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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2000
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-20148
CITIZENS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Kentucky 61-1187135
(State of Incorporation) (I.R.S. Employer Identification No.)
12910 Shelbyville Road, Louisville, Kentucky 40243
(Address of principal executive offices)
(502) 244-2420
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Class A
Stock, No Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes ~~X~~ 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. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant: $7,423,852 (based on a $10.38 per share quoted bid price
on March 21, 2001).
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 1,758,215 shares of Class A
Stock as of March 21, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's Board of Director's Proxy Statement for the Annual
Meeting of Shareholders now scheduled for May 24, 2001 are incorporated into
Part III of this Form 10-K.
The date of this Report is March 22, 2001.
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CONTENTS
PART I
Page
ITEM 1. DESCRIPTION OF BUSINESS...................................... 3
ITEM 2. DESCRIPTION OF PROPERTY...................................... 10
ITEM 3. LEGAL PROCEEDINGS............................................ 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS ................................................ 10
PART~II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS .......................... 11
ITEM 6. SELECTED FINANCAL DATA..................................... 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS....................... 13
ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK. 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ................. 54
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT ... 54
ITEM 11. EXECUTIVE COMPENSATION ..................................... 54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT ............................... 54
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS ........................................ 54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K ..................... 55
SIGNATURES .......................................................... 56
EXHIBIT INDEX ....................................................... 57
EXHIBITS............................................................. 58
This report contains projections and other forward-looking statements regarding
future events or the future financial performance of the Company. Actual events
and results may differ materially from those in the projections and other
forward-looking statements set forth herein. Among the important factors that
could cause actual events or results to differ materially from those in the
projections and other forward-looking statements are: changes in the market
value of the Company's investments, including stock market performance and
interest rate changes; customer response to marketing efforts; mortality and
morbidity trends; regulatory changes; actions of independent rating agencies;
general economic conditions and increased competition; the Comany's ability to
achieve operating efficiencies; unanticipated adverse litigation; and changes in
Federal tax law. Readers are referred to the Items 1, 7, 7a and 8 in this report
and to the Company Report on Financial Statements in the Company's Annual Report
for a discussion of these and other important risk factors concerning the
Company and its operations.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Citizens Financial Corporation (herein, the "Company" or the "Registrant") was
incorporated in Kentucky in 1990 at the direction of the Board of Directors of
Citizens Security Life Insurance Company ("Citizens Security") for the ultimate
purpose of becoming an insurance holding company. Pursuant to a merger completed
in 1991, Citizens Security became a wholly-owned subsidiary of the Company. The
Company is now a holding company that engages in the business of life insurance,
annuities, and accident and health insurance through Citizens Security and
United Liberty Life Insurance Company ("United Liberty") (herein collectively,
the "Life Insurance Subsidiaries"). During October 1999, the Company acquired
Kentucky Insurance Company ("Kentucky Insurance"), which is licensed as a
property and casualty insurer in four states. Kentucky Insurance is planning to
offer home service fire and casualty insurance coverage; however, it currently
has no business inforce. In January 2001, the Company contributed the stock of
Kentucky Insurance to Citizens Security. The Life Insurance Subsidiaries and
Kentucky Insurance are herein collectively referred to as the "Insurance
Subsidiaries".
Citizens Security was incorporated in Kentucky and commenced business in 1965.
In 1971, Citizens Security acquired Central Investors Life Insurance Company by
merger. In 1987, it purchased the stock of Old South Life Insurance Company
("Old South"). In 1992, Old South merged into Citizens Security. In 1995, the
Company and Citizens Security purchased substantially all of the stock of
Integrity National Life Insurance Company ("Integrity") and merged it into
Citizens Security. During May 1998, Citizens Security purchased all of the
outstanding shares of United Liberty. As stated above, in October 1999, the
Company acquired Kentucky Insurance. See Item 7. "Management's Discussion and
Analysis" and Item 8, Note 2 of the Notes to Consolidated Financial Statements
for descriptions of certain of these acquisitions. The Life Insurance
Subsidiaries are currently licensed to transact the business of life insurance,
annuities, and accident and health insurance. Citizens Security is licensed in
twenty states and the District of Columbia while United Liberty is licensed in
twenty-three states.
Insurance Operations
The Company, through its Life Insurance Subsidiaries, operates in five segments
-- 1) home service life insurance, 2) broker-sold life insurance and annuities,
3) preneed life insurance, 4) dental insurance, and 5) other health and accident
insurance. The home service and preneed life segments provide individual
coverages; the dental segment provides group coverages; while the broker life
and other health segments include individual and group insurance coverages. The
following table presents each business segment's revenue; pretax income or loss
excluding realized investment gains and interest expense; and ending assets for
each of the last three fiscal years. Additional segment information is contained
in Item 7, "Management's Discussion and Analysis" and in Item 8, Note 11 of the
Notes to Consolidated Financial Statements.
Segment Revenue, Profit or Loss, and Assets:
Year Ended December 31 2000 1999 1998
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Revenue:
Home Service Life $ 9,036,005 $ 8,745,144 $ 8,315,665
Broker Life 6,090,607 6,003,025 5,341,104
Preneed Life 5,584,207 3,614,758 2,099,584
Dental 7,933,598 7,141,409 6,435,680
Other Health 1,469,316 1,383,437 1,409,483
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Segment Totals 30,113,733 26,887,773 23,601,516
Net realized investment gains, 1,180,879 9,375,339 3,675,489
net of expenses
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Total Revenue $31,294,612 $36,263,112 $27,277,005
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Year Ended December 31 2000 1999 1998
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Segment Profit (Loss):
Home Service Life $ 200,479 $ 312,703 $ 211,713
Broker Life 299,777 150,317 254,189
Preneed Life (827,265) (993,560) 15,325
Dental 331,206 436,587 295,038
Other Health 32,186 (64,524) 90,174
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Segment Totals 36,383 (158,477) 866,439
Net realized investment gains, 1,180,879 9,375,339 3,675,489
net of expenses
Interest expense 769,132 553,017 468,268
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Income before Income Tax $ 448,130 $8,663,845 $4,073,660
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December 31 2000 1999 1998
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Assets:
Home Service Life $ 45,577,255 $ 47,347,032 $ 43,299,037
Broker Life 57,721,008 57,958,271 52,783,159
Preneed Life 29,421,677 29,754,353 30,869,962
Dental 799,496 913,939 674,728
Other Health 2,018,570 2,006,435 1,872,237
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Total Assets $135,538,006 $137,980,030 $129,499,123
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Home Service Life. The Home Service Life segment consist of traditional whole
life insurance, which provides policyholders with permanent life insurance and
fixed, guaranteed rates of return on the cash value element of policy premiums.
Agents for these products sell primarily small face value policies (typically
from $1,000 to $10,000). These policies are subject to normal underwriting
procedures with the extent of such procedures determined by the amount of
insurance, age of applicant and other pertinent factors.
Broker Life. The Broker Life segment offers traditional whole life insurance;
universal life insurance, which provides policyholders with permanent life
insurance and adjustable rates of return on the cash value element of policy
premiums, based upon current interest rates; annuities; group life; accidental
death and dismemberment; and dependent life insurance. The majority of Broker
Life sales consist of whole life graded death benefit and simplified issue
policies.
The graded death benefit policy, introduced in the second quarter of 1997,
returns premium plus interest compounded at an annual rate of 10% if the insured
dies of natural causes during the first three years the policy is in force. If
the insured dies of an accidental cause, the benefit payable is the face amount
of the policy. The simplified issue product provides full face amount coverage
from date of issue, is more extensively underwritten and carries lower premium
rates than the graded death benefit product. This product was introduced in the
third quarter of 1997. These products are targeted towards the "final expense
market".
Generally, traditional whole life insurance products are more profitable than
universal life policies, in part because investment margins are normally greater
for traditional whole life products than for universal life policies. Overall
profitability on universal life policies may decline as a result of downward
interest crediting rate adjustments to the extent that policyholders withdraw
funds to invest in higher-yielding financial products. The profitability of
traditional whole life products and universal life policies is also dependent
upon the ultimate underwriting experience and the realization of anticipated
unit administrative costs. The Company believes that the historical claims
experience for the traditional whole life and universal life products issued by
the Life Insurance Subsidiaries has been within expected ranges, in relation to
the mortality assumptions used to price the products.
Substantially all annuity considerations are attributable to sales of flexible
premium deferred annuities, life policy annuity riders, and single premium
deferred annuities. Generally, a flexible premium deferred annuity or a life
policy annuity rider permits premium payments in such amounts as the
policyholder deems appropriate, while a single premium deferred annuity requires
a one-time lump sum payment.
Preneed Life. The Preneed Life segment products are traditional life policies
sold to individuals in connection with prearrangement of their funeral and
include single and multi-pay coverages, generally in amounts of $10,000 and
less. These policies are generally sold to older individuals at increased
premium rates.
The following table provides information concerning the Life Insurance
Subsidiaries' volume of life insurance coverage in force excluding participation
in group underwriting pools for federal employees (FEGLI) and service personnel
(SGLI) for each of the last three fiscal years.
Year Ended December 31 (Dollars
in Thousands) 2000 1999 1998
----------------------------------- -------------- ------------- --------------
Gross In-force at beginning of
period1 $765,440 $757,571 $680,664
Business purchased 43,940 --- 88,107
New business issued during period:
Individual $ 91,182 $ 84,640 $ 65,860
Group 2,001 7,170 4,026
----------------------------------- -------------- ------------- --------------
New business total $ 93,183 $ 91,810 $ 69,886
Terminations during period $ 93,518 $ 83,941 $ 81,086
Termination rate2 11.9% 11.7% 10.8%
Gross In-force at end of period1:
Individual $658,800 $605,309 $590,467
Group 150,245 160,131 167,104
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Gross In-force Total $809,045 $765,440 $757,571
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Reinsurance ceded at end of
period 100,829 119,001 122,993
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Net In-force at end of period $708,216 $646,439 $634,578
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1 Before deduction of reinsurance ceded.
2 Represents the percentage of individual policies terminated during the
indicated period by lapse, surrender, conversion, maturity, or otherwise.
Dental Insurance. Dental products are indemnity policies sold on a pure group
and voluntary group basis. Voluntary dental groups must meet prescribed
participation limits. All dental products have annual limits on all covered
procedures and lifetime limits on orthodontia procedures. In addition,
orthodontia and major restorative procedures are not covered for the first six
months to one year, depending upon the plan, unless a no-loss-no-gain provision
is attached to the policy.
Other Health Insurance. Other Health products include individual accident and
health insurance policies, which provide coverage for monthly income during
periods of hospitalization, scheduled reimbursement for specific hospital and
surgical expenses and cancer treatments, and lump sum payments for accidental
death or dismemberment. Group health plans are also offered, providing coverage
for short and long-term disability, and income protection. The Company is not
allocating significant marketing resources to this segment.
Marketing. The Life Insurance Subsidiaries are currently licensed to sell
products in 29 states and the District of Columbia. Citizens Security and United
Liberty are both licensed in the states designated below with a "b" while only
Citizens Security is licensed in the states designated "c" and only United
Liberty in the states designated "u".
b Alabama b Indiana u Nebraska u Oregon
u Arizona u Kansas u Nevada c Pennsylvania
b Arkansas b Kentucky c New Jersey b South
Carolina
u Colorado b Louisiana u New Mexico b Tennessee
c Delaware b Maryland c North b Texas
Carolina
c District of b Mississippi u Oklahoma u Utah
Columbia
b Florida b Missouri b Ohio c Virginia
c Georgia b West
Virginia
The Life Insurance Subsidiaries market products through the personal producing
general agent distribution system. Approximately 2,600 sales representatives are
licensed as independent agents for the Life Insurance Subsidiaries. The majority
of these agents also represent other insurers. Approximately 400 of these agents
specialize in the home service market. That market consists primarily of middle
and low-income families and individuals who desire whole life policies with
policy limits typically below $10,000. Agents usually collect premiums directly
at monthly intervals. The home service market has higher than average policy
lapse rates. Approximately 300 agents specialize in the preneed market.
Typically, these agents are funeral directors or operate from facilities owned
by funeral directors.
The Life Insurance Subsidiaries furnish rate material, brochures, applications,
and other pertinent sales material, at no expense to the agents. The agents are
responsible for complying with state licensing laws and any related appointment
fees. Agents are compensated by commissions. The Life Insurance Subsidiaries
have agent commission arrangements that are generally intended to provide
competitive incentives for agents to increase their production of new insurance
and to promote continued renewals of in-force insurance. Historically, these
incentives have frequently involved awards, overrides, and compensation scales
that escalate according to achievement levels for newly-issued business and that
provide additional payments for renewal business.
Underwriting. The Life Insurance Subsidiaries follow underwriting procedures
designed to assess and quantify insurance risks before issuing life and health
insurance policies to individuals and members of groups. Such procedures require
medical examinations (including blood tests, where permitted) of applicants for
certain policies of health insurance and for policies of life insurance in
excess of certain policy limits. These requirements are graduated according to
the applicant's age and vary by policy type. In addition, certain types of life
insurance policies are offered with higher premium rates and less stringent
underwriting requirements. The Life Insurance Subsidiaries also rely upon each
applicant's written application for insurance, which is generally prepared under
the supervision of a trained agent. In issuing health insurance, information
from the application and, in some cases, inspection reports, physician
statements, or medical examinations are used to determine whether a policy
should be issued as applied for, issued with reduced coverage under a health
rider, or rejected.
Acquired Immunodeficiency Syndrome ("AIDS") claims identified to date, as a
percentage of total claims, have not been significant for the Life Insurance
Subsidiaries. Evaluating the impact of future AIDS claims under health and life
insurance policies issued is extremely difficult, in part due to the
insufficiency and conflicting data regarding the number of persons now infected
with the AIDS virus, uncertainty as to the speed at which the AIDS virus has and
may spread through the general population, and advancements in medical treatment
options. The Life Insurance Subsidiaries have implemented, where legally
permitted, underwriting procedures designed to assist in the detection of the
AIDS virus in applicants.
Investments. The Company derives a substantial portion of its revenue from
investments. The Life Insurance Subsidiaries maintain diversified investment
portfolios that are held primarily to fund future policyholder obligations.
State insurance laws impose certain restrictions on the nature and extent of
investments by insurance companies and, in some states, require divestiture of
assets contravening these restrictions. Within the framework of such laws, the
Life Insurance Subsidiaries follow a general strategy to maximize total return
(current income plus appreciation) without subjecting themselves to undue risk.
