1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended MARCH 31, 2001 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________________ to ________________________ Commission File Number: 1-13004 ------------------------------------------------------- CITIZENS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Colorado 84-0755371 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) 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) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) 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 requirements for the past 90 days. [X] Yes [ ] No As of March 31, 2001, Registrant had 24,417,118 shares of Class A common stock, No Par Value, outstanding and 711,040 shares of Class B common stock, No Par Value, outstanding.
2 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES INDEX <TABLE> <CAPTION> Page Number ------ <S> <C> <C> PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Statements of Financial Position, March 31, 2001 (Unaudited) and December 31, 2000 3 Consolidated Statements of Operations, Three-Months Ended March 31, 2001 and 2000 (Unaudited) 5 Consolidated Statements of Cash Flows, Three-Months Ended March 31, 2001 and 2000 (Unaudited) 6 Notes to Consolidated Financial Statements 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS 11 PART II. OTHER INFORMATION 16 </TABLE> 2
3 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION MARCH 31, 2001 AND DECEMBER 31, 2000 <TABLE> <CAPTION> (UNAUDITED) MARCH 31, DECEMBER 31, 2001 2000 ------------ ------------ <S> <C> <C> ASSETS Investments: Fixed maturities held-for-investment, at amortized cost (market $5,597,500 in 2001 and $5,589,000 in 2000) $ 5,579,576 $ 5,582,802 Fixed maturities available-for-sale, at fair value (cost $166,143,584 in 2001 and $165,996,272 in 2000) 167,354,813 164,945,698 Equity securities, at fair value (cost $713,235 in 2001 and 2000) 672,620 675,726 Mortgage loans on real estate (net of reserve of $50,000 in 2001 and 2000) 1,154,123 1,178,668 Policy loans 20,518,396 20,884,136 Other long-term investments 935,001 936,297 ------------ ------------ Total investments 196,214,529 194,203,327 Cash 5,905,411 4,064,035 Accrued investment income 1,981,905 2,222,583 Reinsurance recoverable 3,039,611 2,662,724 Deferred policy acquisition costs 38,042,983 38,052,352 Other intangible assets 1,598,525 1,675,325 Federal income tax recoverable 174,978 174,978 Deferred federal income tax 3,670,793 4,628,750 Cost of insurance acquired 5,911,434 6,156,424 Excess of cost over net assets acquired 7,198,049 7,362,654 Property, plant and equipment 5,421,086 5,469,583 Other assets 1,473,755 1,169,629 ------------ ------------ Total assets $270,633,059 $267,842,364 ============ ============ </TABLE> See accompanying notes to consolidated financial statements. (Continued) 3
4 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED MARCH 31, 2001 AND DECEMBER 31, 2000 <TABLE> <CAPTION> (UNAUDITED) MARCH 31, DECEMBER 31, 2001 2000 ------------- ------------- <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Future policy benefit reserves $ 176,349,221 $ 175,269,307 Dividend accumulations 4,749,823 4,749,321 Premium deposits 3,088,258 3,033,514 Policy claims payable 2,895,578 2,866,110 Other policyholders' funds 2,158,011 2,245,947 ------------- ------------- Total policy liabilities 189,240,891 188,164,199 Other liabilities 1,508,077 1,355,718 Commissions payable 558,144 1,009,416 ------------- ------------- Total liabilities 191,307,112 190,529,333 STOCKHOLDERS' EQUITY: Common stock: Class A, no par value, 50,000,000 shares authorized, 26,642,938 shares issued and outstanding in 2001 and in 2000, including shares in treasury of 2,225,820 in 2001 and 2000 79,701,590 79,701,590 Class B, no par value, 1,000,000 shares authorized, 711,040 shares issued and outstanding in 2001 and 2000 910,482 910,482 Retained earnings 1,833,831 1,311,655 Accumulated other comprehensive income (loss): Unrealized investment gain (loss), net of tax 772,605 (718,135) ------------- ------------- 83,218,508 81,205,592 Treasury stock, at cost (3,892,561) (3,892,561) ------------- ------------- Total stockholders' equity 79,325,947 77,313,031 ------------- ------------- Total liabilities and stockholders' equity $ 270,633,059 $ 267,842,364 ============= ============= </TABLE> See accompanying notes to consolidated financial statements. 4
