policy dividends were determined to be valid, we could face the possibility of other
securities law claims within the United States. Also, we could be faced with contingent
liabilities with respect to possible claims for violations of securities laws, the extent of which
would be difficult to determine. In the absence of countervailing considerations, we would expect
to defend any such claims, and we could incur significant defense costs, including not only
attorneys’ fees and other direct litigation costs, but also the expenditure of substantial amounts
of management time that otherwise would be devoted to our business. This could materially
adversely affect our results of operations and financial condition.
Reinsurers with which we do business could increase their premium rates and may not honor their
obligations, leaving us liable for the reinsured coverage.
We reinsure certain risks underwritten by our various insurance subsidiaries. Market conditions
beyond our control determine the availability and cost of the reinsurance protection we purchase.
The high cost of reinsurance or lack of affordable coverage could adversely affect our results of
operations and financial condition.
Our reinsurance facilities are generally subject to annual renewal. We may not be able to maintain
our current reinsurance facilities and, even if highly desirable or necessary, we may not be able
to obtain replacement reinsurance facilities in adequate amounts or at rates economic to us. If we
are unable to renew our expiring facilities or to obtain new reinsurance facilities, either our net
exposures would increase or, if we are unwilling or unable to bear an increase in net exposures, we
may have to reduce the level of our underwriting commitments. In addition, our reinsurance
facilities may be cancelled, pursuant to their terms, upon the occurrence of certain specified
events, including a change of control of our Company (generally defined as the acquisition of 10%
or more of our voting equity securities) or the failure of our insurance company subsidiaries to
maintain the minimum required levels of statutory surplus. Any of these potential developments
could materially adversely affect our revenues, results of operations and financial condition.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
In 2009, we reinsured $363 million of face amount of our life insurance policies. Amounts
reinsured in 2009 represented 8.2% of the face amount of direct life insurance in force in that
year. Although the cost of reinsurance is, in some cases, reflected in premium rates, under
certain reinsurance agreements, the reinsurer may increase the rate it charges us for reinsurance.
If our cost of reinsurance were to increase, we might not be able to recover these increased costs,
and our results of operations and financial condition could be materially adversely affected. See
Note 5 to the Company’s Consolidated Financial Statements.
We may not be able to continue our past strategy of acquiring other U.S. life insurance companies,
and we may not realize improvements to our financial results as a result of our past or any future
acquisitions.
We have acquired 16 U.S. life insurance companies since 1987. Our objective in this strategy has
been to increase our assets, revenues and capital, improve our competitive position and increase
our earnings, in part by realizing certain operating efficiencies associated with economies of
scale.
We evaluate possible acquisitions of other insurance companies on an ongoing basis. While our
business model is not dependent primarily upon acquisitions, the time frame for achieving or
further improving our market positions can be shortened through acquisitions. There can be no
assurance that suitable acquisitions presenting opportunities for continued growth and operating
efficiencies will be available to us, or that we will realize the anticipated financial results
from completed acquisitions.
Even if we identify and complete insurance company acquisitions, we may be unable to integrate them
on an economically favorable basis. Implementation of an acquisition strategy entails a number of
risks, including, among others, inaccurate assessment of assets, liabilities or contingent
liabilities and the failure to achieve anticipated revenues, earnings or cash flow. The occurrence
of any of these events could have a material adverse effect on our results of operations and
financial condition.
Our international and domestic operations face significant competition.
Our international marketing plan focuses on making available U.S. Dollar-denominated life insurance
products to high net worth, high income individuals residing in more than 30 countries. New
competition could cause the supply of insurance to change, which could affect our ability to price
our products at attractive profitable rates to us, thereby adversely affecting our revenues,
results of operations and financial condition. Although there are some impediments facing
potential competitors that wish to enter the foreign markets we serve, the entry of new competitors
into these markets may occur, affording our customers reason to change to other insurance
providers. In connection with our business with foreign nationals, we experience competition
primarily from the following sources, many of which have substantially greater financial, marketing
and other resources than we have:
| • |
Foreign operated companies with U.S. Dollar policies. We face direct competition from
companies that operate in the same manner as we operate in our international markets.
|
| • |
Companies foreign to the countries in which their policies are sold but that issue local
currency policies. Another group of our competitors in the international marketplace consists
of companies that are foreign to the countries in which their policies are sold but issue life
insurance policies denominated in the local currencies of those countries. Local currency
policies provide the benefit of assets located in the country of foreign residents, but entail
risks of uncertainty due to local currency fluctuations, as well as the perceived instability
and weakness of local currencies.
|
| • |
Locally operated companies with local currency policies. We compete with companies formed
and operated in the country in which our foreign insureds reside. Generally, these companies
are subject to risks of currency fluctuations, and they primarily use mortality tables based
on experience of the local population as a whole. These mortality tables are typically based
on significantly shorter life spans than those we use. As a result, the cost of insurance
from these companies tends to be higher than ours. Although these companies typically market
their policies to a broader section of the population than do our independent marketing firms
and independent consultants, there can be no assurance that these companies will not endeavor
to place a greater emphasis on our target market and compete more directly with us.
|
In the United States, we compete with more than 1,000 other life insurance companies of various
sizes. The life insurance business in the United States is highly competitive, in part because it
is a mature industry that, in recent years, has experienced little to no growth in life insurance
sales. Many domestic life insurance companies have substantially greater financial resources,
longer business histories and more diversified lines of insurance coverage than we do. These
companies also have larger sales forces than we have. Competition in the United States has also
increased recently because the life insurance industry is consolidating, with larger, more
efficient organizations emerging from the consolidation. In addition, legislation became effective
in 2000 that permits commercial banks, insurance companies and investment banks to combine. This
legislation permits, for instance, a commercial bank to acquire or form an insurance company. We
believe these factors have increased competitive pressures in the life insurance market in general.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
In addition, from time to time, companies enter and exit the markets in which we operate, thereby
increasing competition at times when there are new entrants. We may lose business to competitors
offering competitive products at lower prices, or for other reasons.
There can be no assurance that we will be able to compete effectively in any of our markets. If we
do not, our business, results of operations and financial condition will be materially adversely
affected.
Sales of our products may be reduced if we are unable to (i) establish and maintain commercial
relationships with independent marketing firms and independent consultants (ii) attract and retain
employee agents or (iii) develop and maintain our distribution sources.
We distribute our insurance products through several distribution channels, including independent
marketing firms and independent consultants and our employee agents. These relationships are
significant for both our revenues and our profits. In our life insurance segment, we depend almost
exclusively on the services of independent marketing firms and independent consultants. In our
home service insurance segment, we depend on employee agents whose role in our distribution process
is integral to developing and maintaining relationships with policyholders. Significant
competition exists among insurers to form relationships with marketers of demonstrated ability.
Some of our competitors may offer better compensation packages for marketing firms, independent
consultants and agents and broader arrays of products and have a greater diversity of distribution
resources, better brand recognition, more competitive pricing, lower cost structures and greater
financial strength or claims paying ratings than we do. We compete with other insurers for
marketing firms, independent consultants and employee agents primarily on the basis of our
compensation and support services. Any reduction in our ability to attract and retain effective
sales representatives could materially adversely affect our revenues, results of operations and
financial condition.
Loss of the services of our senior management team would likely hinder development of our operating
and marketing programs and our strategy for expanding our business.
We rely on the active participation of our Chairman of the Board and Chief Executive Officer,
Harold E. Riley (age 81), and our Vice Chairman of the Board and President, Rick D. Riley (age 56),
in connection with the development and execution of our operating and marketing plans and strategy
for expanding our business. We anticipate that their expertise will continue to be of substantial
value in connection with our operations. The loss of the services of either of these individuals
could have a significant adverse effect on our business and prospects. We do not have an
employment agreement with either of these persons nor do we carry a key-man insurance policy on
either of their lives.
We are subject to extensive governmental regulation in the United States, which increases our costs
of doing business and could restrict the conduct of our business.
We are subject to extensive regulation and supervision in U.S. jurisdictions wherein we do
business, as well as anti-money laundering regulations adopted under the U.S. Patriot Act.
Insurance company regulation is generally designed to protect the interests of policyholders, with
substantially lesser protections to shareholders of the regulated insurance companies. To that
end, all the states in which we do business have insurance regulatory agencies with broad powers
under law with respect to such things as: licensing companies to transact business; mandating
capital and surplus requirements; regulating trade and claims practices; approving policy forms;
and restricting companies’ ability to enter and exit markets.
The capacity for an insurance company’s growth in premiums is partially a function of its required
statutory surplus. Maintaining appropriate levels of statutory surplus, as measured by statutory
accounting practices prescribed or permitted by a company’s state of domicile, is considered
important by all state insurance regulatory authorities. Failure to maintain required levels of
statutory surplus could result in increased regulatory scrutiny and enforcement action by
regulatory authorities.
See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” — Liquidity and Capital Resources for further discussion on statutory capital
requirements.
Most insurance regulatory authorities have broad discretion to grant, renew, suspend and revoke
licenses and approvals, and could preclude or temporarily suspend us from carrying on some or all
of our activities, including acquisitions of other insurance companies, require us to add capital
to our insurance company subsidiaries, or fine us. If we are unable to maintain all required
licenses and approvals, or if our insurance business is determined not to comply fully with the
wide variety of applicable laws and regulations and their interpretations, including the U.S.
Patriot Act, our revenues, results of operations and financial condition could be materially
adversely affected.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Changes in U.S. regulation may adversely affect our results of operations and financial condition
and limit our prospective growth.
Currently, the U.S. Federal Government does not directly regulate the insurance business, although
initiatives for Federal regulation of insurance are proposed by members of the U.S. Congress from
time to time. However, Federal legislation and administrative policies in several other areas can
materially and adversely affect insurance companies, including our business. These areas include
the U.S. Patriot Act, financial services regulation, securities regulation, including the
Sarbanes-Oxley Act of 2002, pension regulation, privacy, tort reform legislation and taxation. In
addition, various forms of direct federal regulation of insurance have been proposed from time to
time.
Our failure to maintain effective information systems could adversely affect our business.
We must maintain and enhance our existing information systems and develop new information systems
in order to keep pace with continuing changes in information processing technology, evolving
industry and regulatory standards and changing customer preferences. If we do not maintain
adequate systems, we could experience adverse consequences, including inadequate information on
which to base pricing, underwriting and reserve decisions, regulatory problems, failure to meet
prompt payment obligations, increases in administrative expenses and loss of customers.
Some of our information technology systems and software are mainframe-based, legacy-type systems
that require an ongoing commitment of resources to maintain current standards. We continuously
enhance and update our systems to keep pace with changes in our products and business models,
information processing technology, evolving industry and regulatory standards and policyholder
needs. Our success is in large part dependent on maintaining and enhancing the effectiveness of
existing systems, as well as continuing to integrate, develop and enhance our information systems
to support business processes in a cost-effective manner.
Our failure to maintain effective and efficient information systems, or our failure to efficiently
and effectively consolidate our information systems to eliminate redundant or obsolete
applications, could have a material adverse effect on our results of operations and financial
condition.
Our failure to protect confidential information and privacy could result in the loss of customers,
subject us to fines and penalties and adversely affect our results of operations and financial
condition.
Our insurance subsidiaries are subject to privacy regulations and to confidentiality obligations.
We also have legal obligations to protect certain confidential information we obtain from our
existing vendors. These obligations generally include protecting confidential information in the
same manner and to the same extent as we protect our own confidential information. The actions we
take to protect confidential information include among other things: monitoring our record
retention plans and policies and any changes in state or federal privacy and compliance
requirements; maintaining secure storage facilities for tangible records; and limiting access to
electronic information in order to safeguard certain information.
In addition, the Gramm-Leach-Bliley Act requires that we deliver a notice regarding our privacy
policy both at the delivery of an insurance policy and annually thereafter. Certain exceptions are
allowed for sharing of information under joint marketing agreements. However, certain state laws
may require us to obtain a policyholder’s consent before we share information.
We have a written information security program with appropriate administrative, technical and
physical safeguards to protect such confidential information. If we do not comply with privacy
regulations and protect confidential information, we could experience adverse consequences,
including regulatory sanctions, loss of reputation and litigation, any of which could have a
material adverse effect on our business, results of operations and financial condition.
The insurance industry in which we operate may be subject to periodic negative publicity, which may
negatively impact our financial results.
We interface with and distribute our products to individual consumers. There may be a perception
that these purchasers may be unsophisticated and in need of consumer protection. Accordingly, from
time to time, consumer advocate groups or the media may focus attention on our products, thereby
subjecting us to periodic negative publicity. We may also be negatively impacted if other
insurance companies engage in practices resulting in increased public attention to our businesses.
Negative publicity may result in lower sales of insurance, lower persistency of our insurance
products, increased regulation and legislative scrutiny of industry practices as well as increased
litigation, which may further increase our costs of doing business and impede our ability to market
our products. As a result, our business, results of operations and financial condition could be
materially, adversely affected.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
General economic, financial market and political conditions may materially, adversely affect our
results of operations and financial condition.
Our results of operations and financial condition may be materially, adversely affected from time
to time by general economic, financial market and political conditions, both in the United States
and in the foreign countries where our policy owners reside. These conditions include economic
cycles such as: levels of consumer spending; levels of inflation; movements of the financial
markets; availability of credit; fluctuations in interest rates, monetary policy or demographics;
and legislative and competitive changes.
During periods of economic downturn, such as the one occurring in 2008 and 2009, our insureds may
choose not to purchase our insurance products, may terminate existing policies, permit policies to
lapse or may choose to reduce the amount of coverage purchased, any of which could have a material
adverse effect on our results of operations and financial condition. Also, our sales of new
insurance policies might decrease.
Our insurance subsidiaries are restricted by applicable laws and regulations in the amounts of
fees, dividends and other distributions they may make to us. The inability of our subsidiaries to
make payments to us in sufficient amounts for us to conduct our operations could adversely affect
our ability to meet our obligations or expand our business.
As a holding company, our principal asset is the stock of our subsidiaries. We rely primarily on
statutorily permissible payments from our insurance company subsidiaries, principally through
service agreements we have with our subsidiaries, to meet our working capital and other corporate
expenses. The ability of our insurance company subsidiaries to make payments to us is subject to
regulation by the states in which they are domiciled, and these payments depend primarily on
approved service agreements between us and these subsidiaries and, to a lesser extent, the
statutory surplus (which is the excess of assets over liabilities as determined under statutory
accounting practices prescribed by an insurance company’s state of domicile), future statutory
earnings (which are earnings as determined in accordance with statutory accounting practices) and
regulatory restrictions.
Generally, the net assets of our insurance company subsidiaries available for dividends are limited
to either the lesser or greater (depending on the state of domicile) of the subsidiary’s net gain
from operations during the preceding year and 10% of the subsidiary’s net statutory surplus as of
the end of the preceding year as determined in accordance with accounting practices prescribed by
insurance regulatory authorities.
Except to the extent that we are a creditor with recognized claims against our subsidiaries, claims
of our subsidiaries’ creditors, including policyholders, have priority with respect to the assets
and earnings of the subsidiaries over the claims of our creditors and shareholders. If any of our
subsidiaries becomes insolvent, liquidates or otherwise reorganizes, our creditors and shareholders
will have no right to proceed in their own right against the assets of that subsidiary or to cause
the liquidation, bankruptcy or winding-up of the subsidiary under applicable liquidation,
bankruptcy or winding-up laws.
Adverse capital and credit market conditions may significantly affect our access to debt and equity
capital and our cost of capital in seeking to expand our business.
The capital and credit markets experienced extreme volatility in 2008 continuing into 2009. In
some cases, the markets exerted significant downward pressure on availability of debt and equity
capital for certain issuers (including short term liquidity and credit capacity). We believe the
availability of debt and equity capital has decreased significantly compared to prior years.
The availability of equity and debt financing to us will depend on a variety of factors such as
market conditions, the general availability of credit, the overall availability of credit to the
financial services industry, our credit capacity, as well as the possibility that investors or
lenders could develop a negative perception of our long- or short-term financial prospects.
Disruptions, uncertainty or volatility in the capital markets may also limit our access to equity
capital for us to seek to expand our business. As such, we may be forced to delay raising debt or
equity capital, or bear an unattractive cost of capital, which could adversely affect our ability
to complete any acquisitions and negatively impact profitability of an acquisition.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
There can be no assurance that actions of the U.S. Government, the Federal Reserve and other
governmental and regulatory bodies for the purpose of stabilizing the financial markets will
achieve the intended effect.
In response to the financial crises affecting the U.S. banking system and financial markets and
going concern threats to investment banks and other financial institutions, on October 3, 2008,
President Bush signed the Emergency Economic Stabilization Act of 2008 (the “EESA”) into law.
Pursuant to the EESA, the U.S. Treasury has the authority to, among other things, purchase up to
$700 billion of mortgage-backed and other securities from financial institutions for the purpose of
stabilizing the financial markets and invest in financial services companies. The Federal
Government, the Federal Reserve and other governmental and regulatory bodies have taken or are
considering taking other actions to address the current financial crisis, including purchases of
commercial paper. On February 17, 2009, President Obama signed the American Recovery and
Reinvestment Act of 2009, which provided for Federal spending and tax cuts, estimated in the
aggregate to be approximately $789 billion, for the purpose of job preservation and creation,
infrastructure investment, energy efficiency and science, unemployment assistance, state and local
government fiscal stabilization and other associated purposes. There can be no assurance as to
what impact such actions will have on the financial markets, including the high levels of
volatility currently being experienced. Such continued volatility could materially and adversely
affect our business, financial condition and results of operations, or the trading price of our
Class A common stock.
Risks Relating to Our Class A Common Stock
The price of our Class A common stock may be volatile and may be affected by market conditions
beyond our control.
Our Class A common stock price has historically fluctuated and is likely to fluctuate in the future
and could decline materially because of the volatility of the stock market in general, decreased
participation in the Plan referred to above or a variety of other factors, many of which are beyond
our control, including: quarterly or annual variations in actual or anticipated results of our
operations; interest rate fluctuations; changes in financial estimates by securities analysts;
competition and other factors affecting the life insurance business generally; and conditions in
the U.S. and world economies.
Our Class A common shareholders will not control us for the foreseeable future, will have a limited
ability to influence our business policies and corporate actions and will not by themselves be able
to elect any directors.
It is difficult for minority shareholders to elect any of our directors or otherwise exert
influence over our business. Holders of our outstanding Class B common stock are entitled to elect
a simple majority of our board of directors and are therefore deemed our ultimate controlling
party. All of our Class B common stock is currently owned indirectly by the Harold E. Riley Trust
of which Harold E. Riley, our Chairman of the Board and Chief Executive Officer, is the sole
trustee. Additionally, Harold E. Riley beneficially owns approximately 7% of the issued shares of
our Class A common stock.
Our articles of incorporation and bylaws, as well as applicable state insurance laws, may
discourage takeovers and business combinations that our shareholders might consider to be in their
best interests.
Our articles of incorporation and bylaws, as well as various state insurance laws, may delay,
deter, render more difficult or prevent a takeover attempt our shareholders might consider in their
best interests. As a result, our shareholders will be prevented from receiving the benefit from
any premium to the market price of our Class A common stock that may be offered by a bidder in a
takeover context. Even in the absence of a takeover attempt, the existence of these provisions may
adversely affect the prevailing market price of our Class A common stock if they are viewed as
discouraging takeover attempts in the future.
The following provisions in our articles of incorporation and bylaws make it difficult for our
Class A shareholders to replace or remove our directors and have other anti-takeover effects that
may delay, deter or prevent a takeover attempt:
| • |
holders of shares of our Class B common stock elect a simple majority of our board of
directors, and all of these shares are owned by the Harold E. Riley Trust; and
|
| • |
our board of directors may issue one or more series of preferred stock without the approval
of our shareholders.
|
State insurance laws generally require prior approval of a change in control of an insurance
company. Generally, such laws provide that control over an insurer is presumed to exist if any
person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies
representing 10% or more of the voting securities of the insurer. In considering an application to
acquire control of an insurer, an insurance commissioner generally will consider such factors as
the experience, competence and financial strength of the applicant, the integrity of the
applicant’s board of directors and executive officers, the acquirer’s plans for the management and
operation of the insurer, and any anti-competitive results that may arise from the acquisition. In
addition, a person seeking to acquire control of an insurance company is required in some states to
make filings prior to
completing an acquisition if the acquirer and the target insurance company and their affiliates
have sufficiently large market shares in particular lines of insurance in those states. These
state insurance requirements may delay, deter or prevent our ability to complete an acquisition.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
We have never paid any cash dividends on our Class A common stock and do not anticipate doing so in
the foreseeable future.
We have never paid cash dividends on our Class A common stock, as it is our policy to retain
earnings for use in the operation and expansion of our business.
There are a substantial number of shares of our Class A common stock eligible for future sale in
the public market. The sale of these shares could cause the market price of our Class A common
stock to fall.
There were 48,686,759 shares of our Class A common stock issued as of December 31, 2009. Our
executive officers, directors and management owned approximately 4,268,000 shares of our Class A
common stock as of this date, representing approximately 10% of our then outstanding Class A common
stock. Almost all of these shares have been registered for public resale and generally may be sold
freely. In the event of a sale of some or all of these shares or the perceived sale of these
shares, the market price of our Class A common stock could fall substantially.
None.
We own our principal office in Austin, Texas, consisting of an 80,000 square foot office building
in addition to approximately one acre of land nearby that houses 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, Arkansas and Louisiana that
are incidental to our operations.
We are a defendant in a lawsuit originally filed on August 6, 1999 in the Texas District Court,
Austin, Texas, now styled
Citizens Insurance Company of America, Citizens, Inc., Harold E. Riley
and Mark A. Oliver, Petitioners v. Fernando Hakim Daccach
,
Respondent
, in which a class was
originally certified by the trial court and affirmed by the Court of Appeals for the Third District
of Texas. We appealed the grant of class status to the Texas Supreme Court, which on March 2,
2007, reversed the Court of Appeal’s affirmation of the trial court’s class certification order,
decertified the class and remanded the case to the trial court for further proceedings consistent
with the Texas Supreme Court’s opinion. The underlying lawsuit alleged that certain life insurance
policies that we made available to non-U.S. residents, when combined with a policy feature that
allowed certain cash benefits to be assigned to two non-U.S. trusts for the purpose of accumulating
ownership of our Class A common stock, along with allowing the policyholders to make additional
contributions to the trusts, were actually offers and sales of securities that occurred in Texas by
unregistered dealers in violation of the Texas securities laws. The remedy sought was rescission
and return of the insurance premium payments. On November 16, 2009, the trial court conducted
further proceedings on the case, in order to determine whether the class should be recertified. On
December 9, 2009, the trial court denied the recertification of the class. The remaining
plaintiffs must now proceed individually, and not as a class, if they intend to pursue their cases
against Citizens. Citizens intends to maintain a vigorous defense in any remaining proceedings.
Security Plan Fire Insurance Company (“SPFIC”) is a defendant in a suit styled
The State of
Louisiana v. AAA Insurance
, or
Road Home Litigation
, which was filed in the Civil District Court
for the Parish of Orleans on August 23, 2007 by the state of Louisiana as subrogee/assignee of the
insureds of more than 200 different insurance companies. The suit was filed to recover money that
the state of Louisiana paid to certain insureds under the Louisiana Road Home Program for damages
resulting from Hurricanes Katrina and Rita. The suit was removed to the United States District
Court for the Eastern District of Louisiana on September 11, 2007. In March 2009, the trial court
judge dismissed all bad faith claims asserted against the defendants, including SPFIC. The judge
also dismissed all claims for flood damage and all claims asserted under Louisiana’s Valued Policy
Law. Due to the District Court’s recent rulings noted above, we no longer believe an adverse
ruling in the
Road Home Litigation
would have a material impact on our financial statements.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
In addition to the legal proceedings described above, we may from time to time be subject to a
variety of legal and regulatory actions relating to our future, current and past business
operations, including, but not limited to:
| • |
disputes over insurance coverage or claims adjudication;
|
| • |
regulatory compliance with insurance and securities laws in the United States and in
foreign countries;
|
| • |
disputes with our marketing firms, consultants and employee agents over compensation
and termination of contracts and related claims;
|
| • |
disputes regarding our tax liabilities;
|
| • |
disputes relative to reinsurance and coinsurance agreements; and
|
| • |
disputes relating to businesses acquired and operated by us.
|
In the absence of countervailing considerations, we would expect to defend any such claims
vigorously. However, in doing so, we could incur significant defense costs, including not only
attorneys’ fees and other direct litigation costs, but also the expenditure of substantial amounts
of management time that otherwise would be devoted to our business. If we suffer an adverse
judgment as a result of any claim, it could have a material adverse effect on our business, results
of operations and financial condition.
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASE OF EQUITY SECURITIES
Our Class A common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol CIA. As
of December 31, 2009, the approximate number of record owners of our Class A common stock was
86,000. Management estimates the number of beneficial owners to be approximately 125,000.
Quarterly high and low closing prices per share of our Class A common stock as reported by the NYSE
are shown below.
| 2009 | 2008 | |||||||||||||||
| Quarter Ended | High | Low | High | Low | ||||||||||||
|
March 31
|
$ | 9.65 | 6.32 | $ | 6.95 | 5.14 | ||||||||||
|
June 30
|
7.98 | 6.08 | 7.96 | 6.02 | ||||||||||||
|
September 30
|
7.20 | 5.59 | 9.15 | 5.79 | ||||||||||||
|
December 31
|
6.83 | 5.80 | 9.70 | 6.99 | ||||||||||||
We have not paid cash dividends in any of the past five years and do not expect to pay cash
dividends in the foreseeable future. For restrictions on our present and future ability to pay
dividends, see Note 6 of the “Notes to Consolidated Financial Statements.”
We did not purchase any of our equity securities during any quarter in 2007, 2008 or 2009.
Securities Authorized for Issuance Under Equity Compensation Plans
We do not maintain any equity compensation plans or arrangements. Thus, we do not have any
securities authorized for issuance under these types of plans, nor have we issued any options,
warrants or similar instruments to purchase any of our equity securities, except for warrants
issued in conjunction with the convertible preferred stock issued in 2004 and 2005. See Note 7 of
the “Notes to Consolidated Financial Statements.”
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
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.
| Year ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total Revenues
|
$ | 188,980 | 146,673 | 169,637 | 154,189 | 139,024 | ||||||||||||||
|
Net Income (Loss)
|
17,340 | (15,707 | ) | 16,557 | 8,677 | 7,302 | ||||||||||||||
|
Basic and Diluted Earnings (Loss)
Per Class A Share
|
0.31 | (0.42 | ) | 0.35 | 0.16 | 0.13 | ||||||||||||||
|
Total Assets
|
927,326 | 832,276 | 787,909 | 711,184 | 661,889 | |||||||||||||||
|
Total Liabilities
|
711,251 | 653,022 | 597,532 | 558,690 | 513,380 | |||||||||||||||
|
Total Stockholders’ Equity
|
216,075 | 171,541 | 176,157 | 139,611 | 136,963 | |||||||||||||||
|
Book Value Per Share
|
4.35 | 3.68 | 4.00 | 3.38 | 3.33 | |||||||||||||||
See Item 1. “Business” and Item 7. “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” for information that may affect the comparability of the financial data
contained in the above table.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We conduct operations as an insurance holding company emphasizing ordinary life insurance products
in niche markets where we believe we can achieve competitive advantages. As an insurance provider,
we collect premiums in the current period to pay future benefits to our policy and contract
holders. Our core operations include issuing:
| • |
U.S. Dollar-denominated ordinary whole life insurance and endowment policies
predominantly to high net worth, high income foreign residents, located principally in
Latin America and the Pacific Rim, through approximately 2,100 independent marketing
consultants;
|
| • |
ordinary whole life insurance policies to middle income households in the midwest and
the southern United States through approximately 340 independent marketing consultants; and
|
| • |
final expense and limited liability property policies to middle and lower income
households in Louisiana, Mississippi and Arkansas through approximately 625 employee and
independent agents in our home service distribution segment.
|
Life Insurance.
