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, 2010
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, 2010, the aggregate market value of the Class A voting stock held by non-affiliates
of the registrant was approximately $292,164,100.
Number of shares of
common stock outstanding as of March 8, 2011:
Class A: 48,686,759
Class B: 1,001,714
Class A: 48,686,759
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 2011 Annual Meeting of Shareholders.
Table of Contents
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| Exhibit 31.1 | ||||||||
| Exhibit 31.2 | ||||||||
| Exhibit 32.1 | ||||||||
| Exhibit 32.2 | ||||||||
| Exhibit 99.1 | ||||||||
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;
|
| • |
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;
|
| • |
The performance of our investment portfolio, which may be adversely affected by changes in
interest rates, adverse developments and ratings of issuers whose debt securities we may hold,
and other adverse macroeconomic events;
|
| • |
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; and
|
| • |
Changes in statutory or U.S. GAAP accounting principles, policies or practices.
|
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
ITEM 1.
BUSINESS
Overview
Citizens, Inc. is an insurance holding company serving the life insurance needs of individuals in
the United States since 1969 and in over 34 countries around the world since 1975. Through our
insurance subsidiaries, we pursue a strategy of offering traditional insurance products in niche
markets where we believe we are able to achieve competitive advantages. We had approximately $1.0
billion of assets under management at December 31, 2010 and approximately $5.1 billion of insurance
in force. Our core insurance 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 concentrated in the
midwest and southern United States through independent marketing consultants; and
|
| • |
final expense and limited liability property policies to middle and lower income
households in Louisiana, Arkansas, and Mississippi through employee and independent agents
in our home service distribution channel.
|
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 Company
has experienced significant growth through acquisitions in the domestic market and through market
expansion in the international market. We capitalize on the experience of our management team in
marketing and operations as we seek to generate bottom line return 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 be competitive
in our current markets while protecting our shareholders and servicing our policyholders.
Our business has grown, both internationally and domestically, in recent years. Revenues rose from
$154.2 million in 2006 to $191.2 million in 2010. During the five years ended December 31, 2010,
our assets grew from $711.1 million to $986.5 million. Total stockholders’ equity increased from
$139.6 million at December 31, 2006 to $227.6 million at December 31, 2010. See Item 6. “Selected
Financial Data” in this Report.
Our Operating Segments
Our business is comprised of three operating business segments, as detailed below.
| • |
Life Insurance
|
| • |
Home Service Insurance
|
| • |
Other Non-insurance Enterprises
|
Our insurance operations are the primary focus of the Company as those segments generate the
majority of our income. See Note 9 of the “Notes to Consolidated Financial Statements” for operating results of our segments for each of
the years ended December 31, 2010, 2009 and 2008.
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. Additionally, endowment contracts
are issued by the Company, which are principally accumulation 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 Sales
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 unit of coverage;
|
| • |
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;
|
| • |
favorable persistency levels and mortality rates comparable to our U.S. policies.
|
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,
Texas 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 or
customers 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 includes medical
reviews of applicants as well as background and reference checks. In addition, we have a claims
policy that requires investigation of substantially all death claims. Furthermore, we perform
background reviews and reference checks of prospective marketing firms and consultants.
Independent marketing firms and consultants 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 CICA, our subsidiary that writes all of our international business.
| Years ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
Country
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||||||||||||||||||||||||
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Colombia
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$ | 21,622 | 20.9 | % | $ | 23,755 | 23.8 | % | $ | 19,473 | 20.6 | % | ||||||||||||
|
Venezuela
|
16,875 | 16.3 | 14,209 | 14.2 | 12,594 | 13.4 | ||||||||||||||||||
|
Taiwan
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15,245 | 14.7 | 14,316 | 14.4 | 13,793 | 14.6 | ||||||||||||||||||
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Ecuador
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12,427 | 12.0 | 10,922 | 11.0 | 10,889 | 11.5 | ||||||||||||||||||
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Argentina
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9,232 | 8.9 | 8,669 | 8.7 | 9,580 | 10.2 | ||||||||||||||||||
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Other Non-U.S.
|
28,159 | 27.2 | 27,843 | 27.9 | 27,988 | 29.7 | ||||||||||||||||||
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Total
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$ | 103,560 | 100.0 | % | $ | 99,714 | 100.0 | % | $ | 94,317 | 100.0 | % | ||||||||||||
|
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The ordinary whole life policies issued to residents of foreign countries during 2010 had an
average face amount of approximately $68,000.
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
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| • |
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 for cash dividend as apportioned by CICA’s board of
directors). 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 living 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 their countries.
Domestic Sales
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.
Our distribution strategy is focused on 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 transition 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 our policyholders.
5
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
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.
| Years ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
State
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||||||||||||||||||||||||
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Texas
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$ | 6,284 | 39.4 | % | $ | 6,501 | 37.2 | % | $ | 7,306 | 41.6 | % | ||||||||||||
|
Indiana
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1,904 | 11.9 | 2,125 | 12.1 | 99 | 0.6 | ||||||||||||||||||
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Missouri
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1,734 | 10.9 | 1,877 | 10.7 | 2,073 | 11.8 | ||||||||||||||||||
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Kentucky
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1,296 | 8.1 | 1,525 | 8.7 | 1,838 | 10.5 | ||||||||||||||||||
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Mississippi
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1,188 | 7.4 | 1,308 | 7.5 | 1,417 | 8.1 | ||||||||||||||||||
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Other States
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3,559 | 22.3 | 4,159 | 23.8 | 4,819 | 27.5 | ||||||||||||||||||
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Total
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$ | 15,965 | 100.0 | % | $ | 17,495 | 100.0 | % | $ | 17,552 | 100.0 | % | ||||||||||||
|
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The 2009 increase in Indiana resulted from the acquisition of Integrity Capital Insurance Company
(“ICIC”), which is domiciled in Indiana and had year-to-date premiums totaling approximately $1.6
million and $1.7 million in 2009 and 2010. The Company completed its acquisition of Integrity
Capital Corporation (“ICC”) in exchange for 1,294,000 shares of Citizens, Inc. Class A common
stock. ICC is the parent of ICIC, an Indiana life insurance company that is included in the Life
Insurance segment. The transaction was valued at $9.0 million when the transaction closed on
February 27, 2009.
A number of domestic life insurance companies we acquired had blocks of accident and health
insurance policies, which we did not consider to be a core part of our business. We have ceded
this 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, 2010, 2009, and 2008 were $5.3 million, $6.3
million and $7.5 million, respectively.
Domestic Products
Our domestic life insurance products focus primarily on living needs and provide benefits focused
toward accumulating money for the policyowner. The features of our domestic life insurance
products include:
| • |
cash accumulation/living benefits;
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| • |
tax-deferred interest earnings;
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| • |
guaranteed lifetime income options;
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| • |
monthly income for surviving family members;
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| • |
accidental death benefit coverage options; and
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| • |
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.
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 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.
6
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
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”), and focus on the life insurance needs
of the middle and lower income markets, primarily 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.
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.
| Years ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
State
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Louisiana
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$ | 39,920 | 87.1 | % | $ | 38,759 | 86.3 | % | $ | 37,485 | 86.0 | % | ||||||||||||
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Arkansas
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4,395 | 9.6 | 4,652 | 10.4 | 4,584 | 10.5 | ||||||||||||||||||
|
Mississippi
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333 | 0.7 | 330 | 0.7 | 359 | 0.8 | ||||||||||||||||||
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Other States
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1,167 | 2.5 | 1,190 | 2.6 | 1,180 | 2.7 | ||||||||||||||||||
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||||||||||||||||||||||||
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Total
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$ | 45,815 | 100.0 | % | $ | 44,931 | 100.0 | % | $ | 43,608 | 100.0 | % | ||||||||||||
|
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||||||||||||||||||||||||
Home Service Products and Competition
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 issued was
approximately $7,100 in 2010; 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 face competition in Louisiana, Mississippi and Arkansas from other companies
specializing in home service distribution of insurance. We seek to compete based upon our emphasis
on personal service to our customers. We intend to continue premium growth within this segment via
direct sales and acquisitions.
The Company completed the acquisition of Ozark National Life Insurance Company (“ONLIC”) in October
of 2008 for a purchase price of $8.0 million. This entity was merged into SPLIC as of December 31,
2009.
Other Non-Insurance Enterprises
Other Non-insurance Enterprises includes Computing Technology, Inc., which provides data processing
services to the Company, and Insurance Investors, Inc., which provides aviation transportation to
the Company. 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 in Louisiana and Arkansas, as
well as our support center in Donaldsonville, Louisiana through approximately 64 operations
personnel, and Little Rock, Arkansas through 2 personnel. At our executive offices, we perform
policy design, marketing oversight, underwriting, accounting and reporting, customer service,
administration and investing activities.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
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 ultimately 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.
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 USA Patriot Act of 2001, the Gramm-Leach-Bliley Act of 1999, the International Money Laundering
Abatement and Financial Anti-Terrorism Act of 2001, the Sarbanes-Oxley Act of 2002 and the recently
enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Dodd-Frank Act”), are
examples of U.S. regulation that affect our business. We are subject to comprehensive regulations
under the USA Patriot Act with respect to money laundering, as well as federal regulations
regarding privacy and confidentiality. Our insurance products and thus our businesses also are
affected by U.S. federal, state and local tax laws. The Dodd-Frank Act focuses on financial reform
and may result in significant changes to the regulation of institutions operating in the financial
services industry, including the Company. Legislative or regulatory requirements imposed by or
promulgated in connection with this Act may make it more expensive for the Company to conduct its
business, may have a material adverse effect on the overall business climate and could materially
affect the profitability of the results of operations and financial condition of financial
institutions. The Company is uncertain as to all of the impacts this new legislation will have and
cannot provide assurance it will not adversely affect its results of operations and financial
condition. In general, government regulation at the federal level may increase and may result in
unpredictable consequences for the Company. In addition, other federal laws and regulations apply
to us in areas such as pension regulations, privacy, tort reform and taxation.
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.
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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 such payment could be
adverse to policyholders or insurance 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 our shareholders might consider desirable.
Risk-based capital (“RBC”) requirements are imposed on life and property and casualty insurance
companies. The National Association of Insurance Commissioners (“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 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.
Two of our subsidiaries fell below the minimum RBC threshold at December 31, 2008. A capital
contribution of $1.0 million was made to SPFIC during the first quarter of 2009. An additional
$1.0 million capital contribution was made to SPFIC in the third quarter of 2009. A capital
contribution of $1.0 million was also made to Ozark National Life Insurance Company (“ONLIC”)
during the first quarter of 2009 due to its RBC ratio falling below 200% at December 31, 2008. 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. These capital contributions increased the RBC
ratios and RBC action plans were submitted to the relevant insurance departments. The capital
balance of ONLIC was determined to be at company action level at March 31, 2009 due to continued
declines relative to its investment 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. All insurance subsidiaries were above
the RBC minimums at December 31, 2010.
Effective September 1, 2010, CICA contributed 150,000 shares of Citizens, Inc. Class A common
stock, valued at $1,032,000, to CNLIC as a capital contribution due to surplus issues that arose in
Florida and Mississippi where CNLIC was deficient by approximately $0.4 million and $0.5 million,
respectively. The contribution corrected the deficiencies in both states. The transaction has
been eliminated under consolidation accounting rules. Life premiums collected in 2010 were $1,200
and $8,000, and in 2009 were $2,000 and $9,800 relating exclusively to policy renewals in Florida
and Mississippi, respectively. Management is currently evaluating CNLIC’s operations and strategy
for the future, but does not anticipate any material change relative to the consolidated financial
condition 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 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 and 2010. To temper
this positive RBC impact, and as a temporary measure at December 31, 2009 and 2010, a 5% pre-tax
RBC charge must be applied to the additional admitted deferred tax assets generated by SSAP 10R.
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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.
| Item 1A. |
RISK FACTORS
|
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 financial statement 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 foreign insurance laws, political instability and 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 seek to address this risk by, among other
things, not accepting insurance applications outside of the U.S., maintaining all of our assets are
in the U.S. and requiring all policy premiums must be paid to us in U.S. Dollars drawn on U.S.
financial institutions. Accordingly, 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 marketing our insurance products.
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. Also, new laws or
regulations could be implemented or new applications of existing laws or regulations could occur,
which could result in the cessation of marketing activities by our independent marketing firms and
consultants. Further, 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 market our policies. 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. From time to time we have become aware of new foreign laws,
regulations or new interpretations of foreign laws or regulations that may have an adverse effect
on the marketing efforts of our foreign independent marketing firms and consultants. We cannot
assure you that any of these laws, regulations, or application of them by foreign regulatory
authorities will not have an adverse effect on the marketing efforts of our independent marketing
firms and consultants and, in turn, on our revenues.
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 legal prohibition, 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.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
The majority of our foreign policyholders choose to invest their policy dividends or other cash
benefits in our Class A common stock through the Citizens, Inc. Stock Investment Plan (the “Plan”). If a securities regulatory
authority were to deem the Plan’s operation contrary to applicable securities laws,
we risk facing fines and penalties and cease and desist orders which would create a reduction in
the amount of Class A common stock purchased on the open market through the Plan.
The offer and sale of our Class A common stock through the Plan is
registered under the Securities Act of 1933, but not under the laws of any foreign jurisdiction.
Most all of our foreign policyholders participate in the Plan and choose to invest dividends paid
on their insurance policies in our Class A common stock pursuant to the Plan. 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 foreign securities regulatory authority
were to determine the offer and sale of our Class A common stock under the Plan were contrary to
applicable laws and regulations of its jurisdiction, we could be faced with cease and desist
orders, fines and penalties, or reduced participation in the Plan by our foreign policyholders.
This also could materially reduce the amount of our Class A common stock purchased and sold in the
open market under the Plan, as historically a significant volume of shares have been purchased
under the Plan through issuance of 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.
We face financial and capital market risks in our operations
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 over the past
several years, we experienced significant call activity on our fixed income portfolio which has
decreased our investment yields compared to prior years. Also, we recorded other-than-temporary
impairments (“OTTI”) in 2008 and 2009 due to market declines and credit decline. We recognized
realized gains due to market appreciation on a significant number of these previously impaired
securities that were disposed of in 2009 and 2010. In addition, the significant increase in
worldwide economic instability and unemployment rates 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.
Changes in market interest rates may significantly affect our profitability.
Some of our products, principally traditional whole life insurance with annuity riders, 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 of our 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.
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Our investment portfolio is subject to various risks that may result in realized investment losses.
In particular, decreases in the fair value of fixed maturities may significantly reduce the value
of our investments, and as a result, our financial condition may suffer.
We are subject to credit risk in our investment portfolio. Defaults by third parties in the payment
or performance of their obligations under these securities could reduce our investment income and
realized investment gains or result in the recognition of investment losses. The value of our
investments may be materially adversely affected by increases in interest rates, downgrades in the
bonds included in our portfolio and by other factors that may result in the recognition of
other-than-temporary impairments. Each of these events may cause us to reduce the carrying value of
our investment portfolio.
In particular, at December 31, 2010, fixed maturities represented $656 million or 84.6% of our
total investments of $775 million. The fair value of fixed maturities and the related investment
income fluctuates depending on general economic and market conditions. The fair value of these
investments generally increases or decreases in an inverse relationship with fluctuations in
interest rates, while net investment income realized by us will generally increase or decrease in
line with changes in market interest rates. In addition, actual net investment income and/or cash
flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed
securities, may differ from those anticipated at the time of investment as a result of interest
rate fluctuations. An investment has prepayment risk when there is a risk that the timing of cash
flows that result from the repayment of principal might occur earlier than anticipated because of
declining interest rates or later than anticipated because of rising interest rates. We experienced
significant prepayments of bonds in our investment portfolio in 2010 and 2009. The impact of value
fluctuations affects our consolidated financial statements. Because all of our fixed maturities are
classified as available for sale, changes in the fair value of our securities are reflected in our
stockholders’ equity (accumulated other comprehensive income or loss). No similar adjustment is
made for liabilities to reflect a change in interest rates. Therefore, interest rate fluctuations
and economic conditions could adversely affect our stockholders’ equity, total comprehensive income
and/or cash flows. For mortgage-backed securities, credit risk exists if mortgagees default on the
underlying mortgages. Although at December 31, 2010, approximately 74.4% of our fixed maturities
were investment grade and continue to be rated AA or above, all of our fixed maturities are subject
to credit risk. If any of the issuers of our fixed maturities suffer financial setbacks, the
ratings on the fixed maturities could fall (with a concurrent fall in fair value) and, in a worst
case scenario, the issuer could default on its financial obligations. If the issuer defaults, we
could have realized losses associated with the impairment of the securities.
A substantial portion of our investment portfolio is concentrated in U.S. Government sponsored
corporations and agencies.
At December 31, 2010 we had investments of $378 million (48.7% of our total investment portfolio)
in U.S. Government sponsored corporations and agencies, including the Federal Home Loan Mortgage
Corporation (“Freddie”) and the Federal National Mortgage Association (“Fannie”). Both Freddie and
Fannie are currently in conservatorship and the federal government is considering proposals to
phase them out, or allow them to continue as private corporations, among other things. If they are
wound down, it is not clear how investments sponsored by them might be affected; however, the
direct and indirect impact on our investment portfolio could be material and could be adverse.
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 our net income. Our total gross
unrealized losses on our available-for-sale securities portfolio at December 31, 2010 were $13.7
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.
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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, 2010, we had $125.7 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, 2010, we had $31.6 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.
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. Goodwill in our consolidated financial statements was
$17,160,000 as of December 31, 2009 and 2010.
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
Delia Bolanos Andrade, et al., Plaintiffs, v.
Citizens Insurance Company of America, et al.
, 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.
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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
benefits 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 benefits 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.
In 2010, we reinsured $381 million of face amount of our life insurance policies. Amounts
reinsured in 2010 represented 8.6% 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. In addition, we face intense competition in seeking to make
acquisitions, much of which is from companies with greater financial and human resources than we
have.
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 operating efficiencies, 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.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
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 increase the supply of available insurance, 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.
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 in attracting and maintaining 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.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
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 82), and our Vice Chairman of the Board and President, Rick D. Riley (age 57),
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 USA 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.
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 USA
Patriot Act, our revenues, results of operations and financial condition could be materially
adversely affected.