Where deemed appropriate, the Life Insurance Subsidiaries will hold selected
non-investment grade bonds that provide higher yields or are convertible to
common stock. The Company considers a bond non-investment grade if it is unrated
or rated less than BBB by Standard & Poor's Rating Group ("S&P") or BAA by
Moody's Investors Service ("Moody's"). The Life Insurance Subsidiaries'
non-investment grade bonds, based on reported fair values, represented 4.5% of
the Company's cash and invested assets as of December 31, 2000. Citizens
Security has maintained substantial investments in equity securities in order to
achieve higher investment earnings than can usually be achieved through
portfolio bonds but at a greater comparative risk. The Company also maintains an
investment portfolio of equity securities separate from those of the Insurance
Subsidiaries. Mortgage loans, federally-insured mortgage-backed securities,
collateralized mortgage obligations and real estate investments, apart from the
investment in the office building described in Item 2. "Description of
Property," represented approximately 3.4% of cash and invested assets as of
December 31, 2000. Neither the Company nor its subsidiaries owned any
collateralized mortgage-backed securities as of December 31, 2000 that would be
included in the high-risk classification.
For additional information concerning investment results, see Item 7,
"Management's Discussion and Analysis."
Reinsurance. In keeping with industry practice, the Life Insurance Subsidiaries
reinsure, with unaffiliated insurance companies, portions of the life and health
insurance risks which they underwrite. The Life Insurance Subsidiaries retain no
more than $40,000 of individual life insurance risk and $15,000 of group life
insurance risk for any single life. Graded death benefit and simplified issue
coverages above $4,000 are generally 50% reinsured, with the Life Insurance
Subsidiaries maintaining a maximum $10,000 risk on any one life. Individual and
group accidental death coverage is 100% reinsured. At December 31, 2000,
approximately $100,829,000 or 12.5% of life insurance in force was reinsured
under arrangements described in Note 13 to the Consolidated Financial
Statements. Under most reinsurance arrangements described above, new insurance
is reinsured automatically rather than on a basis that would require the
reinsurer's prior approval. Generally, the Life Insurance Subsidiaries enter
into indemnity reinsurance arrangements to assist in diversifying their risks
and to limit its maximum loss on large or unusually hazardous risks. Indemnity
reinsurance does not discharge the ceding insurer's liability to meet policy
claims on the reinsured business. Accordingly, the Life Insurance Subsidiaries
remain responsible for policy claims on the reinsured business to the extent a
reinsurer should fail to pay such claims.
Competition. The insurance industry is highly competitive, with approximately
1,500 life and health insurance companies in the United States. Many insurers
and insurance holding company systems have substantially greater capital and
surplus, larger and more diversified portfolios of life and health insurance
policies, and larger agency sales operations than those of the Life Insurance
Subsidiaries. Financial and claims-paying ratings assigned to insurers by A.M.
Best Company ("Best") and by nationally-recognized statistical rating
organizations have become more important to policyholders. Citizens Security's
rating was last changed by Best in October, 1999, when it was upgraded to B
(Fair) from B- (Fair). United Liberty's rating has remained at B- (Fair) since
its 1998 acquisition. According to Best, B and B- ratings are assigned to
companies that have on balance, fair financial strength, operating performance
and market profile when compared to the standards established by Best. Also
according to Best, B and B- companies have an ability to meet their current
obligations to policyholders, but their financial strength is vulnerable to
adverse changes in underwriting or economic conditions. There are six Best
rating categories above the B category from B+ to A++. The Life Insurance
Subsidiaries will continue to pursue upward revisions in their Best ratings.
Kentucky Insurance has no insurance business inforce and is not rated by Best.
S&P assigns claims-paying ability ratings to certain U.S. insurers. Generally,
such a rating is S&P's opinion of an insurer's financial capacity to meet the
obligations of its insurance policies in accordance with their terms. In the
case of companies like Citizens Security that have not requested ratings, S&P's
methodology uses statistical tests based on statutory financial data as filed
with the National Association of Insurance Commissioners ("NAIC"). The rating
process does not involve contact between S&P analysts and the insurer's
management. In 1998, S&P changed their rating methodology and revised Citizens
Security's rating from BBq to BBpi. (The "q" subscript designated the
quantitative method of rating while the "pi" subscript designates the public
information method). United Liberty has not been rated by S&P. According to S&P,
BB companies may have adequate financial security but their capacity to meet
policyholder obligations is vulnerable to adverse economic and underwriting
conditions. The BB rating is the highest of five ratings in the vulnerable range
of ratings.
A rating is not a recommendation to buy, sell or hold securities and is subject
to revision or withdrawal by the assigning rating organization. Each rating
should be evaluated independently of any other rating.
The Life Insurance Subsidiaries compete primarily on the basis of the
experience, size, accessibility and claims response of its customer service
representatives, product design, service and pricing. The Company believes that
the Life Insurance Subsidiaries are generally competitive in the markets in
which they are engaged based upon premium rates and services, have good
relationships with their agents, and have an adequate variety of insurance and
annuity products approved for issuance.
State Insurance Regulation. The Insurance Subsidiaries, in common with other
insurers, are subject to comprehensive regulation in the states in which they
are authorized to conduct business. The laws of such states establish
supervisory agencies with broad administrative powers, among other things, to
grant and revoke licenses for transacting business, regulate the form and
content of policies, establish reserve requirements, prescribe the type and
amount of allowable investments, and review premium rates for fairness and
adequacy. The Insurance Subsidiaries file detailed annual convention statements
with all states in which they are licensed to transact business. The Kentucky
Department of Insurance also periodically examines the business and accounts of
the Insurance Subsidiaries. In recent years, various state insurance departments
and the NAIC have expressed concern, essentially about the "rate of return"
earned by holders of small face amount life policies, potentially including
Preneed policies. Although the Company does not believe calculating a simple
"rate of return" is meaningful for traditional life insurance products, state
insurance regulators could take steps that would alter the profitability of
existing contracts and/or eliminate small face amount policies as a viable
product offering.
The Life Insurance Subsidiaries also can be required, under the solvency or
guaranty laws of most states in which they do business, to pay assessments (up
to prescribed limits) to fund policyholder losses or liabilities of other
insurance companies that become insolvent. These assessments may be deferred or
foregone under most guaranty laws if they would threaten an insurer's financial
strength and, in certain instances, may be offset against future premium or
intangible property taxes. Gross assessments for the Life Insurance
Subsidiaries, net of refunds but before offsets for future premium or intangible
property taxes, were $(11,000), $(13,000), and $24,665 in 2000, 1999 and 1998,
respectively.
Kentucky, in common with substantially all states, regulates transactions
between or affecting insurance holding companies and their insurance company
subsidiaries, including the Company and the Insurance Subsidiaries. Generally,
under Kentucky insurance holding company statutes, the Kentucky Department of
Insurance must approve in advance the direct or indirect acquisition of 15% or
more of the voting securities of an insurance company organized under the laws
of Kentucky. Such statutes also regulate certain transactions among affiliates,
including the payment of dividends by an insurance company to its holding
company parent. Under the Kentucky statutes, the Insurance Subsidiaries may not
during any year pay dividends on their common and preferred stock to their
parent company in excess of the lesser of the net gain from operations for the
preceding year or 10% of their capital and surplus at the end of the preceding
year, without the consent of the Kentucky Commissioner of Insurance. For 2000,
the maximum amount of dividends that Citizens Security, United Liberty, and
Kentucky Insurance could pay, without the Commissioner's approval, is $715,000,
$294,000, and $93,000 respectively. It is presently anticipated that the Company
will derive substantially all of its liquidity from income and capital gains
earned on its investment portfolio, management service fees and dividends paid
by the Insurance Subsidiaries, and Citizens Security's repurchase of its
preferred stock owed by the Company.
During recent years, the National Association of Insurance Commissioners (NAIC)
has taken several steps to address public concerns regarding insurer solvency.
These steps included implementing a state certification program designed to
promote uniformity among the insurance laws of the various states and developing
insurer reporting requirements that focus on asset quality, capital adequacy,
profitability, asset/liability matching, and liquidity. These requirements
include establishment of asset valuation reserves ("AVR") and interest
maintenance reserves ("IMR"), risk-based capital ("RBC") rules to assess the
capital adequacy of an insurer, and a revision to the Standard Valuation Law
("SVL") that specifies minimum reserve levels and requires cash flow testing in
which projected cash inflows from assets are compared to projected cash outflows
for liabilities to determine reserve adequacy.
The Life Insurance Subsidiaries' AVR, as of December 31, 2000, 2000 and 1999, is
shown in Item 7. "Management's Discussion and Analysis". Cash flow testing and
the results of such testing as applied to the Life Insurance Subsidiaries are
also described and discussed in Item 7.
RBC provides a means of establishing the capital standards for insurance
companies to support their overall business operations in light of their size
and risk profile. The four categories of major risk involved in the formula are
[i] asset risk -- the risk with respect to the insurer's assets; [ii] insurance
risk -- the risk of adverse insurance experience with respect to the insurer's
liabilities and obligations; [iii] interest rate risk -- the interest risk with
respect to the insurer's business; and [iv] business risk -- all other business
risks. A company's RBC is calculated by applying factors to various asset,
premium and reserve items, with higher factors for those items with greater
underlying risk and lower for less risky items. RBC standards are used by
regulators to set in motion appropriate regulatory actions relating to insurers
that show signs of weak or deteriorating conditions. They also provide an
additional standard for minimum capital, below which companies would be placed
in conservatorship. Based on RBC computations as of December 31, 2000, the
Insurance Subsidiaries each have capital levels which are at least 250% of the
minimum requirements.
Action taken by the NAIC in these and other areas may have a significant impact
on the regulation of insurance companies during the next several years. Given
their comparatively small size, it may be expected that the Life Insurance
Subsidiaries would be affected by more stringent regulatory policy, both under
existing laws and any new regulatory initiatives. Such effects could include
curtailment or discontinuance of insurance underwriting in one or more states,
mandated increases in capital and surplus, and/or other effects.
Income Taxation. The Life Insurance Subsidiaries are taxed under the life
insurance company provisions of the Internal Revenue Code of 1986, as amended
(the "Code"). Under the Code, a life insurance company's taxable income
incorporates all income, including life and health premiums, investment income,
and certain decreases in reserves. The Code currently establishes a maximum
corporate tax rate of 35% and imposes a corporate alternative minimum tax rate
of 20%. See Item 7. "Management's Discussion and Analysis" and Note 9 of the
Notes to Consolidated Financial Statements.
The Code currently requires capitalization and amortization over a five to ten
year period of certain policy acquisition costs incurred in connection with the
sale of certain insurance products. Prior tax laws permitted these costs to be
deducted as incurred. These provisions apply to life, health, and annuity
business. Certain proposals to make additional changes in the federal income tax
laws, including increasing marginal tax rates, and regulations affecting
insurance companies or insurance products, continue to be considered at various
times in the United States Congress and by the Internal Revenue Service. The
Company currently cannot predict whether any additional changes will be adopted
in the foreseeable future or, if adopted, whether such measures will have a
material effect on its operations.
Reserves. In accordance with applicable insurance laws, the Life Insurance
Subsidiaries have established and carry as liabilities actuarially determined
reserves to meet their policy obligations. Life insurance reserves, when added
to interest thereon at certain assumed rates and premiums to be received on
outstanding policies, are required to be sufficient to meet policy obligations.
The actuarial factors used in determining reserves in the statutory basis
financial statements are based upon statutorily-prescribed mortality and
interest rates. Reserves maintained for health insurance include the unearned
premiums under each policy, reserves for claims that have been reported but not
yet paid, and reserves for claims that have been incurred but have not been
reported. Furthermore, for all health policies under which renewability is
guaranteed, additional reserves are maintained in recognition of the
actuarially-calculated probability that the frequency and amount of claims will
increase as policies persist. The Life Insurance Subsidiaries do not continue
accumulating reserves on reinsured business after it is ceded. The Life
Insurance Subsidiaries are required to maintain reserves on reinsured business
assumed on a basis essentially comparable to direct insurance reserves.
Reinsurance business assumed is presently insignificant in amount.
The reserves carried in the financial statements included in this Form 10-K are
calculated on the basis of accounting principles generally accepted in the
United States and differ from the reserves specified by laws of the various
states, which govern preparation of financial statements on the statutory basis
of accounting for the Life Insurance Subsidiaries. These differences arise from
the use of different mortality and morbidity tables and interest assumptions,
the introduction of lapse assumptions into the reserve calculation, and the use
of the level premium reserve method on all insurance business. See Note 1 of the
Notes to Consolidated Financial Statements for certain additional information
regarding reserve assumptions under accounting principles generally accepted in
the United States.
Employees. As of March 21, 2001, 72 people, excluding agents, were employed by
the Company. As of that date, the Company had approximately 2,600 independent
agents licensed to sell its products.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns, through Citizens Security, a three-story, 63,000 square foot
office building in suburban Louisville, Kentucky completed in 1988. The Company
and its Subsidiaries occupy about 28% of the building for their headquarters and
home offices. The Company leases the remaining space to tenants under leases of
various duration. Market conditions for this property are favorable and, in
management's opinion, the property is adequately covered by insurance.
Currently, the Company's policy is not to invest in additional real estate or
real estate mortgages, although a change in such policy would not require a vote
of security holders. In addition, the Company's current bank lending agreement
precludes investment in additional real estate and in mortgages with a
loan-to-appraised-value ratio of more than 75%.
ITEM 3. LEGAL PROCEEDINGS
During June 2000, the Company was informed of an action filed against United
Liberty, by two policyholders. The complaint in the action refers to a
particular class of life insurance policies that United Liberty issued over a
period of years ending around 1971. The complaint alleges that United Liberty's
dividend payments on these policies from 1993 through 1999 were less than the
required amount. The complaint does not specify the amount of the alleged
underpayment but implies a maximum of about $1 million. The plaintiffs also
allege that United Liberty is liable to pay punitive damages, also in an
unspecified amount, for breach of an implied covenant of good faith and fair
dealing to the plaintiffs in relation to the dividends. The plaintiffs are
seeking to have the action certified as a class action on behalf of all other
policyholders whose policies were still in force in 1993. United Liberty has
filed its answer denying the material allegations of the complaint and intends
to defend the action vigorously. The Company has engaged in pre-trial discovery
proceedings, in relation both to the plaintiffs' underlying allegations and
their request for class action certification. At this early stage of the
litigation, the Company is unable to determine whether an unfavorable outcome of
the action is likely to occur or, alternatively, whether the chance of such an
outcome is remote. Therefore, at this time, management has no basis for
estimating potential losses, if any. There are no other material legal
proceedings pending against the Company or its subsidiaries or of which any of
their property is the subject other than routine litigation incidental to the
business of the Company and its subsidiaries. There are no material proceedings
in which any director, officer, affiliate or shareholder of the Company, or any
of their associates, is a party adverse to the Company or any of its
subsidiaries or has a material interest adverse to the Company or any of its
subsidiaries.
ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered by
this Form 10-K to a vote of the Company's security holders, through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
As of March 21, 2001, there were approximately 2,600 holders of record of the
Company's Class A Stock, its only class of common equity.
The Class A Stock is currently eligible for quotation on the National
Association of Securities Dealers, Inc.'s Small-Cap Market ("NASDAQ") under the
trading symbol CNFL. Trading volume in 2000 was about 13% of the average shares
outstanding during the year and trading volume by non-affiliates was about 30%
of the average shares owned by non-affiliates during the year.