5 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS THREE-MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED) <TABLE> <CAPTION> THREE-MONTHS ENDED MARCH 31, ------------------------------ 2001 2000 ------------ ------------ <S> <C> <C> REVENUES: Premiums $ 12,049,115 $ 12,376,601 Annuity and universal life considerations 59,218 66,427 Net investment income 3,308,238 2,976,711 Realized gains (losses) (62,629) 11,163 Other income 127,839 147,538 ------------ ------------ Total revenues 15,481,781 15,578,440 BENEFITS AND EXPENSES: Insurance benefits paid or provided: Increase in future policy benefit reserves 1,194,962 1,119,916 Policyholders' dividends 597,714 550,671 Claims and surrenders 7,177,997 8,238,358 Annuity expenses 55,658 89,211 ------------ ------------ Total insurance benefits paid or provided 9,026,331 9,998,156 Commissions 2,696,967 2,863,834 Other underwriting, acquisition and insurance expenses 2,550,543 2,503,213 Capitalization of deferred policy acquisition costs (2,186,888) (2,105,985) Amortization of deferred policy acquisition costs 2,196,257 2,302,406 Amortization of cost of insurance acquired, excess of cost over net assets acquired and other intangibles 486,395 437,325 ------------ ------------ Total benefits and expenses 14,769,605 15,998,949 ------------ ------------ Income (loss) before Federal income tax 712,176 (420,509) Federal income tax expense (benefit) 190,000 (119,837) ------------ ------------ NET INCOME (LOSS) $ 522,176 $ (300,672) ============ ============ PER SHARE AMOUNTS: BASIC AND DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK $ 0.02 $ (0.01) ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING 25,128,158 25,128,158 ============ ============ </TABLE> See accompanying notes to consolidated financial statements. 5
6 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS THREE-MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED) <TABLE> <CAPTION> THREE-MONTHS ENDED MARCH 31, ------------------------------ 2001 2000 ------------ ------------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 522,176 $ (300,672) Adjustments to reconcile net gain to net cash provided by (used in) operating activities: Realized (gains) losses on sale of investments and other assets 62,629 (11,163) Net deferred policy acquisition costs 9,369 196,421 Amortization of cost of insurance acquired, excess cost over net assets acquired and other intangibles 486,395 437,325 Depreciation 150,278 131,726 Change in: Accrued investment income 240,678 609,418 Reinsurance recoverable (376,887) (1,743,083) Future policy benefit reserves 1,079,914 1,111,713 Other policy liabilities (3,222) 261,471 Deferred federal income tax 190,000 -- Federal income tax -- (1,420,837) Commissions payable and other liabilities (298,913) 670,145 Other, net (277,177) (15,692) ------------ ------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,785,240 (73,228) CASH FLOWS FROM INVESTING ACTIVITIES: Sale of fixed maturities, available-for-sale 4,057,416 -- Maturity of fixed maturities, available-for-sale 13,734,756 1,403,763 Purchase of fixed maturities, available-for-sale (18,025,836) (4,317,947) Principal payments on mortgage loans 24,545 35,858 Sale of other long-term investments and property, plant and equipment 1,296 3,901 </TABLE> See accompanying notes to consolidated financial statements. (Continued) 6
7 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED THREE-MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED) <TABLE> <CAPTION> THREE-MONTHS ENDED MARCH 31, ------------------------------ 2001 2000 ------------ ------------ <S> <C> <C> Decrease in policy loans, net $ 365,740 $ 103,861 Purchase of other long-term investments and property, plant and equipment (101,781) (317,484) ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 56,136 (3,088,048) ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,841,376 (3,161,276) Cash and cash equivalents at beginning of period 4,064,035 11,149,084 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,905,411 $ 7,987,808 ============ ============ Supplemental: Cash paid during the period for Income taxes $ -- $ 1,301,000 ============ ============ </TABLE> See accompanying notes to consolidated financial statements. 7
8 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) (1) FINANCIAL STATEMENTS The interim consolidated financial statements include the accounts and operations of Citizens, Inc. (Citizens), incorporated in the state of Colorado on November 8, 1977, and its wholly-owned subsidiaries, Citizens Insurance Company of America (CICA), Computing Technology, Inc. (CTI), Funeral Homes of America, Inc. (FHA), Insurance Investors, Inc. (III), Central Investors Life Insurance Company of Illinois (CILIC), First Investors Group, Inc. (Investors) and Excalibur Insurance Corporation (Excalibur). Citizens and its consolidated subsidiaries are collectively referred to as "the Company." The statement of financial position for March 31, 2001, the statements of operations for the three-month periods ended March 31, 2001 and 2000, and the statements of cash flows for the three-month periods then ended have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows at March 31, 2001 and for comparative periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 2000 annual 10-K report filed with the Securities and Exchange Commission. The results of operations for the period ended March 31, 2001 are not necessarily indicative of the operating results for the full year. (2) SEGMENT INFORMATION The Company has two reportable segments identified by geographic area: International business and domestic business. International business, consisting of ordinary whole-life business, is sold throughout Central and South America. The Company has no assets, offices or employees outside of the United States of America (U.S.) and requires that all transactions be in U.S. dollars, paid in the U.S. Domestic business, consisting of traditional life and burial insurance, pre-need policies, accident and health specified disease, hospital indemnity and accidental death policies, are sold throughout the southern U.S. 