Although the U.S. federal government has not historically regulated the insurance business, the
Dodd-Frank Act, enacted in July 2010, expands the federal presence in insurance oversight. The
Act’s requirements include streamlining the state-based regulation of reinsurance and non-admitted
insurance (also known as surplus lines insurance, which is property or casualty insurance written
by a company that is not licensed to sell policies of insurance in a given state). This legislation
also establishes a new Federal Insurance Office within the U.S. Department of the Treasury with
powers over all lines of insurance except health insurance, certain long-term care insurance and
crop insurance. The Federal Insurance Office is authorized to, among other things, gather data and
information to monitor aspects of the insurance industry, identify issues in the regulation of
insurers about insurance matters and preempt state insurance measures under certain circumstances.
As this Act calls for numerous studies and contemplates further regulation, the future impact of
the Act on our results of operations or our financial condition cannot be determined at this time.
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 USA Patriot Act, financial services regulation, securities regulation, including the
Sarbanes-Oxley Act of 2002, the Dodd-Frank Act, 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.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
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 products acquired through
acquisition, 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 in seeking 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 dependent, among other things, 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
customers and vendors. Obligations to protect vendors 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 the insurance industry 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.
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 policyowners 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 that occurred 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.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
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 through 2008, 2009
and 2010. 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 seek any acquisitions and negatively impact profitability of an acquisition.
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, in October 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 or other debt. In February 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. The positive effect on the U.S.
economy is unclear. There can be no assurance as to what impact such actions and any future U.S.
government’s purported fiscal stimuli 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.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Unexpected losses in future reporting periods may require us to adjust the valuation allowance
against our deferred tax assets.
The Company’s valuation allowance of $2.5 million at December 31, 2009 relative to our deferred tax
asset (“DTA”) was released, and there was no allowance at December 31, 2010. The valuation
allowance was previously 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 may be required to record a 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.
Risks Relating to Our Class A Common Stock
The price of our Class A common stock may be impacted by the level of participation in the
Citizens, Inc., Stock Investment Plan (the “Plan”).
Most all of our international policyholders participate in the Plan and they invest their policy
dividends and benefits in our Class A common stock pursuant to the Plan. Once a policyholder
elects to participate in the Plan, his or her policy benefits can be used to purchase Citizens
Class A common stock under the Plan. There is a risk our Class A common stock price could be
negatively impacted by a decrease in our policyholders’ participation in the Plan. If fewer
policyholders elect to participate in the Plan, or our international premium collections were to
decrease as a result of regulatory, economic, or marketing impediments, the participation in the
Plan could decrease and our Class A common stock price could be negatively impacted.
Control of our Company, through the ownership of our Class B Common Stock, may be held by a
501(c)(3) charitable foundation established by our Founder and we cannot determine whether any
change in our management, operations, or operating strategies will occur as a result of such an
ownership change.
Harold E. Riley, our Founder, Chairman and CEO, is the beneficial owner of 100% of the Citizens
Class B common stock, which is held in the name of the Harold E. Riley Trust (“Trust”), of which he
serves as Trustee. Citizens’ Class A and Class B common stock are identical in all respects,
except the Class B common stock elects a simple majority of the Board and receives one-half of any
cash dividends paid on a per share basis as the Class A shares. Therefore, Mr. Riley controls our
Company. The Class A common stock elects the remainder of the Board. The Trust documents provide
that upon Mr. Riley’s death, the Class B common stock will be transferred from the Trust to the
Harold E. Riley Foundation, a charitable organization established under 501(c)(3) of the Internal
Revenue Code (the “Foundation”). In addition, the Trust documents provide that Mr. Riley may at
any time transfer the Class B common stock held by the Trust to the Foundation. It is unclear
what, if any, changes would occur to our board, management structure, or corporate operating
strategies as a result of different ownership of our Class B common stock.
There are a substantial number of our issued shares of 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, 2010. Our
executive officers, directors and management owned approximately 4,580,000 shares of our Class A
common stock as of December 31, 2010, representing approximately 9% 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.
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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 do not control us and have a limited ability to influence our
business policies and corporate actions and are not by themselves able to elect any of our
directors.
It is difficult for Class A common shareholders to elect any of our directors or otherwise exert
any significant influence over our business. The sole holder of our outstanding Class B common
stock is entitled to elect a simple majority of our board of directors and therefore controls us.
All of our Class B common stock is currently owned by the Harold E. Riley Trust, of which Harold E.
Riley, our founder, 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 proposed acquirer, the integrity of the
proposed acquirer’s board of directors and executive officers, the proposed 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.
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. We do not expect to pay cash
dividends on our Class A common stock for the foreseeable future.
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| Item 1B. |
UNRESOLVED STAFF COMMENTS
|
None.
| Item 2. |
PROPERTIES
|
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.
| Item 3. |
LEGAL PROCEEDINGS
|
We are a defendant in a lawsuit filed on August 6, 1999 in the Texas District Court, Austin, Texas,
now styled
Delia Bolanos Andrade, et al., Plaintiffs, v. Citizens Insurance Company of America, et
al., Defendants
in which a class was originally certified by the trial court and reversed by the
Texas Supreme Court in 2007 with an order to the trial court to conduct further proceedings
consistent with its ruling. The underlying lawsuit alleged that certain life insurance policies
CICA 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 December 9, 2009, the trial court denied the recertification of
the class after conducting additional proceedings in accordance with the Texas Supreme Court’s
ruling. The remaining plaintiffs must now proceed individually, and not as a class, if they intend
to pursue their cases against us. We intend to maintain a vigorous defense in any remaining
proceedings.
In addition to the legal proceeding 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 4. |
(Reserved)
|
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
| Item 5. |
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASE OF EQUITY SECURITIES
|
Market Information
Our Class A common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol CIA.
Quarterly high and low closing prices per share of our Class A common stock as reported by the NYSE
are shown below.
| 2010 | 2009 | |||||||||||||||
| Quarter Ended | High | Low | High | Low | ||||||||||||
|
March 31
|
$ | 7.27 | 5.90 | $ | 9.65 | 6.32 | ||||||||||
|
June 30
|
7.31 | 6.43 | 7.98 | 6.08 | ||||||||||||
|
September 30
|
7.17 | 6.55 | 7.20 | 5.59 | ||||||||||||
|
December 31
|
7.59 | 6.84 | 6.83 | 5.80 | ||||||||||||
Equity Security Holders
The number of stockholders on record on March 8, 2011 was as follows:
| • |
Class A Common Stock — 90,082
|
| • |
Class B Common Stock — 1
|
We have never paid cash dividends on our Class A or B common stock 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 2008, 2009 or 2010.
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.”
| Item 6. |
SELECTED FINANCIAL DATA
|
The following table presents selected financial data of the Company. This should be read in
conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and Item 8. “Financial Statements and Supplementary Data” of this Form 10-K.
| Years ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
|
Operating items
|
||||||||||||||||||||
|
Insurance premiums
|
$ | 152,052 | 147,280 | 141,297 | 136,748 | 124,626 | ||||||||||||||
|
Net investment income
|
30,077 | 29,602 | 30,478 | 30,743 | 26,975 | |||||||||||||||
|
Realized gains (losses)
|
8,012 | 8,040 | (23,812 | ) | (94 | ) | 1,286 | |||||||||||||
|
Change in fair value of warrants
|
232 | 3,154 | (2,662 | ) | 828 | (244 | ) | |||||||||||||
|
Total revenues
|
191,181 | 188,980 | 146,673 | 169,637 | 154,189 | |||||||||||||||
|
Net income (loss)
|
15,511 | 17,340 | (15,707 | ) | 16,557 | 8,677 | ||||||||||||||
|
Balance sheet data
|
||||||||||||||||||||
|
Total assets
|
986,506 | 927,326 | 832,276 | 787,909 | 711,184 | |||||||||||||||
|
Total liabilities
|
758,872 | 711,251 | 653,022 | 597,532 | 558,690 | |||||||||||||||
|
Total stockholders’ equity
|
227,634 | 216,075 | 171,541 | 176,157 | 139,611 | |||||||||||||||
|
Life insurance in force
|
5,115,662 | 4,997,043 | 4,666,848 | 4,538,202 | 4,382,530 | |||||||||||||||
|
Per share data
|
||||||||||||||||||||
|
Book value per share
|
4.58 | 4.35 | 3.68 | 4.00 | 3.38 | |||||||||||||||
|
Basic and diluted earnings (loss)
per Class A share
|
0.32 | 0.31 | (0.42 | ) | 0.35 | 0.16 | ||||||||||||||
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.
22
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
| Item 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following is management’s discussion and analysis of the consolidated financial condition and
consolidated results of operations of the Company. It is intended to be a discussion of certain
key financial information regarding the Company and should be read in conjunction with the
Consolidated Financial Statements and related Notes to this report on Form 10-K.
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 on an ongoing basis to pay future benefits to our policy and contract holders.
Our core operations include issuing:
| • |
whole life insurance;
|
||
| • |
endowments;
|
||
| • |
credit insurance;
|
||
| • |
final expense; and
|
||
| • |
limited liability property policies.
|
Life Insurance
. For 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. We make our insurance products available using third-party marketing
organizations and independent marketing consultants.
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 mid-west and southern U.S. The majority of our revenues are the result of
acquisitions of domestic life insurance companies 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 premiums and provide personal policyholder service.
The Company derives its revenues principally from 1) premiums earned for insurance coverages
provided to insureds; 2) net investment income; and 3) net realized capital gains and losses.
Profitability of our operations depends heavily upon the Company’s underwriting discipline, which
seeks to manage exposure to loss through favorable risk selection and diversification, management
of claims, use of reinsurance, the size of our in force block, actual mortality and morbidity
experience, and our ability to manage our expense ratio, which we accomplish through economies of
scale and management of acquisition costs and other underwriting expenses.
Pricing adequacy depends on a number of factors, including the ability to obtain regulatory
approval for rate changes, proper evaluation of underwriting risks, the ability to project future
losses based on historical loss experience adjusted for known trends, the Company’s response to
competitors, and expectations about regulatory and legal developments and expense levels. The
Company seeks to price our insurance policies such that insurance premiums and future net
investment income earned on premiums received will cover underwriting expenses and the ultimate
cost of paying claims reported on the policies and provide for a profit margin. For many of our
insurance products, the Company is required to obtain approval for the premium rates from state
insurance departments. The profitability of fixed annuities, riders and other “spread-based”
product features depends largely on the Company’s ability to earn target spreads between earned
investment rates on assets and interest credited to policyholders.
The investment return, or yield, on invested assets is an important element of the Company’s
earnings since insurance products are priced with the assumption that premiums received can be
invested for a period of time before benefits are paid. The majority of the Company’s invested
assets have been held in available-for-sale securities, including, among other asset classes,
corporate bonds, municipal bonds, and government obligation bonds.
23
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
The primary investment objective for the Company is to maximize economic value, consistent with
acceptable risk parameters, including the management of credit risk and interest rate sensitivity
of invested assets, while generating sufficient after-tax income to meet policyholder and corporate
obligations. The Company maintains a conservative investment strategy that may vary based on a
variety of factors including business needs, regulatory requirements and tax considerations.
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.
| • |
As 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 pay 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.
|
| • |
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 recent economic pressures, 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.
|
| • |
While our management has more than 40 years of experience in writing life
insurance policies for foreign residents, changes related to foreign government laws and
regulations and application of them, along with currency controls affecting our foreign
resident insureds could adversely impact our revenues, results of operations and financial
condition.
|
Recent Acquisitions
In 2008, the Company acquired ONLIC, an Arkansas domiciled life company. This entity provided an
Arkansas field force of home service agents and funeral homes selling pre-need and final expense
policies and was merged into SPLIC as of December 31, 2009, and is included in the Home Service
segment. In the first quarter of 2009, the Company completed its acquisition of Integrity Capital
Corporation (“ICC”). ICC is the parent of Integrity Capital Insurance Company (“ICIC”), an Indiana
life insurance company that is included in the Life Insurance segment.
24
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
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.
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Revenues:
|
||||||||||||
|
Premiums:
|
||||||||||||
|
Life insurance
|
$ | 145,665 | 141,001 | 134,953 | ||||||||
|
Accident and health insurance
|
1,577 | 1,531 | 1,580 | |||||||||
|
Property insurance
|
4,810 | 4,748 | 4,764 | |||||||||
|
Net investment income
|
30,077 | 29,602 | 30,478 | |||||||||
|
Realized gains (losses), net
|
8,012 | 8,040 | (23,812 | ) | ||||||||
|
Decrease (increase) in fair value of warrants
|
232 | 3,154 | (2,662 | ) | ||||||||
|
Other income
|
808 | 904 | 1,372 | |||||||||
|
|
||||||||||||
|
Total revenues
|
191,181 | 188,980 | 146,673 | |||||||||
|
Exclude increase (decrease) in fair value
of warrants
|
(232 | ) | (3,154 | ) | 2,662 | |||||||
|
|
||||||||||||
|
Total revenues excluding fair value adjustments
of warrants outstanding
|
$ | 190,949 | 185,826 | 149,335 | ||||||||
|
|
||||||||||||
Premium Income
. Premium income derived from life, accident and health, and property
insurance sales, increased 3.2% during 2010 to $152.1 million from $147.3 million in 2009. The
increase resulted primarily from renewal premiums, which totaled $127.1 million, $123.2 million and
$116.6 million in 2010, 2009 and 2008, respectively. Endowment sales represent a significant
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 policy
loan asset balance increased 10.9% year over year.
Net Investment Income
. Net investment income increased $0.5 million with $30.1 million in
2010 compared to $29.6 million in 2009, primarily reflecting higher average invested balances as a
result of investment of new premium revenue, partially offset by lower interest rates.
Net investment income performance is summarized as follows.
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands, except for %) | ||||||||||||
|
|
||||||||||||
|
Net investment income
|
$ | 30,077 | 29,602 | 30,478 | ||||||||
|
Average invested assets, at amortized cost
|
$ | 696,134 | 622,699 | 583,286 | ||||||||
|
Yield on average invested assets
|
4.32 | % | 4.75 | % | 5.23 | % | ||||||
Investment yields have declined over the past several years, as the Company experienced significant
calls by issuers of fixed maturity securities and those proceeds were reinvested into new
securities yielding lower returns as the market rates declined. In the current low yield
environment, we anticipate investment income will decline despite the higher invested asset
balances.
25
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
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. The Company increased
holdings in corporate and municipal bonds during the current year and over 87.1% of total
investment income in 2010 was 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.
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Gross investment income:
|
||||||||||||
|
Fixed maturity securities
|
$ | 26,829 | 25,921 | 27,536 | ||||||||
|
Equity securities
|
713 | 1,056 | 1,027 | |||||||||
|
Mortgage loans
|
101 | 50 | 28 | |||||||||
|
Policy loans
|
2,704 | 2,444 | 2,105 | |||||||||
|
Long-term investments
|
246 | 465 | 39 | |||||||||
|
Other
|
207 | 507 | 357 | |||||||||
|
|
||||||||||||
|
Total investment income
|
30,800 | 30,443 | 31,092 | |||||||||
|
Less investment expenses
|
(723 | ) | (841 | ) | (614 | ) | ||||||
|
|
||||||||||||
|
Net investment income
|
$ | 30,077 | 29,602 | 30,478 | ||||||||
|
|
||||||||||||
Income related to equity securities declined in the current year due to the fact the Company
disposed of a significant number of these securities during the year, resulting in lower investment
income from dividends. The majority of the disposed securities had been previously impaired.
Other investment income for the year ended December 31, 2009 included a legal settlement of $0.2
million in connection with a defaulted bond investment.
Realized Gains (Losses) on Investments
. During the current year, the Company realized net
gains of $1.7 million on security sales that were primarily below investment-grade quality and
related to assets of an acquired entity. In 2010 and 2009, the Company sold equity mutual funds,
which were previously impaired, and realized gains of $6.4 million and $4.9 million, respectively.
The Company also sold a number of fixed maturity investments in 2009, resulting in a total gain of
$8.0 million.
Included in this component are other-than-temporary impairments on securities recorded related to
credit losses. One security which had been previously impaired was written down with a charge to
income of $27,000 during 2010. In 2009, the Company recorded $0.3 million in realized losses
related to other-than-temporary impairments due to market declines and issuer credit deterioration.
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.
26
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Realized gains (losses) are as follows:
| Years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Realized gains (losses):
|
||||||||||||
|
Sales, calls and maturities:
|
||||||||||||
|
Fixed maturities
|
$ | 753 | 2,705 | (2 | ) | |||||||
|
Equity securities
|
7,343 | 5,292 | — | |||||||||
|
Property and equipment
|
(8 | ) | 323 | (4 | ) | |||||||
|
Other long-term investments
|
(49 | ) | 16 | 18 | ||||||||
|
|
||||||||||||
|
Net realized gains (losses)
|
8,039 | 8,336 | 12 | |||||||||
|
|
||||||||||||
|
Other-than-temporary impairments:
|
||||||||||||
|
Fixed maturities
|
(27 | ) | (103 | ) | (288 | ) | ||||||
|
Equity securities
|
— | (193 | ) | (23,536 | ) | |||||||
|
|
||||||||||||
|
Realized loss on OTTI
|
(27 | ) | (296 | ) | (23,824 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net realized gains (losses)
|
$ | 8,012 | 8,040 | (23,812 | ) | |||||||
|
|
||||||||||||
Decrease (Increase) in Fair Value of Warrants
. Because the market value of our Class A
common stock decreased during 2010 and 2009, we recognized a gain on the decrease in fair value of
warrants of $0.2 million and $3.2 million, compared to a loss of $2.7 million in 2008. The gains
in 2010 and 2009 were 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
recognize 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 exercised and converted into our Class A
common stock in July 2012, or sooner, at the election of the warrant holders, or expire.