Over the past 30 years, CICA and its predecessors have accepted policy
applications from foreign nationals for U.S. Dollar-denominated ordinary whole life insurance and
endowment policies. Traditionally, this market has been concentrated in the top 3-5% of the
population of a country in terms of income and net worth. In recent years, however, there has been
a shift to encompass a broader spectrum of the population, as upper middle classes develop in Latin
America and the Pacific Rim. We make our insurance products available using third-party marketing
organizations and independent marketing consultants. The number of our producing independent
consultants has expanded over the years in this segment to approximately 2,100, and we received
applications from residents of more than 30 countries outside of the U.S. in 2009. Historically,
the majority of our international business has come from Latin America; however, the Pacific Rim
has represented a meaningful source of new business for several years.
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 and individuals in certain
markets in the midwest and southern U.S. The majority of our revenues are the result of
acquisitions of domestic life insurance company acquisitions since 1987.
Home Service Insurance.
We provide final expense ordinary life insurance to middle and lower
income individuals in Louisiana, Mississippi and Arkansas. Our policies in this segment are sold
and serviced through a home service marketing distribution system utilizing employee-agents who
work on a route system to collect premiums and service policyholders and through networks of
funeral homes who collect premium and provide personal policyholder service.
We also realize revenues from our investment portfolio, which is a key component of our operations.
The revenues we collect as premiums from policyholders are invested to ensure future benefit
payments under the policy contracts. Life insurance companies earn profits on the investment
spread, which reflects the investment income earned on the premiums paid to the insurer between the
time of receipt and the time benefits are paid out under policies. Changes in interest rates,
changes in economic conditions and volatility in the capital markets can all impact the amount of
earnings that we realize from our investment portfolio.
Marketplace Conditions and Trends
Described below are some of the significant trends affecting the life insurance industry and the
possible effects they may have on our future operations.
| • |
An increasing percentage of the world population reaches retirement age, we believe we
will benefit from increased demand for living products rather than death products, as aging
baby boomers will require cash accumulation to provide expenses to meet their lifetime
needs. Our ordinary life products are designed to accumulate cash values to provide for
living expenses in a policy owner’s later years, while continuously providing a death
benefit.
|
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
| • |
The current worldwide recession and contraction of credit availability has resulted in
adverse effects for the life insurance industry, including increased surrender of life
insurance policies in force, decreased new life insurance policy sales and increased
competition for new life insurance policy sales. Our operations in 2009 reflected these
adverse developments, and are discusssed further below.
|
| • |
We believe there is a trend toward consolidation of domestic life insurance companies,
due to significant losses incurred by the life insurance industry as a result of the credit
crisis and recession of 2008-2009, as well as increasing costs of regulatory compliance for
domestic life insurance companies. We believe this trend should be a benefit to our
acquisition strategy as more complementary acquisition candidates may become available for
us to consider.
|
| • |
Many of the events and trends affecting the life insurance industry have had an impact
on the life reinsurance industry. These events have led to a decline in the availability
of reinsurance. While we currently cede a limited amount of our primary insurance business
to reinsurers, we may find it difficult to obtain reinsurance in the future, forcing us to
seek reinsurers who are more expensive to us. If we cannot obtain affordable reinsurance
coverage, either our net exposures will increase or we will have to reduce our underwriting
commitments.
|
Recent Acquisitions
In the fourth quarter of 2008, the Company completed its acquisition of ONLIC, included in the Home
Service segment, for $8.0 million and had additional acquisition related expenses of $900,000. In
the first quarter of 2009, the Company completed its acquisition of Integrity Capital Corporation
(“ICC”) in exchange for 1,292,000 shares of Citizens, Inc. Class A common stock. ICC is the parent
of Integrity Capital Insurance Company (“ICIC”), an Indiana life insurance company that is included
in the Life Insurance segment. The transaction was valued at $8.4 million when the transaction
closed on February 27, 2009.
Consolidated Results of Operations
Insurance revenues are primarily generated from premium revenues and investment income. In
addition, realized gains and losses on investment holdings can significantly impact revenues from
year to year.
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Revenues:
|
||||||||||||
|
Premiums:
|
||||||||||||
|
Life insurance
|
$ | 141,001 | 134,953 | 130,265 | ||||||||
|
Accident and health insurance
|
1,531 | 1,580 | 1,558 | |||||||||
|
Property insurance
|
4,748 | 4,764 | 4,925 | |||||||||
|
Net investment income
|
29,602 | 30,478 | 30,743 | |||||||||
|
Realized gains (losses), net
|
8,040 | (23,812 | ) | (94 | ) | |||||||
|
Decrease (increase) in fair value of warrants
|
3,154 | (2,662 | ) | 828 | ||||||||
|
Other income
|
904 | 1,372 | 1,412 | |||||||||
|
|
||||||||||||
|
Total revenues
|
188,980 | 146,673 | 169,637 | |||||||||
|
Exclude increase (decrease) in fair value
of warrants
|
(3,154 | ) | 2,662 | 828 | ||||||||
|
|
||||||||||||
|
Total revenues excluding fair value adjustments
of warrants outstanding
|
$ | 185,826 | 149,335 | 170,465 | ||||||||
|
|
||||||||||||
Premium Income
. Premium income during 2009 increased 4.2% to $147.3 million from $141.3
million in 2008. The increase resulted primarily from renewal premiums, which totaled $123.2
million, $116.6 million and $111.2 million in 2009, 2008 and 2007, respectively. The Company
believes that new business sales were negatively impacted due to the global recession and
policyholder concerns. Endowment sales represented an increased portion of new business sales
internationally, as these products have gained in popularity over the past several years. In
addition, most of our life insurance policies contain a policy loan provision, which allows the
policyholder to use cash value of a policy to pay premiums. The Company believes this feature is
routinely used by policyholders to keep a policy active, as evidenced by the increase in the policy
loan asset balance year over year.
23
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Net Investment Income
. Net investment income decreased during 2009 to $29.6 million,
compared to $30.5 million during 2008 and $30.7 million in 2007. The decrease resulted from lower
investment rates available in 2009 on new money investments compared to the prior two years, as
well as the significant call activity the Company experienced on its overall investment portfolio
in the current year, resulting in lower rates on reinvested funds. We continue to invest in bonds
of U.S. Government-sponsored enterprises, such as Federal National Mortgage Association (“FNMA”)
and Federal Home Loan Mortgage Association (“FHLMC”), due to our conservative investment strategy
of investing in high quality issuers. Over 85% of total investment income is attributable to the
Company holdings of fixed maturity securities. Policy loan income increased in the current year
due to the growth in the asset balance, as policyholders utilized the policy loan feature to pay
premiums and keep policies in force.
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Gross investment income:
|
||||||||||||
|
Fixed maturity securities
|
$ | 25,921 | 27,536 | 26,925 | ||||||||
|
Equity securities
|
1,056 | 1,027 | 2,171 | |||||||||
|
Mortgage loans
|
50 | 28 | 33 | |||||||||
|
Policy loans
|
2,444 | 2,105 | 1,919 | |||||||||
|
Long-term investments
|
465 | 39 | (47 | ) | ||||||||
|
Other
|
507 | 357 | 191 | |||||||||
|
|
||||||||||||
|
Total investment income
|
30,443 | 31,092 | 31,192 | |||||||||
|
Less investment expenses
|
(841 | ) | (614 | ) | (449 | ) | ||||||
|
|
||||||||||||
|
Net investment income
|
$ | 29,602 | 30,478 | 30,743 | ||||||||
|
|
||||||||||||
Realized Gains (Losses) on Investments
. The investment markets were very volatile at the
end of 2008 and throughout 2009 due to the credit crisis and economic downturn. In 2009, the
Company sold equity mutual funds, which were previously impaired, for a realized gain of $4.9
million. The Company also sold a number of fixed maturity investments in 2009, resulting in a
total gain of $8.0 million. The Company recorded $0.3 million in realized losses during 2009
related to other-than-temporary impairments due to market declines and issuer credit deterioration,
which are netted against the gains recorded. In 2008, the Company recognized other-than-temporary
impairment write-downs of $23.5 million on its holdings of equity mutual funds. In addition, we
also impaired two bonds due to credit quality, recognizing a realized loss of $0.3 million.
Decrease (Increase) in Fair Value of Warrants
. Because the market value of our Class A
common stock decreased during 2009, we recognized a gain on the decrease in fair value of warrants
of $3.2 million in 2009, compared to a loss of $2.7 million in 2008 and a gain of $0.8 million in
2007. The gain in 2009 was directly related to the decrease in the price of our Class A common
stock. The warrant liability is calculated using the Black-Scholes option pricing model, which
projects the future value of the warrants when they expire in July 2011 and 2012. Current
accounting standards require the change in the value of the warrant liability be recorded as a
component of revenues. When the liability increases we incur a loss, and when the liability
decreases we recognized income. The warrant liability is not anticipated to have an effect on the
Company’s cash flows, as the Company expects the warrants will either be converted into our Class A
common stock in July 2012, or sooner, at the election of the warrant holders, or expire.
24
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Benefits and expenses:
|
||||||||||||
|
Insurance benefits paid or provided:
|
||||||||||||
|
Claims and surrenders
|
$ | 59,988 | 56,253 | 50,571 | ||||||||
|
Increase in future policy benefit reserves
|
40,790 | 37,117 | 36,420 | |||||||||
|
Policyholders’ dividends
|
6,680 | 6,865 | 6,401 | |||||||||
|
|
||||||||||||
|
Total insurance benefits paid or provided
|
107,458 | 100,235 | 93,392 | |||||||||
|
Commissions
|
35,536 | 35,984 | 35,641 | |||||||||
|
Other underwriting, acquisition and
insurance expense
|
28,340 | 28,611 | 27,583 | |||||||||
|
Capitalization of deferred policy acquisition costs
|
(23,656 | ) | (24,109 | ) | (26,210 | ) | ||||||
|
Amortization of deferred policy acquisition costs
|
17,202 | 15,650 | 12,530 | |||||||||
|
Amortization of cost of customer relationships
acquired and other intangibles
|
3,494 | 2,897 | 3,203 | |||||||||
|
|
||||||||||||
|
Total benefits and expenses
|
$ | 168,374 | 159,268 | 146,139 | ||||||||
|
|
||||||||||||
Claims and Surrenders
. As noted in the table below, claims and surrenders increased 6.6%
from $56.3 million in 2008 to $60.0 million in 2009. The 2009 increase primarily related to an
increase in surrender expense, as well as an increase in endowments.
| Years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
|
||||||||||||
|
Death claims
|
$ | 22,494 | 22,529 | 20,720 | ||||||||
|
Surrender expenses
|
19,666 | 15,222 | 13,832 | |||||||||
|
Endowment benefits
|
14,079 | 13,814 | 12,835 | |||||||||
|
Property claims
|
1,590 | 2,657 | 1,090 | |||||||||
|
Accident and health benefits
|
437 | 427 | 311 | |||||||||
|
Other policy benefits
|
1,722 | 1,604 | 1,783 | |||||||||
|
|
||||||||||||
|
Total claims and
surrenders
|
$ | 59,988 | 56,253 | 50,571 | ||||||||
|
|
||||||||||||
The Company monitors death claims to determine if they are within levels meeting expectations. The
claim experience in 2009 improved relative to 2008. In addition in 2008, there was a $650,000
decrease in 2007 to correct an overstatement of the prior year’s claim liability.
Policy surrenders increased 29.2% in 2009 to $19.7 million from $15.2 million in 2008, up from
$13.8 million in 2007. The increase in surrender expense is primarily related to our international
business and is expected to increase over time due to the maturity of this block of business. A
significant portion of surrenders relates to policies that have been in force over fifteen years
and no longer have a surrender charge associated with them. In addition, the Company believes a
significant portion of the increase resulted from the global recession and policyholder uncertainty
about the economy. Total direct insurance inforce reported in 2009 was $4.4 billion compared to
$4.3 billion in 2008 and $4.2 billion in 2007.
Endowment benefits increased 1.9% from $13.8 million in 2008 to $14.1 million in 2009. Endowments
totaled $12.8 million in 2007. 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 popular in
the Pacific Rim and Latin America, where the Company has experienced increased interest in our
guaranteed products in recent years. Like policy dividends, endowments are factored into the
premium and, as such, the increase has no impact on profitability. The Company expects these
benefits to continue to increase as this block of business increases.
25
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Property claims decreased 40.2% in 2009, from $2.7 million in 2008 to $1.6 million in 2009, and
were $1.1 million in 2007. 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 released claim
liabilities of $711,000 that were no longer required due to the expiration of the statute of
limitations, which had been related to Hurricane Katrina in 2005 and impacted several years
thereafter.
Reserves
. The change in future policy benefit reserves increased from $37.1 million in
2008 to $40.8 million in 2009. Sales of certain endowment products have gained popularity is our
international markets, which build reserves at a much higher rate, and have contributed to the
increasing reserves over the past several years. Endowment sales totaled approximately $8.5
million, $7.4 million and $6.6 million in 2009, 2008 and 2007, respectively.
Policyholder Dividends
. Policyholder dividends decreased 2.7% during 2009 to $6.7 million
from $6.9 million in 2008 and $6.4 million in 2007, due to the decline in inforce of our ordinary
whole life products. All of our international policies are participating. Policyholder dividends
are factored into the premiums and have no impact on profitability.
Commissions
. Commissions decreased slightly during 2009 to $35.5 million from $36.0
million in 2008 and $35.6 million in 2007. Commissions were essentially flat all three years, even
though premium income was up due to the increase of renewal premiums, which pay a lower commission
rate than the rate paid on first year business.
Underwriting, Acquisition and Insurance Expense
. Underwriting, acquisition and insurance
expenses decreased to $28.3 million in 2009 from $28.6 million in 2008 and $27.6 million in 2007.
The 2009 decrease compared to 2008 primarily related to lower audit and consulting fees. The 2008
increase was due largely to an increase in employee compensation and increased fees for
international shipping.
Deferred Policy Acquisition Costs
. Capitalized deferred policy acquisition costs (“DAC”)
decreased 1.9% from $24.1 million in 2008 to $23.7 million in 2009. These costs were $26.2 million
in 2007. The decrease resulted from the decline in new business and, therefore, the decline in the
associated new business costs that were capitalized. Significantly lower amounts are capitalized
related to renewal business. Amortization amounts increased in 2009 to $17.2 million compared to
$15.6 million in 2008 and $12.5 million in 2007. The increase in 2009 and 2008 was significantly
impacted by the amount of policy surrenders that the Company experienced in the latter part of 2008
and throughout 2009. We believe this trend is driven primarily by the negative economy and
resulting policyholder uncertainty.
Cost of Customer Relationships Acquired and Other Intangibles
. Amortization of cost of
customer relationships acquired and other intangibles increased from $2.9 million in 2008, to $3.5
million in 2009, and was $3.2 million in 2007. The 2009 increase related to the ICC acquisition
and faster amortization due to the increase in lapses on this new business block, in addition to a
full year of amortization related to ONLIC in the current year compared to two months in 2008.
Federal Income Tax
. The Federal income tax expense was $3.3 million, $3.1 million and $6.9
million in 2009, 2008 and 2007, respectively, resulting in effective tax rates of 15.8%, 24.7% and
29.5%, 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 increasing tax expense. In 2009, $2.8 million of this allowance was released as a
reduction of tax expense primarily due to the sale of approximately 42% of the mutual fund
portfolio in 2009. In addition, the fair market value change related to outstanding warrants of
$3.2 million reported as an increase in revenues in 2009 compared to a decrease in income of $2.7
million and increase of $0.8 million in 2008 and 2007, respectively, which was not taxable and also
impacted the corporate tax rate.
Segment Operations
The Company has three reportable segments: Life Insurance, Home Service Insurance and Other
Non-Insurance Enterprises. These segments are reported in accordance with U.S. GAAP. The Company
evaluates profit and loss performance based on net income before Federal income taxes.
| Home | Other | |||||||||||||||
| Life | Service | Non-Insurance | ||||||||||||||
| Insurance | Insurance | Enterprises | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Income (loss) before Federal income tax:
|
||||||||||||||||
|
For the year ended December 31:
|
||||||||||||||||
|
2009
|
$ | 10,472 | 9,245 | 889 | 20,606 | |||||||||||
|
2008
|
712 | (8,955 | ) | (4,352 | ) | (12,595 | ) | |||||||||
|
2007
|
13,145 | 12,729 | (2,376 | ) | 23,498 | |||||||||||
26
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Life Insurance
Our Life Insurance segment consists of issuing primarily ordinary whole life insurance in U.S.
Dollar-denominated amounts to foreign residents in 30 countries, and domestically through
independent marketing firms and consultants throughout the United States.
| For the Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Revenue:
|
||||||||||||
|
Premiums
|
$ | 105,997 | 102,030 | 97,292 | ||||||||
|
Net investment income
|
16,667 | 17,015 | 16,891 | |||||||||
|
Realized gains (losses), net
|
1,100 | (13,882 | ) | 3 | ||||||||
|
Other income
|
340 | 330 | 660 | |||||||||
|
|
||||||||||||
|
Total revenue
|
124,104 | 105,493 | 114,846 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Benefits and expenses:
|
||||||||||||
|
Insurance benefits paid or provided:
|
||||||||||||
|
Claims and surrenders
|
41,277 | 36,241 | 34,305 | |||||||||
|
Increase in future policy benefit reserves
|
36,043 | 34,246 | 34,160 | |||||||||
|
Policyholders’ dividends
|
6,594 | 6,714 | 6,401 | |||||||||
|
|
||||||||||||
|
Total insurance benefits paid or provided
|
83,914 | 77,201 | 74,866 | |||||||||
|
|
||||||||||||
|
Commissions
|
21,146 | 21,589 | 22,144 | |||||||||
|
Other underwriting, acquisition and insurance
expenses
|
10,167 | 10,866 | 13,294 | |||||||||
|
Capitalization of deferred policy acquisition costs
|
(17,871 | ) | (19,177 | ) | (20,653 | ) | ||||||
|
Amortization of deferred policy acquisition costs
|
14,757 | 13,331 | 10,874 | |||||||||
|
Amortization of cost of customer relationships
acquired and other intangibles
|
1,519 | 971 | 1,176 | |||||||||
|
|
||||||||||||
|
Total benefits and expenses
|
113,632 | 104,781 | 101,701 | |||||||||
|
|
||||||||||||
|
Income before Federal income tax
|
$ | 10,472 | 712 | 13,145 | ||||||||
|
|
||||||||||||
Premiums
. Premium revenues increased 3.9% to $106.0 million for 2009 compared to $102.0
million for 2008. First year premiums have declined in this segment due primarily to lower
international new sales. However, total segment premiums reflect an increase due to higher renewal
premiums, which have been trending higher as this block of insurance matures.
Life Insurance premium breakout is detailed below.
| For the Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Premiums:
|
||||||||||||
|
First year
|
$ | 16,294 | 18,020 | 20,104 | ||||||||
|
Renewal
|
89,703 | 84,010 | 77,188 | |||||||||
|
|
||||||||||||
|
Total premium
|
$ | 105,997 | 102,030 | 97,292 | ||||||||
|
|
||||||||||||
27
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Net Investment Income
. Net investment income decreased to $16.7 million in 2009 compared
to $17.0 million and $16.9 million in 2008 and 2007. The decrease related to lower investment
rates available in 2009, as well as the significant call activity the Company experienced in the
current year. Approximately $215.0 million in bonds was called by the U.S. Government and
Government agencies in 2009 on a total life segment portfolio of $289.6 million. This money was
reinvested in lower yielding securities.
Realized Gains (Losses), Net
. Realized gains totaled $1.1 million in 2009 resulting from
sales of available-for-sale fixed income securities, compared to realized losses of $13.9 million
in 2008, primarily resulting from other-than-temporary impairments on equity mutual fund holdings
in 2008.
| For the Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
|
||||||||||||
|
Death claims
|
$ | 7,986 | 7,147 | 7,254 | ||||||||
|
Surrender expenses
|
17,672 | 13,770 | 12,250 | |||||||||
|
Endowment benefits
|
14,051 | 13,877 | 12,813 | |||||||||
|
Accident and health benefits
|
288 | 290 | 193 | |||||||||
|
Other policy benefits
|
1,280 | 1,157 | 1,795 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total claims and surrenders
|
$ | 41,277 | $ | 36,241 | $ | 34,305 | ||||||
|
|
||||||||||||
Claims and Surrenders
. Claims and surrenders increased to $41.3 million in 2009 compared
to $36.2 million and $34.3 million in 2008 and 2007.
Death claim amounts fluctuate from period to period, and are monitored by the Company. The amounts
are within anticipated ranges based upon management’s expectations.
Surrender benefits increased 28.3% to $17.7 million in 2009 compared to $13.8 million and $12.3
million in 2008 and 2007. The majority of this increase in policy surrenders was attributable to
our international business and related to policies that have been in force over fifteen years, and
no longer have a surrender charge. The Company believes a significant portion of the increase was
a result of the global recession and policyholder uncertainty. In addition, the Company recorded
surrenders resulting from poor persistency related to one Brazilian agent. The Company has
canceled the contract with this agent.
Commissions
. Commissions are a principal operating expense that is paid in relation to
sales production. The decline in commission expense in 2009 is a reflection of the decrease in
first year business, which pays a higher commission rate than the renewal business that is the
source of a significant portion of current year premium revenues. Renewal premiums represented 85%
of total premium revenue in 2009 compared to 82% in 2008.
Other Underwriting, Acquisition and Insurance Expenses
. The operating expenses have
declined over the past several years due to lower expenses related to staffing reductions,
accountants and other consultants. In addition, an expense allocation adjustment was made in 2008
to more realistically weight the Home Service segment overhead due to its higher administrative
overhead than our other operations. The Company monitors all operating expenses and continues to
seek efficiencies in our operations.
Deferred Policy Acquisition Costs (“DAC”).
Capitalized DAC was lower in 2009, with $17.9
million compared to $19.2 million and $20.7 million in 2008 and 2007, respectively, due to
decreased sales of new products. The Company believes a significant portion of this decrease
resulted from the global recession and policyholder uncertainty. Amortization of DAC increased to
$14.8 million compared to lower levels in 2008 and 2007, primarily due to an increase in lapses on
this segment of business as previously noted.
Amortization of Cost of Customer Relationships Acquired (“COIA”)
. Amortization expense
increased to $1.5 million in 2009 compared to $1.0 million and $1.2 million in 2008 and 2007, due
to increased lapses relating to the purchased blocks. The Company generally reports higher
amortization in the first year of an acquisition because lapses are typically higher, and then a
leveling off and more consistent amortization in the following years. Amortization related to ICIC
acquired business in early 2009 totaled $0.6 million at year end 2009.
28
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Home Service Insurance
Our Home Service Insurance segment provides preneed and final expense ordinary life insurance and
annuities to middle and lower income individuals primarily in Louisiana, Mississippi and Arkansas.
Our policies in this segment are sold and serviced through funeral homes and a home service
marketing distribution system utilizing employee and independent agents. Ozark National Life
Insurance Company (“ONLIC”) was acquired in late 2008.
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Revenue:
|
||||||||||||
|
Premiums
|
$ | 41,283 | 39,267 | 39,456 | ||||||||
|
Net investment income
|
12,680 | 12,654 | 13,502 | |||||||||
|
Realized gains (losses), net
|
6,562 | (9,948 | ) | (85 | ) | |||||||
|
Other income
|
101 | 273 | 6 | |||||||||
|
|
||||||||||||
|
Total revenue
|
60,626 | 42,246 | 52,879 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Benefits and expenses:
|
||||||||||||
|
Insurance benefits paid or provided:
|
||||||||||||
|
Claims and surrenders
|
18,711 | 20,012 | 16,266 | |||||||||
|
Increase in future policy benefit reserves
|
4,747 | 2,871 | 2,260 | |||||||||
|
Policyholders’ dividends
|
86 | 151 | — | |||||||||
|
|
||||||||||||
|
Total insurance benefits paid or provided
|
23,544 | 23,034 | 18,526 | |||||||||
|
|
||||||||||||
|
Commissions
|
14,390 | 14,395 | 13,497 | |||||||||
|
Other underwriting, acquisition and insurance
expenses
|
14,812 | 14,459 | 10,001 | |||||||||
|
Capitalization of deferred policy acquisition costs
|
(5,785 | ) | (4,932 | ) | (5,557 | ) | ||||||
|
Amortization of deferred policy acquisition costs
|
2,445 | 2,319 | 1,656 | |||||||||
|
Amortization of cost of customer relationships
acquired and other intangibles
|
1,975 | 1,926 | 2,027 | |||||||||
|
|
||||||||||||
|
Total benefits and expenses
|
51,381 | 51,201 | 40,150 | |||||||||
|
|
||||||||||||
|
Income (loss) before Federal income tax
|
$ | 9,245 | (8,955 | ) | 12,729 | |||||||
|
|
||||||||||||
Premiums
. The increase in 2009 was due to a full year of ONLIC premiums, which were
reflected in 2009 for this segment compared to only one quarter of premium in 2008. In addition,
in 2009 there was an increase in premiums related to SPFIC fire business sales and a premium rate
increase for SPFIC that was effective in the last quarter of 2009.
Net Investment Income
. The increase in 2009 was due to the overall increase in the
investment portfolio holdings with the addition of ONLIC. In addition, SPLIC received $240,000
from a lawsuit settlement related to a bond in default. The overall investment yield on investment
securities resulted in lower investment income in 2009 due to significant call activity that
resulted in approximately 21% of the bond portfolio being reinvested into lower yielding
securities.
Realized Gains (Losses), Net
. Gains reported in 2009 totaled $6.6 million compared to
losses of $9.9 million in 2008. The net gains in 2009 related primarily to sales of equity mutual
funds previously impaired in 2008 under other-than-temporary impairment guidance. The impairments
in 2008 totaled $9.9 million relative to the Home Service segment. Additional impairments of $0.3
million were recorded in 2009 due to further declines in market values relating to credit issues
and are reducing the net gains as reported.
29
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Claims and Surrenders
. Claims and surrenders decreased with $18.7 million incurred in 2009
compared to $20.0 million and $16.3 million in 2008 and 2007. The decrease from 2008 to 2009 was
due primarily to a decrease in death benefits for SPLIC and a decrease in casualty claims for SPFIC
in 2009 compared to the same period in 2008. The results in 2008 included incurred claims from
Hurricanes Ike and Gustav totaling $0.8 million.
| For the Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
|
||||||||||||
|
Death claims
|
$ | 14,508 | 15,382 | 13,466 | ||||||||
|
Surrender expenses
|
1,994 | 1,452 | 1,582 | |||||||||
|
Endowment benefits
|
28 | (63 | ) | 22 | ||||||||
|
Property claims
|
1,590 | 2,657 | 1,090 | |||||||||
|
Accident and health benefits
|
149 | 137 | 118 | |||||||||
|
Other policy benefits
|
442 | 447 | (12 | ) | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total claims and surrenders
|
$ | 18,711 | $ | 20,012 | $ | 16,266 | ||||||
|
|
||||||||||||
Increase in Future Policy Benefit Reserves
. The increase in 2009 included $0.4 million
resulting from a correction related to ONLIC reserves caused by data issues discovered in the
current year.
Commissions
. Commission expense in 2009 included a full year of ONLIC commissions that
were not completely included in the prior year, due to the acquisition date of October 2008.
Higher commissions were recorded in 2008 for Security Plan due to the use of a manual computation,
which resulted in a higher commission expense. This process was partially automated in 2009 and is
resulting in a more refined computation in the current year.