The following table summarizes quarterly high and low bid quotations for the
Class A Stock in 2000 and 1999 as reported by NASDAQ. Such quotations reflect
inter-dealer prices and do not include retail markup, markdown, or commission,
and may not represent actual transactions.
Bid Quotations for
Class A Stock
--------------------------
Quarter
Ended High Bid Low Bid
--------------------------
December 31, 2000 $ 12.750 $ 10.000
September 30, 2000 $ 16.313 $ 11.500
June 30, 2000 $ 13.875 $ 10.625
March 31, 2000 $ 12.750 $ 11.000
December 31, 1999 $ 12.469 $ 10.750
September 30, 1999 $ 12.500 $ 11.000
June 30, 1999 $ 11.250 $ 9.250
March 31, 1999 $ 11.000 $ 8.438
The Company has not paid a dividend on the Class A Stock. The Board of Directors
of the Company has not adopted a dividend payment policy; however, dividends
must necessarily depend upon the Company's earnings and financial condition,
applicable legal restrictions, and other factors relevant at the time the Board
of Directors considers a dividend policy. The Company is subject to a loan
agreement covenant that prevents it from paying dividends on the Class A Stock
without the consent of the lender except to the extent it can meet certain
requirements relating to the ratio of its income before interest and tax expense
plus dividends, to its interest expense and dividend payments for five (5)
consecutive quarters and provided that there is no default or potential default
under the loan agreement. As of January, 2001, the Company could pay dividends
in the maximum amount of approximately $3,075,000 without violating the loan
agreement covenant. Cash available for dividends to shareholders of the Company
must initially come from income and capital gains earned on its investment
portfolio, management service fees and dividends paid by the Insurance
Subsidiaries, and Citizens Security's repurchase of its preferred stock owned by
the Company. Provisions of the Kentucky Insurance Code subject transactions
between the Insurance Subsidiaries and their respective parents, including
dividend payments, to certain standards generally intended to prevent such
transactions from adversely affecting the adequacy of the Insurance
Subsidiaries' capital and surplus available to support policyholder obligations.
See Item 1. "Description of Business -- State Insurance Regulation." In
addition, under the Kentucky Business Corporation Act, the Company may not pay
dividends if, after giving effect to a dividend, it would not be able to pay its
debts as they become due in the usual course of business or if its total
liabilities would exceed its total assets.
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Premiums and other
considerations $23,822,424 $20,844,828 $18,371,628 $17,690,877 $17,947,623
Investment and other
income, net 6,291,309 6,042,945 5,229,888 3,817,818 4,187,500
Policy benefits and
reserve change 19,400,397 17,038,433 13,936,902 12,605,227 12,707,700
Commissions, expense,
amortization, net 10,676,953 10,007,817 8,798,175 8,284,629 8,222,534
Segment profit (loss) 36,383 (158,477) 866,439 618,839 1,204,889
Realized investment
gains, net 1,180,879 9,375,339 3,675,489 2,193,148 915,062
Interest expense 769,132 553,017 468,268 341,275 784,325
Pretax profit 448,130 8,663,845 4,073,660 2,470,712 1,335,626
NET INCOME $238,130 $6,438,845 $3,299,660 $1,988,212 $1,109,323
NET INCOME APPLICABLE
TO COMMON STOCK $238,130 $6,438,845 $3,020,010 $1,581,212 $ 707,109
NET INCOME PER SHARE:
Basic $0.14 $3.59 $2.31 $1.47 $0.66
Diluted $0.14 $3.59 $1.82 $1.10 $0.62
FINANCIAL POSITION
--------------------------------------------------------------------------------
Total assets $135,538,006 $137,980,030 $129,499,123 $84,749,842 $80,262,708
Notes payable 8,000,000 $8,500,000 $6,510,000 $3,510,000 $4,095,869
Redeemable convertible
preferred stock --- --- --- $4,043,907 $4,043,907
Shareholders'
equity $23,274,109 $28,036,457 $21,745,281 $14,320,885 $10,573,455
Shareholders' equity per
share - Basic $13.24 $15.86 $12.06 $13.31 $9.83
Shareholders' equity per
share - Diluted $13.24 $15.86 $12.06 $10.11 $8.05
INVESTMENTS
--------------------------------------------------------------------------------
Average cash and
invested assets $121,807,002 $115,045,517 $98,436,023 $70,294,955 $70,958,058
Average equity portfolio
(cost basis) $20,017,915 $20,650,875 $14,529,633 $11,587,579 $7,125,001
Investment income yield 4.9% 5.1% 5.3% 5.4% 5.9%
Change in unrealized
investment gains (losses)
net of tax $(4,896,265) $243,355 $484,618 $2,166,218 $(1,442,872)
LIFE INSURANCE DATA
--------------------------------------------------------------------------------
Premiums $14,553,493 $12,443,385 $10,657,675 $9,127,795 $9,490,351
Insurance in force,
net at end of
period $706,044,000 $646,439,000 $634,578,000 $565,446,000 $583,294,000
ACCIDENT AND HEALTH INSURANCE DATA
--------------------------------------------------------------------------------
Premiums $9,268,931 $8,401,443 $7,713,953 $8,563,082 $8,457,272
Claims ratio 66.0% 64.5% 65.2% 68.0% 68.7%
Note: Above amounts include results from acquisitions: National Affiliated
Investors Life Insurance Company (reinsurance assumption), Kentucky
Insurance Company and United Liberty Life Insurance Company from the
dates of their acquisition in 2000, 1999 and 1998, respectively.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS
During 2000, the Company's net income applicable to common shares totaled
$238,000 compared to $6,439,000 in 1999 and $3,020,000 in 1998. In addition, the
comprehensive loss (including net unrealized losses) for 2000 was $4,658,000
compared to comprehensive gains of $6,682,000 and $3,784,000 in 1999 and 1998,
repectively. Accordingly, although the Company's total book value has declined
from the end of 1999, it remains more than $1.5 million or 7% above the level at
January 1, 1999. The majority of the 2000 decline in net income and
comprehensive income is attributable to the downturn in the securities markets
during the last half of the year. Obviously we cannot forecast movement in
securities markets during the coming year; however, we do intend to participate
in these markets. Although certainly not without risk, our strategies during the
past ten (10) years have produced an after-tax compound annual growth rate in
book value per share of 9.7% and a 10 year annual growth rate for total equity
of 14.3%. In addition, as detailed below, during the past three years the
Company has maintained an equity portfolio averaging approximately $18,399,000
(cost basis) which has yielded an average annual pretax total return in excess
of 17%.
During 2000, the Company achieved premium increases in four of its five product
segments, Home Service Life, Preneed Life, Dental, and Other Health. Pretax
segment income for 2000, excluding realized investment gains and interest
expense, increased to $36,000 from a prior year loss of $158,000. This
improvement was impacted by an overall 14% premium increase and improving
margins in a majority of the product segments. This improvement was realized
while maintaining the Company's total-return investment strategy which dampens
operating income yields and while making continued investment in the growing
Preneed Life segment.
As described below, during the year the Company purchased a small block of life
insurance business for a net purchase price of approximately $355,000. In
addition, the Company repurchased 9,000 and 35,400 shares of its common stock
during 2000 and 1999, respectively, at average prices of $11.58 and $11.05 per
share, respectively.
The Company manages its operations in five business segments, Home Service Life,
Broker Life, Preneed Life, Dental, and Other Health. Products in all five
segments are sold through independent agency operations. Home Service Life
consists primarily of traditional life insurance coverage sold in amounts of
$10,000 and under to middle and lower income individuals. This distribution
channel is characterized by a significant amount of agent contact with customers
throughout the year. Broker Life product sales consist primarily of simplified
issue and graded-benefit policies in amounts of $10,000 and under. Other
products in the Broker Life segment which comprise a significant portion of
existing business include group life, universal life, annuities and
participating life coverages. Preneed Life products are sold to individuals in
connection with prearrangement of their funeral and include single and multi-pay
coverages, generally in amounts of $10,000 and less. These policies are
generally sold to older individuals at increased premium rates. Dental products
are term coverages generally sold to small and intermediate size employer
groups. Other Health products include various accident and health coverages sold
to individuals and employer groups. Profit or loss for each segment is reported
on a pretax basis, without an allocation of realized investment gains or
interest expense.
ACQUISITIONS
National Affiliated Investors Life
On July 7, 2000, the Company acquired, through an assumption reinsurance
agreement, 100% of the inforce business of National Affiliated Investors Life
Insurance Company ("NAIL") for a net cash purchase price of approximately
$355,000. The acquisition was coordinated through the National Organization of
Life and Health Guaranty Associations. The acquired business consists primarily
of individual life insurance business with policy reserves and annual premium of
approximately $3,500,000 and $300,000, respectively.
Kentucky Insurance Company
On October 14, 1999, the Company acquired 100% of the stock of Kentucky
Insurance from an unaffiliated insurance holding company (the "Kentucky
Insurance Acquisition"). Kentucky Insurance is licensed as a property and
casualty insurance company in four states and has approximately $3.4 million of
statutory capital and surplus; however, it currently has no insurance
operations. The aggregate purchase price for the Kentucky Insurance Acquisition
was approximately $3,550,000 (including net costs associated with the
transaction of approximately $50,000). The acquisition was financed with
available internal funds and $2,500,000 of additional bank borrowings at the
prime rate.
United Liberty Life Insurance Company
On May 12, 1998 the Company and Citizens Security acquired 100% of the common
stock of United Liberty from an unaffiliated insurance holding company (the
"United Acquisition"). The United Acquisition was accounted for as a purchase
and United Liberty's results of operations are included in the consolidated
statements since the date of acquisition.
The aggregate purchase price for the United Acquisition was approximately
$7,076,000 (including net costs associated with the acquisition of approximately
$445,000). In conjunction with the acquisition, the seller retained
approximately $2,100,000 of United Liberty's real estate related and other
assets, which were replaced with cash by Citizens Security.
The United Acquisition was financed with the working capital of Citizens
Security and with approximately $3,400,000 of the $6,710,000 of proceeds under a
Term Loan Agreement dated as of May 8, 1998 between the Company and a commercial
bank (the "Term Loan Agreement"). The remaining borrowing under the Term Loan
Agreement represented refinancing of debt relating to a prior acquisition.
Integrity National Life Insurance Company
During September 1995, the Company and Citizens Security acquired the common
stock of Integrity National Life Insurance Company (the "Integrity Acquisition")
from an unaffiliated insurance holding company. The aggregate purchase price for
the Integrity acquisition, as finally adjusted, was $9,419,000 (including
$437,000 of net transaction costs). Integrity National was merged into Citizens
Security during 1995.
FINANCIAL POSITION
Assets. At December 31, 2000, the Company's available-for-sale fixed maturities
had a fair value of $71,403,674 and amortized cost of $72,516,172. The Company's
fixed maturities portfolio increased approximately 5% in 2000 and decreased
approximately 8% in 1999, on an amortized cost basis. The 2000 increase resulted
primarily from the NAIL acquisition, while the 1999 decrease resulted from
repositioning funds to cash and the equity market. Shown below is a distribution
by rating category of the Company's fixed maturities portfolio as of December
31, 2000.
Standard & Poor's Fair
Corporation Rating Amortized Cost 1 Value 2
---------------------------------------------------------
Investment grade:
AAA to A- $56,143,683 $56,251,789
BBB+ to BBB- 10,322,495 10,033,747
---------------------------------------------------------
Total investment grade 66,466,178 66,285,536
Non-investment grade:
BB+ to BB- 1,611,931 1,494,807
B+ to B- 3,589,098 2,741,731
CCC+ to C 827,715 860,350
CI to not rated 21,250 21,250
---------------------------------------------------------
---------------------------------------------------------
Total non-investment grade 6,049,994 5,118,138
---------------------------------------------------------
Total fixed maturities $72,516,172 $71,403,674
---------------------------------------------------------
1 Net of write-downs on bonds whose decline in value is believed to
be other-than-temporary
2 Fair values as of December 31, 2000 were obtained from the
Company's investment advisor's portfolio review, which used
market prices from Shaw Data Services
The Company believes it has a well diversified portfolio and has no definitive
plans to decrease its non-investment grade portfolio significantly below its
current level, unless necessary to satisfy requirements of state regulators or
rating agencies. The Company purchases non-investment grade bonds to obtain
higher yields or convertible features and attempts to reduce credit risk by
portfolio diversification. Non-investment grade securities comprised 8.3% and
8.8% of the fixed maturities portfolio, on an amortized cost basis at December
31, 2000 and 1999, respectively.
Shown below are the Company's four largest holdings in non-investment grade
bonds by a single issuer as of December 31, 2000.
Non-Investment Grade
Amortized
December 31, 2000 Cost Fair Value
------------------------------------------------
Largest $500,000 $445,625
Second largest 488,155 521,850
Third largest 476,227 402,900
Fourth largest 401,025 479,350
------------------------------------------------
Total $1,865,407 $1,849,725
------------------------------------------------
The Company had no guarantee or other type of enhancement associated with the
issuers represented above.
The Company's investment in equity securities decreased $4,551,000 and
$10,363,000 during 2000 on a cost (net of write-downs) and fair value basis,
respectively, after increasing $3,495,000 and $5,733,000 on the same basis in
1999. As of December 31, 2000 there were $1,099,000 of unrealized losses on
equity securities, as compared with $4,713,000 and $2,474,000 of unrealized
gains at December 31, 1999 and December 31, 1998, respectively. One security
accounted for $672,000 of the unrealized losses at December 31, 2000.
The Company reviews its marketable investments each quarter to determine if
there have been declines in their value that in management's opinion are
other-than-temporary. These reviews can involve qualitative and quantitative
information relating to an individual company or industry and general factors
impacting the economy. In addition, market performance subsequent to the balance
sheet date has historically been a key factor. However, due to wide market
fluctuations occurring prior and subsequent to December 31, 2000, post balance
sheet price movements have become less useful for assessing permanent
impairment. Accordingly, determining whether declines are temporary, has become
much more complex and judgmental. These reviews resulted in the recognition of
impairment losses on equity securities totaling $5,733,000 during 2000
($1,035,000, $865,000, $838,000 and $2,995,000 for the first through fourth
quarters, respectively). In addition, $912,000 of impairment losses were
recognized on fixed maturities during 2000 ($513,000, $5,000, $387,000 and
$7,000 during the first through fourth quarters, respectively). During 2000,
equity securities and fixed maturities were sold which contained impairment
writedowns of $1,108,000 and $15,000, respectively.
As more extensively discussed under Consolidated Results and Analysis, below,
the Company realized significant net capital gains from its marketable
investments over the three-year period ended December 31, 2000. Management
believes these pretax net gains, which total $14,232,000 ($1,181,000,
$9,375,000, and $3,676,000 for 2000, 1999 and 1998, respectively), are greater
than would have been obtained from a more conservative investment strategy
involving only investment grade bonds. The Company's strategy has in some years
subjected it to fluctuations in income and shareholders' equity of a magnitude
significantly larger than would be anticipated under a more conservative
investment strategy. Net capital gains or losses for a given period are not
necessarily indicative of those for future periods. In addition, the net
realized gains (and unrealized losses) reported for 2000 are significantly
impacted by the judgmental determination of securities impairments discussed
above.