Benefits and expenses are summarized as follows:
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Benefits and expenses:
|
||||||||||||
|
Insurance benefits paid or provided:
|
||||||||||||
|
Claims and surrenders
|
$ | 61,038 | 59,988 | 56,253 | ||||||||
|
Increase in future policy benefit reserves
|
46,420 | 40,790 | 37,117 | |||||||||
|
Policyholders’ dividends
|
7,485 | 6,680 | 6,865 | |||||||||
|
|
||||||||||||
|
Total insurance benefits paid or provided
|
114,943 | 107,458 | 100,235 | |||||||||
|
Commissions
|
36,585 | 35,536 | 35,984 | |||||||||
|
Other underwriting, acquisition and
insurance expense
|
27,057 | 28,340 | 28,611 | |||||||||
|
Capitalization of deferred policy acquisition costs
|
(27,960 | ) | (27,132 | ) | (29,234 | ) | ||||||
|
Amortization of deferred policy acquisition costs
|
17,840 | 20,678 | 20,775 | |||||||||
|
Amortization of cost of customer relationships
acquired and other intangibles
|
3,086 | 3,494 | 2,897 | |||||||||
|
|
||||||||||||
|
Total benefits and expenses
|
$ | 171,551 | 168,374 | 159,268 | ||||||||
|
|
||||||||||||
27
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Claims and Surrenders
. As noted in the table below, claims and surrenders increased 1.8%
from $60.0 million in 2009 to $61.0 million in 2010. The 2010 increase primarily related to an
increase in endowment benefits, as well as an increase in other policy benefits, which is mostly
interest on other policyholder liabilities. These policy related interest bearing liabilities
increased $7.3 million in 2010 over 2009.
| Years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Death claims
|
$ | 22,670 | 22,494 | 22,529 | ||||||||
|
Surrender expenses
|
19,727 | 19,666 | 15,222 | |||||||||
|
Endowment benefits
|
14,499 | 14,079 | 13,814 | |||||||||
|
Property claims
|
1,578 | 1,590 | 2,657 | |||||||||
|
Accident and health benefits
|
608 | 437 | 427 | |||||||||
|
Other policy benefits
|
1,956 | 1,722 | 1,604 | |||||||||
|
|
||||||||||||
|
Total claims and surrenders
|
$ | 61,038 | 59,988 | 56,253 | ||||||||
|
|
||||||||||||
| • |
The Company monitors death claims based upon expectations. The claims experience has
remained relatively consistent over the last three years. These values may routinely
fluctuate from year to year.
|
| • |
Policy surrenders increased in 2010 and 2009 compared to 2008, but remained at a level
that represents approximately 0.4% of direct insurance inforce. The increase in surrender
expense is primarily related to our international business and is expected to increase over
time due to the aging 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. Total direct insurance inforce reported in 2010 was
$4.5 billion, and in 2009 was $4.4 billion compared to $4.3 billion in 2008.
|
| • |
Endowment benefits increased in each of the last three years. 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.
|
| • |
Property claims remained consistent in 2010 with the amount reported for 2009. In 2008,
Hurricanes Gustav and Ike swept through Louisiana resulting in an increase in property
claims of $800,000.
|
Reserves
. The change in future policy benefit reserves has increased over the past several
years. Sales of certain endowment products, which build reserves at a much higher rate, have
gained popularity in our international markets and have contributed to the increasing reserves over
the past several years. Endowment sales totaled approximately $9.4 million, $8.5 million and $7.4
million in 2010, 2009 and 2008, respectively.
Policyholder Dividends
. The Company issues long duration participating policies to foreign
residents that are expected to pay dividends to policyholders based upon actual experience.
Policyholder dividends are factored into the premiums and have no impact on profitability.
Commissions
. Commission expense fluctuates in a direct relationship to new and renewal
insurance premiums.
Underwriting, Acquisition and Insurance Expense
. Underwriting, acquisition and insurance
expenses decreased over the past several years as management has eliminated inefficiencies and
improved processes. The decrease year to year was primarily related to lower audit and consulting
fees.
Deferred Policy Acquisition Costs
. Capitalized deferred policy acquisition costs (“DAC”)
were $28.0 million, $27.1 million and $29.2 million in 2010, 2009 and 2008. These costs will vary
based upon new and renewal business. Significantly lower amounts are capitalized related to
renewal business. Amortization of deferred policy acquisition costs has decreased from the 2009
level of $20.7 million to $17.8 million in 2010, as policy persistency improved. Amortization
amounts increased in 2009 to $20.7 million compared to $20.8 million in 2008 due to policy
surrenders the Company experienced in the latter part of 2008 and throughout 2009.
28
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Cost of Customer Relationships Acquired and Other Intangibles
. The 2009 increase related
primarily to the ICC acquisition and greater amortization due to the increase in lapses on this new
block of business.
Federal Income Tax
. Federal income tax expense was $4.1 million, $3.3 million and $3.1
million in 2010, 2009 and 2008, respectively, resulting in effective tax rates of 20.9%, 15.8% and
24.7%, respectively. The Company established a tax valuation allowance related to
other-than-temporary impairment (“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. The remaining $2.5 million valuation
allowance was released in 2010, as the Company sold investments at a gain that enabled it to
realize the tax basis losses, thereby making the valuation allowance no longer necessary. In
addition, the fair value change related to outstanding warrants of $0.2 million reported as an
increase in revenues in 2010 and $3.2 million in 2009 compared to a decrease in revenues of $2.7
million in 2008, 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:
|
||||||||||||||||
|
2010
|
$ | 13,909 | 6,723 | (1,002 | ) | 19,630 | ||||||||||
|
2009
|
10,472 | 9,245 | 889 | 20,606 | ||||||||||||
|
2008
|
712 | (8,955 | ) | (4,352 | ) | (12,595 | ) | |||||||||
29
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 approximately 30 countries through over 2,400 independent marketing consultants, and domestically
through 275 independent marketing firms and consultants throughout the United States.
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Revenue:
|
||||||||||||
|
Premiums
|
$ | 109,985 | 105,997 | 102,030 | ||||||||
|
Net investment income
|
16,523 | 16,667 | 17,015 | |||||||||
|
Realized gains (losses), net
|
6,590 | 1,100 | (13,882 | ) | ||||||||
|
Other income
|
650 | 340 | 330 | |||||||||
|
|
||||||||||||
|
Total revenue
|
133,748 | 124,104 | 105,493 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Benefits and expenses:
|
||||||||||||
|
Insurance benefits paid or provided:
|
||||||||||||
|
Claims and surrenders
|
41,040 | 41,277 | 36,241 | |||||||||
|
Increase in future policy benefit reserves
|
42,619 | 36,043 | 34,246 | |||||||||
|
Policyholders’ dividends
|
7,414 | 6,594 | 6,714 | |||||||||
|
|
||||||||||||
|
Total insurance benefits paid or provided
|
91,073 | 83,914 | 77,201 | |||||||||
|
|
||||||||||||
|
Commissions
|
21,899 | 21,146 | 21,589 | |||||||||
|
Other underwriting, acquisition and insurance
expenses
|
10,947 | 10,167 | 10,866 | |||||||||
|
Capitalization of deferred policy acquisition costs
|
(21,398 | ) | (20,975 | ) | (22,922 | ) | ||||||
|
Amortization of deferred policy acquisition costs
|
16,185 | 17,861 | 17,076 | |||||||||
|
Amortization of cost of customer relationships
acquired and other intangibles
|
1,133 | 1,519 | 971 | |||||||||
|
|
||||||||||||
|
Total benefits and expenses
|
119,839 | 113,632 | 104,781 | |||||||||
|
|
||||||||||||
|
Income before Federal income tax
|
$ | 13,909 | 10,472 | 712 | ||||||||
|
|
||||||||||||
Premiums
. Premium revenues increased for 2010 compared to 2009 and 2008, primarily due to
higher renewal premiums, which have been trending up as this block of insurance ages. In addition,
sales from Venezuela, Taiwan, Colombia and Ecuador represented the majority of the first year premium
increase.
Life Insurance premium breakout is detailed below.
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Premiums:
|
||||||||||||
|
First year
|
$ | 16,630 | 16,294 | 18,020 | ||||||||
|
Renewal
|
93,355 | 89,703 | 84,010 | |||||||||
|
|
||||||||||||
|
Total premium
|
$ | 109,985 | 105,997 | 102,030 | ||||||||
|
|
||||||||||||
30
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Net Investment Income
. Net investment income decreased to $16.5 million in 2010 compared
to $16.7 million and $17.0 million in 2008. The decrease is related to lower investment rates
available in 2010 on new business funds invested, as well as on reinvested funds caused by the
significant call activity the Company experienced in the last two years. Approximately $263.6
million and $215.0 million in bonds matured or were called by issuers in 2010 and 2009 on a total
life segment portfolio of $346.2 million and $289.6 million.
Realized Gains (Losses), Net
. Realized gains of $6.6 million were recognized in 2010, due
primarily to disposals of previously impaired equity mutual funds. 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
recognized on equity mutual fund holdings in 2008.
A breakout of claims and surrender benefits is detailed below:
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
|
||||||||||||
|
Death claims
|
$ | 7,278 | 7,986 | 7,147 | ||||||||
|
Surrender expenses
|
17,354 | 17,672 | 13,770 | |||||||||
|
Endowment benefits
|
14,473 | 14,051 | 13,877 | |||||||||
|
Accident and health benefits
|
443 | 288 | 290 | |||||||||
|
Other policy benefits
|
1,492 | 1,280 | 1,157 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total claims and surrenders
|
$ | 41,040 | 41,277 | 36,241 | ||||||||
|
|
||||||||||||
Endowment benefits have increased due to overall increase of endowment product sales in the past
several years. Other policy benefits includes most notably interest credited on policy funds and
dividends and coupons left on deposit at interest.
Other Underwriting, Acquisition and Insurance Expenses
. The operating expenses increased
from 2009 to 2010, due to renegotiating our agreement with Texas International Life Insurance
Company (“TILIC”) whereby we paid $0.2 million, and an increase in credit card processing fees of
approximately $0.2 million, as an increased number of policyholders are using our credit card
payment option. The operating expenses have declined from 2008 to 2009 due to lower expenses
related to staffing reductions, accountants and other consultants. The Company monitors all
operating expenses and continues to seek efficiencies in our operations.
31
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Home Service Insurance
Our Home Service Insurance segment provides pre-need 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 approximately 600 employee and independent agents.
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Revenue:
|
||||||||||||
|
Premiums
|
$ | 42,067 | 41,283 | 39,267 | ||||||||
|
Net investment income
|
13,008 | 12,680 | 12,654 | |||||||||
|
Realized gains (losses), net
|
1,475 | 6,562 | (9,948 | ) | ||||||||
|
Other income
|
82 | 101 | 273 | |||||||||
|
|
||||||||||||
|
Total revenue
|
56,632 | 60,626 | 42,246 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Benefits and expenses:
|
||||||||||||
|
Insurance benefits paid or provided:
|
||||||||||||
|
Claims and surrenders
|
19,998 | 18,711 | 20,012 | |||||||||
|
Increase in future policy benefit reserves
|
3,801 | 4,747 | 2,871 | |||||||||
|
Policyholders’ dividends
|
71 | 86 | 151 | |||||||||
|
|
||||||||||||
|
Total insurance benefits paid or provided
|
23,870 | 23,544 | 23,034 | |||||||||
|
|
||||||||||||
|
Commissions
|
14,686 | 14,390 | 14,395 | |||||||||
|
Other underwriting, acquisition and insurance
expenses
|
14,307 | 14,812 | 14,459 | |||||||||
|
Capitalization of deferred policy acquisition costs
|
(6,562 | ) | (6,157 | ) | (6,312 | ) | ||||||
|
Amortization of deferred policy acquisition costs
|
1,655 | 2,817 | 3,699 | |||||||||
|
Amortization of cost of customer relationships
acquired and other intangibles
|
1,953 | 1,975 | 1,926 | |||||||||
|
|
||||||||||||
|
Total benefits and expenses
|
49,909 | 51,381 | 51,201 | |||||||||
|
|
||||||||||||
|
Income (loss) before Federal income tax
|
$ | 6,723 | 9,245 | (8,955 | ) | |||||||
|
|
||||||||||||
Premiums
. The premium increases were due to enhanced marketing efforts to promote the Home
Service segment, as well as a SPFIC rate increase that was effective in the latter part of 2009.
The Company has received approval for an additional rate increase for SPFIC of approximately 5.7%
that became effective January 1, 2011.
Net Investment Income
. The current year increase was due to the increased size of the
asset portfolio provided by new business sales and income earned on the portfolio. The Company
experienced significant call activity beginning in the second quarter of 2009, which depressed our
investment income and lowered portfolio yields. Call activity was again significant in the latter
part of the second quarter of 2010, which resulted in a further reduction of investment income The
2009 results included a one-time positive adjustment from a legal settlement of $0.2 million
related to a defaulted bond.
Realized Gains (Losses), Net
. Gains of $1.5 million in 2010 relate primarily to sales of
below investment grade securities that were added to the portfolio as part of an acquisition and
had been previously impaired. 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 that
had been previously impaired. The impairments in 2008 relating to equity mutual funds 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 fair values relating to credit issues.
32
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Claims and Surrenders
. Death claims vary from year to year, but were within expected
actuarial expectations. Surrenders have been increasing as the Home Service block grows. The
results in 2008 included incurred claims from Hurricanes Ike and Gustav totaling $0.8 million.
A breakout of claims and surrender benefits is detailed below.
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
|
||||||||||||
|
Death claims
|
$ | 15,392 | 14,508 | 15,382 | ||||||||
|
Surrender expenses
|
2,374 | 1,994 | 1,452 | |||||||||
|
Endowment benefits
|
26 | 28 | (63 | ) | ||||||||
|
Property claims
|
1,578 | 1,590 | 2,657 | |||||||||
|
Accident and health benefits
|
165 | 149 | 137 | |||||||||
|
Other policy benefits
|
463 | 442 | 447 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total claims and surrenders
|
$ | 19,998 | 18,711 | 20,012 | ||||||||
|
|
||||||||||||
Increase in Future Policy Benefit Reserves
. The reserves in 2009 included a decrease
of $0.4 million resulting from a correction related to Ozark National Life Insurance Company, which
was acquired in 2008.
Other Underwriting, Acquisition and Insurance Expenses
. The decrease in 2010 was related
to a reduction in premium taxes due to the utilization of larger tax credits and a reduction in
salary expenses as part of a staff reduction plan.
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, 2010 was $0.2 million, which was recorded as
revenue, compared to revenue of $3.2 million recorded for 2009 and a reduction of revenue of $2.7
million 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, investment grade 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.
33
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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, 2010 | December 31, 2009 | |||||||||||||||
| 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
|
$ | 378,012 | 48.7 | % | $ | 399,626 | 55.6 | % | ||||||||
|
Mortgage-backed (1)
|
14,808 | 1.9 | 19,452 | 2.7 | ||||||||||||
|
Corporate
|
161,298 | 20.8 | 116,098 | 16.1 | ||||||||||||
|
Municipal bonds (2)
|
101,719 | 13.1 | 57,192 | 7.9 | ||||||||||||
|
Foreign governments
|
132 | — | 120 | — | ||||||||||||
|
|
||||||||||||||||
|
Total fixed maturity securities
|
655,969 | 84.6 | 592,488 | 82.3 | ||||||||||||
|
Cash and cash equivalents
|
49,723 | 6.4 | 48,625 | 6.8 | ||||||||||||
|
Short-term investments
|
— | — | 2,510 | 0.3 | ||||||||||||
|
Other investments:
|
||||||||||||||||
|
Policy loans
|
35,585 | 4.6 | 32,096 | 4.5 | ||||||||||||
|
Equity securities
|
23,304 | 3.0 | 33,477 | 4.6 | ||||||||||||
|
Mortgage loans
|
1,489 | 0.2 | 1,533 | 0.2 | ||||||||||||
|
Real estate and other long-term investments
|
9,348 | 1.2 | 9,216 | 1.3 | ||||||||||||
|
|
||||||||||||||||
|
Total cash, cash equivalents and investments
|
$ | 775,418 | 100.0 | % | $ | 719,945 | 100.0 | % | ||||||||
|
|
||||||||||||||||
| (1) |
Includes $13.2 million and $16.2 million of U.S. Government agencies and
government-sponsored enterprises in 2010 and 2009, respectively.
|
|
| (2) |
Includes $53,979,000 of securities guaranteed by third parties for the year ended December 31, 2010.
|
The current year decline in U.S. government-sponsored securities is due to call activity from this
sector and reinvestment into fixed maturity bond categories. The Company has increased investments
in the current year in municipals primarily related to Build America taxable bonds and corporate
issuer holdings in the utility sector.
At December 31, 2010, investments in fixed maturity and equity securities were 87.6% of our total
cash, and cash equivalents and investments. All of our fixed maturities were classified as either
available-for-sale or held-to-maturity securities at December 31, 2010. We had no fixed maturity
or equity securities that were classified as trading securities at December 31, 2010 or 2009.
The following table shows the distribution of the credit ratings of our portfolio of fixed
maturity securities by carrying value.
| December 31, 2010 | December 31, 2009 | |||||||||||||||
| Carrying Value | % | Carrying Value | % | |||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||
|
AAA and U.S. Government
|
$ | 428,194 | 65.3 | % | $ | 442,160 | 74.2 | % | ||||||||
|
AA
|
59,454 | 9.1 | 26,613 | 4.9 | ||||||||||||
|
A
|
73,341 | 11.2 | 69,934 | 11.8 | ||||||||||||
|
BBB
|
84,489 | 12.9 | 48,311 | 8.2 | ||||||||||||
|
BB and other
|
10,491 | 1.5 | 5,470 | 0.9 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Totals
|
$ | 655,969 | 100.0 | % | $ | 592,488 | 100.0 | % | ||||||||
|
|
||||||||||||||||
34
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
As noted, the Company held municipal securities with third party guarantees. Detailed below is a
presentation by rating.
| December 31, 2010 | ||||||||
| Carrying Value | Carrying Value | |||||||
| with Third Party | without Third Party | |||||||
| Guarantees | Guarantees | |||||||
| (In thousands) | ||||||||
|
AAA
|
$ | 31,974 | $ | 19,490 | ||||
|
AA
|
42,602 | 43,663 | ||||||
|
A
|
17,158 | 26,181 | ||||||
|
BBB
|
4,700 | 6,624 | ||||||
|
BB and other
|
5,285 | 5,761 | ||||||
|
|
||||||||
|
|
||||||||
|
Totals
|
$ | 101,719 | $ | 101,719 | ||||
|
|
||||||||
The credit rating distribution has changed in the current year as AAA government-sponsored issues
were called during the year and reinvested in municipal and corporate bond holdings with ratings of
AA and BBB. The Company purchases exclusively investment grade securities, and the increase in the
below investment grade category is due to municipals that were rated investment grade at December
31, 2009 and as of December 31, 2010 were no longer rated.