Other Underwriting, Acquisition and Insurance Expenses
. Expenses increased to $14.8
million in 2009 compared to $14.5 million and $10.0 million in 2008 and 2007. The current year
increase was due primarily to the additional allocation of expenses in this segment due to the
labor intensive nature of the high volume and lower face amount products.
Deferred Policy Acquisition Costs (“DAC”)
. Capitalized expenses increased to $5.8 million
in 2009 compared to $4.9 million and $5.6 million in 2008 and 2007. This increase was directly
related to the increase in premiums collected and agent production. Amortization totaled $2.4
million, $2.3 million and $1.7 million in 2009, 2008 and 2007, respectively. Amortization was
impacted by lapse rates relative to the block of business. Higher lapse rates resulted in higher
DAC amortization.
Other Non-Insurance Enterprises
Overall, other non-insurance operations are relatively immaterial to the consolidated results,
except for the fair value adjustment related to the Company’s warrants to purchase Class A common
stock. The fair value adjustment as of December 31, 2009 was $3.2 million, which was recorded as
revenue, compared to a loss of $2.7 million recorded for the same period in 2008. These amounts
fluctuate due to the movement in our Class A common stock price and fair value calculation using
the Black-Scholes valuation model.
Investments
The administration of our investment portfolios is handled by our management, pursuant to
board-approved investment guidelines, with all trading activity approved by a committee of the
respective boards of directors of our insurance company subsidiaries. The guidelines used require
that bonds, both government and corporate, are of high quality and comprise a majority of the
investment portfolio. State insurance statutes prescribe the quality and percentage of the various
types of investments that may be made by insurance companies and generally permit investment in
qualified state, municipal, federal and foreign government obligations, high quality corporate
bonds, preferred and common stock, real estate, mortgage loans and real estate within certain
specified
percentages. The assets selected are intended to mature in accordance with the average maturity of
the insurance products and to provide the cash flow for our insurance company subsidiaries to meet
their respective policyholder obligations.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
The following table shows the carrying value of our investments by investment category and cash and
cash equivalents, and the percentage of each to total invested assets.
| December 31, 2009 | December 31, 2008 | |||||||||||||||
| Percent of Total | Percent of Total | |||||||||||||||
| Carrying Value | Carrying Value | Carrying Value | Carrying Value | |||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||
|
Fixed maturity securities:
|
||||||||||||||||
|
U.S. Government-sponsored corporations
and U.S. Government agencies
|
$ | 399,626 | 55.6 | % | $ | 295,481 | 46.6 | % | ||||||||
|
Mortgage-backed (1)
|
19,452 | 2.7 | 51,907 | 8.2 | ||||||||||||
|
Corporate
|
116,098 | 16.1 | 79,528 | 12.5 | ||||||||||||
|
Municipal bonds
|
57,192 | 7.9 | 58,105 | 9.2 | ||||||||||||
|
Foreign governments
|
120 | — | 134 | — | ||||||||||||
|
|
||||||||||||||||
|
Total fixed maturity securities
|
592,488 | 82.3 | 485,155 | 76.5 | ||||||||||||
|
Cash and cash equivalents
|
48,625 | 6.8 | 63,792 | 10.1 | ||||||||||||
|
Short-term investments
|
2,510 | 0.3 | 2,250 | 0.4 | ||||||||||||
|
Other investments:
|
||||||||||||||||
|
Policy loans
|
32,096 | 4.5 | 28,955 | 4.6 | ||||||||||||
|
Equity securities
|
33,477 | 4.6 | 43,000 | 6.8 | ||||||||||||
|
Mortgage loans
|
1,533 | 0.2 | 339 | 0.1 | ||||||||||||
|
Real estate and other long-term investments
|
9,216 | 1.3 | 9,553 | 1.5 | ||||||||||||
|
|
||||||||||||||||
|
Total cash, cash equivalents and investments
|
$ | 719,945 | 100.0 | % | $ | 633,044 | 100.0 | % | ||||||||
|
|
||||||||||||||||
| (1) |
Includes $16.2 million and $46.4 of U.S. Government agencies and government-sponsored enterprises in 2009 and 2008, respectively.
|
At December 31, 2009, investments in fixed maturity and equity securities were 86.9% of our total
investments. All of our fixed maturities were classified as either available-for-sale or
held-to-maturity securities at December 31, 2009. We had no fixed maturity or equity securities
that were classified as trading securities at December 31, 2009 or 2008.
The following table shows the distribution of the credit ratings of our portfolio of fixed maturity
securities by carrying value as of December 31, 2009.
| December 31, 2009 | December 31, 2008 | |||||||||||||||
| Carrying Value | % | Carrying Value | % | |||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||
|
AAA and U.S. Government
|
$ | 442,160 | 74.6 | % | $ | 379,547 | 78.2 | % | ||||||||
|
AA
|
26,613 | 4.5 | 37,263 | 7.7 | ||||||||||||
|
A
|
69,934 | 11.8 | 56,043 | 11.6 | ||||||||||||
|
BBB
|
48,311 | 8.2 | 7,217 | 1.5 | ||||||||||||
|
BB and other
|
5,470 | 0.9 | 5,085 | 1.0 | ||||||||||||
|
|
||||||||||||||||
|
Totals
|
$ | 592,488 | 100.0 | % | $ | 485,155 | 100.0 | % | ||||||||
|
|
||||||||||||||||
The Company experienced a significant amount of maturities and call activity relative to the fixed
income portfolio, with $292.7 million reported in 2009 compared to $162.3 million and $75.9 million
in 2008 and 2007. As interest rates declined over the past two years, issuers called those
holdings and the Company reinvested into lower yielding securities. The gross investment yield on
the fixed maturity securities portfolio dropped approximately 50 basis points from year end 2008
compared to the same period in 2009.
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Valuation of Investments in Fixed Maturity and Equity Securities
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 assessment of whether impairments have occurred is based on a case-by-case
evaluation of underlying reasons for the decline in fair value. 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 to sell the security, or if it is more likely than not that
the Company would be required to sell a security before recovery of its amortized cost.
When an other-than-temporary impairment has occurred, the amount of the other-than-temporary
impairment recognized in earnings depends on whether the Company intends to sell the security or
more likely than not will be required to sell the security before recovery of its amortized cost
basis. If the Company intends to sell the security or more like than not will be required to sell
the security before recovery of its amortized cost basis, the other-than-temporary impairment shall
be recognized in earnings equal to the entire difference between the investment’s cost and its fair
value at the balance sheet date. If the Company does not intend to sell the security and it is not
more likely than not that the Company will be required to sell the security before recovery of its
amortized cost basis, the other-than-temporary impairment shall be separated into the following:
a) the amount representing the credit loss; and b) the amount related to all other factors. The
amount of the total other-than-temporary impairment related to the credit loss shall be recognized
in earnings. The amount of the total other-than-temporary impairment related to other factors
shall be recognized in other comprehensive income, net of applicable taxes. The previous amortized
cost basis less the other-than-temporary impairment recognized in earnings shall become the new
amortized cost basis of the investment. That new amortized cost basis shall not be adjusted for
subsequent recoveries in fair value.
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. In 2009, the Company
impaired three bonds for $0.1 million and a number of common stocks totaling $0.2 million. These
2009 impairments resulted from declines due to credit quality of the issuers and have been
reflected as a realized loss in the accompanying income statement. The Company impaired two bonds
totaling $0.3 million during 2008, because the Company did not expect these securities to recover
in value in the near term. The Company’s equity securities consist of mutual funds acquired in
2007 and 2008. The Company recorded an other-than-temporary impairment charges on its equity
securities in 2008 in the amount of $23.5 million. Based upon our emphasis on investing in fixed
maturity securities primarily composed of obligations of U.S. Government-sponsored corporations 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, 2009 were
not impaired, and no additional other-than-temporary losses need to be recorded.
Gross unrealized losses on fixed maturities available-for-sale amounted to $9.7 million as of
December 31, 2009 and $16.0 million as of December 31, 2008. This increase was primarily due to a
lower interest rate environment, which put downward pricing pressure on the fair values of our U.S.
Government and agency bonds. There were no gross unrealized losses on equity securities as of
December 31, 2009, as all of these securities were deemed impaired in 2008 and were written down to
their fair value as of December 31, 2008. In 2009, the Company sold the equity mutual fund
holdings from the Home Service segment and recorded realized gains of $4.9 million due to market
recovery since impairment at December 31, 2008. 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.”
Reinsurance
As is customary among insurance companies, our insurance company subsidiaries reinsure with other
companies portions of the life insurance risks they underwrite. A primary purpose of reinsurance
agreements is to enable an insurance company to reduce the amount of risk on any particular life
and, by reinsuring the amount exceeding the maximum amount the insurance company is willing to
retain, to insure individuals in amounts larger than it could without such agreements. Even though
a portion of the risk may be reinsured, our insurance company subsidiaries remain liable to perform
all the obligations imposed by the policies issued by them and could be liable if their reinsurers
were unable to meet their obligations under the reinsurance agreements.
We believe we have established appropriate reinsurance coverage based upon our net retained insured
liabilities compared to our surplus.
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The effect of reinsurance on premiums is as follows:
| Year ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Direct premiums
|
$ | 155,727 | 151,077 | 146,409 | ||||||||
|
Reinsurance assumed
|
1,416 | 1,459 | 1,462 | |||||||||
|
Reinsurance ceded
|
(9,863 | ) | (11,239 | ) | (11,123 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net premiums
|
$ | 147,280 | 141,297 | 136,748 | ||||||||
|
|
||||||||||||
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.
The effect of reinsurance on life insurance in force is as follows:
| Year ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In millions) | ||||||||||||
|
Direct written life insurance inforce
|
$ | 4,432 | 4,322 | 4,168 | ||||||||
|
Reinsurance assumed
|
928 | 647 | 644 | |||||||||
|
Reinsurance ceded
|
(363 | ) | (302 | ) | (274 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net life insurance inforce
|
$ | 4,997 | 4,667 | 4,538 | ||||||||
|
|
||||||||||||
Virtually all of the Company’s non-credit accident and health insurance has been assigned and is
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.
The Company monitors the credit ratings of our life and property reinsurers. The ratings by A.M.
Best Company range from B+ (Good) to A+ (Superior).
SPFIC elected to increase the amount of first and second event catastrophe reinsurance to $10.0
million per event from $7.1 million and raise the retention level to $500,000 per event from
$250,000, after the negative effects from Hurricane Katrina in 2005. Thus, the first $500,000 of
incurred claims and any claims in excess of $10.0 million were SPLIC’s responsibility. The same
reinsurance levels were in place for 2007 and 2008. The reinsurance premium for first event
catastrophe reinsurance was $750,000 in 2008, and $840,000 in 2007. In 2008, SPFIC also paid
reinsurance premiums in the amount of $478,000 for second and third event coverage due to
Hurricanes Gustav and Ike.
Liquidity and Capital Resources
Liquidity refers to a company’s ability to generate sufficient cash flows to meet the needs of its
operations. Liquidity is managed on insurance operations to ensure stable and reliable sources of
cash flows to meet obligations and is provided by a variety of sources.
The liquidity requirements of our Company are met primarily by funds provided from operations.
Premium deposits and revenues, investment income and investment maturities are the primary sources
of funds, while investment purchases, policy benefits, and operating expenses are the primary uses
of funds. We historically have not had to liquidate investments to provide cash flow, but in 2008
SPFIC sold $237,000 of bonds because of liquidity needs as a result of Hurricanes Gustav and Ike.
There were no liquidity issues in 2009. Our investments consist primarily of marketable debt
securities that could be readily converted to cash for liquidity needs. See Note 8 of the “Notes
to Consolidated Financial Statements” for a table disclosing our contractual obligations.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
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, have been largely consistent with our assumptions in asset
liability management, our associated cash outflows have, historically, 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 and cash flow tests under various market interest rate scenarios are also performed
annually to assist in evaluating liquidity needs and adequacy. We currently anticipate that
available liquidity sources and future cash flows will be adequate to meet our needs for funds.
Cash flows from our insurance operations historically have been sufficient to meet current needs.
Cash flows from operating activities were $52.1 million, $46.4 million and $37.9 million for the
years ended December 31, 2009, 2008 and 2007, respectively. We have traditionally also had
significant cash flows from both scheduled and unscheduled investment security maturities,
redemptions, and prepayments, which totaled $292.7 million, $162.3 million and $75.9 million in
2009, 2008 and 2007. These cash flows, for the most part, are reinvested in fixed income
securities. Net cash outflows from investment activity totaled $68.8 million, $14.3 million and
$58.8 million for the years ended December 31, 2009, 2008 and 2007, respectively. The outflows
from investing activities for the year ended December 31, 2009, primarily related to the investment
of excess cash and cash equivalents generated from operations during 2009. The Company’s cash
flows from financing activities were $1.5 million in 2009, $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.
Stockholders’ equity at December 31, 2009 was $216.1 million compared to $171.5 million at December
31, 2008. The 2009 increase was largely due to income earned during the period and conversion of
the Company’s preferred stock to Class A common stock.
Investments increased to $671.3 million at December 31, 2009 from $569.3 million at December 31,
2008. Invested assets increased 17.9% during 2009, due to the increase in fixed income holdings in
the Company’s portfolio resulting from new premium and cash amounts being invested, as cash
balances decreased by $15.2 million from 2008 to 2009, and the inclusion of ICC. Fixed maturities
are categorized as fixed maturities available-for-sale, which are carried in our consolidated
financial statements at fair value and held-to-maturity, which are carried at amortized cost.
Fixed maturities available-for-sale were 57.4% of investments at December 31, 2009, and fixed
maturities held-to-maturity were 30.8% of investments at December 31, 2009.
Policy loans comprised 4.8% of invested assets at December 31, 2009 compared to 5.1% at
December 31, 2008. 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 we maintain adequate liquidity despite the uncertain
maturities of these loans.
Our cash balances at our primary depositories were significantly in excess of Federal Deposit
Insurance Corporation coverage at December 31, 2009 and December 31, 2008. Management monitors the
solvency of all financial institutions in which we have funds to minimize the exposure for loss.
Management does not believe we are at significant risk for such a loss. During 2010, we intend to
continue to utilize short term agencies and U.S. Treasuries as a cash management tool to minimize
excess cash balances.
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, 2009, all of our insurance subsidiaries were above the required minimum
levels.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Two of our subsidiaries were below the minimum threshold at December 31, 2008. A capital
contribution of $1.0 million was made to SPFIC by its parent SPLIC during the first quarter of 2009
because the ratio fell below 200%. An additional $1.0 million contribution was made to SPFIC by
its parent SPLIC in the third quarter of 2009. Adjustments have been made relative to SPFIC
product profitability, which had a positive impact on operations through the remainder of 2009 and
are expected to benefit future years. A capital contribution of $1.0 million was also made to
ONLIC by its parent CICA during the first quarter of 2009 when its ratio fell below 200%. The
decline in SPFIC’s capital balance mainly resulted from hurricane losses in 2008 and an increase in
operating expenses. The reduction in ONLIC’s capital balance resulted from declines in asset
values of preferred and common stock holdings. The capital contributions made in 2009 increased
the ratios as anticipated in action plans submitted to the appropriate state insurance departments.
The Company received approval from the respective state insurance departments to merge ONLIC into
SPLIC as of October 1, 2009. The capital contributions did not impact the overall consolidated
financial position or results of operations of the Company.
Parent Company Liquidity and Capital Resources
We are a holding company and have had minimal operations of our own. Our assets primarily consist
of the capital stock of our subsidiaries. Accordingly, our cash flows depend upon the availability
of statutorily permissible payments, primarily payments under management agreements from our two
primary life insurance subsidiaries, CICA and SPLIC. The ability to make payments is limited by
applicable laws and regulations of Colorado, CICA’s state of domicile, and Louisiana, Security
Plan’s state of domicile, which subject insurance operations to significant regulatory
restrictions. These laws and regulations require, among other things, that these insurance
subsidiaries maintain minimum solvency requirements and limit the amount of dividends these
subsidiaries can pay to the holding company. We historically have not relied upon dividends from
subsidiaries for our cash flow needs and we do not intend to do so in the future.
Critical Accounting Estimates
Our critical accounting policies are as follows:
Policy Liabilities
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 that a premium deficiency did not exist as of December 31, 2009.
Management believes that our policy liabilities and increase in future policy benefit reserves as
of the years ended December 31, 2009, 2008 and 2007 are based upon assumptions, including a
provision for the risk of adverse deviation, that do not warrant revision. The relative stability
of these assumptions and management’s analysis is discussed below.
Deferred Policy Acquisition Costs
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.
We utilize the factor method to determine the amount of costs to be capitalized and the ending
asset balance. The factor method is based on the ratio of premium revenue recognized for the
policies in force at the end of each reporting period compared to the premium revenue recognized
for policies in force at the beginning of the reporting period. The factor method ensures that
policies that lapsed or surrendered during the reporting period are no longer included in the
deferred policy acquisition costs calculation. The factor method limits the amount of deferred
costs to its estimated realizable value, provided actual experience is comparable to that
contemplated in the factors.
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 insurance business. Those costs generally
include costs related to the production, underwriting and issuance of new business.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
A recoverability test that considers, among other things, actual experience and projected future
experience is performed at least annually. These annual recoverability tests initially calculate
the available premium (gross premium less benefit and expense portion of premium) for the next
30 years. The available premium per policy and the deferred policy acquisition costs per policy
are then calculated. The deferred policy acquisition costs are then evaluated over two methods
utilizing reasonable assumptions and two other methods using pessimistic assumptions. The two
methods using reasonable assumptions illustrate an early-deferred policy acquisition recoverability
period. The two methods utilizing pessimistic assumptions still support early recoverability of
our aggregate deferred policy acquisition costs. Management believes that our deferred policy
acquisition costs and related amortization for the years ended December 31, 2009, 2008 and 2007
limits the amount of deferred costs to its estimated realizable value. This belief is based upon
the analysis performed on capitalized expenses that vary with and are primarily related to the
acquisition of new and renewal insurance business, utilization of the factor method and annual
recoverability testing.
Cost of Customer Relationships Acquired
Cost of Customer Relationships Acquired (“CCRA”) is established when we purchase a block of
insurance. CCRA is amortized primarily over the emerging profit of the related policies using the
same assumptions as were used in computing liabilities for future policy benefits. We utilize
various methods to determine the amount of the ending asset balance, including a static model and a
dynamic model. Inherent in the amortization of CCRA are certain management judgments about the
ending asset balance and the annual amortization. The assumptions used are based upon interest,
mortality and lapses at the time of purchase.
A recoverability test that considers, among other things, actual experience and projected future
experience is performed at least annually. These annual recoverability tests initially calculate
the available premium (gross premium less benefit and expense portion of premium) for the next
thirty years. The CCRA is then evaluated utilizing reasonable assumptions. Management believes
that our CCRA and related amortization is recoverable for the years ended December 31, 2009, 2008
and 2007. This belief is based upon the analysis performed on estimated future results of the
block and our annual recoverability testing.
Goodwill
Current accounting guidance requires that goodwill balances be review for impairment at least
annually or more frequently if events occur or circumstances change that would indicate that a
triggering event has occurred. A reporting unit is defined as an operating segment on 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 segment, 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.
The goodwill impairment test follows a two step process as defined under current accounting
guidance. 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.
Management’s determination of the fair value of each reporting unit incorporates multiple inputs
including discounted cash flow calculations, peer company price to earnings multiples, the level of
the Company’s Class A common stock price and assumptions that market participants would make in
valuing the reporting unit. Other assumptions can include levels of economic capital, future
business growth, and earnings projections.
Valuation of Investments in Fixed Maturity and Equity Securities
The evaluation of securities for impairments is a quantitative and qualitative process, which is
subject to risks and uncertainties and is intended to determine whether declines in the fair value
of investments should be recognized in current period earnings. The risks and uncertainties
include changes in general economic conditions, the issuer’s financial condition or future
prospects, the effects of changes in interest rates or credit spreads and the expected recovery
period.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Based upon current accounting guidance, investment securities must be classified as
held-to-maturity, available-for-sale or trading. Management determines the appropriate
classification at the time of purchase. The classification of securities is significant since it
directly impacts the accounting for unrealized gains and losses on securities. Fixed maturity
securities are classified as held-to-maturity and carried at amortized cost when management has the
positive intent and the Company has the ability to hold the securities to maturity. Securities not
classified as held-to-maturity are classified as available-for-sale and are carried at fair value,
with the unrealized holding gains and losses, net of tax, reported in other comprehensive income
and do not affect earnings until realized.
The Company evaluates all securities on a quarterly basis, and more frequently when economic
conditions warrant additional evaluations, for determining if an OTTI exists pursuant to the
accounting guidelines. In evaluating the possible impairment of securities, consideration is given
to the length of time and the extent to which the fair value has been less than cost, the financial
conditions and near-term prospects of the issuer, and the ability and intent of the Company to
retain its investment in the issuer for a period of time sufficient to allow for any anticipated
recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider
whether the securities are issued by the Federal government or its agencies, by
government-sponsored agencies, or whether downgrades by bond rating agencies have occurred, and
reviews of the issuer’s financial condition.
If management determines that an investment experienced an OTTI, management must then determine the
amount of OTTI to be recognized in earnings. If management does not intend to sell the security
and it is more likely than not that the Company will not be required to sell the security before
recovery of its amortized cost basis less any current period loss, the OTTI will be separated into
the amount representing the credit loss and the amount related to all other factors. The amount of
OTTI related to the credit loss is determined based on the present value of cash flows expected to
be collected and is recognized in earnings. The amount of OTTI related to other factors will be
recognized in other comprehensive income, net of applicable taxes. The previous amortized cost
basis less the OTTI recognized in earnings will become the new amortized cost basis of the
investment. If management intends to sell the security or more likely than not will be required to
sell the security before recovery of its amortized cost basis less any current period credit loss,
the OTTI will be recognized in earnings equal to the entire difference between the investment’s
amortized cost basis and its fair value at the balance sheet date. Any recoveries related to the
value of these securities are recorded as an unrealized gain (as other comprehensive income (loss)
in shareholders’ equity) and not recognized in income until the security is ultimately sold.
The Company from time to time may dispose of an impaired security in response to asset/liability
management decisions, future market movements, business plan changes, or if the net proceeds can be
reinvested at a rate of return that is expected to recover the loss within a reasonable period of
time.
Premium Revenue and Related Expenses
Premiums on life and accident and health policies are reported as earned when due or, for short
duration contracts, over the contract period on a pro rata basis. Benefits and expenses are
associated with earned premiums so as to result in recognition of profits over the estimated life
of the contracts. This matching is accomplished by means of provisions for future benefits and the
capitalization and amortization of deferred policy acquisition costs.
Annuities are accounted for in a manner consistent with accounting for interest bearing financial
instruments. Our primary annuity products do not include fees or other such charges.
Tax Accounting
A deferred tax asset or deferred tax liability is recorded only if a determination is made that is
more-likely-than-not that the tax treatment on which the deferred tax item depends will be
sustained in the event of an audit. These determinations inherently involves management’s
judgment. In addition, the Company must record a tax valuation allowance with respect to deferred
tax assets if it is more-likely-than-not that the tax benefit will not be realized. This valuation
allowance is in essence a contra account to the deferred tax asset. Management must determine the
portion of the deferred tax asset and resulting tax benefit that may not be realized based upon
judgment of expected outcomes. Due to significant estimates utilized in establishing the valuation
allowance and the potential for changes in facts and circumstances, it is reasonably possible that
we will be required to record adjustments to the valuation allowance in future reporting
periods. Such a charge could have a material adverse effect on our results of operations,
financial condition and capital position.
37
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Recent Accounting Pronouncements
See “Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial
Statements, Note 1. Accounting Pronouncements.”
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
The nature of our business exposes us to investment market risk. Market risk is the risk of loss
that may occur when changes in interest rates and public equity prices adversely affect the value
of our invested assets. Interest rate risk is our primary market risk exposure. Substantial and
sustained increases and decreases in market interest rates can affect the fair value of our
investments. The fair value of our fixed maturity portfolio generally increases when interest
rates decrease and decreases when interest rates increase.
Market Risk Related to Interest Rates
Our exposure to interest rate changes results from our significant holdings of fixed maturity
investments, policy loans and mortgage loans on real estate, all of which comprised over 87.0% of
our cash and investment portfolio as of December 31, 2009. These investments are mainly exposed to
changes in U.S. Treasury rates. Our fixed maturities investments include U.S. Government-sponsored
corporations, U.S. Government bonds, securities issued by government agencies, and corporate bonds.
Approximately 70.2% of the fixed maturities we owned at December 31, 2009 are instruments of U.S.
Government-sponsored enterprises, or are backed by U.S. Government agencies.
| December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||
| Net | Net | |||||||||||||||||||||||
| Unrealized | Unrealized | |||||||||||||||||||||||
| Amortized | Fair | Gains | Amortized | Fair | Gains | |||||||||||||||||||
| Cost | Value | (Losses) | Cost | Value | (Losses) | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Fixed maturities, available-for-sale
|
$ | 389,195 | 385,579 | (3,616 | ) | 494,034 | 485,155 | (8,879 | ) | |||||||||||||||
|
Fixed maturities, held-to-maturity
|
206,909 | 199,676 | (7,233 | ) | — | — | — | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total fixed maturities
|
$ | 596,104 | 585,255 | (10,849 | ) | 494,034 | 485,155 | (8,879 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total equity securities
|
$ | 25,899 | 33,477 | 7,578 | 42,908 | 43,000 | 92 | |||||||||||||||||
|
|
||||||||||||||||||||||||
To manage interest rate risk, we perform periodic projections of asset and liability cash
flows to evaluate the potential sensitivity of our investments and liabilities. We assess interest
rate sensitivity with respect to our fixed maturities investments using hypothetical test scenarios
that assume either upward or downward 100 basis point shifts in the prevailing interest rates.
The Company performs an analysis of fair values using 100 basis point upward and downward shifts in
interest rates. The following table sets forth the potential amount of unrealized losses that
could be caused by 100 basis point upward shifts on our fixed maturities investments as of the
dates indicated. Declining interest rate scenarios are not reported due to the fact that current
rates are low and further declines are not probable.
| Increases in Interest Rates | ||||||||||||
| (In thousands) | ||||||||||||
| December 31, | 100 Basis Points | 200 Basis Points | 300 Basis Points | |||||||||
|
|
||||||||||||
|
2009
|
$ | (49,599 | ) | (97,573 | ) | (132,425 | ) | |||||
|
|
||||||||||||
|
2008
|
$ | (55,265 | ) | (85,159 | ) | (113,469 | ) | |||||
|
|
||||||||||||
38
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
While the test scenario is for illustrative purposes only and does not reflect our expectations
regarding future interest rates or the performance of fixed-income markets, it is a near-term
change that illustrates the potential impact of such events. Due to the composition of our book of
insurance business, we believe it is unlikely we would encounter large surrender activity due an
interest rate increase that would force us to dispose of our fixed maturities at a loss.
There are no fixed maturities or other investments that we classify as trading instruments. At December 31, 2009 and 2008, we had no investments in derivative instruments, nor does the Company have any subprime or CDO (collateralized debt obligation) risk.
There are no fixed maturities or other investments that we classify as trading instruments. At December 31, 2009 and 2008, we had no investments in derivative instruments, nor does the Company have any subprime or CDO (collateralized debt obligation) risk.
Market Risk Related to Equity Prices
Changes in the level or volatility of equity prices affect the value of equity securities we hold
as investments. However, our equity investments portfolio was less than 5% of our total
investments at December 31, 2009. Thus, we believe significant decreases in the equity markets
would have an immaterial impact on our total investment portfolio. (See also Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.)
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the notes thereto, and the report of our independent
registered public accounting firm, as listed on the table of contents.
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.