Citizens Security owns the building in which the Company and its subsidiaries
maintain their home offices. The Company occupies approximately 28% of the
building with 62% leased to third-party tenants and 10% being offered for lease.
Market conditions for this property are generally favorable and the Company does
not anticipate significant difficulty in leasing available space. An appraisal
obtained during 1996 indicates that the current market value of the property is
approximately $1,700,000 higher than its carrying value.
The Company has maintained significant cash and short-term balances over the
past several years, principally to hedge against the uncertainty of future
interest rates.
At December 31, 2000, the Company holds a $156,000 mortgage loan from a real
estate limited partnership in which the Company also has a 20% equity interest.
The mortgage loan, maturing March 31, 2002, permits revolving credit advances,
not to exceed at any time, the lesser of $750,000 or 80% of the collateral fair
value. Stockholders of the partnership's general partner personally guarantee
80% of the loan.
Liabilities. A comparison of total policy liabilities as of December 31, 2000,
1999 and 1998 is shown below. Approximately 82% of the 2000 total consists of
future policy benefit reserves while policyholder deposit liabilities represent
16% of the total.
Year Ended December 31 2000 1999 1998
---------------------------------------------------------------------
Home Service Life $ 31,543,557 $ 30,300,225 $ 28,967,749
Broker Life 44,631,499 41,718,948 39,933,144
Preneed Life 23,094,830 21,509,265 23,260,792
Dental 610,111 633,751 485,750
Other Health 2,143,247 3,031,510 2,997,162
---------------------------------------------------------------------
Total $102,023,244 $ 97,193,699 $ 95,644,597
---------------------------------------------------------------------
Home Service Life policy liabilities comprise approximately 31% of the Company
total. During recent years, this segment has experienced moderate growth through
a combination of attracting new producers and continuing to focus on meeting the
needs of existing customers and agents. The Broker Life segment's 2000 net
growth is due primarily to the NAIL acquisition, while the 1999 growth resulted
from favorable sales of the Company's simplified issue and graded benefit life
products which were redesigned in late 1997. The Company initially entered the
Preneed Life business in 1998 after completing the United Acquisition. During
2000, Preneed Life product offerings were redesigned and the Company attracted a
number of new producers who have reacted favorably to the new products and level
of service provided. During the initial full year of Preneed production in 1999,
claims on the inforce business outpaced the Company's new sales production. The
Company's Dental products are annual term coverages; accordingly, policy
liabilities for this segment are not significant. The Other Health segment
change in 2000 relates primarily to the settlement of a reinsurance obligation
with no impact on overall retention.
Shown below is a progression of the Company's policyholder deposit activity for
the year ended December 31, 2000.
Year Ended December 31, Universal
2000 Total Annuity Life Other
---------------------------------------------------------------------
Beginning Balance $15,811,486 $9,346,749 $5,205,603 $1,259,134
Acquired Business $1,600,158 309,794 1,193,240 97,124
Deposits 866,778 308,685 550,802 7,291
Withdrawals (2,785,603)(1,818,106) (892,359) (75,138)
Interest credited 888,428 507,285 319,430 61,713
---------------------------------------------------------------------
Ending Balance $16,381,247 $8,654,407 $6,376,716 $1,350,124
---------------------------------------------------------------------
The 2000 increase in total policyholder deposits of approximately $570,000 is
primarily attributable to the NAIL acquisition. Without the acquisition,
deposits would have declined approximately $1,080,000 compared to a 1999 net
reduction of $512,000. The Company is not devoting significant marketing effort
toward these products and has elected not to aggressively compete in crediting
excess interest.
CONSOLIDATED RESULTS AND ANALYSIS
Premiums and Other Considerations. The following table details premiums and
other considerations received during the past three fiscal years.
Year Ended December
31 2000 1999 1998
----------------------------------------------------------------
Home Service Life $6,906,473 $6,697,932 $6,551,375
Broker Life 3,425,795 3,447,440 3,040,231
Preneed Life 4,221,225 2,298,013 1,066,069
Dental 7,892,356 7,105,627 6,414,720
Other Health 1,376,575 1,295,816 1,299,233
----------------------------------------------------------------
Total $ 23,822,424 $ 20,844,828 $ 18,371,628
----------------------------------------------------------------
Home Service Life premium increased 3.1% during 2000 as the Company achieved its
most favorable sales results since the late 1995 acquisition of this product
line. The Company has continued to attract a number of successful, experienced
Home Service agents without subsidizing inexperienced agents. In addition, a
1999 pilot program to automate and streamline agent field accounting was
expanded during 2000 and continues to be favorably received by the agency force.
During 1998, the Company introduced redesigned products which raised premium
rates approximately 15%, increased base renewal commission rates by
approximately 5% of premium, simplified the policy application form, and
streamlined the policy underwriting process for qualifying agents. These changes
were favorably received by the Home Service Life agency force and production
began increasing during the fourth quarter of 1998.
The less than 1% decline in Broker Life premium during 2000 was primarily
attributable reductions in group life premium and lapses on a closed block of
business obtained in the United Acquisition. In addition, the Company
experienced some softening in sales of simplified issue and graded benefit life
policies, partially offset by additional premium from the NAIL acquisition. The
13% increase in Broker Life premium during 1999 was attributable to increased
sales of simplified issue and graded benefit life policies as well as to
receiving a full year of premium on participating life policies obtained in the
1998 United Acquisition.
The 84% increase in Preneed Life premium during 2000 resulted from intensified
marketing efforts aimed at introducing the Company as a committed participant in
this market, successfully negotiating various competitive third-party marketing
agreements, and redesigning the former United Liberty Preneed products. The
Company anticipates accelerating growth in this segment along with increased
statutory surplus strain associated with advance commission arrangements typical
in the industry. The premium growth in 1999 reflects the resumption of sales
efforts and recognition of a full year of premium from policies obtained in the
1998 United Acquisition.
The 11% growth rates for Dental premium during 2000 and 1999 reflect a
continuing focus on this market, favorable reaction to the quality of customer
service, and a modest marketing incentive program. The Company constantly
strives to build strong customer and agent loyalty by continuing to improve
sales and administrative support functions.
The Company has not been actively marketing Other Health coverages for several
years. However, in response to agent requests, certain cancer and disability
protection products have been updated and promoted. Pricing, underwriting, and
claims experience on these products are closely monitored.
Investments. The Company monitors its available-for-sale fixed maturities and
equity securities to assure they are strategically positioned within the current
market environment. This practice has historically resulted in equity securities
comprising 10% to 20% of the Company's cash and invested assets, which tends to
dampen current income yields in favor of an overall total return focus.
Investment income yields were 4.9%, 5.1%, and 5.3% for 2000, 1999, and 1998,
respectively. The investment income yield declines in 2000 and 1999 resulted
primarily from higher equity security and short-term investment average
balances.
Net realized gains on equity securities were $119,790, $9,131,389, and
$2,848,000 for 2000, 1999, and 1998, respectively. These amounts reflect the
direct expenses shown below, as well as increases (reductions) for amortization
of deferred policy acquisition costs of $201,179, $(229,861), and $(139,027) in
2000, 1999, and 1998, respectively. Also included in gross realized losses
during 2000, 1999 and 1998 are reductions in the carrying value of
available-for-sale equity securities of $5,733,000, 1,122,000, and $1,356,000
respectively, relating to declines in value which were considered by management
to be other than temporary. The equity portfolio had $1,099,000 of net pre-tax
unrealized losses as of December 31, 2000 compared to net pre-tax unrealized
gains of $4,713,000 and $2,474,000 at December 31, 1999 and 1998, respectively.
As previously indicated, much of the 2000 decline in realized and unrealized
investment gains is attributable to the decline in the equity markets during the
second half of the year. Many of the 1999 gains arose from technology related
securities, which experienced significant declines during 2000.
As noted above, although increased cash and equity security balances have
dampened investment income yields and segment operating income results, total
return performance for the past three years has been favorable. As illustrated
below, during the past three years the Company's equity securities have
generated approximately $5,600,000 of additional pre-tax total return, above a
hypothetical 7.0% fixed-maturity return. During this period, the Company's
annual net pretax total return on its equity portfolio has averaged 17%.
Equity Portfolio - Pretax Total Return
------------------------------------------------------------------------------
Year Ended December 31, Total/Average 2000 1999 1998
------------------------------------------------------------------------------
Average Equities
Cost $18,399,474 $20,017,915 $20,650,875 $14,529,633
------------------------------------------------------------------------------
Realized Gains 1 $13,274,860 $ 24,530 $10,064,022 $ 3,186,308
Change in Unrealized
Gains (Losses) (4,028,116) (5,812,184) 2,238,293 (454,225)
Dividends 1,343,919 397,552 523,520 422,847
------------------------------------------------------------------------------
Gross Total Return 10,590,663 (5,390,102) 12,825,835 3,154,930
Direct Expenses (1,147,235) (207,369) (702,772) (237,094)
------------------------------------------------------------------------------
Net Total Return 9,443,428 (5,597,471) 12,123,063 2,917,836
7.0% Base Return (3,863,889) (1,401,254) (1,445,561) (1,017,074)
------------------------------------------------------------------------------
Excess Return $ 5,579,539 $ (6,998,725) $10,677,502 $ 1,900,762
------------------------------------------------------------------------------
Total Return Rate - Gross 19.2% (26.9)% 62.1% 21.7%
Total Return Rate - Net 17.1% (28.0)% 58.7% 20.1%
1 Excludes adjustments for incentive and guaranty fees incurred by the
Company for investment management services.
These amounts are included separately as "Direct Expenses".
Segment Earnings.
Pretax income for 2000 totaled approximately $448,000 compared to $8,664,000 in
1999 and $4,074,000 in 1998. Pretax profit (loss) is shown below for the
Company's five business segments, along with total realized investment gains and
interest expense. As previously indicated, the Company's equity investments have
historically produced very favorable total returns; however, if these funds had
been invested in fixed-maturities yielding 7.0%, the segment profit totals below
would have increased by an additional $1,004,000, $922,000, and $594,000 in
2000, 1999, and 1998 respectively.
Year Ended December 31 2000 1999 1998
-------------------------------------------------------------------------
Home Service Life $ 200,479 $ 312,703 $ 211,713
Broker Life 299,777 150,317 254,189
Preneed Life (827,265) (993,560) 15,325
Dental 331,206 436,587 295,038
Other Health 32,186 (64,524) 90,174
-------------------------------------------------------------------------
Segment Profit (Loss) 36,383 (158,477) 866,439
Net realized investment gains, 1,180,879 9,375,339 3,675,489
net of expenses
Interest expense 769,132 553,017 468,268
-------------------------------------------------------------------------
Income before Income Tax $ 448,130 $ 8,663,845 $ 4,073,660
-------------------------------------------------------------------------
The 2000 decline in Home Service Life profit resulted primarily from the
moderate growth of inforce business as described above, offset by a slight
increase in mortality. The 1999 increase in Home Service profit resulted from
moderate volume growth and some mortality improvement. The 2000 Broker Life
earnings increase resulted primarily from improved mortality on simplified issue
and graded benefit life plans. During 1999, increased mortality on the acquired
United Liberty business offset improvements in simplified issue and graded
benefit life mortality. The 2000 Preneed Life improvement is primarily
attributable to improving mortality on business obtained in the 1998 United
Acquisition and efficiencies associated with growing levels of new business. As
indicated above, the Company has intensified marketing efforts in the Preneed
segment and expects continued revenue growth and improving segment results along
with increased statutory surplus strain associated with higher new business
volumes. Information regarding Dental profitability is included below. The
"contribution margin" shown below is a direct margin without allocable
investment income and general expense.
Year Ended December
31 2000 1999 1998
---------------------------------------------------------
Premium $7,892,356 $7,105,627 $6,414,720
Claims and Reserves $5,369,742 $4,717,678 $4,370,499
Contribution Margin $1,516,948 $1,432,204 $1,224,470
Claim Ratio 68.0% 66.4% 68.1%
The overall Dental contribution margin continued to improve during 2000 as a
result of an 11% increase in premium volume, however the claim ratio also
increased somewhat during the year. After two years of strong premium growth,
management will again reassess renewal underwriting criteria in order to
maintain expected profit margins. The significant improvement in profitability
during 1999 resulted from a number of initiatives. These initiatives included
reconfiguring products to provide additional margins for certain more costly
dental procedures, engaging a company to provide expert assistance with ongoing
adjudication of claims, and implementing a program of aggressive renewal
underwriting and re-rating. In addition to the profitability initiatives, during
1999 the Company launched initiatives aimed at increasing premium volume,
including agent incentive and referral programs for new business. The Company
has not been actively marketing its Other Health products in recent years.
However, the Company is closely monitoring recent sales activity increases for
certain cancer and disability coverages. In addition, state filings for
significant rate increases on certain older blocks of Other Health business have
been approved and will be implemented, beginning in the second quarter of 2001.
Income Taxes. Historically, the Company has experienced a relatively low
effective income tax rate, due primarily to the small life insurance company
deduction. However, during 2000, the effective rate was substantially increased
by state and local income taxes on the parent company's investment gains (which
are not eligible for offset by Insurance Subsidiary investment losses), and the
effect of an increased valuation allowance on deferred tax assets as discussed
below.
The small life insurance company deduction allows the Life Insurance
Subsidiaries to reduce their taxable income by 60% before computing its current
provision for regular or alternative minimum tax. However, for purposes of
computing deferred income tax liabilities under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes",
the Company is precluded from assuming the small life insurance company
deduction will be available in the future. Accordingly, by disallowing this
deduction, SFAS No. 109 significantly increases the deferred taxes on the Life
Insurance Subsidiaries' temporary differences. Thus, when a significant increase
or decrease occurs in the Company's net temporary differences, the related
deferred tax is computed using the 34% federal tax rate, whereas tax may
actually be paid on these net liabilities (when realized) at a rate potentially
as low as 17% (the alternative minimum tax rate after application of the
allowable small life insurance company deduction). The Company's gross deferred
federal income tax liabilities and assets are more fully discussed in Note 9 to
the Consolidated Financial Statements. All deferred tax assets of the Company
are realizable by offset against existing deferred tax liabilities or by
carryback to recapture prior years' taxes paid on operating income and capital
gains. The deferred tax assets are offset, to some extent, by valuation
allowances related to the Company and to the Life Insurance Subsidiaries. Due to
the impact of the small life insurance company deduction, the Life Insurance
Subsidiaries record a valuation allowance to reduce deferred tax assets
(associated with temporary differences) to their expected benefit rate of
approximately 19%, rather than 34%. The Company's valuation allowance is
designed to reduce deferred tax assets to their estimated ultimate realization
value.