The Company experienced a significant amount of maturities and call activity relative to the fixed
income portfolio, with $387.4 million reported in 2010 compared to $292.7 million and $162.3
million in 2009 and 2008. 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 40 basis points from 2009 compared to
2010. We expect lower yields on our investment portfolio due to the current low interest rate
environment.
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 likely than not will be required to
sell the security before recovery of its amortized cost basis, an other-than-temporary impairment
is 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 is required to sell the security before recovery of its
amortized cost basis, the other-than-temporary impairment will 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 is recognized in
earnings. The amount of the total other-than-temporary impairment related to other factors is
recognized in other comprehensive income, net of applicable taxes. The previous amortized cost
basis less the other-than-temporary impairment recognized in earnings becomes the new amortized
cost basis of the investment. The new amortized cost is not adjusted for subsequent recoveries in
fair value.
35
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
With the exception of SPLIC, virtually all of our subsidiaries fixed maturity investments are
in U.S. Government or U.S. Government-sponsored enterprises or U.S. Government instruments. SPLIC
has significant investments in corporate and municipal bonds. An additional impairment of $27,000
was recorded in 2010 to write a security down to zero carrying value. 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. The Company recorded other-than-temporary impairment charges on its mutual fund equity
securities in 2008 in the amount of $23.5 million because the Company did not expect these
securities to recover in value in the near term. 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, 2010 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 $13.7 million as of
December 31, 2010 and $9.7 million as of December 31, 2009. 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, municipal and agency bonds. There were no gross unrealized losses on equity securities
as of December 31, 2010. In 2010 and 2009, the Company sold equity mutual fund holdings from the
Life and Home Service segments and recorded realized gains of $6.4 million and $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.
The effect of reinsurance on premiums is as follows:
| Years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Direct premiums
|
$ | 159,119 | 155,727 | 151,077 | ||||||||
|
Reinsurance assumed
|
1,553 | 1,416 | 1,459 | |||||||||
|
Reinsurance ceded
|
(8,620 | ) | (9,863 | ) | (11,239 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net premiums
|
$ | 152,052 | 147,280 | 141,297 | ||||||||
|
|
||||||||||||
Our insurance subsidiaries monitor the solvency of their reinsurers in seeking to minimize the risk
of loss in the event of default by a reinsurer. The primary reinsurers of our insurance
subsidiaries are large, well capitalized entities.
The effect of reinsurance on life insurance in force is as follows:
| Years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In millions) | ||||||||||||
|
Direct written life insurance inforce
|
$ | 4,452 | 4,432 | 4,322 | ||||||||
|
Reinsurance assumed
|
1,045 | 928 | 647 | |||||||||
|
Reinsurance ceded
|
(381 | ) | (363 | ) | (302 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net life insurance inforce
|
$ | 5,116 | 4,997 | 4,667 | ||||||||
|
|
||||||||||||
Virtually all of the Company’s non-credit accident and health insurance has been reinsured 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.
36
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
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 in 2006 to
$10.0 million per event from $7.1 million and raise its 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 2008 through 2010. The reinsurance premium for first event
catastrophe reinsurance was $1,130,000, $1,075,000 and $750,000 in 2010, 2009 and 2008,
respectively. 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 in 2008.
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.
Our liquidity requirements 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 needed
to sell $237,000 of bonds because of liquidity needs as a result of Hurricanes Gustav and Ike.
There were no such liquidity issues in 2010 or 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.
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 $60.5 million, $52.1 million and $46.4 million for the
years ended December 31, 2010, 2009 and 2008, respectively. We have traditionally also had
significant cash flows from both scheduled and unscheduled investment security maturities,
redemptions, and prepayments, which totaled $387.4 million, $292.7 million and $162.3 million in
2010, 2009 and 2008. These cash flows, for the most part, are reinvested in fixed income
securities. Net cash outflows from investment activity totaled $62.1 million, $68.8 million and
$14.3 million for the years ended December 31, 2010, 2009 and 2008, respectively. The outflows
from investing activities for the year ended December 31, 2010, primarily related to the investment
of excess cash and cash equivalents generated from operations during 2010. The Company’s cash
flows from financing activities were $2.6 million in 2010, $1.5 million in 2009 and $10.6 million
in 2008. In 2008, the Company received $9.4 million from capital contributions relating to our
Series A-1 preferred stock.
Stockholders’ equity at December 31, 2010 was $227.6 million compared to $216.1 million at December
31, 2009. The 2010 increase was largely due to income earned during the period offset by a
decrease in net unrealized gains on securities available-for-sale.
Investments increased to $725.7 million at December 31, 2010 from $671.3 million at December 31,
2009, resulting in an 8.1% increase, mainly due to the increase in fixed income holdings in the
Company’s portfolio. The asset increased primarily from new and renewal premium income. 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 79.3% of investments at December 31,
2010, and fixed maturities held-to-maturity were 11.1% of investments at December 31, 2010.
Policy loans comprised 4.9% of invested assets at December 31, 2010 compared to 4.8% at December
31, 2009. 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.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Our cash balances at our primary depositories were significantly in excess of Federal Deposit
Insurance Corporation coverage at December 31, 2010 and December 31, 2009. 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.
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, 2010, all of our insurance subsidiaries were above the required minimum
levels.
Two of our subsidiaries fell below the minimum RBC threshold at December 31, 2008. A capital
contribution of $1.0 million was made to SPFIC during the first quarter of 2009. An additional
$1.0 million capital contribution was made to SPFIC in the third quarter of 2009. A capital
contribution of $1.0 million was also made to Ozark National Life Insurance Company (“ONLIC”)
during the first quarter of 2009 due to its RBC ratio falling below 200% at December 31, 2008. 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. These capital contributions increased the RBC
ratios and RBC action plans were submitted to the relevant insurance departments. The capital
balance of ONLIC was determined to be at the Company Action Level at March 31, 2009 due to
continued declines relative to its investment 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. All insurance
subsidiaries were above the RBC minimums at December 31, 2010.
Due to a decline in statutory surplus, CNLIC no longer met minimum capital and surplus requirements
as of June 30, 2010 in two states it is licensed in, Florida, deficient by approximately $0.4
million, and Mississippi, deficient by approximately $0.5 million. CNLIC currently maintains its
Certificate of Authority, but voluntarily suspended sales in these states and its licenses were
suspended. Life premiums collected in 2009 were $2,000 and $9,800 and in 2010 were $1,200 and
$8,000 relating exclusively to policy renewals in Florida and Mississippi, respectively.
Effective September 1, 2010, CICA contributed 150,000 shares of Citizens, Inc. Class A common stock
to CNLIC as a capital contribution. The contributed shares had a fair market contributed value of
$1,032,000. These shares were subsequently purchased by Citizens, Inc., the ultimate parent, on
September 13, 2010 for $1,041,000 cash. The transaction has been eliminated under consolidation
accounting rules. Management is currently evaluating CNLIC’s operations and strategy for the
future, but does not anticipate any material change relative to the consolidated financial
condition of the Company.
Contractual Obligations and Off-balance Sheet Arrangements
The Company does not have off-balance sheet arrangements at December 31, 2010 and, therefore, does
not expect any future effects on the Company’s financial condition related to any such
arrangements. We do not utilize special purpose entities as investment vehicles, nor are there any
such entities in which we have an investment that engages in speculative activities of any nature,
and we do not use such investments to hedge our investment positions.
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, SPLIC’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.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Additionally, a substantial portion of our international policyholders invest their policy cash
dividends in our Class A common stock through our Stock Investment Plan (the “Plan”). Once a
policyholder elects to participate in the Plan, their policy dividends are assigned to purchase
Citizens Class A common stock. In 2010, this represented stock investment in the Company of
approximately $23 million. If fewer policyholders elect to participate in the Plan, or if our
international premium collections were to decrease as a result of regulatory or marketing
impediments, the trading volume of our Class A stock may decline from its present levels.
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, 2010.
Management believes that our policy liabilities and increase in future policy benefit reserves as
of the years ended December 31, 2010, 2009 and 2008 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.
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, 2010,
2009 and 2008 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.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
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, 2010, 2009
and 2008. 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.
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.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
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 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 a 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.
Recent Accounting Pronouncements
See Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial
Statements, Note 1. Accounting Pronouncements.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
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 89.4% of
our cash and investment portfolio as of December 31, 2010. 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 60.0% of the fixed maturities we owned at December 31, 2010 are instruments of U.S.
Government-sponsored enterprises, or are backed by U.S. Government agencies.
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Net | Net | |||||||||||||||||||||||
| Unrealized | Unrealized | |||||||||||||||||||||||
| Amortized | Fair | Gains | Amortized | Fair | Gains | |||||||||||||||||||
| Cost | Value | (Losses) | Cost | Value | (Losses) | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Fixed maturities, available-for-sale
|
$ | 578,412 | 575,737 | (2,675 | ) | 389,195 | 385,579 | (3,616 | ) | |||||||||||||||
|
Fixed maturities, held-to-maturity
|
80,232 | 79,103 | (1,129 | ) | 206,909 | 199,676 | (7,233 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total fixed maturities
|
$ | 658,644 | 654,840 | (3,804 | ) | 596,104 | 585,255 | (10,849 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total equity securities
|
$ | 19,844 | 23,304 | 3,460 | 25,899 | 33,477 | 7,578 | |||||||||||||||||
|
|
||||||||||||||||||||||||
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 we believe further declines are not probable. The Company’s portfolio has
substantially been reinvested at the current lower rates due to the significant call activity
experienced over the last several years.
Increases in Interest Rates
(In thousands)
(In thousands)
| 100 Basis Points | 200 Basis Points | 300 Basis Points | ||||||||||
|
|
||||||||||||
|
December 31, 2010
|
$ | (68,765 | ) | (101,755 | ) | (135,085 | ) | |||||
|
|
||||||||||||
|
December 31, 2009
|
$ | (49,599 | ) | (97,573 | ) | (132,425 | ) | |||||
|
|
||||||||||||
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.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
There are no fixed maturities or other investments that we classify as trading instruments. At
December 31, 2010 and 2009, 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, 2010. 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, 2010.
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 2010, 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.
(d) Report of Independent Registered Public Accounting Firm on Internal Control over Financial
Reporting
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
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. and subsidiaries’ internal control over financial reporting as of December 31, 2010,
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. and subsidiaries’ 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”. 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. and subsidiaries maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2010, 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, 2010
and 2009, 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,
2010 of Citizens, Inc. and subsidiaries and our report dated March 11, 2011 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
Austin, Texas
March 11, 2011
March 11, 2011
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
| Item 9B. |
OTHER INFORMATION
|
On March 10, 2011, the Company issued a news release (the “Release”) reporting, among other things,
results for its fourth quarter 2010 earnings. A copy of the Release is furnished as Exhibit 99.1
to this Annual Report on Form 10-K. Citizens also announced that is would hold a conference call
to discuss its financial results at 10:00 a.m. Central Standard Time on Friday, March 11, 2011.
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, 2010.
| 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 | ||||
| 46 | ||||
|
|
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| 47 | ||||
|
|
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| 49 | ||||
|
|
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| 50 | ||||
|
|
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| 52 | ||||
|
|
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| 54 | ||||
|
|
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| 91 | ||||
|
|
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| 94 | ||||
|
|
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| 95 | ||||
|
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.
|
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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, 2010 and 2009, 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, 2010. 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,
2010 and 2009, and the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2010, 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. and subsidiaries’ internal control over financial reporting as of December
31, 2010, 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 11,
2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Austin, Texas
March 11, 2011
March 11, 2011
46
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
December 31
(In thousands)
| Assets | 2010 | 2009 | ||||||
|
|
||||||||
|
Investments:
|
||||||||
|
Fixed maturities available-for-sale, at fair value
(cost: $578,412 in 2010 and $389,195 in 2009)
|
$ | 575,737 | 385,579 | |||||
|
Fixed maturities held-to-maturity, at amortized cost
(fair value: $79,103 in 2010 and $199,676 in 2009)
|
80,232 | 206,909 | ||||||
|
Equity securities available-for-sale, at fair value
(cost: $19,844 in 2010 and $25,899 in 2009)
|
23,304 | 33,477 | ||||||
|
Mortgage loans on real estate
|
1,489 | 1,533 | ||||||
|
Policy loans
|
35,585 | 32,096 | ||||||
|
Real estate held for investment (less $1,017 and $913 accumulated
depreciation in 2010 and 2009, respectively)
|
9,200 | 9,032 | ||||||
|
Other long-term investments
|
148 | 184 | ||||||
|
Short-term investments
|
— | 2,510 | ||||||
|
|
||||||||
|
Total investments
|
725,695 | 671,320 | ||||||
|
|
||||||||
|
Cash and cash equivalents
|
49,723 | 48,625 | ||||||
|
Accrued investment income
|
7,433 | 7,455 | ||||||
|
Reinsurance recoverable
|
9,729 | 11,587 | ||||||
|
Deferred policy acquisition costs
|
125,684 | 115,570 | ||||||
|
Cost of customer relationships acquired
|
31,631 | 34,728 | ||||||
|
Goodwill
|
17,160 | 17,160 | ||||||
|
Other intangible assets
|
1,019 | 1,046 | ||||||
|
Federal income tax receivable
|
1,914 | 4,023 | ||||||
|
Property and equipment, net
|
7,101 | 6,018 | ||||||
|
Due premiums, net (less $1,568 and $1,644 allowance for doubtful
accounts in 2010 and 2009, respectively)
|
8,537 | 8,960 | ||||||
|
Prepaid expenses
|
474 | 288 | ||||||
|
Other assets
|
406 | 546 | ||||||
|
|
||||||||
|
|
||||||||
|
Total assets
|
$ | 986,506 | 927,326 | |||||
|
|
||||||||
(Continued)
See accompanying notes to consolidated financial statements.
47
Table of Contents
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)
| Liabilities and Stockholders’ Equity | 2010 | 2009 | ||||||
|
Liabilities:
|
||||||||
|
Future policy benefit reserves:
|
||||||||
|
Life insurance
|
$ | 637,140 | 592,358 | |||||
|
Annuities
|
42,096 | 37,882 | ||||||
|
Accident and health
|
5,910 | 6,399 | ||||||
|
Dividend accumulations
|
9,498 | 5,621 | ||||||
|
Premiums paid in advance
|
23,675 | 20,373 | ||||||
|
Policy claims payable
|
10,540 | 10,222 | ||||||
|
Other policyholders’ funds
|
8,191 | 8,105 | ||||||
|
|
||||||||
|
Total policy liabilities
|
737,050 | 680,960 | ||||||
|
Commissions payable
|
2,538 | 2,434 | ||||||
|
Deferred federal and state income taxes
|
9,410 | 8,052 | ||||||
|
Payable for securities in process of settlement
|
— | 6,000 | ||||||
|
Warrants outstanding
|
1,587 | 1,819 | ||||||
|
Other liabilities
|
8,287 | 11,986 | ||||||
|
|
||||||||
|
|
||||||||
|
Total liabilities
|
758,872 | 711,251 | ||||||
|
|
||||||||
|
Commitments and contingencies (Notes 5 and 8)
|
||||||||
|
Stockholders’ equity:
|
||||||||
|
Common stock:
|
||||||||
|
Class A, no par value, 100,000,000 shares authorized,
51,822,497 shares issued and outstanding in 2010 and 2009,
including shares in treasury of 3,135,738 in 2010 and 2009
|
256,703 | 256,703 | ||||||
|
Class B, no par value, 2,000,000 shares authorized,
1,001,714 shares issued and outstanding in 2010 and 2009
|
3,184 | 3,184 | ||||||
|
Accumulated deficit
|
(22,581 | ) | (38,092 | ) | ||||
|
Accumulated other comprehensive income (loss):
|
||||||||
|
Net unrealized gains (losses) on securities, net of tax
|
1,339 | 5,291 | ||||||
|
|
||||||||
|
|
238,645 | 227,086 | ||||||
|
Treasury stock, at cost
|
(11,011 | ) | (11,011 | ) | ||||
|
|
||||||||
|
Total stockholders’ equity
|
227,634 | 216,075 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 986,506 | 927,326 | |||||
|
|
||||||||
See accompanying notes to consolidated financial statements.
48
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
For the Years ended December 31
(In thousands, except per share amounts)
| 2010 | 2009 | 2008 | ||||||||||
|
Revenues:
|
||||||||||||
|
Premiums:
|
||||||||||||
|
Life insurance
|
$ | 145,665 | 141,001 | 134,953 | ||||||||
|
Accident and health insurance
|
1,577 | 1,531 | 1,580 | |||||||||
|
Property insurance
|
4,810 | 4,748 | 4,764 | |||||||||
|
Net investment income
|
30,077 | 29,602 | 30,478 | |||||||||
|
Realized gains (losses), net
|
8,012 | 8,040 | (23,812 | ) | ||||||||
|
Decrease (increase) in fair value of warrants
|
232 | 3,154 | (2,662 | ) | ||||||||
|
Other income
|
808 | 904 | 1,372 | |||||||||
|
|
||||||||||||
|
Total revenues
|
191,181 | 188,980 | 146,673 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Benefits and expenses:
|
||||||||||||
|
Insurance benefits paid or provided:
|
||||||||||||
|
Claims and surrenders
|
61,038 | 59,988 | 56,253 | |||||||||
|
Increase in future policy benefit reserves
|
46,420 | 40,790 | 37,117 | |||||||||
|
Policyholders’ dividends
|
7,485 | 6,680 | 6,865 | |||||||||
|
|
||||||||||||
|
Total insurance benefits paid or provided
|
114,943 | 107,458 | 100,235 | |||||||||
|
Commissions
|
36,585 | 35,536 | 35,984 | |||||||||
|
Other underwriting, acquisition and insurance
expenses
|
27,057 | 28,340 | 28,611 | |||||||||
|
Capitalization of deferred policy acquisition costs
|
(27,960 | ) | (27,132 | ) | (29,234 | ) | ||||||
|
Amortization of deferred policy acquisition costs
|
17,840 | 20,678 | 20,775 | |||||||||
|
Amortization of cost of customer relationships
acquired and other intangibles
|
3,086 | 3,494 | 2,897 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total benefits and expenses
|
171,551 | 168,374 | 159,268 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income (loss) before income tax expense
|
19,630 | 20,606 | (12,595 | ) | ||||||||
|
Income tax expense
|
4,119 | 3,266 | 3,112 | |||||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 15,511 | 17,340 | (15,707 | ) | |||||||
|
|
||||||||||||
|
Net income (loss) applicable to common stockholders
|
$ | 15,511 | 14,835 | (18,263 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Per Share Amounts:
|
||||||||||||
|
Basic and
diluted earnings (loss) per share of Class A common stock
|
$ | 0.32 | 0.31 | (0.42 | ) | |||||||
|
|
||||||||||||
|
Basic and diluted earnings (loss) per share of Class B common stock
|
$ | 0.16 | 0.15 | (0.21 | ) | |||||||
|
|
||||||||||||
See accompanying notes to consolidated financial statements.