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There was no change in or disagreement with our accountants related to our accounting and financial
disclosures.
Item 9A.
CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure, among other things, material
information relating to our Company, including its consolidated subsidiaries, is made known to our
officers who certify our financial reports and to the other members of our senior management and
the Board of Directors.
Our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) are responsible for
establishing and maintaining our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based
upon an evaluation at the end of the period, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective as of the end of the
period covered by this annual report.
(b) Management Report on Internal Control over Financial Reporting
Management of our Company is responsible for establishing and maintaining adequate internal control
over financial reporting. Management assessed our internal control over financial reporting based
on criteria established in
Internal Control — Integrated Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management
has concluded that we maintained effective internal control over financial reporting as of December
31, 2009.
Our independent registered public accounting firm, Ernst & Young LLP has issued an attestation
report on our internal control over financial reporting. The report is included in item 9A(d) of
this annual report.
(c) Change in Internal Control over Financial Reporting
During 2009, there have been no changes in the Company’s internal controls over financial reporting
that materially affect or are reasonably likely to affect the Company’s internal controls over
financial reporting. The Company implemented an internal audit function during 2008. This
function provided an additional layer of review and oversight procedures. The Company’s Director
of Internal Audit has significant experience in the life insurance industry, as well as external
audit experience, including design and implementation of internal control processes.
39
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
(d) Report of Independent Registered Public Accounting Firm on Internal Control over Financial
Reporting
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
The Board of Directors and Shareholders of Citizens, Inc.:
We have audited Citizens, Inc.’s internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). Citizens, Inc.’s
management is responsible for maintaining effective internal control over financial reporting, and
for its assessment of the effectiveness of internal control over financial reporting included in
the accompanying Management Report on Internal Control over Financial Reporting under Item 9A of
the Index. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.’
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Citizens, Inc. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated statements of financial position as of December 31, 2009
and 2008, and the related consolidated statements of operations, stockholders’ equity and
comprehensive income, and cash flows for each of the three years in the period ended December 31,
2009 of Citizens, Inc. and subsidiaries and our report dated March 12, 2010 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
Austin, Texas
March 12, 2010
March 12, 2010
40
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Item 9B.
OTHER INFORMATION
None.
Items
10, 11, 12, 13
and
14
of this Report incorporate by reference the information in our
definitive proxy material under the headings “Election of Directors,” “Executive Officers,”
“Executive Officer and Director Compensation,” “Stock and Principal Stockholders,” “Control of the
Company,” and “Principal Accounting Fees and Services,” to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2009.
Item 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| (a) |
(1) and (2) Filings as Part of this Report
|
The financial statements and schedules listed on the following index to financial
statements and financial statement schedules are filed under Item 8 as part of this Form
10-K.
| (b) |
(3) Exhibits — See the Exhibit Index
|
Index to Consolidated Financial Statements and Financial Statement Schedules
| Page | ||||
| Reference | ||||
|
|
||||
| 42 | ||||
|
|
||||
| 43 | ||||
|
|
||||
| 45 | ||||
|
|
||||
| 46 | ||||
|
|
||||
| 48 | ||||
|
|
||||
| 50 | ||||
|
|
||||
| 83 | ||||
|
|
||||
| 86 | ||||
|
|
||||
| 87 | ||||
All other schedules have been omitted because the required information is inapplicable
or the information required is presented in the financial statements or the notes
thereto filed elsewhere herein.
41
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Citizens, Inc.:
We have audited the accompanying consolidated statements of financial position of Citizens, Inc.
and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of
operations, stockholders’ equity and comprehensive income, and cash flows for each of the three
years in the period ended December 31, 2009. Our audit also included the financial statement
schedules II, III, and IV under Item 15 of the Index. These financial statements and schedules are
the responsibility of the Company’s management. Our responsibility is to express an opinion on
these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Citizens, Inc. and subsidiaries at December 31,
2009 and 2008, and the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Citizens, Inc.’s internal control over financial reporting as of December
31, 2009, based on criteria established in
Internal Control-Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12,
2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Austin, Texas
March 12, 2010
March 12, 2010
42
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
December 31
(In thousands)
| 2009 | 2008 | |||||||
|
Assets
|
||||||||
|
Investments:
|
||||||||
|
Fixed maturities available-for-sale, at fair value
(cost: $389,195 and $494,034 in 2009 and 2008, respectively) |
$ | 385,579 | 485,155 | |||||
|
Fixed maturities held-to-maturity, at amortized cost
(fair value: $199,676 in 2009) |
206,909 | — | ||||||
|
Equity securities available-for-sale, at fair value
(cost: $25,899 and $42,908 in 2009 and 2008, respectively) |
33,477 | 43,000 | ||||||
|
Mortgage loans on real estate
|
1,533 | 339 | ||||||
|
Policy loans
|
32,096 | 28,955 | ||||||
|
Real estate held for sale
|
2,825 | 4,156 | ||||||
|
Real estate held for investment (less $374 and $283 accumulated
depreciation in 2009 and 2008, respectively)
|
6,305 | 4,717 | ||||||
|
Other long-term investments
|
86 | 680 | ||||||
|
Short-term investments
|
2,510 | 2,250 | ||||||
|
|
||||||||
|
Total investments
|
671,320 | 569,252 | ||||||
|
|
||||||||
|
Cash and cash equivalents
|
48,625 | 63,792 | ||||||
|
Accrued investment income
|
7,455 | 7,423 | ||||||
|
Reinsurance recoverable
|
11,587 | 13,241 | ||||||
|
Deferred policy acquisition costs
|
115,570 | 109,114 | ||||||
|
Cost of customer relationships acquired
|
34,728 | 33,805 | ||||||
|
Goodwill
|
17,160 | 15,687 | ||||||
|
Other intangible assets
|
1,046 | 1,073 | ||||||
|
Federal income tax receivable
|
4,023 | 2,090 | ||||||
|
Property and equipment, net
|
6,018 | 6,466 | ||||||
|
Due premiums, net (less $1,644 and $2,217 allowance for doubtful
accounts in 2009 and 2008)
|
8,960 | 8,958 | ||||||
|
Other assets
|
834 | 1,375 | ||||||
|
|
||||||||
|
Total assets
|
$ | 927,326 | 832,276 | |||||
|
|
||||||||
(Continued)
See accompanying notes to consolidated financial statements.
43
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Financial Position, Continued
December 31
(In thousands, except share amounts)
December 31
(In thousands, except share amounts)
| 2009 | 2008 | |||||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
Liabilities:
|
||||||||
|
Future policy benefit reserves:
|
||||||||
|
Life insurance
|
$ | 592,358 | 547,621 | |||||
|
Annuities
|
37,882 | 34,025 | ||||||
|
Accident and health
|
6,399 | 7,442 | ||||||
|
Dividend accumulations
|
5,621 | 4,795 | ||||||
|
Premiums paid in advance
|
20,373 | 18,566 | ||||||
|
Policy claims payable
|
10,222 | 9,318 | ||||||
|
Other policyholders’ funds
|
8,105 | 7,929 | ||||||
|
|
||||||||
|
Total policy liabilities
|
680,960 | 629,696 | ||||||
|
Commissions payable
|
2,434 | 2,350 | ||||||
|
Deferred federal and state income taxes
|
8,052 | 3,951 | ||||||
|
Payable for securities in process of settlement
|
6,000 | — | ||||||
|
Warrants outstanding
|
1,819 | 4,973 | ||||||
|
Other liabilities
|
11,986 | 12,052 | ||||||
|
|
||||||||
|
|
||||||||
|
Total liabilities
|
711,251 | 653,022 | ||||||
|
|
||||||||
|
Commitments and contingencies (Notes 5 and 8)
|
||||||||
|
Cumulative convertible preferred stock — Series A
(Series A-1 — $1,000 stated value per share, 6,250 shares issued, authorized and outstanding in 2008; Series A-2 — $935 stated value per share, 5,000 shares authorized, 4,014 shares issued and outstanding in 2008) |
— | 7,713 | ||||||
|
|
||||||||
|
Stockholders’ equity:
|
||||||||
|
Common stock:
|
||||||||
|
Class A, no par value, 100,000,000 shares authorized,
51,822,497 shares issued and outstanding in 2009 and 48,781,753 shares issued and
outstanding in 2008, including shares in treasury of 3,135,738 in 2009 and 2008
|
256,703 | 240,511 | ||||||
|
Class B, no par value, 2,000,000 shares authorized,
1,001,714 shares issued and outstanding in 2009 and 2008
|
3,184 | 3,184 | ||||||
|
Retained deficit
|
(38,092 | ) | (55,432 | ) | ||||
|
Accumulated other comprehensive income (loss):
|
||||||||
|
Unrealized gains (losses) on securities, net of tax
|
5,291 | (5,711 | ) | |||||
|
|
||||||||
|
|
227,086 | 182,552 | ||||||
|
Treasury stock, at cost
|
(11,011 | ) | (11,011 | ) | ||||
|
|
||||||||
|
Total stockholders’ equity
|
216,075 | 171,541 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 927,326 | 832,276 | |||||
|
|
||||||||
See accompanying notes to consolidated financial statements.
44
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
For the Years ended December 31
(In thousands, except per share amounts)
| 2009 | 2008 | 2007 | ||||||||||
|
Revenues:
|
||||||||||||
|
Premiums:
|
||||||||||||
|
Life insurance
|
$ | 141,001 | 134,953 | 130,265 | ||||||||
|
Accident and health insurance
|
1,531 | 1,580 | 1,558 | |||||||||
|
Property insurance
|
4,748 | 4,764 | 4,925 | |||||||||
|
Net investment income
|
29,602 | 30,478 | 30,743 | |||||||||
|
Realized gains (losses), net
|
8,040 | (23,812 | ) | (94 | ) | |||||||
|
Decrease (increase) in fair value of warrants
|
3,154 | (2,662 | ) | 828 | ||||||||
|
Other income
|
904 | 1,372 | 1,412 | |||||||||
|
|
||||||||||||
|
Total revenues
|
188,980 | 146,673 | 169,637 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Benefits and expenses:
|
||||||||||||
|
Insurance benefits paid or provided:
|
||||||||||||
|
Claims and surrenders
|
59,988 | 56,253 | 50,571 | |||||||||
|
Increase in future policy benefit reserves
|
40,790 | 37,117 | 36,420 | |||||||||
|
Policyholders’ dividends
|
6,680 | 6,865 | 6,401 | |||||||||
|
|
||||||||||||
|
Total insurance benefits paid or provided
|
107,458 | 100,235 | 93,392 | |||||||||
|
Commissions
|
35,536 | 35,984 | 35,641 | |||||||||
|
Other underwriting, acquisition and insurance
expenses
|
28,340 | 28,611 | 27,583 | |||||||||
|
Capitalization of deferred policy acquisition costs
|
(23,656 | ) | (24,109 | ) | (26,210 | ) | ||||||
|
Amortization of deferred policy acquisition costs
|
17,202 | 15,650 | 12,530 | |||||||||
|
Amortization of cost of customer relationships
acquired and other intangibles
|
3,494 | 2,897 | 3,203 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total benefits and expenses
|
168,374 | 159,268 | 146,139 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income (loss) before income tax expense
|
20,606 | (12,595 | ) | 23,498 | ||||||||
|
Income tax expense
|
3,266 | 3,112 | 6,941 | |||||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 17,340 | (15,707 | ) | 16,557 | |||||||
|
|
||||||||||||
|
Net income (loss) applicable to common stockholders
|
$ | 14,835 | (18,263 | ) | 14,555 | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Per Share Amounts:
|
||||||||||||
|
Basic and diluted earnings (loss) per share of Class A common stock
|
$ | 0.31 | (0.42 | ) | 0.35 | |||||||
|
|
||||||||||||
|
Basic and diluted earnings (loss) per share of Class B common stock
|
$ | 0.15 | (0.21 | ) | 0.18 | |||||||
|
|
||||||||||||
See accompanying notes to consolidated financial statements.
45
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
For the Years ended December 31, 2009, 2008 and 2007
(In thousands)
For the Years ended December 31, 2009, 2008 and 2007
(In thousands)
| Accumulated | ||||||||||||||||||||||||
| other | Total | |||||||||||||||||||||||
| Common Stock | Retained | comprehensive | Treasury | Stockholders’ | ||||||||||||||||||||
| Class A | Class B | deficit | income (loss) | stock | equity | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at December 31, 2006
|
$ | 210,066 | 3,184 | (56,282 | ) | (6,346 | ) | (11,011 | ) | 139,611 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||
|
Net income
|
— | — | 16,557 | — | — | 16,557 | ||||||||||||||||||
|
Unrealized investment gains, net
|
— | — | — | 4,243 | — | 4,243 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total comprehensive income
|
— | — | 16,557 | 4,243 | — | 20,800 | ||||||||||||||||||
|
Accretion of deferred issuance costs and
discounts on preferred stock
|
(1,337 | ) | — | — | — | — | (1,337 | ) | ||||||||||||||||
|
Sale of Class A common stock
|
17,083 | — | — | — | — | 17,083 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at December 31, 2007
|
225,812 | 3,184 | (39,725 | ) | (2,103 | ) | (11,011 | ) | 176,157 | |||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Comprehensive loss:
|
||||||||||||||||||||||||
|
Net loss
|
— | — | (15,707 | ) | — | — | (15,707 | ) | ||||||||||||||||
|
Unrealized investment losses, net
|
— | — | — | (3,608 | ) | — | (3,608 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total comprehensive loss
|
— | — | (15,707 | ) | (3,608 | ) | — | (19,315 | ) | |||||||||||||||
|
Accretion of deferred issuance costs and
discounts on preferred stock
|
(1,905 | ) | — | — | — | — | (1,905 | ) | ||||||||||||||||
|
Beneficial conversion feature and warrant
discounts on preferred stock capital
contribution
|
854 | — | — | — | — | 854 | ||||||||||||||||||
|
Preferred stock conversions
|
15,625 | — | — | — | — | 15,625 | ||||||||||||||||||
|
Warrants exercised
|
125 | — | — | — | — | 125 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at December 31, 2008
|
240,511 | 3,184 | (55,432 | ) | (5,711 | ) | (11,011 | ) | 171,541 | |||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||
|
Net income
|
— | — | 17,340 | — | — | 17,340 | ||||||||||||||||||
|
Unrealized investment gains, net
|
— | — | — | 11,002 | — | 11,002 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total comprehensive income
|
— | — | 17,340 | 11,002 | — | 28,342 | ||||||||||||||||||
|
Accretion of deferred issuance costs and
discounts on preferred stock
|
(2,289 | ) | — | — | — | — | (2,289 | ) | ||||||||||||||||
|
Acquisition of Integrity Capital
|
8,410 | — | — | — | — | 8,410 | ||||||||||||||||||
|
Preferred stock redemption
|
10,001 | — | — | — | — | 10,001 | ||||||||||||||||||
|
Warrants exercised
|
70 | — | — | — | — | 70 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at December 31, 2009
|
$ | 256,703 | 3,184 | (38,092 | ) | 5,291 | (11,011 | ) | 216,075 | |||||||||||||||
|
|
||||||||||||||||||||||||
(Continued)
46
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Comprehensive Income,
Continued
For the Years ended December 31, 2009, 2008 and 2007
(In thousands)
Continued
For the Years ended December 31, 2009, 2008 and 2007
(In thousands)
A summary of the number of shares of common stock of Class A, Class B and treasury stock issued is
as follows:
| Common Stock | Treasury | |||||||||||
| Class A | Class B | Stock | ||||||||||
|
|
||||||||||||
|
Balance at December 31, 2006
|
43,426 | 1,002 | (3,136 | ) | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Stock dividends
|
97 | — | — | |||||||||
|
Stock sale
|
2,683 | — | — | |||||||||
|
|
||||||||||||
|
Total stock issued
|
2,780 | — | — | |||||||||
|
|
||||||||||||
|
Balance at December 31, 2007
|
46,206 | 1,002 | (3,136 | ) | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Stock dividends
|
90 | — | — | |||||||||
|
Warrant exercised
|
18 | — | — | |||||||||
|
Preferred stock conversions
|
2,468 | — | — | |||||||||
|
|
||||||||||||
|
Total stock issued
|
2,576 | — | — | |||||||||
|
|
||||||||||||
|
Balance at December 31, 2008
|
48,782 | 1,002 | (3,136 | ) | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Stock dividends
|
32 | — | — | |||||||||
|
Warrant exercised
|
10 | — | — | |||||||||
|
Preferred stock redemption
|
1,704 | — | — | |||||||||
|
Acquisition of Integrity Capital
|
1,294 | — | — | |||||||||
|
|
||||||||||||
|
Total stock issued
|
3,040 | — | — | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Balance at December 31, 2009
|
51,822 | 1,002 | (3,136 | ) | ||||||||
|
|
||||||||||||
47
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
For the Years ended December 31
(In thousands)
| 2009 | 2008 | 2007 | ||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income (loss)
|
$ | 17,340 | (15,707 | ) | 16,557 | |||||||
|
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
|
||||||||||||
|
Net realized losses (gains) on sale of investments and other assets
assets and other-than-temporary impairment
charges
|
(8,040 | ) | 23,812 | 94 | ||||||||
|
Net deferred policy acquisition costs
|
(6,454 | ) | (8,459 | ) | (13,680 | ) | ||||||
|
Amortization of cost of customer relationships
acquired and other intangibles
|
3,494 | 2,897 | 3,203 | |||||||||
|
Increase (decrease) in fair value of warrants
|
(3,154 | ) | 2,662 | (828 | ) | |||||||
|
Depreciation
|
1,171 | 1,116 | 1,076 | |||||||||
|
Amortization of premiums and discounts on
fixed maturities
|
2,043 | 354 | 1,243 | |||||||||
|
Deferred federal income tax expense
|
2,329 | 496 | 1,202 | |||||||||
|
|
||||||||||||
|
Change in:
|
||||||||||||
|
Accrued investment income
|
15 | (127 | ) | (8 | ) | |||||||
|
Reinsurance recoverable
|
1,729 | 275 | 2,552 | |||||||||
|
Due premiums and other receivables
|
47 | (1,227 | ) | (1,702 | ) | |||||||
|
Future policy benefit reserves
|
40,477 | 36,100 | 34,132 | |||||||||
|
Other policy liabilities
|
2,477 | 5,412 | 275 | |||||||||
|
Federal income tax
|
(1,922 | ) | (1,474 | ) | (2,746 | ) | ||||||
|
Commissions payable and other liabilities
|
(62 | ) | 637 | (3,367 | ) | |||||||
|
Other, net
|
603 | (335 | ) | (86 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
52,093 | 46,432 | 37,917 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Sale of fixed maturities, available-for-sale
|
74,181 | 237 | 3,844 | |||||||||
|
Maturity of fixed maturities, available-for-sale
|
292,706 | 162,337 | 75,939 | |||||||||
|
Purchase of fixed maturities, available-for-sale
|
(255,251 | ) | (156,055 | ) | (78,845 | ) | ||||||
|
Purchase of fixed maturities, held-to-maturity
|
(207,052 | ) | — | — | ||||||||
|
Sale of equity securities, available-for-sale
|
22,745 | — | 248 | |||||||||
|
Purchase of equity securities available-for-sale
|
(637 | ) | (24,439 | ) | (36,666 | ) | ||||||
|
Principal payments on mortgage loans
|
31 | 97 | 165 | |||||||||
|
Mortgage loans funded
|
— | (115 | ) | — | ||||||||
|
Sale of other long-term investments and property
and equipment
|
933 | 185 | 430 | |||||||||
(Continued)
48
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
For the Years ended December 31
(In thousands)
For the Years ended December 31
(In thousands)
| 2009 | 2008 | 2007 | ||||||||||
|
Cash flows from investing activities (continued):
|
||||||||||||
|
Purchase of other long-term investments and
property
and equipment
|
$ | (2,735 | ) | (1,110 | ) | (4,357 | ) | |||||
|
Increase in policy loans, net
|
(3,141 | ) | (3,062 | ) | (1,948 | ) | ||||||
|
Maturity of short-term investments
|
2,250 | 26,000 | — | |||||||||
|
Purchase of short-term investments
|
(2,605 | ) | (10,173 | ) | (17,650 | ) | ||||||
|
Cash acquired (paid) for acquisition, net
|
9,770 | (8,242 | ) | — | ||||||||
|
|
||||||||||||
|
Net cash used in investing activities
|
(68,805 | ) | (14,340 | ) | (58,840 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Series A-1 preferred stock capital contributions
|
— | 9,375 | — | |||||||||
|
Proceeds from sale of Class A common stock
|
— | — | 17,083 | |||||||||
|
Warrants exercised
|
70 | 125 | — | |||||||||
|
Annuity and universal life deposits
|
3,990 | 2,848 | 2,279 | |||||||||
|
Annuity and universal life withdrawals
|
(2,515 | ) | (1,771 | ) | (1,837 | ) | ||||||
|
|
||||||||||||
|
Net cash provided by financing activities
|
1,545 | 10,577 | 17,525 | |||||||||
|
|
||||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
(15,167 | ) | 42,669 | (3,398 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash, and cash equivalents at beginning of year
|
63,792 | 21,123 | 24,521 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash, and cash equivalents at end of year
|
$ | 48,625 | 63,792 | 21,123 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Supplemental Disclosure of Operating Activities
|
||||||||||||
|
Cash paid during the year for income taxes
|
$ | 2,876 | 4,090 | 8,476 | ||||||||
|
|
||||||||||||
Supplemental Disclosure of Non-Cash Investing Activities:
On
February 27, 2009, the Company acquired Integrity Capital
Corporation (
“
ICC
”
) for 1,294,000
shares of Class A common stock with a fair value of $8.4 million. CICA Life Insurance Company of
America held a 13% interest in ICC prior to the acquisition with a carrying value of $551,000,
making the total non-cash acquisition price approximately $9.0 million.
In 2009, the Company sold four parcels of real estate and issued mortgage loans totaling $1.2
million. In 2008, the Company sold real estate and issued a mortgage loan for $115,000.
Supplemental Disclosures of Non-Cash Financing Activities:
Dividends on the Company’s Series A-1 Convertible Preferred Stock, issued in 2004, and Series A-2
Convertible Preferred Stock, issued in 2005, were paid by the Company through the issuance of Class
A common stock to the preferred shareholders in the amounts of $216,000, $651,000 and $665,000 in
2009, 2008 and 2007, respectively. Accretion of deferred issuance costs and discounts on the
Convertible Preferred Stock recorded as a deduction to Class A common stock during 2009, 2008 and
2007 was $2.3 million, $1.9 million and $1.3 million, respectively. On July 13, 2009, the Company
converted all of its outstanding Series A-1 and Series A-2 Convertible Preferred Stock into Class A
common shares in accordance with the mandatory redemption provision of the preferred shareholder
agreement dated July 12, 2004. The total amount of Class A common shares issued as part of the
conversion was 1,704,446, with a value of $10,001,404.
See accompanying notes to consolidated financial statements.
49
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
| Note 1: |
Summary of Significant Accounting Policies
|
Basis of Presentation and Consolidation
The accompanying consolidated financial statements of the Company and its wholly owned
subsidiaries have been prepared in conformity with U.S. Generally Accepted Accounting
Principles (“U.S. GAAP”).
The consolidated financial statements include the accounts and operations of Citizens, Inc.
(“Citizens”), a Colorado company, and its wholly-owned subsidiaries, CICA Life Insurance
Company of America (“CICA”), Computing Technology, Inc. (“CTI”), Funeral Homes of America,
Inc. (“FHA”), Insurance Investors, Inc. (“III”), Citizens National Life Insurance Company
(“CNLIC”), Integrity Capital Corporation (“ICC”), Integrity Capital Life Insurance Company
(“ICIC”), Security Plan Life Insurance Company (“SPLIC”) and Security Plan Fire Insurance
Company (“SPFIC”). All significant inter-company accounts and transactions have been
eliminated. Citizens and its wholly owned consolidated subsidiaries are collectively
referred to as “the Company,” “we,” or “our.”
Ozark National Life Insurance Company (“ONLIC”) was acquired for $8.0 million in cash on
October 27, 2008. As of October 1, 2009, ONLIC was merged into SPLIC. The Company
completed its acquisition of ICC in exchange for 1,294,000 shares of its Class A common
stock in the first quarter of 2009. ICC is the parent of ICIC, an Indiana life insurance
company. The transaction was valued at $9.0 million on the closing date of February 27,
2009. On October 30, 2009, FHA completed the sale of its funeral home assets. The
transaction was valued at approximately $600,000.
We provide life and health insurance policies through four of our subsidiaries — CICA,
SPLIC, CNLIC and ICIC. CICA, CNLIC and ICIC issue ordinary whole-life policies, burial
insurance, pre-need policies, and accident and health related policies, throughout the
midwest and southern United States. CICA also issued ordinary whole-life policies
internationally. SPLIC offers final expense and home service life insurance in Louisiana,
Arkansas and Mississippi, and SPFIC, a wholly owned subsidiary of SPLIC, writes a limited
amount of property insurance in Louisiana.
CTI provides data processing systems and services as well as furniture and equipment to the
Company. III provides aviation transportation to the Company. FHA was a funeral home
operator.
Significant Accounting Policies
Investments
Based upon current accounting guidance, investment securities must be classified as
held-to-maturity, available-for-sale or trading. Management determines the appropriate
classification at the time of purchase. The classification of securities is significant
since it directly impacts the accounting for unrealized gains and losses on
securities. Fixed maturity securities are classified as held-to-maturity and carried at
amortized cost when management has the positive intent and the Company has the ability to
hold the securities to maturity. Securities not classified as held-to-maturity are
classified as available-for-sale and are carried at fair value, with the unrealized holding
gains and losses, net of tax, reported in other comprehensive income and do not affect
earnings until realized. Fixed maturities consist primarily of bonds classified as
available-for-sale or held-to-maturity. The Company does not classify any fixed maturities
as trading. Equity securities (including non-redeemable preferred stock) are considered
available-for-sale and are reported at fair value.
Unrealized appreciation (depreciation) of equity securities and fixed maturities held as
available-for-sale is shown as a separate component of stockholders’ equity, net of tax, and
is a separate component of comprehensive income.
The Company evaluates all securities on a quarterly basis, and more frequently when economic
conditions warrant additional evaluations, for determining if an Other Than Temporary
Impairment (“OTTI”) exists pursuant to the accounting guidelines. In evaluating the possible
impairment of securities, consideration is given to the length of time and the extent to
which the fair value has been less than cost, the financial conditions and near-term
prospects of the issuer, and the ability
and intent of the Company to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s
financial condition, the Company may consider whether the securities are
issued by the Federal government or its agencies, by government-sponsored
agencies, or whether downgrades by bond rating agencies have occurred, and reviews of the
issuer’s financial condition.
50
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
If management determines that an investment experienced an OTTI, management must then
determine the amount of OTTI to be recognized in earnings. If management does not intend to
sell the security and it is more likely than not that the Company will not be required to
sell the security before recovery of its amortized cost basis less any current period loss,
the OTTI will be separated into the amount representing the credit loss and the amount
related to all other factors. The amount of OTTI related to the credit loss is determined
based on the present value of cash flows expected to be collected and is recognized in
earnings. The amount of OTTI related to other factors will be recognized in other
comprehensive income, net of applicable taxes. The previous amortized cost basis less the
OTTI recognized in earnings will become the new amortized cost basis of the investment. If
management intends to sell the security or more likely than not will be required to sell the
security before recovery of its amortized cost basis less any current period credit loss,
the OTTI will be recognized in earnings equal to the entire difference between the
investment’s amortized cost basis and its fair value at the balance sheet date. Any
recoveries related to the value of these securities are recorded as an unrealized gain (as
other comprehensive income (loss) in shareholders’ equity) and not recognized in income
until the security is ultimately sold.