Statutory Insurance Information. For insurance regulatory and rating purposes,
the Insurance Subsidiaries report on the basis of statutory accounting
principles ("SAP"). During 1999, A.M. Best Company ("Best") upgraded Citizens
Security's rating to B from B-. United Liberty's rating has remained at B- by
Best since it was acquired in 1998, and Kentucky Insurance, due to its lack of
insurance operations, is not rated. Citizens Security reports its investment in
United Liberty on the equity method of accounting for statutory accounting
purposes. Accordingly, the admitted value of Citizens Security's investment in
United Liberty equals United Liberty's statutory capital and surplus total of
$3,112,690 at December 31, 2000. Citizens Security's 2000 statutory net income
includes United Liberty's 2000 statutory net income of $289,489. To provide a
more detailed understanding of Citizens Security's operations, shown below are
SAP basis net income, net operating income, statutory capital and surplus, asset
reserves, and capital ratios for Citizens Security for the five years ended
December 31, 2000.
Statutory
Net Capital Asset
Year Ended Net Operating and Valuation Capital
December 31 Income Income Surplus Reserves1 Ratio2
--------------------------------------------------------------------------
2000 $1,868,575 $ 715,250 $8,315,902 $1,548,271 13.7%
1999 $4,945,708 $ 568,436 $12,942,331 $4,335,111 22.4%
1998 $3,662,188 $1,105,631 $11,227,528 $3,606,655 20.5%
1997 $1,708,884 $ 762,357 $9,627,479 $2,753,064 18.2%
1996 $3,062,421 $ 871,089 $9,145,830 $1,426,918 16.1%
--------------------------------------------------------------------------
1 Asset Valuation Reserves are statutory liabilities that act as
contingency reserves in the event of extraordinary losses on invested
assets and as a buffer for policyholders' surplus to reduce the impact
of realized and unrealized investment losses. The December 31, 2000,
1999 and 1998 amounts also include United Liberty's reserves.
2 Represents Statutory Capital and Surplus plus Asset Valuation Reserves
divided by invested assets plus cash.
During 2000, statutory capital and surplus and asset reserves decreased by
approximately $7,413,000. This decrease resulted primarily from $1,869,000 of
statutory net income offset by $7,875,000 of unrealized losses and a $1,200,000
redemption of Citizens Security's preferred capital stock. The significant
decline during 2000 has been partially offset during 2001 by the contribution of
KIC's stock to Citizens Security in January, 2001. During 1999, statutory
capital and surplus and asset reserves increased by approximately $2,443,000.
This increase resulted primarily from $4,946,000 of statutory net income offset
by a $1,200,000 redemption of preferred capital stock, and a $1,000,000
shareholder dividend paid. During 1998, statutory capital and surplus and asset
reserves increased by approximately $2,454,000. This increase resulted primarily
from $3,662,000 of statutory net income offset by a $1,500,000 redemption of
preferred capital stock, along with unrealized investment gains. During 1997,
statutory capital and surplus and asset reserves increased by approximately
$1,808,000. This increase resulted primarily from $1,709,000 of statutory net
income and $1,130,000 of unrealized investment gains, partially offset by a
$1,050,000 redemption of preferred capital stock.
Statutory capital and surplus, specifically the component called surplus, is
used to fund the expansion of an insurance company's first year individual life
and accident and health sales. The first year commission and underwriting
expenses on such sales will normally consume a very high percentage of, if not
exceed, first year premiums. Accordingly, a statutory loss (surplus strain)
often occurs on these sales during the first policy year. Historically, the
Company's level of life insurance sales has not significantly impacted statutory
surplus. However, as Preneed Life sales increase, the Company anticipates
incurring surplus strain.
In addition to the statutory totals shown above, Kentucky Insurance generated
approximately $93,000 of net income, during 2000 and $150,000 during 1999, with
$21,000 of the 1999 total earned after Kentucky Insurance was acquired by the
Company. At December 31, 2000, Kentucky Insurance capital and surplus totaled
approximately $3,379,000. Effective January 31, 2001, 100% of the capital stock
of Kentucky Insurance was contributed by Citizens Financial into Citizens
Security.
CASH FLOW AND LIQUIDITY
During 2000, the Company used approximately $467,000 of cash flow in operations
while generating $361,000 and $1,620,000 of cash flow during 1999 and 1998,
respectively. The 2000 decrease is principally attributable to Federal Income
Tax deposits required early in the year, which are being refunded. The 1999
decrease is attributable primarily to additional spending on Preneed Life
marketing programs and a decline in accounts payable and accrued expenses at
December 31, 1999.
Cash provided by investment activities during 2000 of $4,488,000 resulted
primarily from a reduction in equity portfolio positions and net cash received
in the acquisition of the NAIL business, partially offset by additional property
and equipment expenditures, including a fractional aircraft ownership share.
Cash provided by investment activities during 1999 of $11,200,000 resulted
primarily from a conservative decision to limit reinvestment activity near
year-end, due to increased market volatility. Cash used in investing activities
during 1998 includes payment of approximately $7,076,000 for the United
Acquisition, less $3,288,000 of cash held by United Liberty on the effective
acquisition date, for a net outflow of $3,788,000. Cash used by financing
activities during 2000 includes higher levels of policyholder deposit
withdrawals, principally due to the Company's decision not to aggressively
compete in crediting higher interest returns on such funds. Cash used by
financing activities in 1999 includes net policyholder deposit withdrawals
comparable to the 1998 level, a $2,500,000 bank borrowing associated with the
Kentucky Insurance Acquisition, net brokerage advance repayments of $1,400,000,
and common stock repurchases of approximately $390,000. Cash provided by
financing activities in 1998 includes $3,400,000 of additional bank borrowings,
which were used, along with available funds at Citizens Security, to acquire
United Liberty on May 12, 1998.
The Company is subject to various market risks. However, the most significant
such risks relate to fluctuations in prices of equity securities and interest
rates. Although the company's total return on equity securities during 2000 was
a loss of approximately $5,600,000, the Company has successfully managed the
risk of equity security price fluctuations during the past several years. For
the three years ended December 31, 2000, the total pretax return on equity
securities has exceeded $9,400,000, for an average annual return of
approximately 17.1%. The Company and its investment advisory firm, SMC Advisors,
Inc. devote significant attention to the equity markets and reposition the
Company's portfolio upon detection of adverse risk trends associated with
individual securities or overall markets. SMC Advisors, Inc. also manages market
risks associated with investments in option securities, as described in Item 8,
Note 3 of the Notes to Consolidated Financial Statements. At December 31, 2000
the fair value of the Company's equity portfolio was approximately $12,578,000
compared to an adjusted cost basis of $13,677,000. Accordingly, a 10% decline in
equity prices would reduce the fair value of the Company's equity portfolio by
$1,257,800.
Regarding interest rate risk, the value of the Company's fixed-maturity
investment portfolio will increase or decrease in an inverse relationship with
fluctuations in interest rates while net investment income earned on
newly-acquired fixed-maturities increases or decreases in direct relationship
with interest rate changes. Management estimates that a 100 basis point increase
in interest rates ("rate shock") would decrease the fair value of its $71.4
million fixed maturity portfolio by approximately 2.8% or $2 million. From an
income perspective, the Company does not believe rising interest rates present a
significant risk, as essentially all of the Company's policy liabilities bear
fixed rates. However, approximately 37% of policy liabilities contain provisions
permitting interest or benefit adjustments at the discretion of the Boards of
Directors of the Insurance Subsidiaries. The Company's cash flow testing
(described below) indicates that overall profitability will generally be
enhanced in rising interest rate scenarios. From a liquidity perspective, the
Company's fixed rate policy liabilities have been relatively insensitive to
interest rate fluctuations. Accordingly, the Company believes gradual increases
in interest rates do not present a significant liquidity exposure. The Company
monitors economic conditions on a regular basis and manages this interest rate
risk primarily by adjusting the duration of its fixed-maturity portfolio.
Historically, the Company has maintained conservative durations in its
fixed-maturity portfolio. At December 31, 2000 cash and fixed-maturity
investments with maturities of less than five years equaled more than 75% of
total policy liabilities. Notwithstanding the foregoing, if interest rates rise
significantly in a short timeframe, there can be no assurance that the life
insurance industry, including the Company, would not experience increased levels
of surrenders and reduced sales, and thereby be materially adversely affected.
Interest expense on the Company's commercial bank debt is also subject to
interest rate risk. The rate on this debt is variable and equals 100% of the
bank's prime lending rate. At December 31, 2000, the rate on the Company's
$8,000,000 of bank borrowings was 9.50% and has since decreased to 8.00% at
March 21, 2001. The Company believes its current liquidity position and
profitability levels are adequate to guard against this interest rate risk.
In addition to the measures described above, the Life Insurance Subsidiaries
comply with the NAIC promulgated Standard Valuation Law ("SVL") which specifies
minimum reserve levels and prescribes methods for determining them, with the
intent of enhancing solvency. The SVL also requires the Company to perform
annual cash flow testing for its Life Insurance Subsidiaries. This testing is
designed to ensure that statutory reserve levels will maintain adequate
protection in a variety of potential interest rate scenarios. The Actuarial
Standards Board of the American Academy of Actuaries also requires cash flow
testing as a basis for the actuarial opinion on the adequacy of the reserves
which is a required part of the annual statutory reporting process.
Cash flow testing projects cash inflows from assets and cash outflows for
liabilities in various assumed economic and yield curve scenarios. This is a
dynamic process, whereby the performance of the assets and liabilities is
directly related to the scenario assumptions. (An example would involve the
credited interest rate on annuity products and how such rates vary depending
upon projected earnings rates, which are based upon asset performance under a
particular economic scenario.)
The Life Insurance Subsidiaries' most recent cash flow testing, which was
completed in February 2001, involved a review of two basic measures. The first
was the value of free market surplus, which is defined as the difference between
the projected market value of assets and liabilities at the end of the analysis
period (typically 10-20 years). Deficits could indicate the need for corrective
action depending upon the severity and the number of scenarios in which a
deficit appeared. A second measure involved distributable earnings. Negative
earnings for extended durations might impair the ability of the Life Insurance
Subsidiaries to continue without exhausting surplus. Again, depending upon
severity and frequency, corrective measures might be needed. Based on results of
the testing, no corrective measures were indicated at the current time. However,
such testing is ongoing and dynamic in nature and future events in the interest
and equity markets or a significant change in the composition of Life Insurance
Subsidiaries' business could negatively impact testing results and require the
initiation of corrective measures.
Any necessary corrective measures could take one or more forms. The duration of
existing assets might not match well with those of the liabilities. Certain
liabilities, such as those associated with indemnity accident and health,
short-term disability and group dental products, are short-term in nature and
are best matched with cash and short-term investments. By contrast, whole life
insurance, which involves lifetime obligations, is usually best matched by
longer duration maturities. In the event there are insufficient assets of these
types, a repositioning of the investment portfolio might be undertaken.
Initially balanced durations do not guarantee positive future results. Asset
type, quality, and yield will vary depending upon the economic scenario tested.
Liabilities will be similarly affected. Projected reinvestment yields may cause
overall yields to fall below those required to support projected liabilities. In
that event, portfolio realignment might involve the type, quality and yield of
investments rather than duration. Alternatively, additional reserve amounts
could be allocated to cover any future shortfalls.
The above discussion centers around asset management. Other possible corrective
measures might involve liability realignment. The Company's marketing plan could
be modified to emphasize certain product types and reduce others. New business
levels could be varied in order to find the optimum level. Management believes
that the Company's current liquidity, current bond portfolio maturity
distribution and cash flow from operations give it substantial resources to
administer its existing business and fund growth generated by direct sales. The
Company will service debt and other expenses by:
Management fees charged to the Insurance Subsidiaries
Redemption of Citizens Security preferred stock as necessary, with such
redemption also requiring approval by the Kentucky Department of
Insurance
Dividends from the Insurance Subsidiaries, which are limited by law to the
lesser of prior year net operating income or 10% of prior year-end capital
and surplus unless specifically approved by the Kentucky Department of
Insurance
FORWARD-LOOKING INFORMATION
All statements, trend analyses and other information contained in this report
relative to markets for the Company's products and trends in the Company's
operations or financial results, as well as other statements including words
such as "anticipate", "believe", "plan", "estimate", "expect", "intend", and
other similar expressions, constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors which may cause actual results to be materially different from those
contemplated by the forward-looking statements. Such factors include, among
other things:
the market value of the Company's investments, including stock market
performance and prevailing interest rate levels (see the Cash Flow and
Liquidity section of Item 7);
customer and agent response to new products, distribution channels and
marketing initiatives, including exposure to unrecoverable advanced
commissions;
mortality, morbidity, lapse rates, and other factors which may affect the
profitability of the Company's insurance products;
regulatory changes or actions, including those relating to regulation of
insurance products and insurance companies (see the State Insurance
Regulation section of Item 1);
ratings assigned to the Company and its subsidiaries by independent rating
organizations which the Company believes are important to the sale of its
products;
general economic conditions and increasing competition which may affect
the Company's ability to sell its products;
the Company's ability to achieve anticipated levels of operating
efficiencies and meet cash requirements based upon projected liquidity
sources;
unanticipated adverse litigation outcomes (see Item 3); and
changes in the Federal income tax laws and regulations which may affect
the relative tax advantages of some of the Company's products.
There can be no assurance that other factors not currently anticipated by
management will not also materially and adversely affect the Company's results
of operations.
ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Qualitative and quantitative disclosures about market risk are described on page
21, (Cash Flow and Liquidity section of Item 7 - Management's Discussion and
Analysis).
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
CITIZENS FINANCIAL CORPORATION AND SUBSIDIARIES
Financial Statements For Full Fiscal Years Page
Report of Independent Auditors........................................26
Consolidated Statements of Income for the
years ended December 31, 2000, 1999 and 1998 ........................27
Consolidated Statements of Financial Condition at
December 31, 2000 and 1999............................................28
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2000, 1999 and 1998..................30
Consolidated Statements of Cash Flows for the
years ended December 31, 2000, 1999 and 1998..........................31
Notes to Consolidated Financial Statements............................32
Financial Statement Schedules
Schedule I - Summary of Investments - Other than Investments
In Related Parties.......................48
Schedule II - Condensed Financial Information of Registrant........49
Schedule III - Supplementary Insurance Information..................52
Schedule IV - Reinsurance..........................................53
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted or the
information is presented in the consolidated financial statements or related
notes.
REPORT OF INDEPENDENT AUDITORS
The Shareholders and Board of Directors
Citizens Financial Corporation
We have audited the consolidated financial statements of Citizens Financial
Corporation and subsidiaries listed in the accompanying index to financial
statements at Item 8. Our audit also included the financial statement schedules
listed in the index at Item 14. 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 auditing standards generally accepted
in the 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Citizens Financial Corporation and subsidiaries at December 31, 2000 and 1999,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States. 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.