49
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
For the Years ended December 31, 2010, 2009 and 2008
(In thousands)
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
For the Years ended December 31, 2010, 2009 and 2008
(In thousands)
| Accumulated | ||||||||||||||||||||||||
| other | Total | |||||||||||||||||||||||
| Common Stock | Accumulated | comprehensive | Treasury | Stockholders’ | ||||||||||||||||||||
| Class A | Class B | deficit | income (loss) | stock | equity | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at January 1, 2008
|
$ | 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 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||
|
Net income
|
— | — | 15,511 | — | — | 15,511 | ||||||||||||||||||
|
Unrealized investment losses, net
|
— | — | — | (3,952 | ) | — | (3,952 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total comprehensive income (loss)
|
— | — | 15,511 | (3,952 | ) | — | 11,559 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at December 31, 2010
|
$ | 256,703 | 3,184 | (22,581 | ) | 1,339 | (11,011 | ) | 227,634 | |||||||||||||||
|
|
||||||||||||||||||||||||
(Continued)
50
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Comprehensive Income,
Continued
For the years ended December 31, 2010, 2009 and 2008
(In thousands)
Consolidated Statements of Stockholders’ Equity and Comprehensive Income,
Continued
For the years ended December 31, 2010, 2009 and 2008
(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 January 1, 2008
|
46,206 | 1,002 | (3,136 | ) | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Stock dividends
|
90 | — | — | |||||||||
|
Warrants exercised
|
18 | — | — | |||||||||
|
Preferred stock conversions
|
2,468 | — | — | |||||||||
|
|
||||||||||||
|
Total stock issued in 2008
|
2,576 | — | — | |||||||||
|
|
||||||||||||
|
Balance at December 31, 2008
|
48,782 | 1,002 | (3,136 | ) | ||||||||
|
|
||||||||||||
|
Stock dividends
|
32 | — | — | |||||||||
|
Warrants exercised
|
10 | — | — | |||||||||
|
Preferred stock redemption
|
1,704 | — | — | |||||||||
|
Acquisition of Integrity Capital
|
1,294 | — | — | |||||||||
|
|
||||||||||||
|
Total stock issued in 2009
|
3,040 | — | — | |||||||||
|
|
||||||||||||
|
Balance at December 31, 2009
|
51,822 | 1,002 | (3,136 | ) | ||||||||
|
|
||||||||||||
|
Total stock issued in 2010
|
— | — | — | |||||||||
|
|
||||||||||||
|
Balance at December 31, 2010
|
51,822 | 1,002 | (3,136 | ) | ||||||||
|
|
||||||||||||
See accompanying notes to consolidated financial statements.
51
Table of Contents
Consolidated Statements of Cash Flows
For the Years ended December 31
(In thousands)
| 2010 | 2009 | 2008 | ||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income (loss)
|
$ | 15,511 | 17,340 | (15,707 | ) | |||||||
|
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
|
||||||||||||
|
Net realized losses (gains) on sale of investments and other
assets and other-than-temporary impairment
charges
|
(8,012 | ) | (8,040 | ) | 23,812 | |||||||
|
Net deferred policy acquisition costs
|
(10,120 | ) | (6,454 | ) | (8,459 | ) | ||||||
|
Amortization of cost of customer relationships
acquired and other intangibles
|
3,086 | 3,494 | 2,897 | |||||||||
|
Increase (decrease) in fair value of warrants
|
(232 | ) | (3,154 | ) | 2,662 | |||||||
|
Depreciation
|
1,048 | 1,171 | 1,116 | |||||||||
|
Amortization of premiums and discounts on
fixed maturities
|
4,381 | 2,043 | 354 | |||||||||
|
Deferred federal income tax expense
|
627 | 2,329 | 496 | |||||||||
|
Change in:
|
||||||||||||
|
Accrued investment income
|
22 | 15 | (127 | ) | ||||||||
|
Reinsurance recoverable
|
1,858 | 1,729 | 275 | |||||||||
|
Due premiums and other receivables
|
423 | 47 | (1,227 | ) | ||||||||
|
Future policy benefit reserves
|
45,896 | 40,477 | 36,100 | |||||||||
|
Other policy liabilities
|
7,583 | 2,477 | 5,412 | |||||||||
|
Federal income tax
|
2,109 | (1,922 | ) | (1,474 | ) | |||||||
|
Commissions payable and other liabilities
|
(3,594 | ) | (62 | ) | 637 | |||||||
|
Other, net
|
(47 | ) | 603 | (335 | ) | |||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
60,539 | 52,093 | 46,432 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Purchase of fixed maturities, held-to-maturity
|
(71,452 | ) | (207,052 | ) | — | |||||||
|
Maturities and calls of fixed maturities, held-to-maturity
|
197,600 | — | — | |||||||||
|
Sale of fixed maturities, available-for-sale
|
8,029 | 74,181 | 237 | |||||||||
|
Maturities and calls of fixed maturities, available-for-sale
|
189,826 | 292,706 | 162,337 | |||||||||
|
Purchase of fixed maturities, available-for-sale
|
(396,188 | ) | (255,251 | ) | (156,055 | ) | ||||||
|
Sale of equity securities, available-for-sale
|
22,822 | 22,745 | — | |||||||||
|
Calls of equity securities, available-for-sale
|
243 | — | — | |||||||||
|
Purchase of equity securities, available-for-sale
|
(9,668 | ) | (637 | ) | (24,439 | ) | ||||||
|
Principal payments on mortgage loans
|
45 | 31 | 97 | |||||||||
|
Mortgage loans funded
|
— | — | (115 | ) | ||||||||
|
Sale of other long-term investments and property
and equipment
|
46 | 933 | 185 | |||||||||
(Continued)
52
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)
| 2010 | 2009 | 2008 | ||||||||||
|
Cash flows from investing activities (continued):
|
||||||||||||
|
Purchase of other long-term investments and property
and equipment
|
$ | (2,366 | ) | (2,735 | ) | (1,110 | ) | |||||
|
Increase in policy loans, net
|
(3,489 | ) | (3,141 | ) | (3,062 | ) | ||||||
|
Maturity of short-term investments
|
2,500 | 2,250 | 26,000 | |||||||||
|
Purchase of short-term investments
|
— | (2,605 | ) | (10,173 | ) | |||||||
|
Cash acquired from (paid for) acquisitions, net
|
— | 9,770 | (8,242 | ) | ||||||||
|
|
||||||||||||
|
Net cash used in investing activities
|
(62,052 | ) | (68,805 | ) | (14,340 | ) | ||||||
|
|
||||||||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Series A-1 preferred stock capital contributions
|
— | — | 9,375 | |||||||||
|
Warrants exercised
|
— | 70 | 125 | |||||||||
|
Annuity and universal life deposits
|
5,775 | 3,990 | 2,848 | |||||||||
|
Annuity and universal life withdrawals
|
(3,164 | ) | (2,515 | ) | (1,771 | ) | ||||||
|
|
||||||||||||
|
Net cash provided by financing activities
|
2,611 | 1,545 | 10,577 | |||||||||
|
|
||||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
1,098 | (15,167 | ) | 42,669 | ||||||||
|
|
||||||||||||
|
Cash and cash equivalents at beginning of year
|
48,625 | 63,792 | 21,123 | |||||||||
|
|
||||||||||||
|
Cash and cash equivalents at end of year
|
$ | 49,723 | 48,625 | 63,792 | ||||||||
|
|
||||||||||||
|
Supplemental Disclosure of Operating Activities
|
||||||||||||
|
Cash paid during the year for income taxes
|
$ | 1,382 | 2,876 | 4,090 | ||||||||
|
|
||||||||||||
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 2010, the Company sold a
parcel of real estate and issued a mortgage loan for $102,000. This
same loan was foreclosed on and the real estate was transferred to
the other long-term investments category in
the amount of $101,000.
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 and $651,000 in 2009 and
2008, respectively. Accretion of deferred issuance costs and discounts on the Convertible
Preferred Stock recorded as a deduction to Class A common stock during 2009 and 2008 was $2.3
million and $1.9 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.
53
Table of Contents
| 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”), 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. Funeral Homes of America (“FHA”) was a funeral home operator that in 2009 completed
the sale of its funeral home assets in a transaction valued at approximately $600,000. FHA
was dissolved in December of 2010.
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.
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.
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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 stockholders’ 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 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
$11,122,000 and $9,947,000 at December 31, 2010 and 2009, 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.
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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 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 the 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. Management believes that our deferred
policy acquisition costs and related amortization for the years ended December 31, 2010,
2009 and 2008 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.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Deferred acquisition costs is summarized as follows:
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
|
||||||||||||
|
Balance at beginning of period
|
$ | 115,570 | 109,114 | 100,655 | ||||||||
|
Capitalized
|
27,960 | 27,132 | 29,234 | |||||||||
|
Amortized
|
(17,840 | ) | (20,678 | ) | (20,775 | ) | ||||||
|
Effects of unrealized gains (losses)
|
(6 | ) | 2 | — | ||||||||
|
|
||||||||||||
|
Balance at end of period
|
$ | 125,684 | 115,570 | 109,114 | ||||||||
|
|
||||||||||||
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 the 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, 2010 and 2009. This belief is based upon the
analysis performed on estimated future results of the block and our annual recoverability
testing.
Cost of customer relationships acquired relative to purchased blocks of insurance is
summarized as follows:
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
|
||||||||||||
|
Balance at beginning of period
|
$ | 34,728 | 33,805 | 31,636 | ||||||||
|
Acquisitions
|
— | 4,006 | 5,038 | |||||||||
|
Amortization
|
(3,059 | ) | (3,432 | ) | (2,869 | ) | ||||||
|
Adjustment
|
— | 326 | — | |||||||||
|
Effects of unrealized gains (losses) on CCRA
|
(38 | ) | 23 | — | ||||||||
|
|
||||||||||||
|
Balance at end of period
|
$ | 31,631 | 34,728 | 33,805 | ||||||||
|
|
||||||||||||
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.
| Year | Amount | |||
| (In thousands) | ||||
|
2011
|
$ | 2,251 | ||
|
2012
|
2,251 | |||
|
2013
|
2,109 | |||
|
2014
|
1,954 | |||
|
2015
|
1,811 | |||
|
Thereafter
|
21,255 | |||
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
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.
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 SPLIC premium paying in force policies were converted to the
Company’s mainframe policy administration system and SPLIC’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 of 2008, resulting in an increase to net
income of $517,000.
The Company corrected two valuation database discrepancies in 2010 that resulted in a
decrease to reserves of $559,000. There was a value per unit error related to fully paid
up policies under one plan in duration twenty-one resulting in a reserve overstatement
amounting to $508,000, with approximately $475,000 related to prior years, and another plan
where surrender charges were not properly recorded, which also overstated reserves by
$51,000, with approximately $48,000 related to prior years. The correction of these errors
resulted in an increase of 2010 pre-tax income of $523,000 and $339,950 increase in net
income.
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.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
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, 2010, the Company had goodwill of $12.6 million allocated to the Life
Insurance segment and $4.5 million allocated to the Home Service Insurance segment. The
Company completes its annual goodwill assessment for the individual reporting units within
the Life Insurance segment and Home Service Insurance segment as of December 31 each year.
There was no impairment of goodwill in 2010, 2009 or 2008.
Goodwill is summarized as follows:
| Accumulated | ||||||||||||
| Gross | amortization | Net | ||||||||||
| (In thousands) | ||||||||||||
|
|
||||||||||||
|
Balance at January 1, 2008
|
$ | 16,454 | (5,068 | ) | 11,386 | |||||||
|
Acquisition
|
4,301 | — | 4,301 | |||||||||
|
|
||||||||||||
|
Balance at December 31, 2008
|
20,755 | (5,068 | ) | 15,687 | ||||||||
|
|
||||||||||||
|
Acquisition
|
1,238 | — | 1,238 | |||||||||
|
Adjustments
|
235 | — | 235 | |||||||||
|
|
||||||||||||
|
Balance at December 31, 2009
|
22,228 | (5,068 | ) | 17,160 | ||||||||
|
|
||||||||||||
|
Adjustments
|
— | — | — | |||||||||
|
|
||||||||||||
|
Balance at December 31, 2010
|
$ | 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 dates 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.
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Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Participating Policies
At December 31, 2010 and 2009, participating business approximated 58.7% and 58.5%,
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 scaling rate used for the 2010 portfolio
ranged between 3.6% up to 5.7% over 15 years. 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.
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.
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.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
The following table sets forth the computation of basic and diluted earnings per share:
| Years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
|
Basic and diluted earnings per share:
|
||||||||||||
|
Numerator:
|
||||||||||||
|
Net income (loss)
|
$ | 15,511 | 17,340 | (15,707 | ) | |||||||
|
Less: Preferred stock dividends
|
— | (216 | ) | (651 | ) | |||||||
|
Accretion of deferred issuance costs
and discounts on preferred stock
|
— | (2,289 | ) | (1,905 | ) | |||||||
|
|
||||||||||||
|
Net income (loss) available to common
stockholders
|
$ | 15,511 | 14,835 | (18,263 | ) | |||||||
|
|
||||||||||||
|
Net income (loss) allocated to Class A
common stock
|
$ | 15,353 | 14,680 | (18,054 | ) | |||||||
|
Net income (loss) allocated to Class B
common stock
|
158 | 155 | (209 | ) | ||||||||
|
|
||||||||||||
|
Net income (loss) available to common
stockholders
|
$ | 15,511 | 14,835 | (18,263 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Denominator:
|
||||||||||||
|
Weighted average shares of Class A
outstanding — basic
|
48,687 | 47,554 | 43,365 | |||||||||
|
Weighted average shares of Class B
outstanding — basic and diluted
|
1,002 | 1,002 | 1,002 | |||||||||
|
|
||||||||||||
|
Total weighted average shares
outstanding — basic
|
49,689 | 48,556 | 44,367 | |||||||||
|
|
||||||||||||
|
Basic and diluted earnings (loss) per share of
Class A common stock
|
$ | 0.32 | 0.31 | (0.42 | ) | |||||||
|
|
||||||||||||
|
Basic and diluted earnings (loss) per share of
Class B common stock
|
$ | 0.16 | 0.15 | (0.21 | ) | |||||||
|
|
||||||||||||
In 2010 and 2009, certain warrants associated with our Convertible Preferred Stock
became dilutive. As a result, the diluted weighted average shares of Class A common stock
outstanding for 2010 were 48,688,000 and for 2009 were 47,556,000. Total diluted weighted
average shares were 49,690,000 and 48,558,000 for 2010 and 2009, respectively. Diluted
earnings per Class A share were unchanged from basic at $0.32.
In 2008, the warrants associated with our Convertible Preferred Stock were anti-dilutive.
Total weighted average shares outstanding for 2008 were 44,367,000.
The Series A-1 and A-2 Convertible Preferred Stock that was outstanding during 2009 and 2008
was anti-dilutive because the amount of the dividend and accretion of deferred issuance
costs and discounts for the years ended December 31, 2010, 2009 and 2008 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.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
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.
The table below details the Company’s tax valuation allowance in deferred income taxes
payable.
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Valuation Allowance:
|
||||||||||||
|
Balance at beginning of period
|
$ | (2,462 | ) | (7,704 | ) | — | ||||||
|
Tax benefit (expense) in income tax expense
|
2,462 | 2,795 | (6,900 | ) | ||||||||
|
Tax benefit (expense) in other
comprehensive income
|
— | 2,701 | — | |||||||||
|
Adjustment to goodwill
|
— | (254 | ) | (804 | ) | |||||||
|
|
||||||||||||
|
Balance at end of period
|
$ | — | (2,462 | ) | (7,704 | ) | ||||||
|
|
||||||||||||
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, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Property and equipment:
|
||||||||
|
Home office land and buildings
|
$ | 8,136 | 6,551 | |||||
|
Furniture and equipment
|
2,216 | 2,191 | ||||||
|
Electronic data processing
equipment
|
3,687 | 3,483 | ||||||
|
Automobiles and marine assets
|
356 | 345 | ||||||
|
Airplane
|
3,282 | 3,282 | ||||||
|
|
||||||||
|
Total property and equipment
|
17,677 | 15,852 | ||||||
|
Accumulated depreciation
|
(10,576 | ) | (9,834 | ) | ||||
|
|
||||||||
|
Net property and equipment
|
$ | 7,101 | 6,018 | |||||
|
|
||||||||
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.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
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.
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
The Company recorded reclassifications related to DAC amounts capitalized and amortized to
properly reflect the amount used to develop the DAC asset balance and to provide consistent
presentation with the current year. We recorded an increase to DAC capitalized of $3.5
million and $5.1 million and an increase in amortization for the same amount for 2009 and
2008, respectively.
Accounting Pronouncements
Adoption of New Accounting Standards
In January 2010, the Financial Accounting Standards Board (“FASB”) updated Accounting
Standards Codification (“ASC”) Topic 820, requiring additional disclosures about fair value
measurements regarding transfers between fair value categories as well as purchases, sales,
issuances and settlements related to fair value measurements of financial instruments with
non-observable inputs. This update was effective for interim and annual periods beginning
after December 15, 2009 except for disclosures about purchases, sales, issuances and
settlements of financial instruments with non-observable inputs, which are effective for
years beginning after December 15, 2010. The additional disclosures required by this update
are included herein in the note on fair value measurements upon adoption. The additional
disclosures did not have a material impact on our financial condition or results of
operations.