The Company from time to time may dispose of an impaired security in response to
asset/liability management decisions, future market movements, business plan changes, or if
the net proceeds can be reinvested at a rate of return that is expected to recover the loss
within a reasonable period of time.
Mortgage loans on real estate and policy loans are reported at unpaid principal balances.
Real estate and other long-term investments consist primarily of land and buildings that are
recorded at the lower of fair value, minus estimated costs to sell, or depreciated cost. If
the fair value of the real estate is less than the carrying value, an impairment loss is
recognized and charged to earnings.
Premiums and discounts are amortized or accreted over the life of the related security as an
adjustment to yield using the effective interest method. Dividend and interest income is
recognized when earned. Realized gains and losses are included in earnings and are derived
using the specific identification method for determining the cost of securities sold.
The Company had cash equivalents and fixed maturities with an aggregate fair value of
$9,947,000 and $10,653,000 at December 31, 2009 and 2008, respectively, on deposit with
various state regulatory authorities to fulfill statutory requirements.
Premium Revenue and Related Expenses
Premiums on life policies are recognized as earned when due. Due premiums on the balance
sheet are net of allowances. Accident and Health policies are recognized as revenue over the
contract period on a pro rata basis. Benefits and expenses are associated with earned
premiums so as to result in the recognition of profits over the estimated lives of the
contracts. This matching is accomplished by means of a provision for future policy benefits
and the capitalization and amortization of deferred policy acquisition costs.
Annuity policies, primarily flexible premium fixed annuity products, are accounted for in a
manner consistent with accounting for interest bearing financial instruments. Premium
receipts are not reported as revenue, rather as deposit liabilities to annuity contracts.
The annuity products issued do not include fees or other such charges.
Deferred Policy Acquisition Costs and Cost of Customer Relationships Acquired
Acquisition costs, consisting of commissions and policy issuance, underwriting and agency
expenses that are primarily related to and vary with the production of new and renewal
business, have been deferred. These deferred amounts, referred
to as deferred policy acquisition costs (“DAC”) are recorded as an asset on the balance
sheet and amortized to income in a systematic manner, based on related contract revenues or
gross profits as appropriate.
51
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Traditional life insurance and accident and health insurance acquisition costs are being
amortized over the premium paying period of the related policies using assumptions
consistent with those used in computing future policy benefit liabilities. For universal
life type contracts and investment contracts that include significant surrender charges or
that yield significant revenues from sources other than the investment contract holders’
funds, the deferred contract acquisition cost amortization is matched to the recognition of
gross profit. The effect on the DAC asset that would result from realization of unrealized
gains or losses is recognized with an offset to accumulated other comprehensive income in
consolidated stockholders’ equity. If an internal replacement of insurance or investment
contract modification substantially changes a contract as defined in current accounting
guidance, then the DAC is written off immediately through income and any new deferrable
costs associated with the new replacement are deferred. If a contract modification does not
substantially change the contract, the DAC amortization on the original contract will
continue and any acquisition costs associated with the related modification are immediately
expensed.
We utilize the factor method to determine the amount of costs to be capitalized and the
ending asset balance. The factor method is based on the ratio of premium revenue recognized
for the policies in force at the end of each reporting period compared to the premium
revenue recognized for policies in force at the beginning of the reporting period. The
factor method ensures that policies that lapsed or surrendered during the reporting period
are no longer included in the deferred policy acquisition costs calculation. The factor
method limits the amount of deferred costs to its estimated realizable value, provided
actual experience is comparable to that contemplated in the factors.
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
insurance business. Those costs generally include costs related to the production,
underwriting and issuance of new business.
A recoverability test that considers, among other things, actual experience and projected
future experience is performed at least annually. These annual recoverability tests
initially calculate the available premium (gross premium less benefit and expense portion of
premium) for the next 30 years. The available premium per policy and the deferred policy
acquisition costs per policy are then calculated. The deferred policy acquisition costs are
then evaluated over two methods utilizing reasonable assumptions and two other methods using
pessimistic assumptions. The two methods using reasonable assumptions illustrate an
early-deferred policy acquisition recoverability period. The two methods utilizing
pessimistic assumptions still support early recoverability of our aggregate deferred policy
acquisition costs. Management believes that our deferred policy acquisition costs and
related amortization for the years ended December 31, 2009, 2008 and 2007 limits the amount
of deferred costs to its estimated realizable value. This belief is based upon the analysis
performed on capitalized expenses that vary with and are primarily related to the
acquisition of new and renewal insurance business, utilization of the factor method and
annual recoverability testing.
Cost of Customer Relationships Acquired (“CCRA”) is established when we purchase a block of
insurance. CCRA is amortized primarily over the emerging profit of the related policies
using the same assumptions as were used in computing liabilities for future policy benefits.
We utilize various methods to determine the amount of the ending asset balance, including a
static model and a dynamic model. Inherent in the amortization of CCRA are certain
management judgments about the ending asset balance and the annual amortization. The
assumptions used are based upon interest, mortality and lapses at the time of purchase.
A recoverability test that considers, among other things, actual experience and projected
future experience is performed at least annually. These annual recoverability tests
initially calculate the available premium (gross premium less benefit and expense portion of
premium) for the next thirty years. The CCRA is then evaluated utilizing reasonable
assumptions. Management believes that our CCRA and related amortization is recoverable for
the years ended December 31, 2009, 2008 and 2007. This belief is based upon the analysis
performed on estimated future results of the block and our annual recoverability testing.
52
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Cost of customer relationships acquired relative to purchased blocks of insurance is
summarized as follows:
| Year ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
|
||||||||||||
|
Balance at beginning of period
|
$ | 33,805 | 31,636 | 34,812 | ||||||||
|
Acquisitions
|
4,006 | 5,038 | — | |||||||||
|
Amortization
|
(3,432 | ) | (2,869 | ) | (3,176 | ) | ||||||
|
Adjustment
|
326 | — | — | |||||||||
|
Effects of unrealized gains on CCRA
|
23 | — | — | |||||||||
|
|
||||||||||||
|
Balance at end of period
|
$ | 34,728 | 33,805 | 31,636 | ||||||||
|
|
||||||||||||
Amortization
above is net of accrued interest of $1.7 million in 2009 and
2008 and $1.9 million in 2007.
Estimated amortization of cost of customer relationships acquired in each of the next five
years and thereafter, is as follows. Actual future amortization will differ from these
estimates due to variances from estimated future withdrawal assumptions.
| (In thousands) | ||||
| Year | Amount | |||
|
2010
|
$ | 2,800 | ||
|
2011
|
2,457 | |||
|
2012
|
2,300 | |||
|
2013
|
2,128 | |||
|
2014
|
1,972 | |||
|
Thereafter
|
23,071 | |||
The value of CCRA in our various acquisitions, which is included in cost of customer
relationships acquired in the accompanying consolidated financial statements, was determined
based on the present value of future profits discounted at annual rates ranging from 4.5% to
8.5%.
Future Policy Benefits and Expenses
Future policy benefit reserves for traditional life insurance and accident and health
insurance contract benefits and expenses are computed using a net level premium method, with
assumptions as to investment yields, dividends on participating business, mortality and
withdrawals based upon our experience, modified as necessary to reflect anticipated trends
and to include provisions for possible unfavorable deviations.
The accrued account balance for non-traditional life insurance and investment contracts is
computed as deposits net of withdrawals made by the contract holder, plus amounts credited
based on contract specifications, less contract fees and charges assessed, plus any
additional interest. Annuity interest crediting rates range from 3.0% to 5.5% annually.
Benefits and expenses are charged against the account balance to recognize costs as incurred
over the estimated lives of the contracts. Expenses include interest credited to contract
account balances and benefits paid in excess of contract account balances.
Unpaid claims on accident and health policies represent the estimated liability for benefit
expenses, both reported but not paid and incurred but not reported to the Company.
Liabilities for unpaid claims are estimated using individual case basis valuations and
statistical analyses. Those estimates are subject to the effects of trends in claim
severity and frequency.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Anticipated investment income is not considered in determining whether a premium deficiency
exists with respect to short-duration contracts. Premium deposits accrue interest at rates
ranging from 4.0% to 8.25% per annum. The cost of insurance is included in the premium when
collected and interest is credited annually to deposit accounts.
The development of liabilities for future policy benefits requires management to make
estimates and assumptions regarding mortality, morbidity, lapse, expense, and investment
experience. These estimates are based primarily on historical experience and future
expectations of mortality, morbidity, expense, persistency, and investment assumptions.
Actual results could differ materially from estimates. We monitor actual experience and
revise assumptions as necessary.
At December 31, 2007, the Security Plan premium paying in force policies were converted to
the Company’s mainframe policy administration system and Security Plan’s original computer
system was discontinued, except for providing access to certain historical information. All
in force amounts were reconciled between systems, but certain records within the paid-up
block were not converted until the third quarter of 2008. The conversion of these paid-up
records resulted in an increase in future policy benefit reserves of approximately $700,000
over the reserves that were being carried prior to conversion. This resulted in a decrease
to 2008 net income of approximately $455,000.
During the first quarter of 2008, the Company discovered a $796,000 overstatement of life
reserves, due to the use of an incorrect reserve factor going back several years. The error
was corrected during the first quarter, resulting in an increase to net income of $517,000.
Goodwill and Other Intangible Assets
Goodwill is the difference between the purchase price in a business combination and the fair
value of assets and liabilities acquired, and is not amortized. Other intangible assets
include various state insurance licenses, which have been determined to have indefinite
useful lives and, therefore, are not amortized. Both goodwill and other intangible assets
with indefinite useful lives are subject to annual impairment analyses.
The goodwill impairment test uses a two step process as set forth under current accounting
guidance. 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.
Management’s determination of the fair value of each reporting unit incorporates multiple
inputs including discounted cash flow calculations, peer company price to earnings
multiples, the level of the Company’s Class A common stock price and assumptions that market
participants would make in valuing the reporting unit. Other assumptions can include levels
of economic capital, future business growth, and earnings projections.
As of December 31, 2009, the Company had goodwill allocated to both the Life Insurance
segment as well as the Home Service Insurance segment. The Company completed its annual
goodwill assessment for the individual reporting units within the Life Insurance segment and
Home Service Insurance segment as of December 31, 2009 and no impairment of goodwill was
identified.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Goodwill is summarized as follows:
| Accumulated | ||||||||||||
| Gross | amortization | Net | ||||||||||
| (In thousands) | ||||||||||||
|
|
||||||||||||
|
Balance at December 31, 2007
|
$ | 16,454 | (5,068 | ) | 11,386 | |||||||
|
Acquisition of ONLIC
|
4,301 | — | 4,301 | |||||||||
|
|
||||||||||||
|
Balance at December 31, 2008
|
20,755 | (5,068 | ) | 15,687 | ||||||||
|
|
||||||||||||
|
Acquisition of ICC
|
1,238 | — | 1,238 | |||||||||
|
Adjustment to ONLIC
|
235 | — | 235 | |||||||||
|
|
||||||||||||
|
Balance at December 31, 2009
|
$ | 22,228 | (5,068 | ) | 17,160 | |||||||
|
|
||||||||||||
Goodwill increased by $1.2 million in 2009 due to the acquisition of ICC. Additional
goodwill in the amount of $254,000 was recorded in 2009 related to the acquisition of ONLIC
in 2008. This arose from an additional tax valuation allowance related to impairments on
investments that existed at the acquisition date but were not identified and recorded until
2009, within the measurement period for purchase accounting adjustments. In addition,
goodwill was decreased by $19,000 in 2009 as a result of a policy reserve omission at the
purchase date of ONLIC, which was discovered and recorded in 2009. This adjustment was
comprised of an increase in CCRA of $326,000 and an increase in policy reserves of $307,000.
In the fourth quarter of 2008, the Company added $4.3 million of goodwill related to the
acquisition of ONLIC. The purchase price was allocated to identifiable assets of $21.4
million (excluding goodwill) and liabilities of $16.9 million based on management’s estimate,
resulting in goodwill of $4.3 million. Adjustments to ONLIC goodwill in 2009 of $235,000
increased total goodwill from the ONLIC acquisition to $4.5 million. The purchase price we
paid for the acquisition was $8.0 million, plus acquisition related expenses of $900,000.
As of December 31, 2009, goodwill of $12.6 million was attributable to the Life Insurance
segment and goodwill acquired of $4.5 million was attributable to the Home Service segment,
with the acquisition of ONLIC, and is tested for impairment at December 31 of each year. The
fair value of that reporting unit was estimated using the present value of estimated future
cash flows. There was no impairment of goodwill in 2007, 2008 or 2009.
Participating Policies
At December 31, 2009 and 2008, participating business approximated 58.5% and 50.5%,
respectively, of direct life insurance in force.
Future policy benefits on participating policies are estimated based on net level premium
reserves for death and endowment policy benefits ranging from 3% to 8%, and the cash
surrender values described in such contracts. The average annual rate of investment yields
used in the determination of expected gross margin was 4.5% in 2009 and 6.0% in 2008 and
2007. Earnings and dividends on participating policies are allocated based on policies in
force.
Policyholder dividends are determined based on the discretion of the Board of Directors of
the policy issuing subsidiary. Policyholder dividends are accrued over the premium paying
periods of the insurance contract.
Earnings Per Share
Basic earnings per share are computed by dividing income available to common stockholders by
the weighted average number of shares of common stock outstanding during each period.
Diluted earnings per share are computed under the if-converted method for convertible
securities and the treasury stock method for warrants, giving effect to all potential
dilutive common stock, including options, warrants and convertible/redeemable preferred
stock. The basic and diluted earnings per share of Class B common stock are one half the
earnings per share of the Class A common stock.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
In 2009, we issued 1.7 million Class A common shares for the mandatory redemption of our
Company Series A Preferred Stock. Additionally, 10,000 shares of Class A common stock were
issued upon one exercise of warrants. During 2009, the Company also issued 1.3 million
shares of Class A common stock for the acquisition of ICC.
In 2008, we issued 2.5 million shares of our Class A common stock for the redemption of part
of our outstanding Series A Preferred Stock. Additionally, 18,000 shares of Class A common
stock were issued upon the exercise of warrants.
On December 4, 2007, the Company sold approximately 2.7 million shares of our Class A common
stock in a registered direct public offering. These shares had a minor effect on weighted
average shares, since they were outstanding for such a short period during 2007. The sale
resulted in gross proceeds of $18.8 million and net proceeds of $17.1 million, after broker
commissions and offering related expenses.
The following table sets forth the computation of basic and diluted earnings per share:
| Year ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
|
Basic and diluted earnings per share:
|
||||||||||||
|
Numerator:
|
||||||||||||
|
Net income (loss)
|
$ | 17,340 | (15,707 | ) | 16,557 | |||||||
|
Less: Preferred stock dividends
|
(216 | ) | (651 | ) | (665 | ) | ||||||
|
Accretion of deferred issuance costs
and discounts on preferred stock
|
(2,289 | ) | (1,905 | ) | (1,337 | ) | ||||||
|
|
||||||||||||
|
Net income (loss) available to common stockholders
|
$ | 14,835 | (18,263 | ) | 14,555 | |||||||
|
|
||||||||||||
|
Net income (loss) allocated to Class A common stock
|
$ | 14,680 | (18,054 | ) | 14,377 | |||||||
|
Net income (loss) allocated to Class B common stock
|
155 | (209 | ) | 178 | ||||||||
|
|
||||||||||||
|
Net income (loss) available to common stockholders
|
$ | 14,835 | (18,263 | ) | 14,555 | |||||||
|
|
||||||||||||
|
Denominator:
|
||||||||||||
|
Weighted average shares of Class A
outstanding — basic
|
47,554 | 43,365 | 40,519 | |||||||||
|
Weighted average shares of Class B
outstanding — basic and diluted
|
1,002 | 1,002 | 1,002 | |||||||||
|
|
||||||||||||
|
Total weighted average shares
outstanding — basic and diluted
|
48,556 | 44,367 | 41,521 | |||||||||
|
|
||||||||||||
|
Basic and diluted earnings (loss) per share of
Class A common stock
|
$ | 0.31 | (0.42 | ) | 0.35 | |||||||
|
|
||||||||||||
|
Basic and diluted earnings (loss) per share of
Class B common stock
|
$ | 0.15 | (0.21 | ) | 0.18 | |||||||
|
|
||||||||||||
In 2009, certain warrants associated with our Convertible Preferred Stock became dilutive.
As a result, the dilutive weighted average shares of Class A common stock outstanding for
2009 were 47,556,000. Total diluted weighted average shares were 48,558,000. Diluted
earnings per Class A share were unchanged from basic at $0.31.
In 2008, the warrants associated with our Convertible Preferred Stock were anti-dilutive.
Total weighted average shares outstanding for 2008 were 44,367,000.
In 2007, certain of the warrants on our Convertible Preferred Stock became dilutive. As a
result, the diluted weighted average shares of Class A common stock outstanding for 2007
were 40,574,000. Total diluted weighted average shares were 41,576,000. Diluted earnings
per Class A share was unchanged from basic earnings per share at $0.35.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
The Series A-1 and A-2 Convertible Preferred Stock was anti-dilutive because the amount of
the dividend and accretion of deferred issuance costs and discounts for the years ended
December 31, 2009, 2008 and 2007 per Class A common stock share obtainable on conversion
exceeds basic income per share available to common stockholders.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered.
A deferred tax asset is recorded only if a determination is made that it is
more-likely-than-not that the tax treatment on which the deferred tax asset depends will be
sustained in the event of an audit. These determinations inherently involve management’s
judgment. In addition, the Company must record a tax valuation allowance with respect to
deferred tax assets if it is more-likely-than-not that the tax benefit will not be realized.
This valuation allowance is in essence a contra account to the deferred tax asset.
Management must determine the portion of the deferred tax asset and resulting tax benefit
that may not be realized based upon judgment of expected outcomes. Due to significant
estimates utilized in establishing the valuation allowance and the potential for changes in
facts and circumstances, it is reasonably possible that we will be required to record
adjustments to the valuation allowance in future reporting periods. Such a charge could
have a material adverse effect on our results of operations, financial condition and capital
position.
Property and Equipment
Property and equipment, including leasehold improvements, are carried at cost less
accumulated depreciation. Depreciation of property and equipment is computed using the
straight-line method over the useful lives of the assets, ranging from three to thirty
years. We amortize leasehold improvements over the shorter of the related lease term or the
estimated life of the improvements. The Company has no capital leases.
Following is a summary of property and equipment:
| At December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Property and equipment:
|
||||||||
|
Home office land and buildings
|
$ | 6,551 | 6,535 | |||||
|
Furniture and equipment
|
2,191 | 2,255 | ||||||
|
Electronic data processing equipment
|
3,483 | 3,381 | ||||||
|
Automobiles and marine assets
|
345 | 412 | ||||||
|
Airplane
|
3,282 | 3,274 | ||||||
|
|
||||||||
|
Total property and equipment
|
15,852 | 15,857 | ||||||
|
Accumulated depreciation
|
(9,834 | ) | (9,391 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Net property and equipment
|
$ | 6,018 | 6,466 | |||||
|
|
||||||||
Reinsurance Recoverable
Reinsurance recoverable includes expected reimbursements for policyholder claim amounts in
excess of the Company’s retention, as well as profit sharing and experience refund accruals.
Reinsurance recoverable is reduced for estimated uncollectible amounts, if any.
Reinsurance premiums, losses and adjustment expenses are accounted for on a basis consistent
with those used in accounting for the original policies issued and the terms of the
reinsurance contracts. The cost of reinsurance related to long duration contracts is
accounted for over the life of the underlying reinsured policies using assumptions
consistent with those used to account for the underlying policies. The cost of reinsurance
related to short duration contracts is accounted for over the coverage period.
Profit-sharing and similar adjustable provisions are accrued based on the experience of the
underlying policies.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Cash Equivalents
The Company considers as cash equivalents all securities whose duration does not exceed 90
days at the date of acquisition.
Depreciation
Depreciation on most property and equipment is calculated on a straight-line basis using
estimated useful lives ranging from three to ten years. Building improvements are
depreciated over the estimated lives of thirty years.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ materially from these estimates.
Reclassification
Certain principal amounts have been reclassified to conform to the current year
presentation, as follows:
The Company had previously accounted for the conversion of a policy from premium paying
to extended term insurance (“ETI”) as the surrender of the premium paying policy for its
cash value, with the cash value being applied as a single premium to purchase the ETI
policy. Thus, premiums and surrenders were overstated by the amount of this single
premium. Beginning in the first quarter of 2008, we no longer account for the
conversion of a premium paying policy to ETI as a surrender of one policy and
simultaneous purchase of a single premium policy. To effect this change, prior year
life premiums were reduced by $4,157,000 for 2007, with a corresponding decrease in
claims and surrender benefits.
In 2007, the consolidated financial statements presented separately premium deposits of
$14.1 million and unearned premiums of $2.0 million. These balances were combined in
2008. The new line is “premiums paid in advance.”
During the third quarter of 2008, the Company completed the conversion of SPLIC’s
supplemental contracts without life contingencies (“SCWOLC”) to our mainframe policy
administration system. In conjunction with this conversion, the SCWOLC account balance
at December 31, 2007 in the amount of $2,692,000 was reclassified out of life insurance
future policy benefit reserves into other policyholders’ funds on the consolidated
statement of financial position.
Accounting Pronouncements
Adoption of New Accounting Standards
Effective July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting
Standards Codification (“ASC”) became the single official source of authoritative,
nongovernmental generally accepted accounting principles. The historical U.S. GAAP
hierarchy was eliminated and the ASC became the only level of authoritative U.S. GAAP, other
than guidance issued by the Securities and Exchange Commission. Our accounting policies
were not affected by the conversion
to ASC. However, references to specific accounting standards in the footnotes to our
consolidated financial statements have been changed to refer to the appropriate section of
ASC.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
As of January 1, 2008, the Company adopted Fair Value Measurement Accounting. This guidance
defined fair value, established a framework for measuring fair value and expanded
disclosures about fair value measurements. The adoption of this Fair Value guidance did not
have a material impact on our consolidated financial statements. Additionally, on
January 1, 2008, the Company elected the partial adoption of accounting guidance that
amended the Fair Value guidance to allow an entity to delay the application of this
Statement until January 1, 2009 for certain non-financial assets and liabilities. Under the
provisions of the guidance, we delayed the application for fair value measurements used in
the impairment testing of goodwill and indefinite-lived intangible assets and eligible
non-financial assets and liabilities included within a business combination. On October 10,
2008, new accounting guidance was issued to clarify the application of fair value
measurements of a financial asset when the market for that asset is not active. This
clarifying guidance became effective upon issuance. The adoption had no impact on our
results of operations or financial position.
On January 1, 2009, we adopted without material impact on our consolidated financial
statements the provisions of the fair value measurement accounting standard related to
nonfinancial assets and nonfinancial liabilities that are not required or permitted to be
measured at fair value on a recurring basis, which include those measured at fair value in
goodwill impairment testing, indefinite-lived intangible assets measured at fair value for
impairment assessment, nonfinancial long-lived assets measured at fair value for impairment
assessment, asset retirement obligations initially measured at fair value, and those
initially measured at fair value in a business combination.
In April 2009, the FASB further updated the fair value measurement standard to provide
additional guidance for estimating fair value when the volume and level of activity for the
asset or liability have significantly decreased. This update re-emphasizes that, regardless
of market conditions, the fair value measurement is an exit price concept as defined in the
original standard. It clarifies and includes additional factors to consider in determining
whether there has been a significant decrease in market activity for an asset or liability
and provides additional clarification on estimating fair value when the market activity for
an asset or liability has declined significantly. The scope of this update does not include
assets and liabilities measured under Level 1 inputs. We adopted this update on June 30,
2009 prospectively to all fair value measurements as appropriate without material impact on
our consolidated financial statements. See Note 3 for additional disclosures about fair
value measurement.
In August 2009, the FASB further updated the fair value measurement guidance to clarify how
an entity should measure liabilities at fair value. The update reaffirms fair value is
based on an orderly transaction between market participants, even though liabilities are
infrequently transferred due to contractual or other legal restrictions. However, identical
liabilities traded in the active market should be used when available. When quoted prices
are not available, the quoted price of the identical liability traded as an asset, quoted
prices for similar liabilities or similar liabilities traded as an asset, or another
valuation approach should be used. This update also clarifies that restrictions preventing
the transfer of a liability should not be considered as a separate input or adjustment in
the measurement of fair value. We adopted the provisions of this update for fair value
measurements of liabilities effective October 1, 2009, and its adoption did not have a
material impact on our consolidated financial statements.
As of January 1, 2008, the Company adopted new accounting guidance that provided an option,
on specified election dates, to report selected financial assets and liabilities, including
insurance contracts, at fair value. Subsequent changes in fair value for designated items
are reported in income in the current period. The adoption did not impact our consolidated
financial statements, as no items were elected for measurement at fair value upon initial
adoption. We continue to evaluate eligible financial assets and liabilities on their
election dates. Any future elections will be disclosed in accordance with the provisions
outlined in the accounting guidance.
Current accounting guidance 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 current accounting guidance, 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. This new
accounting guidance was implemented in the first quarter of 2007. Later clarification on
implementation addressed reinstatements of previously lapsed policies. The unamortized DAC
of lapsed policies should be written off per the clarification. The Company had previously
restored the DAC on lapsed policies that were subsequently reinstated. This new accounting
guidance was only applied prospectively for reinstatements occurring in quarters beginning
after December 31, 2006. The effect of adopting the new accounting guidance was to increase
DAC amortization by $917,000 in 2007.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
On June 30, 2009, in our consolidated financial statements, we adopted the provisions of a
new accounting standard relating to subsequent events, which establishes general standards
of accounting for and disclosures of events that occur after the balance sheet date but
before the financial statements are issued or are available to be issued. The standard
defines two types of subsequent events: recognized subsequent events, which provide
additional evidence about conditions that existed at the balance sheet date, and
nonrecognized subsequent events, which provide evidence about conditions that did not exist
as of the balance sheet date, but arose after that date. Recognized subsequent events are
required to be recognized in the financial statements, and certain nonrecognized subsequent
events are required to be disclosed. The Standard also requires the disclosure of the date
through which an entity has evaluated subsequent events. (See Note 12 for disclosure of
subsequent events.)
On June 30, 2009, we adopted an update to accounting standards for disclosures about the
fair value of financial instruments, which requires publicly-traded companies to provide
disclosures on the fair value of financial instruments in interim financial statements.
On January 1, 2009, we adopted an update to existing accounting standards for business
combinations. The update, which retains the underlying concepts of the original standard in
that all business combinations are still required to be accounted for at fair value under
the acquisition method of accounting, changes the method of applying the acquisition method
in a number of ways. Acquisition costs are no longer considered part of the fair value of
an acquisition and will generally be expensed as incurred, noncontrolling interests are
valued at fair value at the acquisition date, in-process research and development is
recorded at fair value as an indefinite-lived intangible asset at the acquisition date,
restructuring costs associated with a business combination are generally expensed subsequent
to the acquisition date, and changes in deferred tax asset valuation allowances and income
tax uncertainties after the acquisition date generally will affect income tax expense. In
April 2009, the FASB issued a further update in relation to accounting for assets acquired
and liabilities assumed in a business combination that arise from contingencies, which
amends the previous guidance to require contingent assets acquired and liabilities assumed
in a business combination to be recognized at fair value on the acquisition date if fair
value can be reasonably estimated during the measurement period. If fair value cannot be
reasonably estimated during the measurement period, the contingent asset or liability would
be recognized in accordance with standards and guidance on accounting for contingencies and
reasonable estimation of the amount of a loss. Further, this update eliminated the specific
subsequent accounting guidance for contingent assets and liabilities, without significantly
revising the original guidance. However, contingent consideration arrangements of an
acquiree assumed by the acquirer in a business combination would still be initially and
subsequently measured at fair value. These updates are effective for all business
acquisitions occurring on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. We adopted the provisions of these updates for
business combinations with an acquisition date on or after January 1, 2009 and these
adoptions did not have a material effect on the Company’s consolidated financial statements.