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. The Company evaluates performance based on U.S. GAAP net income (loss) before federal income taxes for its two reportable segments. Geographic Areas - The following summary represents financial data of the Company's continuing operations based on their location for the quarter ended March 31, 2001 and 2000. <TABLE> <CAPTION> 2001 2000 ----------- ----------- <S> <C> <C> REVENUES Domestic $ 3,270,239 $ 3,748,149 International 12,211,542 11,830,291 ----------- ----------- Total Revenues $15,481,781 $15,578,440 =========== =========== </TABLE> 8
9 The following summary, representing revenues, amortization expense and pre-tax income from continuing operations and identifiable assets for the Company's reportable segments as of and for the quarters ended March 31, 2001 and 2000, is as follows: <TABLE> <CAPTION> QUARTER ENDED MARCH 31 2001 2000 - ---------------------- ------------ ------------ <S> <C> <C> Revenue, excluding net investment income and realized gain on investments: Domestic $ 2,584,664 $ 3,029,271 International 9,651,508 9,561,295 ------------ ------------ Total consolidated revenue, excluding net investment income and realized gain on investments $ 12,236,172 $ 12,590,566 ============ ============ Net investment income: Domestic $ 698,804 $ 716,192 International 2,609,434 2,260,519 ------------ ------------ Total consolidated net investment income $ 3,308,238 $ 2,976,711 ============ ============ Amortization expense: Domestic $ 587,615 $ 736,253 International 2,095,037 2,003,478 ------------ ------------ Total consolidated amortization expense $ 2,682,652 $ 2,739,731 ============ ============ Realized gain (loss) on investments: Domestic $ (13,229) $ 2,686 International (49,400) 8,477 ------------ ------------ Total consolidated realized gain (loss) $ (62,629) $ 11,163 ============ ============ Income (loss) before federal income tax: Domestic $ (35,173) $ (87,072) International 747,349 (333,437) ------------ ------------ Total consolidated income (loss) before federal income tax $ 712,176 $ (420,509) ============ ============ </TABLE> <TABLE> <CAPTION> QUARTER ENDED YEAR ENDED MARCH 31, 2001 DECEMBER 31, 2000 -------------- ----------------- <S> <C> <C> Assets: Domestic $ 90,932,708 $ 93,476,985 International 179,700,351 174,365,379 ------------ ------------ Total $270,633,059 $267,842,364 ============ ============ </TABLE> 9
10 (3) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) For the three months ended March 31, 2001 and 2000, and the other comprehensive income (loss) amounts included in total comprehensive income (loss) consisted of unrealized gains (losses) on investments in fixed maturities and equity securities available-for-sale of $1,490,740 and $(1,854,983), respectively, net of tax. Total comprehensive income (loss) for the three months ended March 31, 2001 and 2000, was $2,012,916 and $(2,155,655), respectively. (4) EARNINGS PER SHARE Basic and diluted earnings per share have been computed using the weighted average number of shares of common stock outstanding during each period. The weighted average shares outstanding for both the three-months ended March 31, 2001 and 2000 were 25,128,158. The per share amounts have been adjusted retroactively for all periods presented to reflect the change in capital structure resulting from a 7% stock dividend declared on October 31, 2000, payable on December 31, 2000 to holders of record as of December 1, 2000. The stock dividend resulted in the issuance of 1,877,265 Class A shares (including 145,613 shares in treasury) and 46,517 Class B shares. 10
11 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Certain statements contained in this Form 10Q 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, the italicized statements and the statements specifically identified as forward-looking statements within this document. 