On September 29, 2010, the FASB ratified the Emerging Issues Task Force’s (“EITF”) final
consensus on EITF Issue No. 09-G, “
Accounting for Costs Associated with Acquiring or
Renewing Insurance Contracts
” (“Issue 09-G”). Issue 09-G clarifies what costs should be
deferred by insurance companies when issuing or renewing insurance contracts. The EITF
concluded that only costs incurred in the acquisition of new and renewal contracts that are:
1) incremental direct costs of a successful contract acquisition, 2) portions of employees’
salaries and benefits directly related to time spent performing specified acquisition
activities for a contract that has actually been acquired, 3) other costs directly related
to the specified acquisition activities that would not have occurred otherwise, and 4)
advertising costs that meet the capitalization criteria in other issued accounting guidance
would be capitalizable as deferred acquisition costs. Issue 09-G will be effective for
fiscal years, and interim periods within those fiscal years, beginning on or after December
15, 2011. The Company is currently reviewing this guidance and our current deferral
policies to determine the impact this consensus may have on our consolidated financial
statements.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Effective July 1, 2009, the FASB’s 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.
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, quoted
prices for 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.
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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 15 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.
Health Care Reform
The Company has assessed, based upon the information available, the Affordable Care Act, as
passed by the U.S. Congress in the first quarter of 2010. The Company has considered its
medical and dental plans provided for employees, agents and retirees. While the Company
will incur additional costs associated with the implementation of this Act, it does not
believe these costs or ongoing costs associated with this Act will have a material impact to
the consolidated financial statements. The Company does not provide a separate prescription
drug plan to its retirees. In addition, the Company does not sell any medical insurance or
prescription drug coverage. However, the Company does sell dental and vision insurance but
believes that the impact of this Act is immaterial to these products. The Company will
continue to assess the information contained in this Act as additional guidance becomes
available and as additional implications are understood or clarified.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Financial Reform
The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by the U.S.
Congress in July of 2010. This Act focuses on financial reform, specifically changes to
derivative regulation, regulatory framework for executive pay, corporate governance,
investor protection, bonus clawback provisions, mortgage reform, and numerous other issues.
The
Company will continue to assess the information contained in this Act as additional guidance
becomes available and as additional implications are clarified. The Company expects that
additional disclosures may be required and additional costs may be associated with this Act.
However, the Company does not believe they will have a material impact to the consolidated
financial statements.
| 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 of our liabilities. The Company invests
primarily in fixed maturity securities, which totaled 84.6% of total investments and cash and
cash equivalents at December 31, 2010. Holdings in high quality fixed maturity securities
rated A or higher by Standard & Poor’s, Inc. totaled 85.6% of investment holdings in this
category, reflecting the conservative investment philosophy of the Company.
| December 31, 2010 | December 31, 2009 | |||||||||||||||
| Carrying | Percent of Total | Carrying | Percent of Total | |||||||||||||
| Value | Carrying Value | Value | Carrying Value | |||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||
|
Fixed maturity securities
|
$ | 655,969 | 84.6 | % | $ | 592,488 | 82.3 | % | ||||||||
|
Equity securities
|
23,304 | 3.0 | 33,477 | 4.6 | ||||||||||||
|
Mortgage loans
|
1,489 | 0.2 | 1,533 | 0.2 | ||||||||||||
|
Policy loans
|
35,585 | 4.6 | 32,096 | 4.5 | ||||||||||||
|
Real estate and other
long-term investments
|
9,348 | 1.2 | 9,216 | 1.3 | ||||||||||||
|
Short-term investments
|
— | 0.0 | 2,510 | 0.3 | ||||||||||||
|
Cash and cash equivalents
|
49,723 | 6.4 | 48,625 | 6.8 | ||||||||||||
|
|
||||||||||||||||
|
Total cash, cash
equivalents and
investments
|
$ | 775,418 | 100.0 | % | $ | 719,945 | 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, 2010 and 2009, are as follows:
| December 31, 2010 | ||||||||||||||||
| Cost or | Gross | Gross | ||||||||||||||
| Amortized | Unrealized | Unrealized | ||||||||||||||
| Cost | Gains | Losses | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Fixed Maturities Available-for-Sale:
|
||||||||||||||||
|
U.S. Treasury securities
|
$ | 10,908 | 1,917 | — | 12,825 | |||||||||||
|
U.S. Government-sponsored enterprises
|
290,904 | 441 | 6,390 | 284,955 | ||||||||||||
|
States of the United States and political
subdivisions of the states
|
107,214 | 539 | 6,034 | 101,719 | ||||||||||||
|
Foreign governments
|
106 | 26 | — | 132 | ||||||||||||
|
Corporate
|
155,277 | 7,237 | 1,216 | 161,298 | ||||||||||||
|
Securities not due at a single maturity date
|
14,003 | 833 | 28 | 14,808 | ||||||||||||
|
|
||||||||||||||||
|
Total fixed maturities
available-for-sale
|
578,412 | 10,993 | 13,668 | 575,737 | ||||||||||||
|
Fixed Maturities Held-to-Maturity:
|
||||||||||||||||
|
U.S. Government-sponsored enterprises
|
80,232 | 272 | 1,401 | 79,103 | ||||||||||||
|
|
||||||||||||||||
|
Total Fixed Maturities
|
$ | 658,644 | 11,265 | 15,069 | 654,840 | |||||||||||
|
|
||||||||||||||||
|
Total Equity Securities
|
$ | 19,844 | 3,460 | — | 23,304 | |||||||||||
|
|
||||||||||||||||
| 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 Securities
|
$ | 596,104 | 6,056 | 16,905 | 585,255 | |||||||||||
|
|
||||||||||||||||
|
Total Equity Securities
|
$ | 25,899 | 7,578 | — | 33,477 | |||||||||||
|
|
||||||||||||||||
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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, 2010, 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, 2010 | ||||||||||||||||||||||||||||||||||||
| 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
|
$ | 234,994 | 6,390 | 170 | — | — | — | 234,994 | 6,390 | 170 | ||||||||||||||||||||||||||
|
States of the United States and
political subdivisions of
the states
|
66,836 | 3,270 | 60 | 9,626 | 2,764 | 8 | 76,462 | 6,034 | 68 | |||||||||||||||||||||||||||
|
Corporate
|
28,072 | 1,040 | 21 | 2,443 | 176 | 7 | 30,515 | 1,216 | 28 | |||||||||||||||||||||||||||
|
Securities not due at a single
maturity date
|
569 | 8 | 2 | 201 | 20 | 5 | 770 | 28 | 7 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total available-for-sale
|
330,471 | 10,708 | 253 | 12,270 | 2,960 | 20 | 342,741 | 13,668 | 273 | |||||||||||||||||||||||||||
|
Held-to-maturity securities:
|
||||||||||||||||||||||||||||||||||||
|
U.S. Government-sponsored
enterprises
|
45,699 | 1,402 | 18 | — | — | — | 45,699 | 1,401 | 18 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total fixed maturities
|
$ | 376,170 | 12,110 | 271 | 12,270 | 2,960 | 20 | 388,440 | 15,069 | 291 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
As of December 31, 2010, 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 the municipal bonds acquired in the acquisition
of SPLIC 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.
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
to sell the security or whether we more likely than not will be required to sell the security
before its anticipated recovery. All fixed maturity securities sold in 2010 were sold at a
gain or a minimal loss. All securities with a market price below 90% of par were segregated
and reviewed as of December 31, 2010 based upon the items above for other-than-temporary
impairment.
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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, 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 | ||||||||||||||||||||||||||
|
States of the United States and
political
subdivisions of the
states
|
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 | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
The amortized cost and fair value of fixed maturities at December 31, 2010 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.
| Cost or | ||||||||
| Amortized Cost | Fair Value | |||||||
| (In thousands) | ||||||||
|
Available-for-sale securities:
|
||||||||
|
Due in one year or less
|
$ | 4,700 | 4,833 | |||||
|
Due after one year through five years
|
30,972 | 32,349 | ||||||
|
Due after five years through ten years
|
120,894 | 121,910 | ||||||
|
Due after ten years
|
407,843 | 401,837 | ||||||
|
|
||||||||
|
Total available-for-sale securities
|
564,409 | 560,929 | ||||||
|
Held-to-maturity securities:
|
||||||||
|
Due after five years through ten years
|
6,040 | 6,045 | ||||||
|
Due after ten years
|
74,192 | 73,058 | ||||||
|
|
||||||||
|
Total held-to-maturity securities
|
80,232 | 79,103 | ||||||
|
Securities not due at a single maturity date
|
14,003 | 14,808 | ||||||
|
|
||||||||
|
Total fixed maturities
|
$ | 658,644 | 654,840 | |||||
|
|
||||||||
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, excluding U.S. Government agencies, that
exceeded 10% of stockholders’ equity at December 31, 2010. In addition, there were no
investments that were non-income producing for the year ended December 31, 2010.
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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:
| Years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Investment income on:
|
||||||||||||
|
Fixed maturities
|
$ | 26,829 | 25,921 | 27,536 | ||||||||
|
Equity securities
|
713 | 1,056 | 1,027 | |||||||||
|
Mortgage loans on real
estate
|
101 | 50 | 28 | |||||||||
|
Policy loans
|
2,704 | 2,444 | 2,105 | |||||||||
|
Long-term investments
|
246 | 465 | 39 | |||||||||
|
Other
|
207 | 507 | 357 | |||||||||
|
|
||||||||||||
|
|
30,800 | 30,443 | 31,092 | |||||||||
|
Investment expenses
|
(723 | ) | (841 | ) | (614 | ) | ||||||
|
|
||||||||||||
|
Net investment income
|
$ | 30,077 | 29,602 | 30,478 | ||||||||
|
|
||||||||||||
Proceeds and gross realized gains and losses from sales of fixed maturities
available-for-sale for 2010, 2009 and 2008 are summarized as follows:
| Years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Proceeds
|
$ | 8,029 | 74,181 | 237 | ||||||||
|
|
||||||||||||
|
Gross realized gains
|
$ | 912 | 2,752 | 5 | ||||||||
|
|
||||||||||||
|
Gross realized losses
|
$ | 25 | — | — | ||||||||
|
|
||||||||||||
Certain securities were sold during 2010 from a tax planning perspective and due to
statutory reporting considerations related to non-rated securities.
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. No securities were sold from the held-to-maturity portfolio in 2010, 2009 or 2008.
Proceeds and gross realized gains and losses from sales of equity securities for 2010, 2009
and 2008 are summarized as follows:
| Years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Proceeds
|
$ | 22,822 | 22,745 | — | ||||||||
|
|
||||||||||||
|
Gross realized gains
|
$ | 7,254 | 5,292 | — | ||||||||
|
|
||||||||||||
|
Gross realized losses
|
$ | 11 | — | — | ||||||||
|
|
||||||||||||
In 2010 and 2009, the Company sold holdings of equity mutual funds that were previously impaired
in 2008, generating realized capital gains for financial reporting purposes, of $6.4 million and $4.9 million, respectively, but realized
losses for tax purposes. The tax losses will be carried back to recover taxes paid on gains in prior years.
70
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:
| Years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Realized gains (losses):
|
||||||||||||
|
Sales, calls and maturities:
|
||||||||||||
|
Fixed maturities
|
$ | 753 | 2,705 | (2 | ) | |||||||
|
Equity securities
|
7,343 | 5,292 | — | |||||||||
|
Property and equipment
|
(8 | ) | 323 | (4 | ) | |||||||
|
Other long-term
investments
|
(49 | ) | 16 | 18 | ||||||||
|
|
||||||||||||
|
Net realized gains (losses)
|
8,039 | 8,336 | 12 | |||||||||
|
|
||||||||||||
|
Other-than-temporary impairments:
|
||||||||||||
|
Fixed maturities
|
(27 | ) | (103 | ) | (288 | ) | ||||||
|
Equity securities
|
— | (193 | ) | (23,536 | ) | |||||||
|
|
||||||||||||
|
Realized loss on OTTI
|
(27 | ) | (296 | ) | (23,824 | ) | ||||||
|
|
||||||||||||
|
Net realized gains (losses)
|
$ | 8,012 | 8,040 | (23,812 | ) | |||||||
|
|
||||||||||||
| 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 publicly 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.
71
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 and liabilities that are measured at fair value on
a recurring basis as of the date indicated:
| Fair Value Measurements | ||||||||||||||||
| December 31, 2010 | ||||||||||||||||
| Total | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Financial assets:
|
||||||||||||||||
|
Fixed maturities available-for-sale:
|
||||||||||||||||
|
U.S. Treasury and U.S. Government-sponsored enterprises
|
$ | 12,825 | 284,955 | — | 297,780 | |||||||||||
|
Corporate
|
— | 161,298 | — | 161,298 | ||||||||||||
|
Municipal bonds
|
— | 101,719 | — | 101,719 | ||||||||||||
|
Mortgage-backed
|
— | 14,289 | 519 | 14,808 | ||||||||||||
|
Foreign governments
|
— | 132 | — | 132 | ||||||||||||
|
|
||||||||||||||||
|
Total fixed maturities,
available-for-sale
|
12,825 | 562,393 | 519 | 575,737 | ||||||||||||
|
Total equity securities,
available-for-sale
|
23,304 | — | — | 23,304 | ||||||||||||
|
|
||||||||||||||||
|
Total financial assets
|
$ | 36,129 | 562,393 | 519 | 599,041 | |||||||||||
|
|
||||||||||||||||
|
Financial liabilities:
|
||||||||||||||||
|
Warrants outstanding
|
$ | — | 1,587 | — | 1,587 | |||||||||||
|
|
||||||||||||||||
| Fair Value Measurements | ||||||||||||||||
| December 31, 2009 | ||||||||||||||||
| Total | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Financial assets:
|
||||||||||||||||
|
Fixed maturities available-for-sale:
|
||||||||||||||||
|
U.S. Treasury and U.S. Government-sponsored enterprises
|
$ | 12,434 | 180,283 | — | 192,717 | |||||||||||
|
Corporate
|
— | 116,098 | — | 116,098 | ||||||||||||
|
Municipal bonds
|
— | 57,192 | — | 57,192 | ||||||||||||
|
Mortgage-backed
|
— | 18,875 | 577 | 19,452 | ||||||||||||
|
Foreign governments
|
— | 120 | — | 120 | ||||||||||||
|
Short-term investments
|
— | 2,510 | — | 2,510 | ||||||||||||
|
|
||||||||||||||||
|
Total fixed maturities,
available-for-sale
|
12,434 | 375,078 | 577 | 388,089 | ||||||||||||
|
Total equity securities,
available-for-sale
|
33,477 | — | — | 33,477 | ||||||||||||
|
|
||||||||||||||||
|
Total financial assets
|
$ | 45,911 | 375,078 | 577 | 421,566 | |||||||||||
|
|
||||||||||||||||
|
Financial liabilities:
|
||||||||||||||||
|
Warrants outstanding
|
$ | — | 1,819 | — | 1,819 | |||||||||||
|
|
||||||||||||||||
Financial Instruments Valuation
Fixed maturity securities, available-for-sale
. At December 31, 2010, the fixed maturities,
valued using a third-party pricing source, totaled $562.4 million for Level 2 assets and
comprised 97.7% of total reported fair value. Fair values for Level 3 assets are based upon
unadjusted broker quotes that are non-binding. The valuations are reviewed and validated
quarterly through random testing by comparisons to separate pricing models, other third party
pricing services, and back tested to recent trades. For the period ended December 31, 2010,
there were no material changes to the valuation methods or assumptions used to determine fair
values, and no broker or third party prices were changed from the values received.
72
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Equity securities, available-for-sale
. Fair values of these securities are based upon quoted
market price and are classified as Level 1 assets.
Short-term investments
. The fair values for short-term investments are determined using a
third-party pricing source. These assets are classified as Level 2.
Warrants outstanding.
Fair value of our warrants are based upon industry standard models
that consider various observable inputs and are classified as Level 2.
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, 2010 | ||||
| (In thousands) | ||||
|
Ending Balance at December 31, 2009
|
$ | 577 | ||
|
Total realized and unrealized gains (losses):
|
||||
|
Included in net income
|
— | |||
|
Included in other comprehensive income
|
(6 | ) | ||
|
Principal paydowns
|
(52 | ) | ||
|
Transfer in and (out) of Level 3
|
— | |||
|
|
||||
|
Ending Balance at December 31, 2010
|
$ | 519 | ||
|
|
||||
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, 2010 | December 31, 2009 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| Value | Value | Value | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Financial assets:
|
||||||||||||||||
|
Fixed maturities,
held-to-maturity
|
$ | 80,232 | 79,103 | 206,909 | 199,676 | |||||||||||
|
Mortgage loans
|
1,489 | 1,433 | 1,533 | 1,484 | ||||||||||||
|
Policy loans
|
35,585 | 35,585 | 32,096 | 32,096 | ||||||||||||
|
Cash and cash equivalents
|
49,723 | 49,723 | 48,625 | 48,625 | ||||||||||||
|
|
||||||||||||||||
|
Financial liabilities:
|
||||||||||||||||
|
Annuities
|
42,096 | 38,619 | 37,882 | 33,980 | ||||||||||||
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% per year, as of
December 31, 2010 and 2009, with maturities ranging from one to thirty years. Management
estimated the fair value using an annual interest rate of 6.25% at December 31, 2010 and
2009.
73
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
The fair value of the Company’s liabilities under annuity contract policies were
estimated 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.
Policy loans have a weighted average annual interest rate of 7.7% as of December 31, 2010
and 2009, respectively, 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.