There were no noncontrolling interests acquired in the ICC acquisition.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
| Note 2: |
Investments
|
Financial stability and the prevention of capital erosion are important investment
considerations for the Company. A primary investment goal is the conservation of assets due
to the long-term nature of a significant portion our liabilities. The Company invests
primarily in fixed maturity securities, which totaled 82.3% of total investments and cash and
cash equivalents at December 31, 2009. Holdings in high quality fixed maturity securities
rated A or higher by Standard & Poor’s, Inc. totaled 90.9% of investment holdings in this
category, reflecting the conservative investment philosophy of the Company.
| December 31, 2009 | December 31, 2008 | |||||||||||||||
| Carrying | Percent of Total | Carrying | Percent of Total | |||||||||||||
| Value | Carrying Value | Value | Carrying Value | |||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||
|
Fixed maturity securities
|
$ | 592,488 | 82.3 | % | $ | 485,155 | 76.5 | % | ||||||||
|
Equity securities
|
33,477 | 4.6 | 43,000 | 6.8 | ||||||||||||
|
Mortgage loans
|
1,533 | 0.2 | 339 | 0.1 | ||||||||||||
|
Policy loans
|
32,096 | 4.5 | 28,955 | 4.6 | ||||||||||||
|
Real estate and other long-term investments
|
9,216 | 1.3 | 9,553 | 1.5 | ||||||||||||
|
Short-term investments
|
2,510 | 0.3 | 2,250 | 0.4 | ||||||||||||
|
Cash and cash equivalents
|
48,625 | 6.8 | 63,792 | 10.1 | ||||||||||||
|
|
||||||||||||||||
|
Total cash, cash equivalents and investments
|
$ | 719,945 | 100.0 | % | $ | 633,044 | 100.0 | % | ||||||||
|
|
||||||||||||||||
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
The cost, gross unrealized gains and losses and fair value of investments in fixed maturities
and equity securities, as of December 31, 2009 and 2008, are as follows:
| December 31, 2009 | ||||||||||||||||
| Cost or | Gross | Gross | ||||||||||||||
| Amortized | Unrealized | Unrealized | ||||||||||||||
| Cost | Gains | (Losses) | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Fixed Maturities Available-for-Sale:
|
||||||||||||||||
|
U.S. Treasury securities
|
$ | 11,110 | 1,324 | — | 12,434 | |||||||||||
|
U.S. Government-sponsored enterprises
|
184,797 | 96 | (4,610 | ) | 180,283 | |||||||||||
|
States of the United States and political
subdivisions of the states
|
60,070 | 321 | (3,199 | ) | 57,192 | |||||||||||
|
Foreign governments
|
105 | 15 | — | 120 | ||||||||||||
|
Corporate
|
114,175 | 3,726 | (1,803 | ) | 116,098 | |||||||||||
|
Securities not due at a single maturity date
|
18,938 | 556 | (42 | ) | 19,452 | |||||||||||
|
|
||||||||||||||||
|
Total fixed maturities available-for-sale
|
389,195 | 6,038 | (9,654 | ) | 385,579 | |||||||||||
|
Fixed Maturities Held-to-Maturity:
|
||||||||||||||||
|
U.S. Government-sponsored enterprises
|
206,909 | 18 | (7,251 | ) | 199,676 | |||||||||||
|
|
||||||||||||||||
|
Total Fixed Maturities
|
$ | 596,104 | 6,056 | (16,905 | ) | 585,255 | ||||||||||
|
|
||||||||||||||||
|
Total Equity Securities
|
$ | 25,899 | 7,578 | — | 33,477 | |||||||||||
|
|
||||||||||||||||
| December 31, 2008 | ||||||||||||||||
| Cost or | Gross | Gross | ||||||||||||||
| Amortized | Unrealized | Unrealized | ||||||||||||||
| Cost | Gains | (Losses) | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Fixed Maturities Available-for-Sale:
|
||||||||||||||||
|
U.S. Treasury securities
|
$ | 11,306 | 3,113 | — | 14,419 | |||||||||||
|
U.S. Government-sponsored enterprises
|
280,434 | 1,128 | (500 | ) | 281,062 | |||||||||||
|
States of the United States and political
subdivisions of the states
|
64,152 | 156 | (6,203 | ) | 58,105 | |||||||||||
|
Foreign governments
|
105 | 29 | — | 134 | ||||||||||||
|
Corporate
|
87,320 | 1,134 | (8,926 | ) | 79,528 | |||||||||||
|
Securities not due at a single maturity date
|
50,717 | 1,564 | (374 | ) | 51,907 | |||||||||||
|
|
||||||||||||||||
|
Total fixed maturities available-for-sale
|
$ | 494,034 | 7,124 | (16,003 | ) | 485,155 | ||||||||||
|
|
||||||||||||||||
|
Total Equity Securities
|
$ | 42,908 | 92 | — | 43,000 | |||||||||||
|
|
||||||||||||||||
62
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
For investments of available-for-sale fixed maturities that have unrealized losses as of
December 31, 2009, the cost, gross unrealized losses that have been in a continuous
unrealized loss position for less than 12 months, gross unrealized losses that have been in a
continuous unrealized loss position for 12 months or longer and fair value are as follows:
| December 31, 2009 | ||||||||||||||||||||||||||||||||||||
| Less than 12 months | Greater than 12 months | Total | ||||||||||||||||||||||||||||||||||
| Fair | Unrealized | # of | Fair | Unrealized | # of | Fair | Unrealized | # of | ||||||||||||||||||||||||||||
| Value | Losses | Securities | Value | Losses | Securities | Value | Losses | Securities | ||||||||||||||||||||||||||||
| (In thousands, except for # of securities) | ||||||||||||||||||||||||||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||||||||||||||||||||||
|
U.S. Government-sponsored
enterprises
|
$ | 169,514 | (4,610 | ) | 213 | — | — | — | 169,514 | (4,610 | ) | 213 | ||||||||||||||||||||||||
|
Security issued by states and
political subdivisions
|
19,055 | (343 | ) | 19 | 14,995 | (2,856 | ) | 15 | 34,050 | (3,199 | ) | 34 | ||||||||||||||||||||||||
|
Corporate
|
36,342 | (541 | ) | 21 | 12,857 | (1,261 | ) | 12 | 49,199 | (1,802 | ) | 33 | ||||||||||||||||||||||||
|
Securities not due at a single
maturity date
|
179 | (1 | ) | 1 | 637 | (42 | ) | 8 | 816 | (43 | ) | 9 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total available-for-sale
|
225,090 | (5,495 | ) | 254 | 28,489 | (4,159 | ) | 35 | 253,579 | (9,654 | ) | 289 | ||||||||||||||||||||||||
|
Held-to-maturity securities:
|
||||||||||||||||||||||||||||||||||||
|
U.S. Government-sponsored
enterprises
|
185,659 | (7,251 | ) | 81 | — | — | — | 185,659 | (7,251 | ) | 81 | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total fixed maturities
|
$ | 410,749 | (12,746 | ) | 335 | 28,489 | (4,159 | ) | 35 | 439,238 | (16,905 | ) | 370 | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
As of December 31, 2009, there are no unrealized losses on the Company’s equity securities.
The largest group of available-for-sale fixed maturities in a gross unrealized loss position
for more than 12 months is primarily corporate and municipal bonds acquired in the
acquisition of Security Plan in 2004, and under purchase GAAP accounting, have a higher cost
basis than historical cost. These premiums are being amortized to net investment income.
Management has completed its assessment of other-than-temporary impairment of these
securities. Based on our evaluation of the credit worthiness of the issuers and because we
do not intend to sell the investments, nor is it likely that we would be required to sell
these investments, before recovery of their amortized cost bases, which may be maturity, none
of the unrealized losses are considered to be other-than-temporary.
The next largest group of available-for-sale fixed maturities in a gross unrealized loss
situation for more than 12 months is investments in securities not due at a single maturity
date. The current loss position primarily relates to changes in the current interest rate
environment. Given the nature of the securities involved and the fact that we do not intend
to sell the investments, nor is it likely that we would be required to sell these investments
before recovery of their amortized cost bases, which may be maturity, management does not
believe that the unrealized losses on these instruments will result in realized losses.
We monitor 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. Our impairment review, in accordance with current guidance, is
performed by the Company at each reporting date and management uses its best judgment to
decide if impairment is other-than-temporary. We determine other-than-temporary impairment
by reviewing relevant evidence related to the specific security issuer as well as our intent
and ability to hold the investment for a period of time sufficient for a forecasted recovery.
All fixed maturity securities sold in 2009 were sold at a gain. All securities with a
market price below $90 were segregated and reviewed as of December 31, 2009 based upon the
items above for other-than-temporary impairment.
63
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
For investments of available-for-sale fixed maturities and equity securities that have
unrealized losses as of December 31, 2008, the cost, gross unrealized losses that have been
in a continuous unrealized loss position for less than 12 months, gross unrealized losses
that have been in a continuous unrealized loss position for 12 months or longer and fair
value are as follows:
| December 31, 2008 | ||||||||||||||||||||||||||||||||||||
| Less than 12 months | Greater than 12 months | Total | ||||||||||||||||||||||||||||||||||
| Fair | Unrealized | # of | Fair | Unrealized | # of | Fair | Unrealized | # of | ||||||||||||||||||||||||||||
| Value | Losses | Securities | Value | Losses | Securities | Value | Losses | Securities | ||||||||||||||||||||||||||||
| (In thousands, except for # of securities) | ||||||||||||||||||||||||||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||||||||||||||||||||||
|
U.S. Government-sponsored
enterprises
|
$ | 18,680 | (265 | ) | 14 | 11,256 | (235 | ) | 11 | 29,936 | (500 | ) | 25 | |||||||||||||||||||||||
|
Security issued by states and
political subdivisions
|
32,389 | (2,827 | ) | 39 | 21,492 | (3,376 | ) | 23 | 53,881 | (6,203 | ) | 62 | ||||||||||||||||||||||||
|
Corporate
|
20,509 | (2,170 | ) | 51 | 34,880 | (6,756 | ) | 20 | 55,389 | (8,926 | ) | 71 | ||||||||||||||||||||||||
|
Securities not due at a single
maturity date
|
118 | (8 | ) | 3 | 11,629 | (366 | ) | 24 | 11,747 | (374 | ) | 27 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total fixed maturities
|
$ | 71,696 | (5,270 | ) | 107 | 79,257 | (10,733 | ) | 78 | 150,953 | (16,003 | ) | 185 | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
The amortized cost and fair value of fixed maturities at December 31, 2009 by contractual
maturity are shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call or prepayment
penalties.
| Fixed Maturities | ||||||||
| Cost or | ||||||||
| Amortized Cost | Fair Value | |||||||
| (In thousands) | ||||||||
|
Due in one year or less
|
$ | 13,930 | 14,106 | |||||
|
Due after one year through five years
|
32,800 | 33,375 | ||||||
|
Due after five years through ten years
|
38,230 | 38,744 | ||||||
|
Due after ten years
|
492,206 | 479,578 | ||||||
|
|
||||||||
|
|
577,166 | 565,803 | ||||||
|
Securities not due at a single maturity date
|
18,938 | 19,452 | ||||||
|
|
||||||||
|
Total fixed maturities
|
$ | 596,104 | 585,255 | |||||
|
|
||||||||
The securities not due at a single maturity date include mortgage-backed obligations of U.S.
Government-sponsored enterprises and corporate securities.
The Company had no investments in any one entity that exceeded 10% of stockholders’ equity at
December 31, 2009. In addition, there were no investments that were non-income producing for
the year ended December 31, 2009.
64
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Major categories of net investment income are summarized as follows:
| Year ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Investment income on:
|
||||||||||||
|
Fixed maturities
|
$ | 25,921 | 27,536 | 26,925 | ||||||||
|
Equity securities
|
1,056 | 1,027 | 2,171 | |||||||||
|
Mortgage loans on real estate
|
50 | 28 | 33 | |||||||||
|
Policy loans
|
2,444 | 2,105 | 1,919 | |||||||||
|
Long-term investments
|
465 | 39 | (47 | ) | ||||||||
|
Other
|
507 | 357 | 191 | |||||||||
|
|
||||||||||||
|
|
30,443 | 31,092 | 31,192 | |||||||||
|
Investment expenses
|
(841 | ) | (614 | ) | (449 | ) | ||||||
|
|
||||||||||||
|
Net investment income
|
$ | 29,602 | 30,478 | 30,743 | ||||||||
|
|
||||||||||||
Proceeds and gross realized gains (losses) from sales of fixed maturities available-for-sale
for 2009, 2008 and 2007 are summarized as follows:
| Year ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Proceeds
|
$ | 74,181 | 237 | 3,844 | ||||||||
|
|
||||||||||||
|
Gross realized gains
|
$ | 2,752 | 5 | 18 | ||||||||
|
|
||||||||||||
|
Gross realized losses
|
$ | — | — | (141 | ) | |||||||
|
|
||||||||||||
In 2009, the Company sold bonds to capture realized gains and reinvest in higher yielding
securities of the same quality based upon market changes. During 2008, the Company sold
three fixed maturity securities in SPFIC to fund payment of claims related to Hurricane
Gustav. During 2007, we sold fixed maturity securities to fund the purchase of investment
real estate. No securities were sold from the held-to-maturity portfolio in 2009, 2008 or
2007.
Proceeds and gross realized gains (losses) from sales of equity securities for 2009, 2008 and
2007 are summarized as follows:
| Year ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Proceeds
|
$ | 22,745 | — | 248 | ||||||||
|
|
||||||||||||
|
Gross realized gains
|
$ | 5,292 | — | 30 | ||||||||
|
|
||||||||||||
|
Gross realized losses
|
$ | — | — | (32 | ) | |||||||
|
|
||||||||||||
In 2009, the Company sold holdings of equity mutual funds that were previously impaired in
2008, generating realized capital gains for book purpose but realized losses for tax
purposes, to prevent prior years tax capital gain carryforwards from expiring. These sales
resulted in realized gains of $4.9 million.
65
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Realized gains (losses) are as follows:
| Year ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Realized gains (losses):
|
||||||||||||
|
Sales and maturities:
|
||||||||||||
|
Fixed maturities
|
$ | 2,705 | (2 | ) | (123 | ) | ||||||
|
Equity securities
|
5,292 | — | (2 | ) | ||||||||
|
Property and equipment
|
323 | (4 | ) | — | ||||||||
|
Other long-term investments
|
16 | 18 | 31 | |||||||||
|
|
||||||||||||
|
Net realized gains (losses) on sales and maturities
|
8,336 | 12 | (94 | ) | ||||||||
|
|
||||||||||||
|
Other-than-temporary impairments:
|
||||||||||||
|
Fixed maturities
|
(103 | ) | (288 | ) | — | |||||||
|
Equity securities
|
(193 | ) | (23,536 | ) | — | |||||||
|
|
||||||||||||
|
Realized loss on OTTI
|
(296 | ) | (23,824 | ) | — | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net realized gains (losses)
|
$ | 8,040 | (23,812 | ) | (94 | ) | ||||||
|
|
||||||||||||
| Note 3: |
Fair Value Measurements
|
Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. We
hold fixed maturity and equity securities that are carried at fair value.
Fair value measurements are generally based upon observable and unobservable inputs.
Observable inputs reflect market data obtained from independent sources, while unobservable
inputs reflect our view of market assumptions in the absence of observable market
information. We utilize valuation techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs. All assets and liabilities carried at fair value
are required to be classified and disclosed in one of the following three categories:
| • |
Level 1 — Quoted prices for identical instruments in active markets.
|
| • |
Level 2 — Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active and
model-derived valuations whose inputs or whose significant value drivers are
observable.
|
| • |
Level 3 — Instruments whose significant value drivers are unobservable.
|
Level 1 primarily consists of financial instruments whose value is based on quoted market
prices such as U. S. Treasury securities and actively traded mutual fund investments.
Level 2 includes those financial instruments that are valued by independent pricing services
or broker quotes. These models are primarily industry-standard models that consider various
inputs, such as interest rates, credit spreads and foreign exchange rates for the underlying
financial instruments. All significant inputs are observable, or derived from observable
information in the marketplace or are supported by observable levels at which transactions
are executed in the marketplace.
Financial instruments in this category primarily include corporate fixed maturity securities,
U.S. Government-sponsored enterprise securities, municipal securities and certain mortgage
and asset-backed securities.
Level 3 is comprised of financial instruments whose fair value is estimated based on
non-binding broker prices utilizing significant inputs not based on, or corroborated by,
readily available market information. This category consists of two private placement
mortgage-backed securities where we cannot corroborate the significant valuation inputs with
market observable data.
66
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
The following table sets forth our assets that are measured at fair value on a recurring
basis as of the date indicated:
| December 31, 2009 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Financial Assets:
|
||||||||||||||||
|
Fixed Maturities Available-for-Sale
|
$ | 385,579 | 12,434 | 372,568 | 577 | |||||||||||
|
Equity Securities Available-for-Sale
|
33,477 | 33,477 | — | — | ||||||||||||
|
|
||||||||||||||||
|
Total Financial Assets
|
$ | 419,056 | 45,911 | 372,568 | 577 | |||||||||||
|
|
||||||||||||||||
|
Financial Liabilities:
|
||||||||||||||||
|
Warrants outstanding
|
$ | 1,819 | — | 1,819 | — | |||||||||||
|
|
||||||||||||||||
The following table presents additional information about fixed maturity securities measured
at fair value on a recurring basis and for which we have utilized significant unobservable
(Level 3) inputs to determine fair value:
| December 31, 2009 | ||||
| (In thousands) | ||||
|
Ending Balance at December 31, 2008
|
$ | 654 | ||
|
Total realized and unrealized gains (losses):
|
||||
|
Included in net income
|
— | |||
|
Included in other comprehensive income
|
(24 | ) | ||
|
Principal paydowns
|
(53 | ) | ||
|
Transfer in and (out) of Level 3
|
— | |||
|
|
||||
|
Ending Balance at December 31, 2009
|
$ | 577 | ||
|
|
||||
We review the fair value hierarchy classifications each reporting period. Changes in the
observability of the valuation attributes may result in a reclassification of certain
financial assets. Such reclassifications, if any, are reported as transfers in and out of
Level 3 at the beginning fair value for the reporting period in which the changes occur.
Financial Instruments not Carried at Fair Value
Estimates of fair values are made at a specific point in time, based on relevant market
prices and information about the financial instrument. The estimated fair values of
financial instruments presented below are not necessarily indicative of the amounts the
Company might realize in actual market transactions. The carrying amount and fair value for
the financial assets and liabilities on the consolidated balance sheets at each year-end were
as follows:
| December 31, 2009 | December 31, 2008 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| Value | Value | Value | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Financial assets:
|
||||||||||||||||
|
Fixed maturities, held-to-maturity
|
$ | 206,909 | 199,676 | — | — | |||||||||||
|
Mortgage loans
|
1,533 | 1,484 | 339 | 370 | ||||||||||||
|
Policy loans
|
32,096 | 32,096 | 28,955 | 28,955 | ||||||||||||
|
Cash and cash equivalents
|
48,625 | 48,625 | 63,792 | 63,792 | ||||||||||||
|
|
||||||||||||||||
|
Financial liabilities:
|
||||||||||||||||
|
Annuities
|
37,882 | 33,980 | 34,025 | 29,107 | ||||||||||||
67
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Fair values for fixed income securities are based on quoted market prices. In cases where
quoted market prices are not available, fair values are based on estimates using present
value or other assumptions, including the discount rate and estimates of future cash flows.
Mortgage loans are secured principally by residential properties and commercial properties.
Weighted average interest rates for these loans were approximately 6.7% and 8.2% per year,
as of December 31, 2009 and 2008, respectively, with maturities ranging from one to thirty
years. Management estimated the fair value using an annual interest rate of 6.25% at
December 31, 2009 and 2008.
The fair value of the Company’s liabilities under annuity contract policies were
estimated at December 31, 2009 using discounted cash flows at a risk free rate plus a
component for non-performance risk and interest rate risk. The fair value of
liabilities under all insurance contracts are taken into consideration in the overall
management of interest rate risk, which seeks to minimize exposure to changing
interest rates through the matching of investment maturities with amounts due under
insurance contracts.
In 2008, the fair value of the Company’s liabilities under annuity contract policies
represents discounted cash flows using a risk free rate plus a component for
non-performance risk and interest rate risk. The fair value of liabilities under all
insurance contracts are taken into consideration in the overall management of interest rate
risk, which minimizes exposure to changing interest rates through the matching of
investment maturities with amounts due under insurance contracts.
Policy loans have a weighted average annual interest rate of 7.6% as of December 31, 2009
and 2008, and have no specified maturity dates. The aggregate fair value of policy loans
approximates the carrying value reflected on the consolidated balance sheet. These loans
typically carry an interest rate that is tied to the crediting rate applied to the related
policy and contract reserves. Policy loans are an integral part of the life insurance
policies that we have in force and cannot be valued separately and are not marketable,
therefore a fair value is not calculated.
For cash and cash equivalents, accrued investment income, reinsurance recoverable, other
assets, federal income tax payable and receivable, dividend accumulations, commissions
payable, amounts held on deposit, and other liabilities, the carrying amounts approximate
fair value because of the short maturity of such financial instruments.
| Note 4: |
Policy Liabilities
|
Various assumptions used to determine the future policy benefit reserves of life insurance
include the following: a) valuation interest rates from 4% to 9% per year; b) mortality
assumptions are from the 1955 to 1960, 1965 to 1970, 1975 to 1980 and 2001 Select and
Ultimate mortality tables; and c) withdrawals are based primarily on actual historical
termination rates.
68
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
The following table presents information on changes in the liability for life, accident and
health and property policy and contract claims for the years ended December 31, 2009, 2008 and
2007.
| Year ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
|
||||||||||||
|
Policy claims payable at January 1
|
$ | 9,318 | 6,908 | 9,448 | ||||||||
|
Less: reinsurance recoverable
|
2,706 | 1,918 | 2,039 | |||||||||
|
|
||||||||||||
|
Net balance at January 1
|
6,612 | 4,990 | 7,409 | |||||||||
|
|
||||||||||||
|
Acquisition of ONLIC and ICIC, gross and net
|
6 | 140 | — | |||||||||
|
Add claims incurred, related to:
|
||||||||||||
|
Current year
|
25,077 | 25,308 | 22,985 | |||||||||
|
Prior years
|
(556 | ) | 305 | (883 | ) | |||||||
|
|
||||||||||||
|
|
24,521 | 25,613 | 22,102 | |||||||||
|
|
||||||||||||
|
Deduct claims paid, related to:
|
||||||||||||
|
Current year
|
18,386 | 19,735 | 18,736 | |||||||||
|
Prior years
|
4,986 | 4,396 | 5,785 | |||||||||
|
|
||||||||||||
|
|
23,372 | 24,131 | 24,521 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net balance December 31
|
7,767 | 6,612 | 4,990 | |||||||||
|
Plus: reinsurance recoverable
|
2,455 | 2,706 | 1,918 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Policy claims payable, December 31
|
$ | 10,222 | 9,318 | 6,908 | ||||||||
|
|
||||||||||||
The favorable development in 2009 for prior year claims was primarily from SPLIC and SPFIC.
SPLIC’s IBNR was greater at December 31, 2008 than claims incurred during 2009. On prior
year claims, SPFIC had favorable development on Hurricane Ike, which occurred in 2008, and
litigation from Hurricane Katrina, which occurred in 2005.
SPLIC had higher death claims in 2008 than in prior years, which caused the adverse
development. The unfavorable claims development of $305,000 in 2008 was primarily the result
of SPLIC receiving prior year claims in excess of liabilities established.
The favorable development in 2007 was the result of the expiration of the extended due date
for filing of hurricane claims. We released approximately $425,000 of accrued liabilities
in 2007, as we determined that no amounts were ultimately payable on these policies.
| Note 5: |
Reinsurance
|
In the normal course of business, the Company reinsures portions of certain policies that we
underwrite to limit disproportionate risks. During 2009 and 2008, we retained varying
amounts of individual insurance up to a maximum retention of $100,000 on any life. The
Company also reinsures 100% of our accidental death benefit rider coverage. Catastrophe
reinsurance is in place for our property policies. In 2009 and 2008, this reinsurance
provided $10,000,000 of coverage above a $500,000 deductible. Our health insurance policies
are substantially all reinsured on a 100% coinsurance basis. We remain contingently liable
to the extent that the reinsuring companies cannot meet their obligations under these
reinsurance treaties.
Our amounts recoverable from reinsurers represent receivables from and reserves ceded to
reinsurers. We obtain reinsurance from multiple reinsurers, and we monitor concentration as
well as financial strength ratings of our principal reinsurers. The ratings by A.M. Best
Company range from B+ (Good) to A+ (Superior). To protect our position, we have established
and funded a trust to cover the contingent liabilities related to accident and health
reinsurance ceded to Texas
International Life Insurance Company, which represents $5.6 million of the $11.6 million of
reinsurance recoverable at December 31, 2009.
69
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Assumed and ceded life reinsurance activity as of December 31, 2009 and 2008 is summarized
as follows:
| At December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
|
||||||||
|
Aggregate assumed life insurance in force
|
$ | 927,917 | 647,041 | |||||
|
|
||||||||
|
Aggregate ceded life insurance in force
|
$ | (362,891 | ) | (302,253 | ) | |||
|
|
||||||||
|
Net life insurance in force
|
$ | 4,997,043 | 4,666,848 | |||||
|
|
||||||||
The Company’s reinsurance recoveries on ceded reinsurance were $11.6 million in 2009 and $13.2
million in 2008. Premiums and claims and surrenders assumed and ceded for all lines of business
for these years are summarized as follows:
| Year ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Premiums from short-duration contracts:
|
||||||||||||
|
Direct
|
$ | 6,834 | 6,856 | 6,803 | ||||||||
|
Assumed
|
— | — | — | |||||||||
|
Ceded
|
(1,066 | ) | (1,202 | ) | (843 | ) | ||||||
|
|
||||||||||||
|
Net premiums earned
|
5,768 | 5,654 | 5,960 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Premiums from long-duration contracts:
|
||||||||||||
|
Direct
|
148,893 | 144,221 | 139,606 | |||||||||
|
Assumed
|
1,416 | 1,459 | 1,462 | |||||||||
|
Ceded
|
(8,797 | ) | (10,037 | ) | (10,280 | ) | ||||||
|
|
||||||||||||
|
Net premiums earned
|
141,512 | 135,643 | 130,788 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total premiums earned
|
$ | 147,280 | 141,297 | 136,748 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Claims and surrenders assumed
|
$ | 1,434 | 1,429 | 1,422 | ||||||||
|
|
||||||||||||
|
Claims and surrenders ceded
|
$ | (5,649 | ) | (9,982 | ) | (9,338 | ) | |||||
|
|
||||||||||||
Beginning in calendar year 2007, SPFIC elected to increase the amount of first event
catastrophe reinsurance to $10.0 million from $7.1 million and increase the retention to
$500,000 from $250,000. The annual premium was $1,075,000, $750,000 and $840,000 in 2009,
2008 and 2007, respectively. Also in 2008, SPFIC paid $478,000 in second and third event
coverage because of the occurrence of Hurricanes Gustav and Ike.
| Note 6: |
Stockholders’ Equity and Restrictions
|
The two classes of our common stock are equal in all respects, except (a) each Class A share
receives twice the cash dividends paid on a per share basis to the Class B common stock; and
(b) the Class B common stock elects a simple majority of the Board of Directors of Citizens
and the Class A common stock elects the remaining directors.