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 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 plans and objectives of the Company or its 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", "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 involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to: (i) the strength of foreign and U.S. economies in general and the strength of the local economies in which operations are conducted; (ii) the effects of and changes in trade, monetary and fiscal policies and laws; (iii) inflation, interest rates, market and monetary fluctuations and volatility; (iv) the timely development and acceptance of new products and services and perceived overall value of these products and services by existing and potential customers; (v) changes in consumer spending, borrowing and saving habits; (vi) concentrations of business from persons residing in third world countries; (vii) acquisitions; (viii) the persistency of existing and future insurance policies sold by the Company and its subsidiaries; (ix) the dependence of the Company on its Chairman of the Board; (x) the ability to control expenses; (xi) the effect of changes in laws and regulations (including laws and regulations concerning insurance) with which the Company and its subsidiaries must comply, (xii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as the Financial Accounting Standards Board, (xiii) changes in the Company's organization and compensation plans; (xiv) the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; and (xv) the success of the Company at managing the risks involved in the foregoing. 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. 11
12 THREE MONTHS ENDED MARCH 31, 2001 AND 2000 Net income for the three months ended March 31, 2001 was $522,176 or $0.02 per share, compared to a net loss of $(300,672), or $(0.01) per share, for the same period in 2000. Revenues decreased slightly in 2001 to $15,481,781 compared to the first three months of 2000 when revenues were $15,578,440. The decrease in revenues was driven by a 22.5% decline in accident and health premiums that offset an 11.1% increase in net investment income. Premium income for the first three months of 2001 was $12,049,115 compared to $12,376,601 for the same period in 2000. The decline is attributable to a $419,696 decrease in accident and health premiums which were $1,447,202 for the three months ended March 31, 2001 compared to $1,866,898 for the same period in 2000. As a result of a substantial increase in the volume of claims plus an increase in the accident and health loss ratio, management moved to cancel a large portion of the existing blocks of United Security Life Insurance Company's ("USLIC") group dental business and National Security Life and Accident Insurance Company's ("NSLIC") individual major medical business during the third quarter of 1999 in order to curtail both claims and operating expenses. This action contributed to a $3,650,632 decrease in accident and health premiums for the year ended December 31, 2000. An additional decrease of approximately $1.5 million of annual accident and health premium income in 2001 is expected as policies terminate; however, due to the claims experience as well as the overhead necessary to administer such business, management believes this action will enhance near and long-term profitability. Because of increases in loss ratios, management has implemented significant rate increases on several of the supplemental, non-cancelable accident and health products. Production of new international life insurance premiums by marketing contractors of CICA, measured in paid, annualized premiums, increased 21.4% in 2000 from 1999. However, during the first three months of 2001, production approximated the level for the same period in 2000. Management believes that new sales will achieve a measurable increase during 2001. In addition, management developed a domestic ordinary life sales program for which it received regulatory approval in April of 2000. Recruiting efforts for marketing associates began in the State of Texas for the new product in mid-2000 and sales began late in second quarter 2000. This program, targeting rural areas of the United States, is expected to provide a new entre into the domestic life market for the Company. The Company intends to expand sales effort beyond Texas to other states in which CICA is licensed. Because sales efforts are developing, management is unable to predict the success of this program. Net investment income increased 11.1% in the first three months of 2001 compared to the same period in 2000. Net investment income for the three months ended March 31, 2001 was $3,308,238 compared to $2,976,711 for the first three months of 2000. This increase reflects continued expansion of the Company's asset base, investment in higher yielding instruments and the actions taken in previous years to change the mix and duration of the Company's invested assets. Management terminated the Company's outside investment advisor effective March 31, 2000. The Company feels that it can more effectively achieve its investment objectives by overseeing the investment activities in-house. The increased returns in 2001 relate to a shift in the mix of the portfolio to place less emphasis on government guaranteed mortgage pass-through instruments and more emphasis on investments in callable instruments issued by U.S. government agencies. 12