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, 2010, 2009
and 2008.
| Years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Policy claims payable at January 1
|
$ | 10,222 | 9,318 | 6,908 | ||||||||
|
Less: reinsurance recoverable
|
2,455 | 2,706 | 1,918 | |||||||||
|
|
||||||||||||
|
Net balance at January 1
|
7,767 | 6,612 | 4,990 | |||||||||
|
|
||||||||||||
|
Acquisition of ONLIC and ICIC, gross
and net
|
— | 6 | 140 | |||||||||
|
Add claims incurred, related to:
|
||||||||||||
|
Current year
|
26,043 | 25,077 | 25,308 | |||||||||
|
Prior years
|
(1,187 | ) | (556 | ) | 305 | |||||||
|
|
||||||||||||
|
|
24,856 | 24,521 | 25,613 | |||||||||
|
|
||||||||||||
|
Deduct claims paid, related to:
|
||||||||||||
|
Current year
|
18,072 | 18,386 | 19,735 | |||||||||
|
Prior years
|
5,199 | 4,986 | 4,396 | |||||||||
|
|
||||||||||||
|
|
23,271 | 23,372 | 24,131 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net balance December 31
|
9,352 | 7,767 | 6,612 | |||||||||
|
Plus: reinsurance recoverable
|
1,188 | 2,455 | 2,706 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Policy claims payable, December 31
|
$ | 10,540 | 10,222 | 9,318 | ||||||||
|
|
||||||||||||
74
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
The favorable development in 2010 of $1,187,000 was primarily related to SPLIC incurred
but not reported (“IBNR”) claims at December 31, 2009, which was over accrued by
approximately $979,000. The IBNR going forward has been adjusted to account for the better
claims experience trending.
The favorable development in 2009 for prior year claims was primarily from SPLIC and SPFIC.
SPLIC’s IBNR claims were 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.
| Note 5: |
Reinsurance
|
In the normal course of business, the Company reinsures portions of certain policies that we
underwrite to limit disproportionate risks. During 2010 and 2009, 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 2010 and 2009, 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 $5.1
million of the $9.7 million of reinsurance recoverable at December 31, 2010.
75
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, 2010 and 2009 is summarized
as follows:
| At December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Aggregate assumed life insurance in force
|
$ | 1,044,759 | 927,917 | |||||
|
|
||||||||
|
Aggregate ceded life insurance in force
|
$ | (381,076 | ) | (362,891 | ) | |||
|
|
||||||||
|
Net life insurance in force
|
$ | 5,115,662 | 4,997,043 | |||||
|
|
||||||||
The Company’s reinsurance recoveries on ceded reinsurance were $9.7 million in 2010 and $11.6
million in 2009. Premiums and claims and surrenders assumed and ceded for all lines of business
for these years are summarized as follows:
| Years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Premiums from short-duration
contracts:
|
||||||||||||
|
Direct
|
$ | 6,994 | 6,834 | 6,856 | ||||||||
|
Assumed
|
— | — | — | |||||||||
|
Ceded
|
(1,131 | ) | (1,066 | ) | (1,202 | ) | ||||||
|
|
||||||||||||
|
Net premiums earned
|
5,863 | 5,768 | 5,654 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Premiums from long-duration
contracts:
|
||||||||||||
|
Direct
|
152,125 | 148,893 | 144,221 | |||||||||
|
Assumed
|
1,553 | 1,416 | 1,459 | |||||||||
|
Ceded
|
(7,489 | ) | (8,797 | ) | (10,037 | ) | ||||||
|
|
||||||||||||
|
Net premiums earned
|
146,189 | 141,512 | 135,643 | |||||||||
|
|
||||||||||||
|
Total premiums earned
|
$ | 152,052 | 147,280 | 141,297 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Claims and surrenders assumed
|
$ | 1,549 | 1,434 | 1,429 | ||||||||
|
|
||||||||||||
|
Claims and surrenders ceded
|
$ | (5,341 | ) | (5,649 | ) | (9,982 | ) | |||||
|
|
||||||||||||
SPFIC has catastrophe reinsurance that covers the first event in excess of a $500,000
deductible up to $10.0 million. In consideration for a reinstatement premium, second event
coverage is provided in excess of a $500,000 deductible up to $10.0 million. The annual
premium was $1,130,000, $1,075,000 and $750,000 in 2010, 2009 and 2008, 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.
76
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.
| At December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
| (Unaudited) | ||||||||
| Combined Statutory Stockholders’ Equity | ||||||||
|
Life insurance operations
|
$ | 98,261 | 106,688 | |||||
|
Property insurance operations
|
4,646 | 4,655 | ||||||
|
|
||||||||
|
Total statutory capital and surplus
|
$ | 102,907 | 111,343 | |||||
|
|
||||||||
| Years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
| (Unaudited) | ||||||||||||
| Combined Statutory Net Income (Loss) | ||||||||||||
|
Life insurance operations
|
$ | 7,534 | 15,546 | (11,839 | ) | |||||||
|
Property insurance operations
|
(7 | ) | (444 | ) | (1,436 | ) | ||||||
|
|
||||||||||||
|
Total statutory net income (loss)
|
$ | 7,527 | 15,102 | (13,275 | ) | |||||||
|
|
||||||||||||
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,
2010 was $47.5 million and net gain from operations was $7.4 million for CICA. Based upon
statutory net gain from operations and surplus of CICA as of and for the year ended December
31, 2010, a dividend of approximately $7.4 million could be paid to the Company without prior
regulatory approval in 2011. 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. All insurance subsidiaries
exceeded RBC minimum levels at December 31, 2010.
| 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.
There are outstanding warrants to purchase the Company’s stock at prices ranging from $6.95
to $7.93, which were issued to investors of the Class A-1 and A-2 preferred stock. There are
1,022,471 warrants to purchase stock that expire, if not exercised, on July 12, 2011 and
178,969 that expire, if not exercised, in the third quarter of 2012. The fair value of the
warrants is calculated using the Black-Scholes option pricing model and is classified as a
liability on the balance sheet in the amount of $1.6 million and $1.8 million at December 31,
2010 and 2009, respectively. The change in fair value of warrants is reported as a component
of revenue in the income statement. The change in fair value of warrants caused an increase
in revenues of $0.2 million and $3.2 million in 2010 and 2009, respectively, and a decrease
in revenue of $2.7 million in 2008.
77
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, 2010 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
|
$ | 747 | 347 | 384 | 16 | — | ||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Future policy benefit reserves:
|
||||||||||||||||||||
|
Life insurance
|
637,140 | 237 | 1,329 | 12,476 | 623,098 | |||||||||||||||
|
Annuities
|
42,096 | 22,021 | 9,870 | 4,255 | 5,950 | |||||||||||||||
|
Accident and health
|
5,910 | 5,910 | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Total future policy benefit
reserves
|
685,146 | 28,168 | 11,199 | 16,731 | 629,048 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Policy claims payable:
|
||||||||||||||||||||
|
Life insurance
|
9,528 | 9,528 | — | — | — | |||||||||||||||
|
Accident and health
|
521 | 521 | — | — | — | |||||||||||||||
|
Casualty
|
491 | 491 | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Total policy claims payable
|
10,540 | 10,540 | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total contractual obligations
|
$ | 696,433 | 39,055 | 11,583 | 16,747 | 629,048 | ||||||||||||||
|
|
||||||||||||||||||||
Operating lease expense was $542,000, $591,000 and $628,000 for the years ended December
31, 2010, 2009 and 2008, respectively.
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 filed on August 6, 1999 in the Texas District Court, Austin,
Texas, now styled
Delia Bolanos Andrade, et al., Plaintiffs, v. Citizens Insurance Company of
America, et al., Defendants
in which a class was originally certified by the trial court and
reversed by the Texas Supreme Court in 2007 with an order to the trial court to conduct
further proceedings consistent with its ruling. The underlying lawsuit alleged that certain
life insurance policies CICA 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 December 9, 2009, the trial court denied the recertification of the class after
conducting additional proceedings in accordance with the Texas Supreme Court’s ruling. The
remaining plaintiffs must now proceed individually, and not as a class, if they intend to
pursue their cases against us. We intend to maintain a vigorous defense in any remaining
proceedings.
78
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
In addition to the legal proceeding 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.
79
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
| 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 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.
| For the Year Ended December 31, 2010 | ||||||||||||||||
| Other | ||||||||||||||||
| Life | Home | Non-Insurance | ||||||||||||||
| Insurance | Service | Enterprises | Consolidated | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Premiums
|
$ | 109,985 | 42,067 | — | 152,052 | |||||||||||
|
Net investment income
|
16,523 | 13,008 | 546 | 30,077 | ||||||||||||
|
Realized gains, net
|
6,590 | 1,475 | (53 | ) | 8,012 | |||||||||||
|
Decrease in fair value of warrants
|
— | — | 232 | 232 | ||||||||||||
|
Other income
|
650 | 82 | 76 | 808 | ||||||||||||
|
|
||||||||||||||||
|
Total revenue
|
133,748 | 56,632 | 801 | 191,181 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Benefits and expenses:
|
||||||||||||||||
|
Insurance benefits paid or provided:
|
||||||||||||||||
|
Claims and surrenders
|
41,040 | 19,998 | — | 61,038 | ||||||||||||
|
Increase in future policy benefit reserves
|
42,619 | 3,801 | — | 46,420 | ||||||||||||
|
Policyholders’ dividends
|
7,414 | 71 | — | 7,485 | ||||||||||||
|
|
||||||||||||||||
|
Total insurance benefits paid or provided
|
91,073 | 23,870 | — | 114,943 | ||||||||||||
|
|
||||||||||||||||
|
Commissions
|
21,899 | 14,686 | — | 36,585 | ||||||||||||
|
Other underwriting, acquisition and insurance
expenses
|
10,947 | 14,307 | 1,803 | 27,057 | ||||||||||||
|
Capitalization of deferred policy acquisition costs
|
(21,398 | ) | (6,562 | ) | — | (27,960 | ) | |||||||||
|
Amortization of deferred policy acquisition costs
|
16,185 | 1,655 | — | 17,840 | ||||||||||||
|
Amortization of cost of customer relationships
acquired and other intangibles
|
1,133 | 1,953 | — | 3,086 | ||||||||||||
|
|
||||||||||||||||
|
Total benefits and expenses
|
119,839 | 49,909 | 1,803 | 171,551 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Income before income tax expense
|
$ | 13,909 | 6,723 | (1,002 | ) | 19,630 | ||||||||||
|
|
||||||||||||||||
80
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 (losses), net
|
1,100 | 6,562 | 378 | 8,040 | ||||||||||||
|
Increase 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
|
(20,975 | ) | (6,157 | ) | — | (27,132 | ) | |||||||||
|
Amortization of deferred policy acquisition costs
|
17,861 | 2,817 | — | 20,678 | ||||||||||||
|
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 (loss) before income tax expense
|
$ | 10,472 | 9,245 | 889 | 20,606 | |||||||||||
|
|
||||||||||||||||
81
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 | ) | |||||||||
|
Decrease 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
|
(22,922 | ) | (6,312 | ) | — | (29,234 | ) | |||||||||
|
Amortization of deferred policy acquisition costs
|
17,076 | 3,699 | — | 20,775 | ||||||||||||
|
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 | ) | ||||||||
|
|
||||||||||||||||
82
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
The table below summarizes assets by segment.
| At December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Assets:
|
||||||||
|
|
||||||||
|
Life Insurance
|
$ | 582,143 | 547,775 | |||||
|
Home Service Insurance
|
348,635 | 341,920 | ||||||
|
Other Non-Insurance Enterprises
|
55,728 | 37,631 | ||||||
|
|
||||||||
|
Total
|
986,506 | 927,326 | ||||||
|
|
||||||||
Major categories of earned premiums are summarized as follows:
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Premium income:
|
||||||||||||
|
Ordinary life
|
$ | 144,350 | 139,843 | 133,775 | ||||||||
|
Group life
|
1,315 | 1,158 | 1,178 | |||||||||
|
Accident and health
|
1,577 | 1,531 | 1,580 | |||||||||
|
Property
|
4,810 | 4,748 | 4,764 | |||||||||
|
|
||||||||||||
|
Total premium income
|
$ | 152,052 | 147,280 | 141,297 | ||||||||
|
|
||||||||||||
Geographic Information
The following table sets forth the Company’s total yearly earned premium from geographic area for
the years indicated:
| Area | 2010 | 2009 | 2008 | |||||||||
| (In thousands) | ||||||||||||
|
United States
|
$ | 53,189 | 53,741 | 51,616 | ||||||||
|
Colombia
|
21,377 | 23,254 | 19,476 | |||||||||
|
Taiwan
|
14,270 | 13,629 | 13,797 | |||||||||
|
Venezuela
|
16,655 | 13,845 | 12,531 | |||||||||
|
Ecuador
|
12,278 | 10,737 | 10,899 | |||||||||
|
Argentina
|
9,134 | 8,535 | 9,596 | |||||||||
|
Other foreign countries
|
32,216 | 31,986 | 33,162 | |||||||||
|
Net reinsurance
|
(7,067 | ) | (8,447 | ) | (9,780 | ) | ||||||
|
|
||||||||||||
|
Total
|
$ | 152,052 | 147,280 | 141,297 | ||||||||
|
|
||||||||||||
83
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
| Note 10: |
Income Taxes
|
Our federal income tax expense was $4.1 million, $3.3 million and $3.1 million in 2010, 2009
and 2008, respectively. This represents effective tax rates of 20.9%, 15.8% and 24.7%,
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.
Additionally, $2.7 million of the valuation allowance established in 2008 was released as an
increase to other comprehensive income (“OCI”). This release was related to the increase in
the fair value during 2009 of the mutual funds still owned at December 31, 2009. An
additional valuation allowance was set up for $254,000 related to additional declines in
ONLIC investments. This amount was added to goodwill. During 2010, most of the mutual
funds owned at December 31, 2009 were sold. Primarily due to this event, a tax valuation
allowance was no longer required at December 31, 2010 and the $2.5 million allowance was
released as a reduction in tax expense. Additionally, $1.9 million of the valuation
allowance in OCI was released as a reduction in income tax expense, since the mutual funds
that the allowance related to had been sold. The total tax expense reduction from the
release of the valuation allowances in 2010 was $4.3 million. 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. Additionally, a valuation allowance of $804,000 was
established for securities acquired in the ONLIC acquisition.
The table below summarizes the changes in the valuation allowance.
| Other | ||||||||||||||||
| Deferred Tax | Comprehensive | Income Tax | ||||||||||||||
| Liability | Income | Goodwill | Expense | |||||||||||||
| (In thousands) | ||||||||||||||||
|
|
||||||||||||||||
|
Established on 2008 OTTI’s
|
$ | (6,900 | ) | — | — | 6,900 | ||||||||||
|
Established on securities acquired
in Ozark acquisition
|
(804 | ) | — | 804 | — | |||||||||||
|
|
||||||||||||||||
|
Balance at December 31, 2008
|
(7,704 | ) | — | 804 | 6,900 | |||||||||||
|
Release of valuation allowance in 2009
|
5,242 | (2,701 | ) | 254 | (2,795 | ) | ||||||||||
|
|
||||||||||||||||
|
Balance at December 31, 2009
|
(2,462 | ) | (2,701 | ) | 1,058 | 4,105 | ||||||||||
|
Release of valuation allowance in 2010
|
2,462 | 1,858 | — | (4,320 | ) | |||||||||||
|
|
||||||||||||||||
|
Balance at December 31, 2010
|
$ | — | (843 | ) | 1,058 | (215 | ) | |||||||||
|
|
||||||||||||||||
84
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
A reconciliation of federal income tax expense computed by applying the federal income
tax rate of 35% in 2010, 2009 and 2008 to income (loss) before federal income tax
expense is as follows:
| Years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Expected tax expense (benefit)
|
$ | 6,870 | 7,212 | (4,408 | ) | |||||||
|
Change in valuation allowance
|
(2,462 | ) | (2,795 | ) | 6,900 | |||||||
|
Release of valuation allowance previously
held in other comprehensive income
|
(1,858 | ) | — | — | ||||||||
|
Taxable intercompany stock sales
|
1,369 | — | — | |||||||||
|
Tax-exempt interest
|
(203 | ) | (196 | ) | (234 | ) | ||||||
|
Change in fair value of options and
warrants
|
(81 | ) | (1,104 | ) | 932 | |||||||
|
Adjustment of prior year taxes
|
566 | 36 | 23 | |||||||||
|
Effect of graduated rates
|
— | 25 | (62 | ) | ||||||||
|
Other
|
(82 | ) | 88 | (39 | ) | |||||||
|
|
||||||||||||
|
Total income tax expense
|
$ | 4,119 | 3,266 | 3,112 | ||||||||
|
|
||||||||||||
Income tax expense consists of:
| Years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Current
|
$ | 3,492 | 937 | 2,616 | ||||||||
|
Deferred
|
627 | 2,329 | 496 | |||||||||
|
|
||||||||||||
|
Total income tax expense
|
$ | 4,119 | 3,266 | 3,112 | ||||||||
|
|
||||||||||||
85
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
A summary of the changes in the components of deferred federal income taxes is as
follows:
| At December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Deferred tax assets:
|
||||||||
|
Future policy benefit reserves
|
$ | 26,699 | 23,636 | |||||
|
Net operating and capital loss carryforwards
|
4,249 | 5,324 | ||||||
|
Due and accrued dividends and expenses
|
1,247 | 1,246 | ||||||
|
Investments available-for-sale
|
1,233 | 4,459 | ||||||
|
State income tax credits
|
138 | 142 | ||||||
|
Other
|
251 | 1,130 | ||||||
|
|
||||||||
|
Total gross deferred tax assets
|
33,817 | 35,937 | ||||||
|
Valuation allowance
|
— | (2,462 | ) | |||||
|
|
||||||||
|
Total gross deferred tax assets net of valuation
allowance
|
33,817 | 33,475 | ||||||
|
Deferred tax liabilities:
|
||||||||
|
Deferred policy acquisition costs, cost of customer
relationships acquired and intangible assets
|
(42,088 | ) | (40,285 | ) | ||||
|
Other
|
(1,139 | ) | (1,242 | ) | ||||
|
|
||||||||
|
Total gross deferred tax liabilities
|
(43,227 | ) | (41,527 | ) | ||||
|
|
||||||||
|
Net deferred tax liability
|
$ | (9,410 | ) | (8,052 | ) | |||
|
|
||||||||
Some prior year balances were reclassified to conform to the groupings presented in 2010.
A summary of the changes in the components of deferred federal and state income taxes is as
follows:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Deferred federal and state income taxes:
|
||||||||
|
Balance January 1
|
$ | (8,052 | ) | (3,951 | ) | |||
|
Deferred tax benefit (expense)
|
(4,947 | ) | (5,113 | ) | ||||
|
Change in valuation allowance
|
2,462 | 2,795 | ||||||
|
Acquisition of ICIC
|
— | 241 | ||||||
|
Charge to ONLIC goodwill
|
— | (254 | ) | |||||
|
Investments available-for-sale
|
1,112 | (1,762 | ) | |||||
|
Effects of unrealized gains on CCRA and DAC
|
15 | (8 | ) | |||||
|
|
||||||||
|
Balance December 31
|
$ | (9,410 | ) | (8,052 | ) | |||
|
|
||||||||
86
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
The Company and our subsidiaries had net operating losses at December 31, 2010
available to offset future taxable income of approximately $12.2 million, 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, 2010 and 2009,
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, it was more likely than not that the
deferred tax assets would be realized.