/s/ Ernst & Young LLP
Louisville, Kentucky
March 22, 2001
Citizens Financial Corporation and Subsidiaries
Consolidated Statements of Income
Year Ended December 31 2000 1999 1998
-------------------------------------------------------------------------------
Revenues:
Premiums and other considerations $ 24,834,809 $ 21,897,264 $ 19,402,959
Premiums ceded (1,012,385) (1,052,436) (1,031,331)
-------------------------------------------------------------------------------
Net premiums earned 23,822,424 20,844,828 18,371,628
Net investment income 5,993,362 5,885,312 5,190,322
Net realized investment gains,
net of expenses 1,180,879 9,375,339 3,675,489
Other income 297,947 157,633 39,566
-------------------------------------------------------------------------------
Total Revenues 31,294,612 36,263,112 27,277,005
Policy Benefits and Expenses:
Policyholder benefits 16,881,624 15,556,565 13,576,645
Policyholder benefits ceded (1,074,788) (1,013,424) (1,039,024)
-------------------------------------------------------------------------------
Net benefits 15,806,836 14,543,141 12,537,621
Increase in net benefit reserves 2,705,133 1,632,677 553,673
Interest credited on
policyholder deposits 888,428 862,615 845,608
Commissions 5,047,274 4,340,262 3,775,530
General expenses 5,775,093 5,385,477 4,430,902
Interest expense 769,132 553,017 468,268
Policy acquisition costs deferred (1,832,617) (1,376,309) (1,106,373)
Amortization expense:
Deferred policy acquisition
costs 539,062 491,221 696,719
Value of insurance acquired 766,498 839,314 696,702
Goodwill 78,014 51,885 35,771
Depreciation expense 303,629 275,967 268,924
-------------------------------------------------------------------------------
Total Policy Benefits and Expenses 30,846,482 27,599,267 23,203,345
-------------------------------------------------------------------------------
Income before Income Tax 448,130 8,663,845 4,073,660
Income Tax Expense 210,000 2,225,000 774,000
-------------------------------------------------------------------------------
Net Income 238,130 6,438,845 3,299,660
Dividends on Redeemable Convertible
Preferred Stock --- --- (279,650)
-------------------------------------------------------------------------------
Net Income Applicable to Common
Stock $ 238,130 $ 6,438,845 $ 3,020,010
-------------------------------------------------------------------------------
Net Income Per Common Share:
Basic $ 0.14 $ 3.59 $ 2.31
Diluted $ 0.14 $ 3.59 $ 1.82
-------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
Citizens Financial Corporation and Subsidiaries
Consolidated Statements of Financial Condition
December 31 2000 1999
------------------------------------------------------------------------------
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost of
$72,516,172 and $68,958,634 in 2000 and 1999,
respectively) $ 71,403,674 $ 69,501,248
Equity securities (cost of $13,677,303 and
$18,228,519 in 2000 and 1999, respectively) 12,577,874 22,941,274
Investment real estate 3,506,386 3,513,579
Mortgage loans on real estate 156,000 158,309
Policy loans 4,270,588 4,059,801
Short-term investments 610,379 580,425
------------------------------------------------------------------------------
Total Investments 92,524,901 100,754,636
Cash and cash equivalents 20,093,774 18,696,401
Accrued investment income 1,328,491 1,145,447
Reinsurance recoverable 2,686,747 3,607,349
Premiums receivable 212,089 388,146
Property and equipment 2,959,744 2,051,414
Deferred policy acquisition costs 6,511,948 4,690,774
Value of insurance acquired 4,884,680 5,295,818
Goodwill 851,795 809,809
Federal income tax receivable 1,364,502 169,502
Deferred federal income tax 1,711,661 ---
Other assets 407,674 370,734
------------------------------------------------------------------------------
Total Assets $135,538,006 $137,980,030
------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
Citizens Financial Corporation and Subsidiaries
Consolidated Statements of Financial Condition
December 31 2000 1999
------------------------------------------------------------------------------
LIABILITIES
Policy liabilities:
Future policy benefits $ 83,403,780 $ 79,507,902
Policyholder deposits 16,381,247 15,811,486
Policy and contract claims 1,816,947 1,456,030
Unearned premiums 217,670 176,779
Other 203,600 241,502
------------------------------------------------------------------------------
Total Policy Liabilities 102,023,244 97,193,699
Notes payable 8,000,000 8,500,000
Accrued expenses and other liabilities 2,240,653 2,270,660
Deferred federal income tax --- 1,979,214
------------------------------------------------------------------------------
Total Liabilities 112,263,897 109,943,573
COMMIMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, 6,000,000 shares authorized;
1,758,215 and 1,767,215 shares issued and
outstanding in 2000 and 1999, respectively 1,758,215 1,767,215
Additional paid-in capital 7,640,988 7,736,201
Accumulated other comprehensive income (loss) (1,573,294) 3,322,971
Retained earnings 15,448,200 15,210,070
------------------------------------------------------------------------------
Total Shareholders' Equity 23,274,109 28,036,457
------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $135,538,006 $137,980,030
------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
Citizens Financial Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
Accumulated
Other Comprehensive
Additional Comprehensive Income
Common Paid-in Income Retained (Loss)
Stock Capital (Loss) Earnings Total
------------------------------------------------------------------------------
Balance at January 1,
1998 1,075,615 4,836,057 2,594,998 5,814,215
Net Income 3,299,660 $3,299,660
Net unrealized
appreciation of
available for
sale securities 484,618 484,618
-----------
Comprehensive income $3,784,278
===========
Preferred stock dividends (279,650)
Preferred stock
conversion 722,000 3,215,768
Preferred stock redemption (63,000)
Options exercised 5,000 40,000
-------------------------------------------------------------------
Balance at December 31,
1998 1,802,615 8,091,825 3,079,616 8,771,225
Net Income 6,438,845 $6,438,845
Net unrealized appreciation of
available for
sale securities 243,355 243,355
-----------
Comprehensive income $6,682,200
===========
Common stock
repurchases (35,400) (355,624)
-------------------------------------------------------------------
Balance at December 31,
1999 1,767,215 7,736,201 3,322,971 15,210,070
Net Income 238,130 238,130
Net unrealized
depreciation of
available for
sale securities (4,896,265) (4,896,265)
-----------
Comprehensive loss $(4,658,135)
===========
Common stock
repurchases (9,000) (95,213)
-------------------------------------------------------------------
Balance at December 31,
2000 1,758,215 7,640,988 (1,573,294) 15,448,200
===================================================================
See Notes to Consolidated Financial Statements.
Citizens Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31 2000 1999 1998
--------------------------------------------------------------------------------
Cash Flows from Operations:
Net income $ 238,130 $ 6,438,845 $ 3,299,660
Adjustments reconciling to cash from
operations:
Increase in benefit reserves 1,810,331 1,806,387 806,183
Increase (decrease) in claim
liabilities 305,543 196,571 (111,746)
(Increase) decrease in reinsurance
recoverable 920,602 (142,987) (380,034)
Interest credited on policyholder
deposits 888,428 862,615 845,608
Provision for amortization and
depreciation,
net of deferrals (145,414) 308,403 591,743
Amortization of premium and
accretion
of discount on securities
purchased, net 54,094 147,566 112,432
Net realized investment gains (1,180,879) (9,375,339) (3,675,489)
(Increase) decrease in accrued
investment income (183,044) 79,307 12,304
Change in other assets and
liabilities (434,302) 325,992 (269,857)
Deferred income tax expense (benefit) (1,545,000) 550,000 (19,000)
Increase (decrease) in federal
income taxes payable (1,195,000) (836,515) 408,000
--------------------------------------------------------------------------------
Net Cash provided by (used in)
Operations (466,511) 360,845 1,619,804
Cash Flows from Investment Activities:
Securities available-for-sale:
Purchases - fixed maturities (14,302,398) (7,956,333) (12,642,382)
Purchases - equity securities (77,517,925) (73,590,880) (33,322,649)
Sales - fixed maturities 14,362,095 16,523,864 15,160,161
Sales - equity securities 81,928,028 79,476,540 33,432,382
Net cash received (paid) for insurance
business and
subsidiary acquisitions 1,976,855 (3,117,832) (3,787,613)
Investment management and brokerage
account fees (680,654) (292,195) (417,326)
Short-term investments sold
(acquired), net (29,954) 572,192 (22,313)
Additions to real estate (139,232) (204,216) (35,270)
Additions to property and equipment,
net (1,065,533) (197,603) (512,242)
Decrease in net broker receivable --- 8,125 245,000
Other investing activities, net (43,476) (5,776) 159,955
--------------------------------------------------------------------------------
Net Cash provided by (used in)
Investment Activities 4,487,806 11,215,886 (1,742,297)
Cash Flows from Financing Activities:
Policyholder deposits 866,778 705,985 817,372
Policyholder withdrawals (2,785,603) (2,080,766) (2,158,681)
Proceeds from note payable - bank --- 2,500,000 3,400,000
Payments on notes payable - bank (500,000) (510,000) (400,000)
Net brokerage account loan proceeds
(repayment) (100,884) (1,406,524) 989,014
Common stock repurchase (104,213) (391,024) ---
Preferred stock redemption --- --- (169,139)
Dividends on redeemable convertible
preferred stock --- --- (279,650)
Issuance of common stock --- --- 45,000
--------------------------------------------------------------------------------
Net Cash provided by (used in)
Financing Activities (2,623,922) (1,182,329) 2,243,916
--------------------------------------------------------------------------------
Net Increase in Cash and Cash
Equivalents 1,397,373 10,394,402 2,121,423
Cash and Cash Equivalents at Beginning
of Period 18,696,401 8,301,999 6,180,576
--------------------------------------------------------------------------------
Cash and Cash Equivalents at End of
Period $ 20,093,774 $ 18,696,401 $ 8,301,999
--------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation. The accompanying consolidated
financial statements include the accounts of Citizens Financial Corporation and
its wholly-owned subsidiaries: Citizens Security Life Insurance Company
("Citizens Security"), United Liberty Life Insurance Company ("United Liberty"),
Kentucky Insurance Company ("Kentucky Insurance"), and Corporate Realty Service,
Inc. ("Corporate Realty"). These entities are collectively hereinafter referred
to as the "Company". United Liberty, and (effective January 31, 2001) KIC, are
also wholly owned subsidiaries of Citizens Security. All significant
intercompany accounts and transactions are eliminated in consolidation. Certain
balances in prior years have been reclassified to conform to current year
classifications.
Nature of Operations. The Company engages primarily in the business of life
insurance, annuities and accident and health insurance through Citizens Security
and United Liberty ("the Life Insurance Subsidiaries"). The Life Insurance
Subsidiaries offer life, fixed-rate annuity and accident and health insurance
products to individuals and groups through independent agents. Kentucky
Insurance was acquired during 1999 (see Note 2) and is licensed as a property
and casualty insurer in four states. The Company is planning to offer home
service fire and casualty insurance coverage; however, Kentucky Insurance
currently has no business inforce. Corporate Realty manages the Company's real
estate along with two other properties affiliated with the Company's Chairman.
The individual life insurance products currently offered by the Life Insurance
Subsidiaries consist of traditional whole life insurance and universal life
insurance policies. Citizens Security also sells group life and accidental death
and dismemberment policies. The fixed-rate annuity products offered by Citizens
Security consist of flexible premium deferred annuities, life policy annuity
riders, and single premium deferred annuities. Citizens Security's individual
accident and health insurance products provide coverage for monthly income
during periods of hospitalization, scheduled reimbursement for specific hospital
and surgical expenses and cancer treatments, and lump sum payments for
accidental death or dismemberment, while the group accident and health products
provide coverage for short and long-term disability, income protection and
dental procedures.
Citizens Security is licensed to sell products in the District of Columbia and
20 states primarily located in the South and Southeast. United Liberty is
licensed to sell products in 23 states primarily located in the South, Midwest,
and West. United Liberty's ongoing sales efforts are focused primarily in nine
states where Citizens Security is not licensed.
The Life Insurance Subsidiaries market their portfolio of products through the
personal producing general agent distribution system and presently have
approximately 2,600 sales representatives. Many of these agents also represent
other insurance carriers. Approximately 400 of the agents specialize in the home
service market while approximately 300 are preneed representatives who market
through funeral homes. These markets consist primarily of individuals who desire
whole life policies with policy limits typically below $10,000.
Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States ("GAAP") requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Investments. The Company classifies fixed maturities and equity securities as
"available-for-sale". Available-for-sale securities are carried at fair value,
with unrealized gains and losses included in accumulated other comprehensive
income (loss) , net of applicable deferred taxes and adjustments to related
deferred policy acquisition costs.
Fixed maturities and equity securities having a decline in value considered by
management to be other than temporary are adjusted to an amount which, in
management's judgment, reflects such declines. Such amounts are included in net
realized investment gains and losses. For purposes of computing realized gains
and losses on fixed maturities and equity securities sold, the carrying value is
determined using the specific-identification method. Mortgage loans and policy
loans are carried at unpaid balances. Investment real estate is carried at
depreciated cost. Short-term investments, which consist of certificates of
deposit and treasury bills, are carried at cost which approximates fair value.
Cash and cash equivalents consist of highly liquid investments with maturities
of three months or less at the date of purchase and are also carried at cost
which approximates fair value.
Deferred Policy Acquisition Costs. Commissions and other policy acquisition
costs which vary with, and are primarily related to, the production of new
insurance contracts are deferred, to the extent recoverable from future policy
revenues and gross profits, and amortized over the life of the related
contracts. See Premiums, Benefits and Expenses regarding amortization methods.
Property and Equipment. Property and equipment, including the home office
building, are carried at cost less accumulated depreciation, using principally
the straight-line method of depreciation. Accumulated depreciation at December
31, 2000 was $1,977,438 ($1,718,359 at December 31, 1999).
Goodwill and Value of Insurance Acquired. Goodwill represents the excess of
purchase price of purchased subsidiaries, over amounts assigned (based on
estimated fair values at the date of acquisition) to the identifiable net assets
acquired. Goodwill is amortized over 10 to 20 years using the straight-line
method. At December 31, 2000, accumulated amortization was $316,848 ($238,834 at
December 31, 1999).
Value of insurance acquired is recorded for the estimated value assigned to the
insurance in force of the purchased subsidiaries at the dates of acquisition.
The assigned value is amortized over the expected remaining life of the
insurance in force using methods consistent with that used for amortization of
policy acquisition costs (as described under Premiums, Benefits and Expenses).
At December 31, 2000, accumulated amortization was $4,411,694 ($3,645,196 at
December 31, 1999).
Benefit Reserves and Policyholder Deposits. Traditional life and accident and
health insurance products include those contracts with fixed and guaranteed
premiums and benefits and consist principally of whole-life and term insurance
policies, limited-payment life insurance policies and certain annuities with
life contingencies. Reserves on such policies are based on assumed investment
yields which range from 6% to 7%. Reserves on traditional life and accident and
health insurance products are determined using the net level premium method
based on future investment yields, mortality, withdrawals, and other
assumptions, including dividends on participating policies. Such assumptions are
based on past experience and include provisions for possible unfavorable
deviation.
Benefit reserves and policyholder contract deposits on universal life, other
interest-sensitive life products and investment-type products are determined
using the retrospective deposit method and consist of policy account balances,
before deducting surrender charges, which accrue to the benefit of the
policyholder.
Participating insurance business constituted approximately 6%, 6% and 7% of
ordinary life insurance inforce and 4%, 5% and 5% of annualized ordinary life
premium inforce at December 31, 2000, 1999 and 1998, respectively. Participating
dividends are determined at the discretion of the Board of Directors.