13 Claims and surrenders expense decreased 12.9% from $8,238,358 for the three months ended March 31, 2000 to $7,177,997 for the same period in 2001. Death claims decreased slightly from $1,464,142 in the first quarter of 2000 to $1,458,099 in the first quarter of 2001. Surrender expense for the same periods decreased from $4,052,440 in 2000 to $3,675,115 in 2001. Improving persistency on the Company's book of international whole life insurance business was the primary reason for the decreased surrender activity. This improvement in persistency can be attributed to improvements in the economies of several Latin American countries as well as a campaign to inform policyholders about the benefits of their policies. Endowments increased from $1,120,609 in the first quarter of 2000 to $1,144,777 in the first quarter of 2001. Like policy dividends, endowments are factored into the premiums and as such the increase should have no adverse impact on profitability. Accident and health benefits were $807,989 for the first three months of 2001 compared to $1,365,271 for the same period in 2000. This decrease in accident and health benefits is directly related to the cancellation of the USLIC and NSLIC blocks of business discussed above. The remaining components of claims and surrenders amounted to $92,017 for the first quarter of 2001, compared to $235,896 for the first quarter of 2000. These are made up of supplemental contract benefits, interest on policy funds and assorted other miscellaneous policy benefits. Underwriting, acquisition and insurance expenses increased from $2,503,213 in the first quarter of 2000 to $2,550,543 for the same period in 2001, an increase of 1.9%. The increase is attributed to the start-up costs of the domestic marketing program which offset reductions in the expenses associated with the administration of accident and health business. Additionally, the consolidation of several subsidiaries during the year 2000 will, in the opinion of management, afford increased economies of scale in 2001 and future years. Deferred policy acquisition costs capitalized in the first quarter of 2001 were $2,186,888 compared to $2,105,985 the same period of the previous year. Amortization of these costs was $2,196,257 for the first quarter of 2001 compared to $2,302,406 for the same period of 2000. Amortization of cost of insurance acquired, excess of cost over net assets acquired ("goodwill") and other intangible assets increased to $486,395 in the first three months of 2001 from $437,325 for the same period in 2000. The increase in amortization is related to the accelerated amortization of cost of insurance acquired as several of the companies previously purchased closed books of business lapse over time. Should production by the former agents of American Liberty Life Insurance Company, acquired in 1995, now representing CICA, fall below assumed levels, additional write-offs of the American Liberty goodwill could result. Management is monitoring this production in 2001 and anticipates meeting the targeted production levels. There remains approximately $2.7 million of goodwill related to American Liberty at March 31, 2001. LIQUIDITY AND CAPITAL RESOURCES Stockholders' equity increased to $79,325,947 at March 31, 2001 from $77,313,031 at December 31, 2000. The increase was attributable to net income of $522,176 earned during the first quarter of 2001 and unrealized gains, net of tax, increasing by $1,490,740 during the three months ended March 31, 2001 resulting in an unrealized gain as of March 31, 2001 of $772,605, net of tax, at March 31, 2001. Increases in the market value of the Company's available-for-sale bond portfolio caused by higher bond prices resulted in the change in unrealized gains, net of tax. Invested assets increased from $194,203,327 at December 31, 2000 to $196,214,529 at March 31, 2001. At March 31, 2001 and December 31, 2000, fixed maturities were categorized into two classifications: Fixed maturities held-to-maturity, which were valued at amortized cost, 13
14 and fixed maturities available-for-sale which were valued at fair value. Fixed maturities available-for-sale and fixed maturities held-to-maturity were 85.3% and 2.8%, respectively, of invested assets at March 31, 2001. Fixed maturities held-to-maturity, amounting to $5,579,576, consisted primarily of U.S. Treasury securities. Management has the intent and believes the Company has the ability to hold the securities to maturity. The Company's mortgage loan portfolio, which constituted 0.6% of invested assets at December 31, 2000 and March 31, 2001, has historically been composed primarily of seasoned small residential loans in Texas. Management established a reserve of $50,000 at March 31, 2001 and December 31, 2000 (approximately 4% of the mortgage portfolio's balance) to cover potential unforeseen losses in the Company's mortgage portfolio. At March 31, 2001, no loans were past due more than ninety days. Policy loans comprised 10.5% of invested assets at March 31, 2001. These loans, which are secured by the underlying policy values, have yields ranging from 5% to 10% percent and maturities that are related to the maturity or termination of the applicable policies. Management believes that the Company maintains more than adequate liquidity despite the uncertain maturities of these loans. Cash balances