At December 31, 2010, 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, 2010 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, 2010; 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.
CICA Life Insurance Company of America
Security Plan Life Insurance Company
Security Plan Fire Insurance Company
Computing Technologies, Inc.
Insurance Investors, Inc.
Integrity Capital Corporation
Funeral Homes of America, Inc.
Citizens National Life Insurance Company
CICA Life Insurance Company of America
Security Plan Life Insurance Company
Security Plan Fire 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 Company and Security Plan Fire Insurance Company will be
included in the consolidated return for the first time in 2010. Integrity Capital
Insurance Company files a separate return.
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 2007. Some of our subsidiaries have open tax years
going back as far as 1995 due to net operating loss carry-forwards.
87
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
| 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 2010, 2009 and 2008, as indicated below:
| Pre-tax | Tax | Net | ||||||||||
| Amount | Effect | Amount | ||||||||||
| (In thousands) | ||||||||||||
|
Year ended December 31, 2010
|
||||||||||||
|
Unrealized gains (losses) on securities:
|
||||||||||||
|
Unrealized holding gains (losses) arising
during the period
|
$ | 4,891 | (1,712 | ) | 3,179 | |||||||
|
Reclassification adjustment for
(gains) losses included in net income
|
(8,069 | ) | 2,824 | (5,245 | ) | |||||||
|
Effects on DAC and CCRA
|
(43 | ) | 15 | (28 | ) | |||||||
|
Change in tax valuation allowance
|
— | (1,858 | ) | (1,858 | ) | |||||||
|
|
||||||||||||
|
Other comprehensive income (loss)
|
$ | (3,221 | ) | $ | (731 | ) | $ | (3,952 | ) | |||
|
|
||||||||||||
|
Year ended December 31, 2009
|
||||||||||||
|
Unrealized gains (losses) on securities:
|
||||||||||||
|
Unrealized holding gains (losses) arising
during the period
|
$ | 20,449 | (7,158 | ) | 13,291 | |||||||
|
Reclassification adjustment for
(gains) losses 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 (loss)
|
$ | 12,772 | $ | (1,770 | ) | $ | 11,002 | |||||
|
|
||||||||||||
|
Year ended December 31, 2008
|
||||||||||||
|
Unrealized gains (losses) on securities:
|
||||||||||||
|
Unrealized holding gains (losses) arising
during the period
|
$ | (29,377 | ) | 10,283 | (19,094 | ) | ||||||
|
Reclassification adjustment for
(gains) losses included in net income
|
23,826 | (8,340 | ) | 15,486 | ||||||||
|
|
||||||||||||
|
Other comprehensive income (loss)
|
$ | (5,551 | ) | 1,943 | (3,608 | ) | ||||||
|
|
||||||||||||
| 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
$1,000,000 in 2010 and $700,000 in 2009 and 2008. 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.
88
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Citizens, Inc. purchased Class A common shares during 2010 that were held by subsidiaries at
market value as of the transaction dates, which approximated $4.3 million. These
transactions were eliminated for financial reporting purposes in accordance with
consolidation accounting, but generated a tax expense for the year ended December 31, 2010
totaling approximately $1.4 million.
In 2010, CICA paid a dividend of $9.3 million to Citizens, Inc. and SPLIC paid a dividend to
CICA in the amount of $2.6 million. In 2009, CICA declared a dividend to Citizens, Inc. of
$10.5 million that was paid in January 2010 and SPLIC paid a dividend to CICA of $1.4
million.
89
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
| Note 14: |
Quarterly Financial Information
(Unaudited)
|
The following table contains selected unaudited financial data for each quarter.
| Fourth | Third | Second | First | |||||||||||||
| 2010 | Quarter | Quarter | Quarter | Quarter | ||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
|
|
||||||||||||||||
|
Revenues
|
$ | 55,734 | 45,455 | 46,160 | 43,832 | |||||||||||
|
Benefits and expenses
|
45,817 | 42,476 | 41,798 | 41,460 | ||||||||||||
|
Federal income tax expense
|
862 | 1,313 | 1,177 | 767 | ||||||||||||
|
Net income
|
9,055 | 1,666 | 3,185 | 1,605 | ||||||||||||
|
Net income available to
common shareholders
|
9,055 | 1,666 | 3,185 | 1,605 | ||||||||||||
|
Basic and diluted earnings per share
of Class A common stock
|
0.19 | 0.03 | 0.07 | 0.03 | ||||||||||||
|
Basic and diluted earnings per share
of Class B common stock
|
0.09 | 0.02 | 0.03 | 0.02 | ||||||||||||
| 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 of 2009 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.
| 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.
90
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, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Assets
|
||||||||
|
|
||||||||
|
Investment in subsidiaries
(1)
|
$ | 180,015 | 185,775 | |||||
|
Fixed maturities available-for-sale, at fair value
|
18,453 | 1,715 | ||||||
|
Mortgage loans on real estate
|
492 | 500 | ||||||
|
Real estate and other long-term investments
|
6,513 | 6,360 | ||||||
|
Cash
|
23,508 | 21,202 | ||||||
|
Accrued investment income
|
174 | 10 | ||||||
|
Accounts receivable from subsidiaries
(1)
|
2,436 | 3,988 | ||||||
|
Other assets
|
865 | 734 | ||||||
|
|
||||||||
|
Total assets
|
$ | 232,456 | 220,284 | |||||
|
|
||||||||
|
|
||||||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
|
||||||||
|
Liabilities:
|
||||||||
|
Accrued expense and other liabilities
|
$ | 3,235 | 2,390 | |||||
|
Liabilities for options and warrants
|
1,587 | 1,819 | ||||||
|
|
||||||||
|
Total liabilities
|
4,822 | 4,209 | ||||||
|
|
||||||||
|
Stockholders’ equity:
|
||||||||
|
Common stock:
|
||||||||
|
Class A
|
256,703 | 256,703 | ||||||
|
Class B
|
3,184 | 3,184 | ||||||
|
Retained deficit
|
(22,581 | ) | (38,092 | ) | ||||
|
Unrealized investment gains (losses) on securities held by
parent and subsidiaries, net of tax
|
1,339 | 5,291 | ||||||
|
Treasury stock
|
(11,011 | ) | (11,011 | ) | ||||
|
|
||||||||
|
Total stockholders’ equity
|
227,634 | 216,075 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 232,456 | 220,284 | |||||
|
|
||||||||
| (1) |
Eliminated in consolidation.
|
See accompanying report of independent registered public accounting firm.
91
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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Revenues:
|
||||||||||||
|
Management service fees
(1)
|
$ | 29,153 | 29,885 | 29,764 | ||||||||
|
Investment income
|
423 | 164 | 808 | |||||||||
|
Decrease (increase) in fair value of warrants
|
232 | 3,154 | (2,662 | ) | ||||||||
|
Other
|
— | 2 | 11 | |||||||||
|
Realized gains (losses)
|
(53 | ) | 40 | 18 | ||||||||
|
|
||||||||||||
|
Total revenues
|
29,755 | 33,245 | 27,939 | |||||||||
|
|
||||||||||||
|
Expenses:
|
||||||||||||
|
General
|
26,529 | 27,907 | 27,791 | |||||||||
|
Taxes
|
1,608 | 1,363 | 1,186 | |||||||||
|
|
||||||||||||
|
Total expenses
|
28,137 | 29,270 | 28,977 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income (loss) before equity in income (loss)
of consolidated subsidiaries
|
1,618 | 3,975 | (1,038 | ) | ||||||||
|
Equity in income (loss) of consolidated subsidiaries
|
13,893 | 13,365 | (14,669 | ) | ||||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 15,511 | 17,340 | (15,707 | ) | |||||||
|
|
||||||||||||
| (1) |
Eliminated in consolidation.
|
See accompanying report of independent registered public accounting firm.
92
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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income (loss)
|
$ | 15,511 | 17,340 | (15,707 | ) | |||||||
|
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
|
||||||||||||
|
Realized losses (gains)
|
53 | (40 | ) | (18 | ) | |||||||
|
Equity in net (income) loss of consolidated subsidiaries
|
(13,893 | ) | (13,365 | ) | 14,669 | |||||||
|
Increase (decrease) in fair value of options and
warrants
|
(232 | ) | (3,154 | ) | 2,662 | |||||||
|
Accrued expenses and other liabilities
|
845 | (204 | ) | 1,006 | ||||||||
|
Amortization of discounts on short-term investments
|
— | — | (428 | ) | ||||||||
|
Depreciation
|
227 | 252 | 126 | |||||||||
|
Change in accrued investment income
|
(164 | ) | 48 | 21 | ||||||||
|
Increase (decrease) in receivable from subsidiaries
|
1,552 | 758 | (2,457 | ) | ||||||||
|
Other
|
(199 | ) | 868 | (1,379 | ) | |||||||
|
|
||||||||||||
|
Net cash provided by (used in) operating activities
|
3,700 | 2,503 | (1,505 | ) | ||||||||
|
|
||||||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Purchase of fixed maturities, available-for-sale
|
(18,254 | ) | (3,000 | ) | (1,000 | ) | ||||||
|
Maturities of fixed maturities, available-for-sale
|
1,750 | 5,550 | 2,700 | |||||||||
|
Sale of real estate and other long-term investments
|
61 | 212 | 58 | |||||||||
|
Purchase of other long-term investments
and property and equipment
|
(437 | ) | (2,021 | ) | (806 | ) | ||||||
|
Maturity of short-term investments
|
— | 2,250 | 26,000 | |||||||||
|
Purchase of short-term investments
|
— | — | (10,173 | ) | ||||||||
|
Capital contribution to subsidiary
|
— | (1,000 | ) | — | ||||||||
|
Cash paid for acquisition, net
|
— | — | (8,242 | ) | ||||||||
|
|
||||||||||||
|
Net cash provided by (used by) investing activities
|
(16,880 | ) | 1,991 | 8,537 | ||||||||
|
|
||||||||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Dividend from subsidiary
|
19,800 | — | — | |||||||||
|
Warrants exercised
|
— | 70 | 125 | |||||||||
|
Purchase of the Company’s stock from affiliates
|
(4,314 | ) | — | — | ||||||||
|
Series A-1 preferred stock capital contributions
|
— | — | 9,375 | |||||||||
|
|
||||||||||||
|
Net cash provided by financing activities
|
15,486 | 70 | 9,500 | |||||||||
|
|
||||||||||||
|
Net increase in cash
|
2,306 | 4,564 | 16,532 | |||||||||
|
Cash at beginning of year
|
21,202 | 16,638 | 106 | |||||||||
|
|
||||||||||||
|
Cash at end of year
|
$ | 23,508 | 21,202 | 16,638 | ||||||||
|
|
||||||||||||
See accompanying report of independent registered public accounting firm.
93
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Financial Schedules
Financial Schedules
Schedule III
Supplementary Insurance Information
Supplementary Insurance Information
| At December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Deferred policy acquisition cost:
|
||||||||
|
Life Insurance
|
$ | 104,433 | 99,220 | |||||
|
Home Service Insurance
|
21,251 | 16,350 | ||||||
|
Other Non-Insurance Enterprises
|
— | — | ||||||
|
|
||||||||
|
Total consolidated deferred policy acquisition costs:
|
$ | 125,684 | 115,570 | |||||
|
|
||||||||
|
|
||||||||
|
Future policy benefit reserves and policy
claims payable:
|
||||||||
|
Life Insurance
|
$ | 462,354 | 419,766 | |||||
|
Home Service Insurance
|
233,332 | 227,095 | ||||||
|
Other Non-Insurance Enterprises
|
— | — | ||||||
|
|
||||||||
|
Total consolidated future policy benefit reserves
and policy claims payable
|
$ | 695,686 | 646,861 | |||||
|
|
||||||||
|
|
||||||||
|
Unearned premiums:
|
||||||||
|
Life Insurance
|
$ | 1,373 | 1,270 | |||||
|
Home Service Insurance
|
193 | 179 | ||||||
|
Other Non-Insurance Enterprises
|
— | — | ||||||
|
|
||||||||
|
Total consolidated unearned premiums
|
$ | 1,566 | 1,449 | |||||
|
|
||||||||
|
|
||||||||
|
Other policy claims and benefits payable:
|
||||||||
|
Life Insurance
|
$ | 34,999 | 27,942 | |||||
|
Home Service Insurance
|
4,799 | 4,708 | ||||||
|
Other Non-Insurance Enterprises
|
— | — | ||||||
|
|
||||||||
|
Total consolidated other policy claims and benefits
payable
|
$ | 39,798 | 32,650 | |||||
|
|
||||||||
See accompanying report of independent registered public accounting firm.
94
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
Reinsurance
| % of | ||||||||||||||||||||
| Ceded to | Assumed | Amount | ||||||||||||||||||
| Direct | Other | From Other | Assumed to | |||||||||||||||||
| Amount | Companies | Companies | Net Amount | Net | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Year ended December 31, 2010
|
||||||||||||||||||||
|
Life insurance in force
|
$ | 4,451,979 | 381,076 | 1,044,759 | 5,115,662 | 20.4 | % | |||||||||||||
|
|
||||||||||||||||||||
|
Premiums:
|
||||||||||||||||||||
|
Life insurance
|
146,331 | 2,219 | 1,553 | 145,665 | ||||||||||||||||
|
Accident and health insurance
|
6,847 | 5,270 | — | 1,577 | ||||||||||||||||
|
Property insurance
|
5,941 | 1,131 | — | 4,810 | ||||||||||||||||
|
|
||||||||||||||||||||
|
Total premiums
|
$ | 159,119 | 8,620 | 1,553 | 152,052 | 1.0 | % | |||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
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 | ||||||||||||||||
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||||||||||||||||||||
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Total premiums
|
$ | 151,077 | 11,239 | 1,459 | 141,297 | 1.0 | % | |||||||||||||
|
|
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See accompanying report of independent registered public accounting firm.
95
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.
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| Date: March 11, 2011 | 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, 2010, 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 11, 2011
|
/s/ Harold E. Riley
|
/s/ Rick D. Riley | |
|
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||
|
Harold E. Riley, Chairman of the Board and
Chief Executive Officer |
Rick D. Riley, Vice Chairman, President and
Chief Corporate Officer |
|
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/s/ E. Dean Gage
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/s/ Robert B. Sloan, Jr. | |
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Dr. E. Dean Gage, Director
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Dr. Robert B. Sloan, Jr., Director | |
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/s/ Terry S. Maness
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/s/ Grant G. Teaff | |
|
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Dr. Terry S. Maness, Director
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Grant G. Teaff, Director | |
|
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/s/ Dottie S. Riley
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/s/ Timothy T. Timmerman | |
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Dottie S. Riley, Director
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Timothy T. Timmerman, Director | |
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/s/ Steven F. Shelton
|
96
Table of Contents
EXHIBITS
| Exhibit Number | The following exhibits are filed herewith: | |||
|
|
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| 3.1 |
Restated and Amended Articles of Incorporation (a)
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| 3.2 |
Bylaws (b)
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| 4.1 |
Amendment to State Series A-1 and A-2 Senior Convertible Preferred Stock (c)
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| 10.1 |
Self-Administered Automatic Reinsurance Agreement — Citizens Insurance Company of America and
Riunione Adriatica di Sicurta, S.p.A. (d)
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| 10.2 |
Bulk Accidental Death Benefit Reinsurance Agreement between Connecticut General Life
Insurance Company and Citizens Insurance Company of America, as amended (e)
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| 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)
|
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|
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| 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)
|
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|
|
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| 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)
|
||
|
|
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| 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)
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||
|
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| 10.5 | (c) |
Unit Warrant dated July 12, 2004, to Mainfield Enterprises, Inc. (h)
|
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| 10.5 | (d) |
Unit Warrant dated July 12, 2004, to Steelhead Investments Ltd. (h)
|
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| 10.5 | (e) |
Unit Warrant dated July 12, 2004, to Portside Growth and Opportunity Fund (h)
|
||
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| 10.5 | (f) |
Unit Warrant dated July 12, 2004, to Smithfield Fiduciary LLC (h)
|
||
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| 10.5 | (g) |
Warrant to Purchase Class A Common Stock to Mainfield Enterprises, Inc. (h)
|
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| 10.5 | (h) |
Warrant to Purchase Class A Common Stock to Steelhead Investments Ltd. (h)
|
||
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| 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)
|
||
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| 10.5 | (k) |
Subordination Agreement among Regions Bank, the Purchasers and Citizens, Inc. dated July
12, 2004 (h)
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| 10.5 | (l) |
Non-Exclusive Finder’s Agreement dated September 29, 2003, between Citizens, Inc. and the
Shemano Group, Inc. (h)
|
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97
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)
|
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|
|
||||
| 10.7 |
Self-Administered Automatic Reinsurance Agreement between Citizens Insurance Company of
America and Scottish Re Worldwide (England) (j)
|
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|
|
||||
| 10.8 |
Self-Administered Automatic Reinsurance Agreement — CICA Life Insurance Company of America
and Scor Global Life U.S. Re Insurance Company (k)
|
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|
|
||||
| 10.9 |
Self-Administered Automatic Reinsurance Agreement — CICA Life Insurance Company of America
and Mapfre Re Compania de Reaseguros, S.A. (l)
|
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|
|
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| 11 |
Statement re: Computation of per share earnings (see financial statements)
|
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|
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| 21 |
Subsidiaries of the Registrant*
|
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|
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| 23 |
Consent of Independent Registered Public Accounting Firm — Ernst & Young LLP*
|
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|
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| 24 |
Power of Attorney (m)
|
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|
|
||||
| 31.1 |
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act*
|
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|
|
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| 31.2 |
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act*
|
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|
|
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| 32.1 |
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*
|
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|
|
||||
| 32.2 |
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*
|
|||
|
|
||||
| 99.1 |
New Release reporting fourth quarter results issued on March 10, 2011
(furnished herewith).
|
|||
| * |
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.
|
98
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