Reserves on insurance policies acquired by purchase are based on assumptions
considered appropriate as of the date of purchase. Assumed investment yields for
such acquired policies range from 6.6% to 9.0%.
Premiums, Benefits and Expenses. Premiums for traditional individual life and
accident and health policies are reported as earned when due. Benefit claims
(including an estimated provision for claims incurred but not reported), benefit
reserve changes and expenses (except those deferred) are charged to expense as
incurred. Deferred policy acquisition costs related to traditional life and
accident and health policies are charged to expense over the life of the policy
using methods and assumptions consistent with those used in estimating
liabilities for future policy benefits. In determining whether a premium
deficiency exists on short-duration policies, management does not give
consideration to investment income.
Revenues for universal life and investment-type products consist of investment
income and policy charges for the cost of insurance, policy initiation,
administrative surrender fees and investment income. Expenses include interest
credited to policy account balances, incurred administrative expenses and
benefit payments in excess of policy account balances. Deferred policy
acquisition costs related to universal life and investment-type products are
amortized in relation to the incidence of expected gross profits over the life
of the policies. Expected gross profits are reviewed at each reporting period,
and to the extent actual experience varies from that previously assumed, the
effects of such variances are recorded in the current period.
Liabilities for Policy Claims. Policy claim liabilities are based on known
liabilities plus estimated future liabilities developed from trends of
historical data applied to current exposures. These liabilities are closely
monitored and adjustments for changes in experience are made in the period
identified.
Federal Income Taxes. The Company uses the liability method of accounting for
income taxes. Deferred income taxes are provided for cumulative temporary
differences between balances of assets and liabilities determined under GAAP and
balances determined for tax reporting purposes.
Earnings Per Share. Basic earnings per share amounts are based on the weighted
average number of common shares outstanding during the year. Diluted earnings
per share amounts assume conversion of all outstanding Redeemable Convertible
Preferred Stock at a conversion price of $5.50 per share (see notes 7 and 8).
Comprehensive Income. As of January 1, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this Statement
had no impact on the Company's net income or total shareholders' equity. SFAS
No. 130 requires unrealized gains or losses on the Company's available-for-sale
securities to be included in other comprehensive income.
Note 2--ACQUISITIONS
On July 7, 2000, the Company acquired, through an assumption reinsurance
agreement, 100% of the inforce business of National Affiliated Investors Life
Insurance Company ("NAIL") for a net cash purchase price of approximately
$355,000. The acquisition was coordinated through the National Organization of
Life and Health Guaranty Associations. The acquired business consists primarily
of individual life insurance with policy reserves and annual premium of
approximately $3,500,000 and $300,000, respectively.
On October 14, 1999, the Company acquired 100% of the stock of Kentucky
Insurance from an unaffiliated insurance holding company (the "Kentucky
Insurance Acquisition"). Kentucky Insurance is licensed as a property and
casualty insurance company in four states and has approximately $3.4 million of
statutory capital and surplus; however, it currently has no insurance
operations. The aggregate purchase price for the Kentucky Insurance Acquisition
was approximately $3,550,000 (including net costs associated with the
acquisition of approximately $50,000). The acquisition was financed with
available internal funds and $2,500,000 of additional bank borrowings at the
prime rate.
On May 12, 1998 the Company acquired 100% of the common stock of United Liberty
from an unaffiliated insurance holding company (the "United Acquisition"). The
aggregate purchase price for the United Acquisition was approximately $7,076,000
(including net costs associated with the acquisition of approximately $445,000).
In conjunction with the acquisition, the seller retained approximately
$2,100,000 of United Liberty's real estate related and other assets, which were
replaced with cash by Citizens Security. This acquisition was financed with
available internal funds and approximately $3,400,000 of additional bank
borrowings under a Term Loan Agreement. The Term Loan Agreement included
refinancing of debt relating to a prior acquisition.
These acquisitions were accounted for as purchases and the acquired companies'
results of operations are included in the consolidated statements since their
respective dates of acquisition.
Note 3--INVESTMENTS
The cost and fair value of investments in fixed maturities and equity
securities are shown below. The cost amounts are adjusted for amortization
of premium and accretion of discount on fixed maturities and for write-downs
of securities whose decline in value is believed to be other than temporary.
Fair Value
Amortized Gross Unrealized (Carrying
December 31, 2000 Cost Gains Losses Value)
--------------------------------------------------------------------------------
Fixed Maturities:
U.S. Government obligations $ 10,951,802 $ 224,631 $ 4,976 $ 11,171,457
Corporate securities 57,984,195 389,866 1,834,171 56,539,890
Mortgage-backed 3,580,175 119,075 6,923 3,692,327
securities
--------------------------------------------------------------------------------
Total $ 72,516,172 $ 733,572 $ 1,846,070 $ 71,403,674
--------------------------------------------------------------------------------
Equity Securities $ 13,677,303 $ 832,565 $ 1,931,994 $ 12,577,874
--------------------------------------------------------------------------------
December 31, 1999
--------------------------------------------------------------------------------
Fixed Maturities:
U.S. Government obligations $ 8,723,722 $ 640 $ 101,100 $ 8,623,262
Corporate securities 55,714,282 2,222,719 1,569,797 56,367,204
Mortgage-backed 4,520,630 32,000 41,848 4,510,782
securities
--------------------------------------------------------------------------------
Total $ 68,958,634 $ 2,255,359 $ 1,712,745 $ 69,501,248
--------------------------------------------------------------------------------
Equity Securities $ 18,228,519 $ 5,080,683 $ 367,928 $ 22,941,274
--------------------------------------------------------------------------------
The fair values for investments in fixed maturities and equity securities are
based on quoted market prices, where available. For investments in fixed
maturities and equity securities not actively traded, fair values are estimated
using values obtained from independent pricing services.
The annual change in net unrealized investment appreciation or depreciation, at
December 31, 2000, 1999 and 1998, and the amount of net realized investment gain
or loss included in net income for the respective years then ended are as
follows:
Year Ended December 31 2000 1999 1998
-------------------------------------------------------------------------
Fixed maturities:
Change in net unrealized $(1,655,112)$(1,804,929) $1,158,586
appreciation
Net realized gain $ 1,061,089 $ 243,949 $ 827,204
Equity securities:
Change in net unrealized $(5,812,184)$ 2,238,293 $ (454,225)
appreciation
Net realized gain $ 119,790 $ 9,131,390 $2,848,285
The amortized cost and fair value of investments in fixed maturities at December
31, 2000, by contractual maturity are shown below. Expected maturities for
investments in fixed maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations, sometimes without
prepayment penalties.
December 31, 2000 Amortized Cost Fair Value
-------------------------------------------------------------------
Due in one year or less $ 6,409,858 $ 6,486,205
Due after one year through five years 52,157,598 51,440,761
Due after five years through ten years 8,123,240 7,719,552
Due after ten years 2,245,301 2,064,829
-------------------------------------------------------------------
Subtotal 68,935,997 67,711,347
Mortgage-backed securities 3,580,175 3,692,327
-------------------------------------------------------------------
Total $72,516,172 $71,403,674
-------------------------------------------------------------------
Gross gains of $2,268,554, $1,260,650, and $1,411,737 and gross losses of
$1,127,299, $969,136, and $502,680 were realized on the sale of
available-for-sale fixed maturities during 2000, 1999 and 1998, respectively.
Included in gross realized losses during 2000, 1999 and 1998 are net adjustments
to the carrying value of available-for-sale fixed maturities of $912,000,
$55,000, and $150,000 respectively, relating to declines in value which were
considered by management to be other than temporary. Net realized gains from the
sale of fixed maturities have been reduced by $80,166, $20,021, and $38,098 in
2000, 1999 and 1998 respectively, due to amortization of deferred policy
acquisition costs. In addition, net realized gains from the sale of fixed
maturities have been reduced by $27,544, and $43,755 in 1999 and 1998
respectively, for incentive fees earned by the portfolio manager.
Gross gains of $16,764,844, $16,414,949, and $8,165,216 and gross losses of
$16,740,314, $6,350,927, and $4,978,908, were realized on the sale of
available-for-sale equity securities during 2000, 1999 and 1998. Included in
gross realized losses during 2000, 1999 and 1998 are adjustments to the carrying
value of available-for-sale equity securities of $5,733,000 $1,017,000, and
$1,356,000 respectively, relating to declines in value which were considered by
management to be other than temporary. Net realized gains from the sale of
equity securities have been increased by $302,629, $(229,861), and $(100,929) in
2000, 1999 and 1998 respectively, due to amortization of deferred policy
acquisition costs. In addition, net realized gains from the sale of
available-for-sale equity securities have been reduced by $207,369, $702,771,
and $237,094 in 2000, 1999 and 1998, respectively, for incentive and guaranty
fees earned by the portfolio manager and costs associated with operating a
brokerage margin account. Under terms of this brokerage margin account, Morgan
Stanley & Company, Inc. permits 50% of the value of securities held in the
account to be purchased on margin. At December 31, 1999, margin advances of
$100,884 were outstanding and included in the financial statements with accrued
expenses and other liabilities.
Net unrealized appreciation of available-for-sale securities is summarized as
follows:
December 31 2000 1999
--------------------------------------------------------------------------------
Net appreciation depreciation) on available-for-sale:
Fixed maturities $(1,112,498) $ 542,614
Equity securities (1,099,429) 4,712,755
Adjustment of deferred policy acquisition costs 84,590 (220,566)
Deferred income tax benefit (expense) 554,043 (1,711,832)
--------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) $(1,573,294) $ 3,322,971
--------------------------------------------------------------------------------
Investment management services are provided by a firm affiliated with certain
board members and shareholders of the Company - see Related Party Transaction
Note 17.
Major categories of investment income are summarized as follows:
Year Ended December 31 2000 1999 1998
----------------------------------------------------------------------
Fixed maturities $4,410,640 $4,655,498 $4,157,891
Equity securities 397,552 523,520 422,847
Mortgage loans on real estate 14,887 15,406 16,214
Policy loans 239,199 233,844 210,588
Investment real estate 107,969 245,260 406,971
Short-term investments and other 1,138,318 454,102 335,332
----------------------------------------------------------------------
Subtotal 6,308,565 6,127,630 $5,549,843
Investment expense (315,203) (242,318) (359,521)
----------------------------------------------------------------------
Net investment income $5,993,362 $5,885,312 $5,190,322
----------------------------------------------------------------------
The Company limits credit risk by diversifying its investment portfolio among
government and corporate fixed maturities and common and preferred equity
securities. It further diversifies these investment portfolios within industry
sectors. As a result, management believes that significant concentrations of
credit risk do not exist. The Company's largest investment in any entity (other
than the U.S. Government) was Clear Channel Communications, a fixed maturity
totaling $3,123,220 and $4,551,100 at December 31, 2000 and 1999, respectively.
At December 31, 2000, the Company had no investments which had not been income
producing for a period of at least twelve months prior to year-end.
The following table is a reconciliation of the net unrealized gain (loss)
arising during the period and the change in net unrealized gains (losses) as
reported on the accompanying statements of shareholders' equity.
Pretax Tax Net-of-Tax
Year Ended Amount Expense Amount
--------------------------------------------------------------------------------
December 31, 2000:
Unrealized loss arising $(5,981,261) $(1,864,376) $(4,116,885)
Less: Reclassification adjustment
for gains realized in net income 1,180,879 401,499 779,380
--------------------------------------------------------------------------------
Change in net unrealized loss $(7,162,140) $(2,265,875) $(4,896,265)
================================================================================
December 31, 1999:
Unrealized gain arising $ 9,744,056 $ 2,533,084 $ 7,210,972
Less: Reclassification adjustment
For gains realized in net income 9,375,339 2,407,722 6,967,617
--------------------------------------------------------------------------------
Change in net unrealized gain $ 368,717 $ 125,362 $ 243,355
================================================================================
In conjunction with management of its equities portfolio, the Company has also
taken certain option positions, generally on equity securities or related market
indices. Although such positions may be covered by actual securities owned or
offsetting options, hedge accounting is not used. Accordingly, all such
positions are marked to market and changes in value reported as realized gains
or losses. During 2000, options purchases totaled approximately $1,789,000 and
related net realized gains totaled approximately $1,033,000. At December 31,
2000 net option asset positions outstanding had a market value of $14,375 and a
cost of $60,150. There is no significant off-balance-sheet risk associated with
these positions.
Pursuant to requirements of certain state insurance departments, the Company has
investments with a carrying value of $51,098,000, at December 31, 2000, placed
on deposit at various financial institutions which are restricted from
withdrawal without prior regulatory approval.
The Company owns the building and land in which it currently resides. At
December 31, 2000 and 1999, the Company occupied approximately 28% of the
building with the remaining space leased or available for lease to third-party
tenants. The accompanying financial statements reflect the proportionate Company
occupied share of the building and related operating expense as property and
equipment and general expense, respectively. The remaining portion is reflected
as investment real estate and as a reduction of investment income, respectively.
Accumulated depreciation at December 31, 2000 and 1999 on the investment real
estate portion of the building was $950,962 and $843,053, respectively.
The Company leases office space to third-party tenants under noncancellable
lease agreements. Future minimum rental income is $598,000, $570,000, $442,000,
$316,000 and $140,000 for years 2001 through 2005, respectively.
Note 4--VALUE OF INSURANCE ACQUIRED
The value of insurance acquired is an asset which represents the present value
of future profits on business acquired, using interest rates of 6.6% to 9%.
Balances outstanding relate primarily to the purchase of United Liberty and two
additional companies which have been merged into Citizens Security (Integrity
National Life Insurance Company and Old South Life Insurance Company) along with
the NAIL total of $355,360 added during 2000. An analysis of the value of
insurance acquired for the years ended December 31, 2000, 1999 and 1998 is as
follows:
Year Ended December 31 2000 1999 1998
------------------------------------------------------------------
Balance at beginning of year $5,295,818 $6,135,132 $4,496,872
Business Acquired 355,360 --- 2,334,962
Accretion of interest 312,002 378,996 372,629
Amortization (1,078,500) (1,218,310) (1,069,331)
------------------------------------------------------------------
Balance at end of year $4,884,680 $5,295,818 $6,135,132
------------------------------------------------------------------
Amortization of the value of insurance acquired (net of interest accretion) in
each of the following five years will be approximately: 2001 - $648,000; 2002 -
$564,000; 2003 - $486,000; 2004 - $428,000; and 2005 - $387,000.