70
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
The table below shows the combined total of all of our insurance subsidiaries’ capital and
surplus and net income (loss) for life insurance operations and property insurance
operations, although these amounts are not all available as dividends to Citizens, Inc.,
because only CICA is directly owned by Citizens, Inc. All other subsidiaries are owned by
CICA, except ONLIC, which was owned by Citizens, Inc.
| At December 31, | ||||||||
| Combined Statutory Stockholders’ Equity | 2009 | 2008 | ||||||
| (In thousands) | ||||||||
| (Unaudited) | ||||||||
|
Life insurance operations
|
$ | 106,688 | 83,906 | |||||
|
Property insurance operations
|
4,655 | 3,156 | ||||||
|
|
||||||||
|
Total statutory capital and surplus
|
$ | 111,343 | 87,062 | |||||
|
|
||||||||
| Year ended December 31, | ||||||||||||
| Combined Statutory Net Income (Loss) | 2009 | 2008 | 2007 | |||||||||
| (In thousands) | ||||||||||||
| (Unaudited) | ||||||||||||
|
Life insurance operations
|
$ | 15,546 | (11,839 | ) | 14,644 | |||||||
|
Property insurance operations
|
(444 | ) | (1,436 | ) | 1,184 | |||||||
|
|
||||||||||||
|
Total statutory net income (loss)
|
$ | 15,102 | (13,275 | ) | 15,828 | |||||||
|
|
||||||||||||
Generally, the net assets of the insurance subsidiaries available for transfer to their
immediate parent are limited to the greater of the subsidiary net gain from operations during
the preceding year or 10% of the subsidiary net statutory surplus as of the end of the
preceding year as determined in accordance with accounting practices prescribed or permitted
by insurance regulatory authorities. Under these practices, total surplus at December 31,
2009 was $46.1 million and net gain from operations was $9.5 million for CICA. Based upon
statutory net gain from operations and surplus of CICA as of and for the year ended December
31, 2009, a dividend of approximately $9.5 million could be paid to the Company without prior
regulatory approval in 2010. Payments of dividends in excess of such amounts would generally
require approval by regulatory authorities.
CICA, CNLIC, SPLIC, SPFIC, and ICIC have calculated their risk based capital (“RBC”) in
accordance with the National Association of Insurance Commissioners’ Model Rule and the RBC
rules as adopted by their respective states of domicile. The RBC as calculated for CICA,
CNLIC and SPLIC as of December 31, 2008 exceeded levels requiring company or regulatory
action. SPFIC was at the Company Action Level and ONLIC was at a Regulatory Action Level.
The Company contributed $1.0 million to ONLIC and SPLIC contributed $2 million to SPFIC to
eliminate the RBC level of action. All insurance subsidiaries exceeded RBC minimum levels at
December 31, 2009.
| Note 7: |
Convertible Preferred Stock
|
In July 2004, the Company completed a private placement of Series A-1 Convertible Preferred
Stock (“Series A-1 Preferred”) to four unaffiliated institutional investors. We also issued
to the investors warrants to purchase shares of our Class A common stock, at an exercise
price of $6.95 per share, and unit warrants to purchase Series A-2 Convertible Preferred
Stock (“Series A-2 Preferred”). The conversion, exercise and redemption prices, along with
the number of shares and warrants, were adjusted for stock dividends paid on December 31,
2004 and on December 30, 2005.
On July 13, 2009, the Company converted all of its outstanding Series A-1 and Series A-2
Convertible Preferred Stock into Class A common shares in accordance with the mandatory
redemption provision of the preferred shareholder agreement dated July 12, 2004. The total
amount of Class A common shares issued as part of the conversion was 1,706,682, inclusive of
pro rata dividends due through the conversion date.
71
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
| Note 8: |
Commitments and Contingencies
|
We have committed to the following contractual obligations as of December 31, 2009 with the
payments due by the period indicated below:
| Less than 1 | More than 5 | |||||||||||||||||||
| Contractual Obligation | Total | Year | 1 to 3 Years | 3 to 5 Years | Years | |||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Operating leases
|
$ | 652 | 356 | 276 | 20 | — | ||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Future policy benefit reserves:
|
||||||||||||||||||||
|
Life insurance
|
592,358 | 220 | 1,236 | 11,599 | 579,303 | |||||||||||||||
|
Annuities
|
37,882 | 19,816 | 8,882 | 3,829 | 5,355 | |||||||||||||||
|
Accident and health
|
6,399 | 6,399 | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Total future policy benefit reserves
|
636,639 | 26,435 | 10,118 | 15,428 | 584,658 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Policy claims payable:
|
||||||||||||||||||||
|
Life insurance
|
8,856 | 8,856 | — | — | — | |||||||||||||||
|
Accident and health
|
874 | 874 | — | — | — | |||||||||||||||
|
Casualty
|
492 | 492 | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Total policy claims payable
|
10,222 | 10,222 | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total contractual obligations
|
$ | 647,513 | 37,013 | 10,394 | 15,448 | 584,658 | ||||||||||||||
|
|
||||||||||||||||||||
The payments related to the future policy benefits and policy claims payable reflected in the
table above have been projected utilizing assumptions based upon our historical experience
and anticipated future experience.
We are a defendant in a lawsuit originally filed on August 6, 1999 in the Texas District
Court, Austin, Texas, now styled
Citizens Insurance Company of America, Citizens, Inc.,
Harold E. Riley and Mark A. Oliver, Petitioners v. Fernando Hakim Daccach
,
Respondent
, in
which a class was originally certified by the trial court and affirmed by the Court of
Appeals for the Third District of Texas. We appealed the grant of class status to the Texas
Supreme Court, which on March 2, 2007, reversed the Court of Appeal’s affirmation of the
trial court’s class certification order, decertified the class and remanded the case to the
trial court for further proceedings consistent with the Texas Supreme Court’s opinion. The
underlying lawsuit alleged that certain life insurance policies that we made available to
non-U.S. residents, when combined with a policy feature that allowed certain cash benefits to
be assigned to two non-U.S. trusts for the purpose of accumulating ownership of our Class A
common stock, along with allowing the policyholders to make additional contributions to the
trusts, were actually offers and sales of securities that occurred in Texas by unregistered
dealers in violation of the Texas securities laws. The remedy sought was rescission and
return of the insurance premium payments. On November 16, 2009, the trial court conducted
further proceedings on the case, in order to determine whether the class should be
recertified. On December 9, 2009, the trial court denied the Class Plaintiff’s Supplemental
Motion for Class Certification. The remaining plaintiffs must now proceed individually, and
not as a class, if they intend to pursue their cases against Citizens. Citizens intends to
maintain a vigorous defense in any remaining proceedings.
72
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Security Plan Fire Insurance Company (“SPFIC”) is a defendant in a suit styled
The State of
Louisiana v. AAA Insurance
, or
Road Home Litigation
, which was filed in the Civil District
Court for the Parish of Orleans on August 23, 2007 by the state of Louisiana as
subrogee/assignee of the insureds of more than 200 different insurance companies. The suit
was filed to recover money that the state of Louisiana paid to certain insureds under the
Louisiana Road Home Program for damages
resulting from Hurricanes Katrina and Rita. The suit was removed to the United States
District Court for the Eastern District of Louisiana on September 11, 2007 and appeals of the
removal have been denied. In March 2009, the Honorable Judge Stanwood Duval dismissed all
bad faith claims asserted against the defendants, including SPFIC. He also dismissed all
claims for flood damage and all claims asserted under Louisiana’s Valued Policy Law. Despite
the District Court’s recent rulings the
Road Home Litigation
is still in the early stages of
litigation. Therefore, it is not possible to evaluate how many claims relate to SPFIC, or
the potential exposure to SPFIC. However, in the event of an adverse outcome, the potential
exposure to SPFIC could be significant.
In addition to the legal proceedings described above, we may from time to time be subject to
a variety of legal and regulatory actions relating to our future, current and past business
operations, including, but not limited to:
| • |
disputes over insurance coverage or claims adjudication;
|
| • |
regulatory compliance with insurance and securities laws in the United States
and in foreign countries;
|
| • |
disputes with our marketing firms, consultants and employee agents over
compensation and termination of contracts and related claims;
|
| • |
disputes regarding our tax liabilities;
|
| • |
disputes relative to reinsurance and coinsurance agreements; and
|
| • |
disputes relating to businesses acquired and operated by us.
|
In the absence of countervailing considerations, we would expect to defend any such claims
vigorously. However, in doing so, we could incur significant defense costs, including not
only attorneys’ fees and other direct litigation costs, but also the expenditure of
substantial amounts of management time that otherwise would be devoted to our business. If
we suffer an adverse judgment as a result of any claim, it could have a material adverse
effect on our business, results of operations and financial condition.
| Note 9: |
Segment and Other Operating Information
|
Operating Segment Information
The Company has three reportable segments: Life Insurance, Home Service Insurance, and Other
Non-Insurance Enterprises. The accounting policies of the segments are in accordance with
U.S. GAAP and are the same as those described in the summary of significant accounting
policies. We evaluate profit and loss performance based on U.S. GAAP net income before
federal income taxes for its three reportable segments.
|
The allocation of expenses within the Citizens, Inc. management services agreement
was changed in the first quarter of 2008 to reflect the conversion of Security Plan’s
policies to our policy administration system at year end 2007. Approximately $4.0
million in expenses were reallocated from the Life Insurance segment to the Home Service
segment, which is reflected in the lower profits for the Home Service segment compared
to comparable periods in 2007.
|
The measurement of segment profit and loss and segment assets do not include material
transactions between segments. The Company has no reportable differences between segments
and consolidated operations.
73
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
| For the Year Ended December 31, 2009 | ||||||||||||||||
| Other | ||||||||||||||||
| Life | Home | Non-Insurance | ||||||||||||||
| Insurance | Service | Enterprises | Consolidated | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Premiums
|
$ | 105,997 | 41,283 | — | 147,280 | |||||||||||
|
Net investment income
|
16,667 | 12,680 | 255 | 29,602 | ||||||||||||
|
Realized gains, net
|
1,100 | 6,562 | 378 | 8,040 | ||||||||||||
|
Decrease in fair value of warrants
|
— | — | 3,154 | 3,154 | ||||||||||||
|
Other income
|
340 | 101 | 463 | 904 | ||||||||||||
|
|
||||||||||||||||
|
Total revenue
|
124,104 | 60,626 | 4,250 | 188,980 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Benefits and expenses:
|
||||||||||||||||
|
Insurance benefits paid or provided:
|
||||||||||||||||
|
Claims and surrenders
|
41,277 | 18,711 | — | 59,988 | ||||||||||||
|
Increase in future policy benefit reserves
|
36,043 | 4,747 | — | 40,790 | ||||||||||||
|
Policyholders’ dividends
|
6,594 | 86 | — | 6,680 | ||||||||||||
|
|
||||||||||||||||
|
Total insurance benefits paid or provided
|
83,914 | 23,544 | — | 107,458 | ||||||||||||
|
|
||||||||||||||||
|
Commissions
|
21,146 | 14,390 | — | 35,536 | ||||||||||||
|
Other underwriting, acquisition and insurance
expenses
|
10,167 | 14,812 | 3,361 | 28,340 | ||||||||||||
|
Capitalization of deferred policy acquisition costs
|
(17,871 | ) | (5,785 | ) | — | (23,656 | ) | |||||||||
|
Amortization of deferred policy acquisition costs
|
14,757 | 2,445 | — | 17,202 | ||||||||||||
|
Amortization of cost of customer relationships
acquired and other intangibles
|
1,519 | 1,975 | — | 3,494 | ||||||||||||
|
|
||||||||||||||||
|
Total benefits and expenses
|
113,632 | 51,381 | 3,361 | 168,374 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Income before income tax expense
|
$ | 10,472 | 9,245 | 889 | 20,606 | |||||||||||
|
|
||||||||||||||||
74
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
| For the Year Ended December 31, 2008 | ||||||||||||||||
| Other | ||||||||||||||||
| Life | Home | Non-Insurance | ||||||||||||||
| Insurance | Service | Enterprises | Consolidated | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Premiums
|
$ | 102,030 | 39,267 | — | 141,297 | |||||||||||
|
Net investment income
|
17,015 | 12,654 | 809 | 30,478 | ||||||||||||
|
Realized gains (losses), net
|
(13,882 | ) | (9,948 | ) | 18 | (23,812 | ) | |||||||||
|
Increase in fair value of warrants
|
— | — | (2,662 | ) | (2,662 | ) | ||||||||||
|
Other income
|
330 | 273 | 769 | 1,372 | ||||||||||||
|
|
||||||||||||||||
|
Total revenue
|
105,493 | 42,246 | (1,066 | ) | 146,673 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Benefits and expenses:
|
||||||||||||||||
|
Insurance benefits paid or provided:
|
||||||||||||||||
|
Claims and surrenders
|
36,241 | 20,012 | — | 56,253 | ||||||||||||
|
Increase in future policy benefit reserves
|
34,246 | 2,871 | — | 37,117 | ||||||||||||
|
Policyholders’ dividends
|
6,714 | 151 | — | 6,865 | ||||||||||||
|
|
||||||||||||||||
|
Total insurance benefits paid or provided
|
77,201 | 23,034 | — | 100,235 | ||||||||||||
|
|
||||||||||||||||
|
Commissions
|
21,589 | 14,395 | — | 35,984 | ||||||||||||
|
Other underwriting, acquisition and insurance
expenses
|
10,866 | 14,459 | 3,286 | 28,611 | ||||||||||||
|
Capitalization of deferred policy acquisition costs
|
(19,177 | ) | (4,932 | ) | — | (24,109 | ) | |||||||||
|
Amortization of deferred policy acquisition costs
|
13,331 | 2,319 | — | 15,650 | ||||||||||||
|
Amortization of cost of customer relationships
acquired and other intangibles
|
971 | 1,926 | — | 2,897 | ||||||||||||
|
|
||||||||||||||||
|
Total benefits and expenses
|
104,781 | 51,201 | 3,286 | 159,268 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Income (loss) before income tax expense
|
$ | 712 | (8,955 | ) | (4,352 | ) | (12,595 | ) | ||||||||
|
|
||||||||||||||||
75
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
| For the Year Ended December 31, 2007 | ||||||||||||||||
| Other | ||||||||||||||||
| Life | Home | Non-Insurance | ||||||||||||||
| Insurance | Service | Enterprises | Consolidated | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Premiums
|
$ | 97,292 | 39,456 | — | 136,748 | |||||||||||
|
Net investment income
|
16,891 | 13,502 | 350 | 30,743 | ||||||||||||
|
Realized gains (losses), net
|
3 | (85 | ) | (12 | ) | (94 | ) | |||||||||
|
Decrease in fair value of warrants
|
— | — | 828 | 828 | ||||||||||||
|
Other income
|
660 | 6 | 746 | 1,412 | ||||||||||||
|
|
||||||||||||||||
|
Total revenue
|
114,846 | 52,879 | 1,912 | 169,637 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Benefits and expenses:
|
||||||||||||||||
|
Insurance benefits paid or provided:
|
||||||||||||||||
|
Claims and surrenders
|
34,305 | 16,266 | — | 50,571 | ||||||||||||
|
Increase in future policy benefit reserves
|
34,160 | 2,260 | — | 36,420 | ||||||||||||
|
Policyholders’ dividends
|
6,401 | — | — | 6,401 | ||||||||||||
|
|
||||||||||||||||
|
Total insurance benefits paid or provided
|
74,866 | 18,526 | — | 93,392 | ||||||||||||
|
|
||||||||||||||||
|
Commissions
|
22,144 | 13,497 | — | 35,641 | ||||||||||||
|
Other underwriting, acquisition and insurance
expenses
|
13,294 | 10,001 | 4,288 | 27,583 | ||||||||||||
|
Capitalization of deferred policy acquisition costs
|
(20,653 | ) | (5,557 | ) | — | (26,210 | ) | |||||||||
|
Amortization of deferred policy acquisition costs
|
10,874 | 1,656 | — | 12,530 | ||||||||||||
|
Amortization of cost of customer relationships
acquired and other intangibles
|
1,176 | 2,027 | — | 3,203 | ||||||||||||
|
|
||||||||||||||||
|
Total benefits and expenses
|
101,701 | 40,150 | 4,288 | 146,139 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Income (loss) before income tax expense
|
$ | 13,145 | 12,729 | (2,376 | ) | 23,498 | ||||||||||
|
|
||||||||||||||||
76
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements, Continued
December 31, 2009, 2008 and 2007
The table below summarizes assets by segment.
| At December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Assets:
|
||||||||
|
Life Insurance
|
$ | 547,775 | 481,606 | |||||
|
Home Service Insurance
|
341,920 | 316,184 | ||||||
|
Other Non-Insurance Enterprises
|
37,631 | 34,486 | ||||||
|
|
||||||||
|
Total
|
$ | 927,326 | 832,276 | |||||
|
|
||||||||
Major categories of earned premiums are summarized as follows:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Premium income:
|
||||||||||||
|
Ordinary life
|
$ | 139,843 | 133,775 | 129,100 | ||||||||
|
Group life
|
1,158 | 1,178 | 1,165 | |||||||||
|
Accident and health
|
1,531 | 1,580 | 1,558 | |||||||||
|
Property
|
4,748 | 4,764 | 4,925 | |||||||||
|
|
||||||||||||
|
Total premium income
|
$ | 147,280 | 141,297 | 136,748 | ||||||||
|
|
||||||||||||
Geographic Information
The following table sets forth the Company’s total yearly earned premium from geographic area for
the years indicated:
| Area | 2009 | 2008 | 2007 | |||||||||
| (In thousands) | ||||||||||||
|
United States
|
$ | 53,741 | 51,616 | 53,290 | ||||||||
|
Colombia
|
23,390 | 19,509 | 24,427 | |||||||||
|
Taiwan
|
14,096 | 13,818 | 12,607 | |||||||||
|
Venezuela
|
13,991 | 12,617 | 11,652 | |||||||||
|
Ecuador
|
10,754 | 10,909 | 9,673 | |||||||||
|
Argentina
|
8,536 | 9,598 | 9,133 | |||||||||
|
Other foreign countries
|
31,219 | 33,010 | 25,627 | |||||||||
|
Net reinsurance
|
(8,447 | ) | (9,780 | ) | (9,661 | ) | ||||||
|
|
||||||||||||
|
Total
|
$ | 147,280 | 141,297 | 136,748 | ||||||||
|
|
||||||||||||
77
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements, Continued
December 31, 2009, 2008 and 2007
| Note 10: |
Income Taxes
|
Our federal income tax expense was $3.3 million, $3.1 million and $6.9 million in 2009, 2008
and 2007, respectively. This represents effective tax rates of 15.8%, 24.7% and 29.5%,
respectively. In 2009, $2.8 million of the valuation allowance established in 2008 for the
OTTI on mutual funds was released as a reduction in tax expense. This release related to
the mutual funds that were sold in 2009 and generated realized capital gains in 2009. In
2008, a valuation allowance of $6.9 million was established for the OTTI recorded in 2008
related to the Company’s stock mutual funds. In 2007, a valuation allowance was released in
the amount of $1.1 million, as the CNLIC sale agreement was terminated and we consolidated
CNLIC in our life-nonlife tax return in 2008.
A reconciliation of federal income tax expense computed by applying the federal income tax
rate of 35% in 2009 and 2008 and 2007 to income (loss) before federal income tax expense is
as follows:
| Year ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Expected tax expense (benefit)
|
$ | 7,212 | (4,408 | ) | 8,224 | |||||||
|
Change in valuation allowance
|
(2,795 | ) | 6,900 | (1,177 | ) | |||||||
|
Tax-exempt interest
|
(196 | ) | (234 | ) | (241 | ) | ||||||
|
Change in fair value of options and
warrants
|
(1,104 | ) | 932 | (290 | ) | |||||||
|
Adjustment of prior year taxes
|
36 | 23 | 294 | |||||||||
|
Taxable portion of intercompany dividend
|
— | — | 175 | |||||||||
|
State income tax credits
|
3 | 4 | (149 | ) | ||||||||
|
Change in expected tax rate related to
deferred taxes
|
— | — | 48 | |||||||||
|
Effect of graduated rates
|
25 | (62 | ) | — | ||||||||
|
Other
|
72 | (49 | ) | 48 | ||||||||
|
|
||||||||||||
|
Federal income tax expense
|
3,253 | 3,106 | 6,932 | |||||||||
|
State income tax expense
|
13 | 6 | 9 | |||||||||
|
|
||||||||||||
|
Total income tax expense
|
$ | 3,266 | 3,112 | 6,941 | ||||||||
|
|
||||||||||||
Income tax expense consists of:
| Year ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Current
|
$ | 937 | 2,616 | 5,739 | ||||||||
|
Deferred
|
2,329 | 496 | 1,202 | |||||||||
|
|
||||||||||||
|
Total income tax expense
|
$ | 3,266 | 3,112 | 6,941 | ||||||||
|
|
||||||||||||
78
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements, Continued
December 31, 2009, 2008 and 2007
A summary of the changes in the components of deferred federal income taxes is as follows:
| At December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Deferred tax assets:
|
||||||||
|
Future policy benefit reserves
|
$ | 23,632 | 23,699 | |||||
|
Net operating and capital loss carryforwards
|
5,324 | 4,833 | ||||||
|
Due and accrued dividends and expenses
|
1,246 | 1,310 | ||||||
|
Investments available-for-sale
|
4,580 | 13,106 | ||||||
|
State income tax credits
|
142 | 145 | ||||||
|
Other
|
1,134 | 1,253 | ||||||
|
|
||||||||
|
Total gross deferred tax assets
|
36,058 | 44,346 | ||||||
|
Valuation allowance
|
(2,462 | ) | (7,704 | ) | ||||
|
|
||||||||
|
Total gross deferred tax assets net of valuation
allowance
|
33,596 | 36,642 | ||||||
|
Deferred tax liabilities:
|
||||||||
|
Deferred policy acquisition costs, cost of customer
relationships acquired and intangible assets
|
(40,285 | ) | (38,452 | ) | ||||
|
Investments amortization
|
(121 | ) | (569 | ) | ||||
|
Other
|
(1,242 | ) | (1,572 | ) | ||||
|
|
||||||||
|
Total gross deferred tax liabilities
|
(41,648 | ) | (40,593 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Net deferred tax liability
|
$ | (8,052 | ) | (3,951 | ) | |||
|
|
||||||||
A summary of the changes in the components of deferred federal and state income taxes is as follows:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Deferred federal and state income taxes:
|
||||||||
|
Balance January 1
|
$ | (3,951 | ) | (4,810 | ) | |||
|
Deferred tax benefit (expense)
|
(5,113 | ) | (496 | ) | ||||
|
Change in valuation allowance
|
2,795 | — | ||||||
|
Acquisition of ONLIC and ICIC
|
241 | 216 | ||||||
|
Charge to ONLIC goodwill
|
(254 | ) | — | |||||
|
ONLIC valuation allowance
|
— | (804 | ) | |||||
|
Investments available-for-sale
|
(1,762 | ) | 1,943 | |||||
|
Effects of unrealized gains on CCRA and DAC
|
(8 | ) | — | |||||
|
|
||||||||
|
Balance December 31
|
$ | (8,052 | ) | (3,951 | ) | |||
|
|
||||||||
79
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements, Continued
December 31, 2009, 2008 and 2007
The Company and our subsidiaries had net operating losses and capital losses at December
31, 2009 available to offset future taxable income of approximately $14.0 million and $1.2
million, respectively, for federal income tax, expiring at various
times through 2029. A portion of the net operating loss carryforward is subject to
limitations under Section 382 of the Internal Revenue Code. At December 31, 2009 and 2008,
we determined that as a result of our income, projected future income, tax planning
strategies, and the nature of the items from which the deferred tax assets are derived,
other than assets for which OTTI was recorded and capital loss carryforwards, it was more
likely than not that the deferred tax assets would be realized. However, the Company
established a valuation allowance at December 31, 2009 for realized capital losses that
could not be carried back in the amount of $2.5 million. The Company established a
valuation allowance at December 31, 2008 in the amount of $6.9 million for the OTTI write
down for the portion of the tax benefit that the Company could not carry back and offset
against prior year capital gains. The valuation allowance was reduced at December 31, 2009
due to unrealized gains in the portfolio and disposition of the assets. The Company
established a valuation allowance of $804,000, related to the acquisition of ONLIC, for the
capital losses in the stock portfolio for which it was determined that realization was not
more likely than not. The amount was reduced in 2009 due to dispositions of the related
stock and unrealized gains in the portfolio.
At December 31, 2009, the Company had accumulated approximately $3,291,000 in our
“policyholders’ surplus account.” This is a special memorandum tax account into which
certain amounts not previously taxed, under prior tax laws, were accumulated. No new
additions are expected to be made to this account. Federal income taxes will become
payable thereon at the then current tax rate (a) when and if distributions to shareholders,
other than stock dividends and other limited exceptions, are made in excess of the
accumulated previously taxed income; or (b) when a company ceases to be a life insurance
company as defined by the Internal Revenue Code and such termination is not due to another
life insurance company acquiring its assets in a nontaxable transaction. We do not
anticipate any transactions that would cause any part of this amount to become taxable.
However, should the balance at December 31, 2009 become taxable, the tax computed at
present rates would be approximately $1,152,000.
There are no uncertain tax positions for the year ended December 31, 2009, and therefore,
we did not accrue any interest or penalties related to these items.
The Company’s Federal income tax return is filed on a consolidated basis with the following
entities:
Citizens, Inc.
Computing Technologies, Inc.
Insurance Investors, Inc.
Integrity Capital Corporation
Funeral Homes of America, Inc.
Citizens National Life Insurance Company
Computing Technologies, Inc.
Insurance Investors, Inc.
Integrity Capital Corporation
Funeral Homes of America, Inc.
Citizens National Life Insurance Company
Security Plan Life Insurance, Security Plan Fire Insurance and Integrity Capital Insurance
companies all file separate returns as of December 31, 2009. SPLIC and SPFIC will be
consolidated within the Federal consolidated return beginning with the year ending 2010.
The method of allocation among companies is subject to a written tax sharing agreement,
approved by the Board of Directors, whereby allocation is made primarily on a separate
return basis with current credit for any net operating losses or other items utilized in
the consolidated tax return. Intercompany tax balances are settled quarterly.
The Company and our subsidiaries file income tax returns in the U.S. federal jurisdiction
and various U.S. states. Most of our subsidiaries are not subject to examination by U.S.
tax authorities for years prior to 2006. Some of our subsidiaries have open tax years
going back as far as 1994 due to net operating loss carry-forwards.