of the Company in its primary depository, Chase Bank, Austin, Texas, were significantly in excess of Federal Deposit Insurance Corporation coverage at March 31, 2001 and December 31, 2000. Management monitors the solvency of all financial institutions in which it has funds to minimize the exposure for loss. Management does not believe the Company is at risk for such a loss. CICA owned 2,085,244 shares of Citizens Class A common stock at March 31, 2001 and December 31, 2000. Statutory accounting practices prescribed by the National Association of Insurance Commissioners ("NAIC") and the State of Colorado require that the Company carry its investment at market value reduced by the percentage ownership of Citizens by CICA, limited to 2% of admitted assets. As of March 31, 2001 and December 31, 2000, the Company valued the shares in accordance with prescribed statutory accounting practices. In the Company's consolidated financial statements, this stock is included in treasury stock. The NAIC has established minimum capital requirements in the form of Risk-Based Capital ("RBC"). Risk-based capital factors the type of business written by a company, the quality of its assets, and various other factors into account to develop a minimum level of capital called "authorized control level risk-based capital" and compares this level to an adjusted statutory capital that includes capital and surplus as reported under Statutory Accounting Principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level risk-based capital fall below 200%, a series of actions by the Company would begin. At December 31, 2000 and March 31, 2001, all life insurance subsidiaries were above required minimum levels. Effective January 1, 2001, the NAIC implemented codified rules for statutory accounting. These rules are subject to implementation and approval by each state. Colorado notified CICA that it has adopted the codified accounting rules; however, certain state laws that differ from these rules should be followed. The primary difference between the Colorado statutes and the codified rules 14
15 involve the establishment of a liability for future policy dividends payable. Under codification, such a reserve is mandated; however, Colorado has an exception if the difference between the premiums charged and the mortality factor included in the premium on participating policies exceeds the reserve that would be established. Such is the case for CICA. As a result, CICA did not establish the reserve of approximately $3 million in its statutory financial statements. Overall, the implementation of codification had no material effect on the Company's statutory capital and surplus. FINANCIAL ACCOUNTING STANDARDS Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, became effective January 1, 2001. Implementation of SFAS No. 133, as amended, did not have a material affect on the financial position, results of operations or liquidity of the Company. SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - A Replacement of FASB Statement 125" revises the rules to be followed when determining whether a special purpose entity (SPE) is a qualifying SPE (QSPE). SFAS No. 140 requires that a QSPE have at least 10% of its beneficial interests held by parties unrelated to the transferor and limits the amount and type of derivative instruments that a QSPE can hold, SFAS No. 140 requires that for a transfer to a QSPE to be accounted for as a sale, the transferor must not retain effective control over the transferred assets through a removal-of-accounts provision that allows the transferor to unilaterally reclaim specific transferred assets. SFAS No. 140 requires extensive disclosures about securitizations entered into during the period and retained interests in securitized financial assets at the balance sheet data, accounting policies, sensitivity information related to retained interests and cash flows distributed to the transferor. It is effective for transfers occurring after March 31, 2001. However, the expanded disclosures about securitizations and collateral are effective for fiscal years ending after December 15, 2000. Management does not believe that SFAS No. 140 will have a significant effect on the financial position, results of operations or liquidity of the Company. 15
16 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2 CHANGES IN SECURITIES None, other than disclosed in the Notes to the Financial Statements or Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION The Annual meeting of stockholders will be held on Tuesday, June 5, 2001, at 10:00 a.m. at the Company's executive offices. The record date for the meeting was April 20, 2001. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K None. 16
17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CITIZENS, INC. By: /s/ Mark A. Oliver --------------------------------------- Mark A. Oliver, FLMI President By: /s/ Jeffrey J. Wood --------------------------------------- Jeffrey J. Wood, CPA Executive Vice President, Secretary/Treasurer and CFO Date: May 14, 2001 17