80
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements, Continued
December 31, 2009, 2008 and 2007
| Note 11: |
Other Comprehensive Income (Loss)
|
The changes in the components of other comprehensive income (loss) are reported net of the
effects of income taxes of 35% in 2009, 2008 and 2007, as indicated below:
| Pre-tax | Tax | Net | ||||||||||
| Amount | Effect | Amount | ||||||||||
| (In thousands) | ||||||||||||
|
Year ended December 31, 2009
|
||||||||||||
|
Unrealized gain on securities:
|
||||||||||||
|
Unrealized holding gain arising
during the period
|
$ | 20,449 | (7,158 | ) | 13,291 | |||||||
|
Reclassification adjustment for
gains included in net income
|
(7,701 | ) | 2,695 | (5,006 | ) | |||||||
|
Effects on DAC and CCRA
|
24 | (8 | ) | 16 | ||||||||
|
Change in tax valuation allowance
|
— | 2,701 | 2,701 | |||||||||
|
|
||||||||||||
|
Other comprehensive income
|
$ | 12,772 | $ | (1,770 | ) | $ | 11,002 | |||||
|
|
||||||||||||
|
Year ended December 31, 2008
|
||||||||||||
|
Unrealized loss on securities:
|
||||||||||||
|
Unrealized holding loss arising
during the period
|
$ | (29,377 | ) | 10,283 | (19,094 | ) | ||||||
|
Add reclassification adjustment for
losses included in net income
|
23,826 | (8,340 | ) | 15,486 | ||||||||
|
|
||||||||||||
|
Other comprehensive loss
|
$ | (5,551 | ) | 1,943 | (3,608 | ) | ||||||
|
|
||||||||||||
|
Year ended December 31, 2007
|
||||||||||||
|
Unrealized gains on securities:
|
||||||||||||
|
Unrealized holding gain arising
during the period
|
$ | 6,228 | (2,084 | ) | 4,144 | |||||||
|
Add reclassification adjustment for
losses included in net income
|
125 | (44 | ) | 81 | ||||||||
|
Change in tax valuation allowance
|
— | 18 | 18 | |||||||||
|
|
||||||||||||
|
Other comprehensive income
|
$ | 6,353 | (2,110 | ) | 4,243 | |||||||
|
|
||||||||||||
| Note 12: |
Profit-Sharing Plan
|
The Company sponsors a defined contribution profit-sharing plan. Employees with one year of
service can participate. Contributions are made at the discretion of the Board of Directors
and are subject to a tiered vesting schedule. Employer contributions to the plan were
$700,000, $700,000 and $650,000 in 2009, 2008 and 2007, respectively. The plan does not
permit employee contributions.
| Note 13: |
Related Party Transactions
|
The Company sponsors the Citizens, Inc. Stock Investment Plan (the “Plan”), which is
administered by an independent third party. The Plan is a means for new and existing
investors in our Class A Common Stock to purchase and sell shares at market prices. Each
share purchased through the Plan is registered in the name of the investing shareholder.
The Company offers the Plan to our policyholders for automatic investment of policy
benefits, including policyholder dividends. We do not have possession of, or control over,
any amounts invested through the Plan.
81
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements, Continued
December 31, 2009, 2008 and 2007
In 2009, CICA declared a dividend of $10.5 million to Citizens, Inc. This dividend was
funded in early 2010. Also, SPLIC paid a dividend to CICA in the amount of $1.4 million and
FHA paid a dividend of $500,000 to CICA in 2009.
| Note 14: |
Quarterly Financial Information (Unaudited)
|
The following table contains selected unaudited financial data for each quarter.
| Fourth | Third | Second | First | |||||||||||||
| 2009 | Quarter | Quarter | Quarter | Quarter | ||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
|
|
||||||||||||||||
|
Revenues
|
$ | 54,049 | 44,844 | 45,429 | 44,658 | |||||||||||
|
Benefits and expenses
|
45,918 | 41,776 | 41,808 | 38,872 | ||||||||||||
|
Federal income tax expense as reported
|
— | 820 | 905 | 1,409 | ||||||||||||
|
Federal income tax expense as adjusted
|
504 | 1,033 | 320 | 1,409 | ||||||||||||
|
Net income as reported
|
— | 2,248 | 2,716 | 4,377 | ||||||||||||
|
Net income as adjusted
|
7,627 | 2,035 | 3,301 | 4,377 | ||||||||||||
|
Net income available to
common shareholders as reported
|
— | 2,091 | 1,546 | 3,199 | ||||||||||||
|
Net income available to
common shareholders as adjusted
|
7,627 | 1,878 | 2,131 | 3,199 | ||||||||||||
|
Basic and diluted earnings per share
of Class A common stock as reported
|
— | 0.04 | 0.03 | 0.07 | ||||||||||||
|
Basic and diluted earnings per share
of Class A common stock as adjusted
|
0.16 | 0.04 | 0.04 | 0.07 | ||||||||||||
|
Basic and diluted earnings per share
of Class B common stock as reported
|
— | 0.02 | 0.02 | 0.03 | ||||||||||||
|
Basic and diluted earnings per share
of Class B common stock as adjusted
|
0.08 | 0.02 | 0.02 | 0.03 | ||||||||||||
Tax expense has been reclassified in the second and third quarters from amounts
previously reported of $905,000 and $820,000, respectively, for a release of a
tax valuation allowance related to ONLIC. The release of the allowance was
originally recorded as an adjustment to ONLIC goodwill, but should have been
recorded as tax expense.
| Fourth | Third | Second | First | |||||||||||||
| 2008 | Quarter | Quarter | Quarter | Quarter | ||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
|
|
||||||||||||||||
|
Revenues
|
$ | 23,303 | 40,163 | 43,281 | 39,926 | |||||||||||
|
Benefits and expenses
|
44,114 | 40,661 | 38,948 | 35,545 | ||||||||||||
|
Federal income tax expense (benefit)
|
(191 | ) | 316 | 1,341 | 1,646 | |||||||||||
|
Net income (loss)
|
(20,620 | ) | (814 | ) | 2,992 | 2,735 | ||||||||||
|
Net income (loss) available to
common shareholders
|
(21,375 | ) | (1,604 | ) | 2,493 | 2,223 | ||||||||||
|
Basic and diluted earnings (loss) per
share of Class A common stock
|
(0.48 | ) | (0.04 | ) | 0.06 | 0.05 | ||||||||||
|
Basic and diluted earnings (loss) per
share of Class B common stock
|
(0.24 | ) | (0.02 | ) | 0.03 | 0.03 | ||||||||||
| Note 15: |
Subsequent Events
|
We have evaluated for subsequent events as defined by the accounting guidance through the
date of financial statement issuance. No items were identified in this period subsequent to
the financial statement date that required adjustment or disclosure.
82
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Financial Schedules
Financial Schedules
Schedule II
Condensed Financial Information of Registrant
CITIZENS, INC. (Parent Company)
Balance Sheet
Condensed Financial Information of Registrant
CITIZENS, INC. (Parent Company)
Balance Sheet
| At December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Assets
|
||||||||
|
|
||||||||
|
Investment in subsidiaries
(1)
|
$ | 185,775 | 151,973 | |||||
|
Fixed maturities available-for-sale, at fair value
|
1,715 | 4,301 | ||||||
|
Mortgage loans on real estate
|
500 | — | ||||||
|
Real estate and other long-term investments
|
6,360 | 5,262 | ||||||
|
Short-term investments
|
— | 2,250 | ||||||
|
Cash
|
21,202 | 16,638 | ||||||
|
Accrued investment income
|
10 | 58 | ||||||
|
Accounts receivable from subsidiaries
(1)
|
3,988 | 4,746 | ||||||
|
Other assets
|
734 | 1,029 | ||||||
|
|
||||||||
|
Total assets
|
$ | 220,284 | 186,257 | |||||
|
|
||||||||
|
|
||||||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
|
||||||||
|
Liabilities:
|
||||||||
|
Accrued expense and other liabilities
|
$ | 2,390 | 2,030 | |||||
|
Liabilities for options and warrants
|
1,819 | 4,973 | ||||||
|
|
||||||||
|
Total Liabilities
|
4,209 | 7,003 | ||||||
|
|
||||||||
|
|
||||||||
|
Cumulative convertible preferred stock
|
— | 7,713 | ||||||
|
|
||||||||
|
|
||||||||
|
Stockholders’ equity:
|
||||||||
|
Common stock:
|
||||||||
|
Class A
|
256,703 | 240,511 | ||||||
|
Class B
|
3,184 | 3,184 | ||||||
|
Retained deficit
|
(38,092 | ) | (55,432 | ) | ||||
|
Unrealized investment gains (losses) on securities held by
parent and subsidiaries, net of tax
|
5,291 | (5,711 | ) | |||||
|
Treasury stock
|
(11,011 | ) | (11,011 | ) | ||||
|
|
||||||||
|
Total stockholders’ equity
|
216,075 | 171,541 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 220,284 | 186,257 | |||||
|
|
||||||||
| (1) |
Eliminated in consolidation.
|
See accompanying report of independent registered public accounting firm.
83
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Financial Schedules
Financial Schedules
Schedule II, Continued
Condensed Financial Information of Registrant
CITIZENS, INC. (Parent Company)
Statements of Operations
Condensed Financial Information of Registrant
CITIZENS, INC. (Parent Company)
Statements of Operations
| Years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Revenues:
|
||||||||||||
|
Management service fees
(1)
|
$ | 29,885 | 29,764 | 27,110 | ||||||||
|
Investment income
|
164 | 808 | 342 | |||||||||
|
Decrease (increase) in fair value of warrants
|
3,154 | (2,662 | ) | 828 | ||||||||
|
Other
|
2 | 11 | 6 | |||||||||
|
Realized gains (losses)
|
40 | 18 | (12 | ) | ||||||||
|
|
||||||||||||
|
Total revenues
|
33,245 | 27,939 | 28,274 | |||||||||
|
|
||||||||||||
|
Expenses:
|
||||||||||||
|
General
|
27,907 | 27,791 | 25,547 | |||||||||
|
Taxes
|
1,363 | 1,186 | 1,345 | |||||||||
|
|
||||||||||||
|
Total expenses
|
29,270 | 28,977 | 26,892 | |||||||||
|
|
||||||||||||
|
Income (loss) before equity in income (loss)
of consolidated subsidiaries
|
3,975 | (1,038 | ) | 1,382 | ||||||||
|
Equity in income (loss) of consolidated subsidiaries
|
13,365 | (14,669 | ) | 15,175 | ||||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 17,340 | (15,707 | ) | 16,557 | |||||||
|
|
||||||||||||
| (1) |
Eliminated in consolidation.
|
See accompanying report of independent registered public accounting firm.
84
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Financial Schedules
Financial Schedules
Schedule II, Continued
Condensed Financial Information of Registrant
CITIZENS, INC. (Parent Company)
Statements of Cash Flows
Condensed Financial Information of Registrant
CITIZENS, INC. (Parent Company)
Statements of Cash Flows
| Years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income (loss)
|
$ | 17,340 | (15,707 | ) | 16,557 | |||||||
|
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
|
||||||||||||
|
Realized losses (gains)
|
(40 | ) | (18 | ) | 12 | |||||||
|
Equity in net (income) loss of consolidated subsidiaries
|
(13,365 | ) | 14,669 | (15,175 | ) | |||||||
|
Increase (decrease) in fair value of options and
warrants
|
(3,154 | ) | 2,662 | (828 | ) | |||||||
|
Accrued expenses and other liabilities
|
(204 | ) | 1,006 | 353 | ||||||||
|
Amortization of discounts on short-term investments
|
— | (428 | ) | — | ||||||||
|
Depreciation
|
252 | 126 | 94 | |||||||||
|
Change in accrued investment income
|
48 | 21 | 28 | |||||||||
|
Increase (decrease) in receivable from subsidiaries
|
758 | (2,457 | ) | (644 | ) | |||||||
|
Other
|
868 | (1,379 | ) | 225 | ||||||||
|
|
||||||||||||
|
Net cash provided by (used in) operating activities
|
2,503 | (1,505 | ) | 622 | ||||||||
|
|
||||||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Purchase of fixed maturities, available-for-sale
|
(3,000 | ) | (1,000 | ) | — | |||||||
|
Sale of fixed maturities, available-for-sale
|
— | — | 1,988 | |||||||||
|
Maturities of fixed maturities, available-for-sale
|
5,550 | 2,700 | 500 | |||||||||
|
Sale of real estate and other long-term investments
|
212 | 58 | 104 | |||||||||
|
Purchase of other long-term investments
and property and equipment
|
(2,021 | ) | (806 | ) | (3,901 | ) | ||||||
|
Maturity of short-term investments
|
2,250 | 26,000 | — | |||||||||
|
Purchase of short-term investments
|
— | (10,173 | ) | (17,650 | ) | |||||||
|
Capital contribution to subsidiary
|
(1,000 | ) | — | — | ||||||||
|
Cash paid for acquisition, net
|
— | (8,242 | ) | — | ||||||||
|
|
||||||||||||
|
Net cash provided by (used by) investing activities
|
1,991 | 8,537 | (18,959 | ) | ||||||||
|
|
||||||||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Proceeds from sale of Class A common stock
|
— | — | 17,083 | |||||||||
|
Warrants exercised
|
70 | 125 | — | |||||||||
|
Series A-1 preferred stock capital contributions
|
— | 9,375 | — | |||||||||
|
|
||||||||||||
|
Net cash provided by financing activities
|
70 | 9,500 | 17,083 | |||||||||
|
|
||||||||||||
|
Net increase (decrease) in cash
|
4,564 | 16,532 | (1,254 | ) | ||||||||
|
Cash at beginning of year
|
16,638 | 106 | 1,360 | |||||||||
|
|
||||||||||||
|
Cash at end of year
|
$ | 21,202 | 16,638 | 106 | ||||||||
|
|
||||||||||||
See accompanying report of independent registered public accounting firm.
85
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Financial Schedules
Financial Schedules
Schedule III
Supplementary Insurance Information
| At December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
|
||||||||
|
Deferred policy acquisition cost:
|
||||||||
|
Life Insurance
|
$ | 99,220 | 96,106 | |||||
|
Home Service Insurance
|
16,350 | 13,008 | ||||||
|
Other Non-Insurance Enterprises
|
— | — | ||||||
|
|
||||||||
|
Total consolidated deferred policy acquisition costs:
|
$ | 115,570 | 109,114 | |||||
|
|
||||||||
|
|
||||||||
|
Future policy benefit reserves and policy
claims payable:
|
||||||||
|
Life Insurance
|
$ | 419,766 | 377,039 | |||||
|
Home Service Insurance
|
227,095 | 221,367 | ||||||
|
Other Non-Insurance Enterprises
|
— | — | ||||||
|
|
||||||||
|
Total consolidated future policy benefit reserves
and policy claims payable
|
$ | 646,861 | 598,406 | |||||
|
|
||||||||
|
|
||||||||
|
Unearned premiums:
|
||||||||
|
Life Insurance
|
$ | 1,270 | 690 | |||||
|
Home Service Insurance
|
179 | 194 | ||||||
|
Other Non-Insurance Enterprises
|
— | — | ||||||
|
|
||||||||
|
Total consolidated unearned premiums
|
$ | 1,449 | 884 | |||||
|
|
||||||||
|
|
||||||||
|
Other policy claims and benefits payable:
|
||||||||
|
Life Insurance
|
$ | 27,942 | 25,742 | |||||
|
Home Service Insurance
|
4,708 | 4,664 | ||||||
|
Other Non-Insurance Enterprises
|
— | — | ||||||
|
|
||||||||
|
Total consolidated other policy claims and benefits
payable
|
$ | 32,650 | 30,406 | |||||
|
|
||||||||
See accompanying report of independent registered public accounting firm.
86
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Financial Schedules
Financial Schedules
For the Company’s short duration premiums (property), written premium is not materially different
from earned premium, therefore only earned premiums are detailed in Schedule IV.
Schedule IV
Reinsurance
| % of | ||||||||||||||||||||
| Ceded to | Assumed | Amount | ||||||||||||||||||
| Direct | Other | From Other | Assumed to | |||||||||||||||||
| Amount | Companies | Companies | Net Amount | Net | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Year ended December 31, 2009
|
||||||||||||||||||||
|
Life insurance in force
|
$ | 4,432,017 | 362,891 | 927,917 | 4,997,043 | 18.6 | % | |||||||||||||
|
|
||||||||||||||||||||
|
Premiums:
|
||||||||||||||||||||
|
Life insurance
|
142,098 | 2,513 | 1,416 | 141,001 | ||||||||||||||||
|
Accident and health insurance
|
7,815 | 6,284 | — | 1,531 | ||||||||||||||||
|
Property insurance
|
5,814 | 1,066 | — | 4,748 | ||||||||||||||||
|
|
||||||||||||||||||||
|
Total premiums
|
$ | 155,727 | 9,863 | 1,416 | 147,280 | 1.0 | % | |||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Year ended December 31, 2008
|
||||||||||||||||||||
|
Life insurance in force
|
$ | 4,322,060 | 302,253 | 647,041 | 4,666,848 | 13.9 | % | |||||||||||||
|
|
||||||||||||||||||||
|
Premiums:
|
||||||||||||||||||||
|
Life insurance
|
136,016 | 2,522 | 1,459 | 134,953 | ||||||||||||||||
|
Accident and health insurance
|
9,095 | 7,515 | — | 1,580 | ||||||||||||||||
|
Property insurance
|
5,966 | 1,202 | — | 4,764 | ||||||||||||||||
|
|
||||||||||||||||||||
|
Total premiums
|
$ | 151,077 | 11,239 | 1,459 | 141,297 | 1.0 | % | |||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Year ended December 31, 2007
|
||||||||||||||||||||
|
Life insurance in force
|
$ | 4,167,513 | 273,553 | 644,242 | 4,538,202 | 14.2 | % | |||||||||||||
|
|
||||||||||||||||||||
|
Premiums:
|
||||||||||||||||||||
|
Life insurance
|
130,921 | 2,118 | 1,462 | 130,265 | ||||||||||||||||
|
Accident and health insurance
|
9,720 | 8,162 | — | 1,558 | ||||||||||||||||
|
Property insurance
|
5,768 | 843 | — | 4,925 | ||||||||||||||||
|
|
||||||||||||||||||||
|
Total premiums
|
$ | 146,409 | 11,123 | 1,462 | 136,748 | 1.0 | % | |||||||||||||
|
|
||||||||||||||||||||
See accompanying report of independent registered public accounting firm.
87
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
|
CITIZENS, INC.
|
||||
| Date: March 12, 2010 | By: | /s/ Harold E. Riley | ||
| Harold E. Riley | ||||
| Chairman and Chief Executive Officer | ||||
| By: | /s/ Kay E. Osbourn | |||
| Kay E. Osbourn | ||||
| Executive Vice President, Chief Financial Officer, Principal Accounting Officer and Treasurer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints Rick D. Riley and Geoffrey M. Kolander or any one of them, as his or her
attorney-in-fact and agent, with full power of substitution, for him or her in any and all
capacities, hereby giving and granting to said attorney-in-fact and agent full power and authority
to do and perform all and every act and thing whatsoever requisite and necessary to be done in and
about the premises as fully, to all intents and purposes, as he might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said attorney-in-fact and
agent may or shall lawfully do, or cause to be done, in connection with the proposed filing by
Citizens, Inc., with the Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, of an annual report on Form 10-K for the fiscal year ended
December 31, 2009, including but not limited to, such full power and authority to do the following:
(i) execute and file such annual report; (ii) execute and file any amendment or amendments
thereto; (iii) receive and respond to comments from the Securities and Exchange Commission related
in any way to such annual report or any amendment or amendments thereto; and (iv) execute and
deliver any and all certificates, instruments or other documents related to the matters enumerated
above, as the attorney-in-fact in his sole discretion deems appropriate.
Dated: March 12, 2010
|
/s/ Harold E. Riley
|
/s/ Rick D. Riley | |
|
|
||
|
Harold E. Riley, Chairman of the Board and
Chief Executive Officer
|
Rick D. Riley, Vice Chairman, Chief Corporate Officer and President | |
|
|
||
|
/s/ Richard C. Scott
|
/s/ Robert B. Sloan, Jr. | |
|
|
||
|
Dr. Richard C. Scott, Director
|
Robert B. Sloan, Jr., Director | |
|
|
||
|
/s/ E. Dean Gage
|
/s/ Steven F. Shelton | |
|
|
||
|
Dr. E. Dean Gage, Director
|
Steven F. Shelton, Director | |
|
|
||
|
/s/ Timothy T. Timmerman
|
/s/ Grant G. Teaff | |
|
|
||
|
Timothy T. Timmerman, Director
|
Grant G. Teaff, Director | |
|
|
||
|
|
/s/ Dottie S. Riley | |
|
|
||
|
|
Dottie S. Riley, Director |
88
Table of Contents
EXHIBITS
| Exhibit Number | The following exhibits are filed herewith: | |||
|
|
||||
| 3.1 |
Restated and Amended Articles of Incorporation (a)
|
|||
|
|
||||
| 3.2 |
Bylaws (b)
|
|||
|
|
||||
| 4.1 |
Amendment to State Series A-1 and A-2 Senior Convertible Preferred Stock (c)
|
|||
|
|
||||
| 10.1 |
Self-Administered Automatic Reinsurance Agreement — Citizens Insurance Company of America and
Riunione Adriatica di Sicurta, S.p.A. (d)
|
|||
|
|
||||
| 10.2 |
Bulk Accidental Death Benefit Reinsurance Agreement between Connecticut General Life
Insurance Company and Citizens Insurance Company of America, as amended (e)
|
|||
|
|
||||
| 10.3 |
Coinsurance Reinsurance Agreement, Assumption Reinsurance Agreement, Administrative Services
Agreement dated March 9, 2004, between Citizens Insurance Company of America and Texas
International Life Insurance Company, Reinsurance Trust Agreement dated March 9, 2004, by and
among Citizens Insurance Company of America, Texas International Life Insurance Company and
Wells Fargo Bank,
N.A. (f)
|
|||
|
|
||||
| 10.4 |
Coinsurance Reinsurance Agreement, Assumption Reinsurance Agreement, Administrative Services
Agreement dated March 9, 2004, between Combined Underwriters Life Insurance Company and Texas
International Life Insurance Company, Reinsurance Trust Agreement dated March 9, 2004, by and
among Combined Underwriters Life Insurance Company, Texas International Life Insurance Company
and Wells Fargo Bank, N.A. (g)
|
|||
|
|
||||
| 10.5 | (a) |
Securities Purchase Agreement dated July 12, 2004 among Citizens, Inc., Mainfield
Enterprises, Inc., Steelhead Investments Ltd., Portside Growth and Opportunity Fund, and
Smithfield Fiduciary LLC (h)
|
||
|
|
||||
| 10.5 | (b) |
Registration Rights Agreement dated July 12, 2004 among Citizens, Inc., Mainfield
Enterprises, Inc., Steelhead Investments Ltd., Portside Growth and Opportunity Fund, and
Smithfield Fiduciary LLC (h)
|
||
|
|
||||
| 10.5 | (c) |
Unit Warrant dated July 12, 2004, to Mainfield Enterprises, Inc. (h)
|
||
|
|
||||
| 10.5 | (d) |
Unit Warrant dated July 12, 2004, to Steelhead Investments Ltd. (h)
|
||
|
|
||||
| 10.5 | (e) |
Unit Warrant dated July 12, 2004, to Portside Growth and Opportunity Fund (h)
|
||
|
|
||||
| 10.5 | (f) |
Unit Warrant dated July 12, 2004, to Smithfield Fiduciary LLC (h)
|
||
|
|
||||
| 10.5 | (g) |
Warrant to Purchase Class A Common Stock to Mainfield Enterprises, Inc. (h)
|
||
|
|
||||
| 10.5 | (h) |
Warrant to Purchase Class A Common Stock to Steelhead Investments Ltd. (h)
|
||
|
|
||||
| 10.5 | (i) |
Warrant to Purchase Class A Common Stock to Portside Growth and Opportunity Fund (h)
|
||
|
|
||||
| 10.5 | (j) |
Warrant to Purchase Class A Common Stock to Smithfield Fiduciary LLC (h)
|
||
|
|
||||
| 10.5 | (k) |
Subordination Agreement among Regions Bank, the Purchasers and Citizens, Inc. dated July
12, 2004 (h)
|
||
|
|
||||
| 10.5 | (l) |
Non-Exclusive Finder’s Agreement dated September 29, 2003, between Citizens, Inc. and the
Shemano Group, Inc. (h)
|
||
89
Table of Contents
| Exhibit Number | The following exhibits are filed herewith: | |||
|
|
||||
| 10.6 |
Self-Administered Automatic Reinsurance Agreement between Citizens Insurance Company of
America and Converium Reinsurance (Germany) Ltd.(i)
|
|||
|
|
||||
| 10.7 |
Self-Administered Automatic Reinsurance Agreement between Citizens Insurance Company of
America and Scottish Re Worldwide (England) (j)
|
|||
|
|
||||
| 10.8 |
Self-Administered Automatic
Reinsurance Agreement - CICA Life Insurance Company of America and Scor Global Life U.S.
Re Insurance Company (k)
|
|||
|
|
||||
| 10.9 |
Self-Administered
Automatic Reinsurance Agreement - CICA Life Insurance Company of America and Mapfre Re Compania de Reaseguros, S.A. (l)
|
|||
|
|
||||
| 11 |
Statement re: Computation of per share earnings (see financial statements)
|
|||
|
|
||||
| 21 |
Subsidiaries of the Registrant*
|
|||
|
|
||||
| 23 |
Consent of Independent Registered Public Accounting Firm — Ernst & Young LLP*
|
|||
|
|
||||
| 24 |
Power of Attorney (m)
|
|||
|
|
||||
| 31.1 |
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act*
|
|||
|
|
||||
| 31.2 |
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act*
|
|||
|
|
||||
| 32.1 |
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*
|
|||
|
|
||||
| 32.2 |
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*
|
|||
| * |
Filed herewith.
|
|
| (a) |
Filed on March 15, 2004 with the Registrant’s Annual Report on Form 10-K for the Year Ended
December 31, 2003 as Exhibit 3.1, and incorporated herein by reference.
|
|
| (b) |
Filed on March 31, 1999 with the Registrant’s Annual Report on Form 10-K for the Year Ended
December 31, 1998, as Exhibit 3.2, and incorporated herein by reference.
|
|
| (c) |
Filed on July 15, 2004, with the Registrant’s Current Report on Form 8-K as Exhibit 4.1, and
incorporated herein by reference.
|
|
| (d) |
Filed as Exhibit 10.8 with the Registration Statement on Form S-4, SEC File No. 333-16163, on
November 14, 1996 and incorporated herein by reference.
|
|
| (e) |
Filed on April 9, 1997 as Exhibit 10.9 with the Registrant’s Annual Report on Form 10-K for
the Year Ended December 31, 1996, Amendment No. 1, and incorporated herein by reference.
|
|
| (f) |
Filed on March 22, 2004 as Exhibit 10.8 of the Registrant’s Current Report on Form 8-K, and
incorporated herein by reference.
|
|
| (g) |
Filed on March 22, 2004 as Exhibit 10.9 of the Registrant’s Current Report on Form 8-K, and
incorporated herein by reference.
|
|
| (h) |
Filed on July 15, 2004 as part of Exhibit 10.12 with the Registrant’s Current Report on Form
8-K, and incorporated herein by reference.
|
|
| (i) |
Filed on March 31, 2005, with the Registrant’s Annual Report on Form 10-K for the Year Ended
December 31, 2004, as Exhibit 10.10(m), and incorporated herein by reference.
|
|
| (j) |
Filed on March 31, 2005, with the Registrant’s Annual Report on Form 10-K for the Year Ended
December 31, 2004, as Exhibit 10.10(n), and incorporated herein by reference.
|
|
| (k) |
Filed on November 6, 2009,
with the Registrant’s Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 2009, as Exhibit 10.8(k), and incorporated herein by reference.
|
|
| (l) |
Filed on November 6, 2009,
with the Registrant’s Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 2009, as Exhibit 10.9(l), and incorporated herein by reference.
|
|
| (m) |
The Power of Attorney is incorporated in the signature page enclosed herein.
|
90
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. (reserved)Part IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchase Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIPart IVItem 15. Exhibits, Financial Statement SchedulesNote 1: Summary Of Significant Accounting PoliciesNote 2: InvestmentsNote 3: Fair Value MeasurementsNote 4: Policy LiabilitiesNote 5: ReinsuranceNote 6: Stockholders Equity and RestrictionsNote 7: Convertible Preferred StockNote 8: Commitments and ContingenciesNote 9: Segment and Other Operating InformationNote 10: Income TaxesNote 11: Other Comprehensive Income (loss)Note 12: Profit-sharing PlanNote 13: Related Party TransactionsNote 14: Quarterly Financial Information (unaudited)Note 15: Subsequent Events