Note 5--LIABILITY FOR ACCIDENT AND HEALTH UNPAID CLAIMS AND INCURRED, BUT NOT
REPORTED CLAIMS PORTION OF RESERVES
Activity in the accident and health liability portion of policy and contract
claims ($414,454 and $494,616 at December 31, 2000 and 1999, respectively) and
the incurred but not reported portion of accident and health reserves
($1,188,515 and $2,219,676 at December 31, 2000 and 1999, respectively) is
summarized as follows:
Year Ended December 31 2000 1999
------------------------------------------------------------------
Balance at January 1 $2,714,292 $2,407,516
Less: reinsurance recoverable 1,720,047 1,597,137
------------------------------------------------------------------
Net balance at January 1 994,245 810,379
Total incurred - current year 6,151,422 5,496,236
Paid related to:
Current year 5,450,648 4,785,389
Prior years 693,776 526,981
------------------------------------------------------------------
Total paid 6,144,424 5,312,370
------------------------------------------------------------------
Net balance at December 31 1,001,243 994,245
Plus reinsurance recoverable 601,726 1,720,047
------------------------------------------------------------------
Balance at December 31 $1,602,969 $2,714,292
------------------------------------------------------------------
Note 6--DEBT
Long term debt consists of the following:
December 31 2000 1999
---------------------------------------------------------------------
Commercial bank notes, prime, due 2007 $8,000,000 $8,500,000
Less: Current Portion (904,167) (500,000)
---------------------------------------------------------------------
Long Term Portion $7,095,833 $8,000,000
---------------------------------------------------------------------
The Company's outstanding borrowings relate primarily to various insurance
company acquisitions. On October 14, 1999, the Company borrowed $2,500,000 in
conjunction with the Kentucky Insurance Acquisition and on May 12, 1998 borrowed
$3,400,000 in conjunction with the United Acquisition. Interest is payable
quarterly at the bank's prime lending rate. Principal installments are due as
follows: 2001 - $904,167; 2002 through 2004 - $1,316,666; 2005 and 2006 -
$1,416,666; and 2007 - $312,503. The Company has pledged the issued and
outstanding common and preferred stock of Citizens Security and Kentucky
Insurance as collateral for the commercial bank notes. The bank notes also
contain covenants regarding asset acquisitions, shareholder dividends and
maintenance of certain operating ratios.
Cash paid for interest on debt was $771,095, $595,939 and $524,765 during 2000,
1999 and 1998, respectively; including $21,447, $84,491, and $108,514 in 2000,
1999 and 1998, respectively, related to brokerage account borrowings.
Note 7--REDEEMABLE CONVERTIBLE PREFERRED STOCK
In conjunction with the a 1995 acquisition, during 1995 and 1996, the Company
issued $4,070,000 of redeemable convertible preferred stock with cumulative
quarterly dividends due at an annual rate of 10%. During the third quarter of
1998, the Company converted approximately 98% of the preferred stock to common
stock and repurchased the remaining 2% for cash. The conversion resulted in
issuance of 722,000 additional common shares and increased common shareholders'
equity by $3,937,768. The remaining preferred shares were repurchased for
$162,000, resulting in a net shareholders' equity reduction of $63,000.
Note 8--EARNINGS AND DIVIDENDS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share. See Note 7 for additional disclosures regarding the outstanding preferred
stock.
Year Ended December 31 2000 1999 1998
-------------------------------------------------------------------------------
Numerator:
Diluted: Net income $238,130 $6,438,845 $3,299,660
Less: Preferred stock dividends --- --- 279,650
--------------------------------------------------------------------------------
Basic: Net income applicable to
common stock $238,130 $6,438,845 $3,020,010
--------------------------------------------------------------------------------
Denominator:
Basic: Weighted average common shares 1,761,882 1,793,554 1,306,894
Plus: Assumed conversion
of preferred stock --- --- 505,233
--------------------------------------------------------------------------------
Diluted: Weighted average shares
assuming preferred conversions 1,761,882 1,793,554 1,812,127
--------------------------------------------------------------------------------
Basic earnings per share $0.14 $3.59 $2.31
Diluted earnings per share $0.14 $3.59 $1.82
Options to purchase 5,000 shares of the Company's common stock at $9 per share
were outstanding during 1997 but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares and, therefore, the effect would be
antidilutive. These options were exercised during 1998. No common dividends were
paid for 2000, 1999, or 1998.
Note 9--INCOME TAXES
Income taxes consist of the following:
Year Ended December 31 2000 1999 1998
-------------------------------------------------------------------------
Current tax expense $1,755,000 $1,675,000 $793,000
Deferred tax expense (benefit) (1,545,000) 550,000 (19,000)
-------------------------------------------------------------------------
Income tax expense $ 210,000 $2,225,000 $774,000
-------------------------------------------------------------------------
Tax expense includes a current state and local income tax provision of $350,000
and $225,000 in 2000 and 1999, respectively and none in 1998. Deferred income
taxes are provided for cumulative temporary differences between balances of
assets and liabilities determined under GAAP and balances determined for tax
reporting purposes.
Significant components of the Company's deferred tax liabilities and assets as
of December 31, 2000 and 1999 are as follows:
December 31 2000 1999
---------------------------------------------------------------------
Deferred Tax Liabilities:
Value of insurance acquired $ 1,660,791 $ 1,800,578
Deferred policy acquisition costs 639,946 ---
Net unrealized gains on
available-for-sale securities --- 1,711,832
Other 506,113 826,620
---------------------------------------------------------------------
Total deferred tax liabilities 2,806,850 4,339,030
Deferred Tax Assets:
Policy and contract reserves 2,254,166 1,758,494
Fixed maturities and equity securities 2,270,748 377,528
Real estate 548,668 548,668
Unrealized losses 554,043 ---
Deferred policy acquisition costs --- 78,267
Other 309,994 430,117
---------------------------------------------------------------------
Total deferred tax assets 5,937,619 3,193,074
Valuation allowance for deferred
tax assets (1,419,108) (833,258)
---------------------------------------------------------------------
Net deferred tax assets 4,518,511 2,359,816
---------------------------------------------------------------------
Net deferred tax assets (liabilities) $ 1,711,661 $(1,979,214)
---------------------------------------------------------------------
The following is a reconciliation of income tax expense at the federal statutory
rate, to the tax at the Company's effective income tax rate:
December 31 2000 1999 1998
--------------------------------------------------------------------
Tax at the statutory rate $ 152,400 $ 2,945,700 $ 1,385,000
Change in valuation allowance 585,800 (490,400) 85,700
Small life deduction (276,300) (511,900) (566,300)
State and local income tax 233,600 273,500 ---
Surtax exemption and other (446,100) 83,800 40,900
Dividend exclusion (39,400) (75,700) (61,900)
Alternative minimum tax (credit) --- --- (109,400)
--------------------------------------------------------------------
Tax at the effective rate $ 210,000 $ 2,225,000 $ 774,000
--------------------------------------------------------------------
Income taxes paid in 2000, 1999 and 1998 were $3,100,000, $2,458,515, and
$385,000, respectively. The Company utilized $235,567, and $430,885 of net
operating loss carryforwards in 1999 and 1998, respectively. The change in the
valuation allowance is due principally to the limitation in the recovery of
prior year taxes at the full statutory rate.
Under the tax law in effect prior to 1984, a portion of income of Citizens
Security was not taxed when earned. It was accumulated in a tax account known as
policyholders' surplus. Under the provisions of the Deficit Reduction Act of
1984, policyholders' surplus accounts were frozen at their December 31, 1983
balance of $859,000 for Citizens Security on a merged basis. Distributions from
the policyholders' surplus would be subject to income tax. At December 31, 2000,
Citizens Security could have paid additional dividends of approximately
$21,800,000 before paying tax on any part of its policyholders' surplus
accounts. No provision has been made for the related deferred income taxes which
total $292,000, based on current tax rates as of December 31, 2000.
Note 10--STATUTORY ACCOUNTING PRACTICES AND SHAREHOLDERS' EQUITY
The Insurance Subsidiaries are domiciled in Kentucky and prepare their
statutory-basis financial statements in accordance with statutory accounting
practices ("SAP") prescribed or permitted by the Kentucky Department of
Insurance ("KDI"). Net income and capital and surplus for the Company's
insurance operations, as reported in accordance with SAP, for the three years
ended December 31, 2000 are shown below.
Year Ended December 31 2000 1999 1998
--------------------------------------------------------------------
Net Income $ 1,961,792 $ 4,966,948 $ 3,662,188
Capital and Surplus $ 11,694,494 $ 16,227,706 $ 11,227,528
Citizens Security reports its investment in United Liberty on the equity method
of accounting for statutory accounting purposes. Accordingly, the admitted value
of Citizens Security's investment in United Liberty equals United Liberty's
statutory capital and surplus total of $3,112,690, $3,070,963, and $3,302,107 at
December 31, 2000, 1999, and 1998, respectively. Citizens Security's net income
includes $289,489, $234,853 and $404,553 of United Liberty statutory earnings in
2000, 1999 and 1998, respectively. The 2000 and 1999 totals above also include
Kentucky Insurance net income of $93,217 and $21,240, respectively and capital
and surplus of $3,378,592 and $3,285,375, respectively.
Principal differences between SAP and GAAP include: a) costs of acquiring new
policies are deferred and amortized for GAAP; b) value of insurance inforce
acquired is established as an asset for GAAP; c) benefit reserves are calculated
using more realistic investment, mortality and withdrawal assumptions for GAAP;
d) deferred income taxes are provided for GAAP; e) assets and liabilities of
acquired companies are adjusted to their fair values at acquisition with the
excess purchase price over such fair values recorded as goodwill under GAAP; f)
available-for-sale fixed maturity investments are reported at fair value with
unrealized gain and losses reported as a separate component of shareholders'
equity for GAAP; and g) statutory asset valuation reserves and interest
maintenance reserves are not required for GAAP.
"Prescribed" statutory accounting practices include state insurance laws,
regulations, and general administrative rules, as well as a variety of
publications of the National Association of Insurance Commissioners ("NAIC").
"Permitted" statutory accounting practices encompass all accounting practices
that are not prescribed; such practices may differ from state to state, may
differ from company to company within a state, and may change in the future.
Effective January 1, 2001, the NAIC revised its Accounting Practices and
Procedures Manual in a process referred to as Codification. The KDI has adopted
the provisions in the revised manual. The revised manual has changed, to some
extent, prescribed statutory accounting practices that will result in changes to
the accounting practices which the Insurance Subsidiaries use to prepare their
statutory-basis financial statements. Management believes the impact of these
changes will not be material to the Insurance Subsidiaries' statutory-basis
capital and surplus as of January 1, 2001.
Statutory restrictions limit the amount of dividends which the insurance
companies may pay. Generally, dividends during any year may not be paid, without
prior regulatory approval, in excess of the lesser of (a) 10% of statutory
shareholder's surplus as of the preceding December 31, or (b) statutory net
operating income for the preceding year. During 2000, 1999 and 1998, with
appropriate prior regulatory approval, Citizens Security redeemed $1,200,000,
$1,200,000, and $1,500,000, respectively, of its outstanding preferred stock
from the Company. In addition, during 1999, with appropriate regulatory
approval, Citizens Security paid a dividend of $1,000,000 to the Company. During
1999 and 1998, United Liberty paid dividends to Citizens Security of $200,000
and $325,000 respectively. The Insurance Subsidiaries must each maintain
$1,250,000 of capital and surplus, the minimum required for insurance companies
domiciled in Kentucky. The KDI imposes minimum risk-based capital ("RBC")
requirements on insurance enterprises that were developed by the NAIC. The
formulas for determining the amount of RBC specify various weighting factors
that are applied to financial balances and various levels of activity based on
the perceived degree of risk. Regulatory compliance is determined by a ratio
(the "Ratio") of the enterprise's regulatory total adjusted capital, as defined
by the NAIC, to its authorized control level RBC, as defined by the NAIC.
Enterprises below specific trigger points or ratios are classified within
certain levels, each of which requires specified corrective action. The
Insurance Subsidiaries each have a Ratio that is at least 250% of the minimum
RBC requirements; accordingly, they all meet the RBC requirements.
Under a prior year agreement, an option to purchase 5,000 shares of the
Company's common stock was granted to an officer and was outstanding at the
beginning of 1998. The stock option vested as of June 16, 1995, at an exercise
price of $9 per share, and was scheduled to expire on June 16, 1998. This option
was exercised during the second quarter of 1998, resulting in an increase to
shareholders' equity of $45,000. The Company accounts for its stock option
grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees." No compensation expense has been recognized for this stock option.
No options were exercised during 2000 or 1999. The effect of applying the fair
value method of accounting for the Company's stock based awards results in net
income and earnings per share that are not materially different from amounts
reported.
Note 11--SEGMENT INFORMATION
The Company's operations are managed along five principal insurance product
lines: Home Service Life, Broker Life, Preneed Life, Dental, and Other Health.
Products in all five lines are sold through independent agency operations. Home
Service Life consists primarily of traditional life insurance coverage sold in
amounts of $10,000 and under to middle and lower income individuals. This
distribution channel is characterized by a significant amount of agent contact
with customers throughout the year. Broker Life product sales consist primarily
of simplified issue and graded-benefit policies in amounts of $10,000 and under.
Other products in this segment which are not aggressively marketed include:
group life, universal life, annuities and participating life coverages. Preneed
Life products are sold to individuals in connection with prearrangement of their
funeral and include single premium and multi-pay policies with coverages
generally in amounts of $10,000 and less. These policies are generally sold to
older individuals at increased premium rates. Dental products are term coverages
generally sold to small and intermediate size employer groups. Other Health
products include various accident and health coverages sold to individuals and
employer groups.
Segment information as of December 31, 2000, 1999 and 1998, and for the years
then ended is as follows:
Year Ended December 31 2000 1999 1998
---------------------------------------------------------------------------
Revenue:
Home Service Life $ 9,036,005 $ 8,745,144 $ 8,315,665
Broker Life 6,090,607 6,003,025 5,341,104
Preneed Life 5,584,207 3,614,758 2,099,584
Dental 7,933,598 7,141,409 6,435,680
Other Health 1,469,316 1,383,437 1,409,483
---------------------------------------------------------------------------
Segment Totals 30,113,733 26,887,773 23,601,516
Net realized investment gains, 1,180,879 9,375,339 3,675,489
net of expenses
---------------------------------------------------------------------------
Total Revenue $31,294,612 $36,263,112 $27,277,005
---------------------------------------------------------------------------
Below are the net investment income amounts which are included in the revenue
totals above.
Year Ended December 31 2000 1999 1998
---------------------------------------------------------------------------
Net Investment Income:
Home Service Life $ 2,028,680 $ 1,993,810 $ 1,750,942
Broker Life 2,538,610 2,488,921 2,283,466
Preneed Life 1,298,434 1,282,397 1,025,696
Dental 39,289 34,848 20,801
Other Health 88,349 85,336 109,417
---------------------------------------------------------------------------
Segment Totals $ 5,993,362 $ 5,885,312 $ 5,190,322
---------------------------------------------------------------------------
The Company evaluates performance based on several factors, of which the primary
financial measure is segment profit. Segment profit represents pretax earnings,
determined in accordance with the accounting policies described in Note 1,
except net realized investment gains and interest expense are excluded. The
majority of the Company's realized investment gains are generated from
investment in equity securities. The equities portfolio has averaged
approximately $18,399,000 (cost basis) during the past three years. If these
funds had been invested in fixed-maturities yielding 7.0%, realized investment
gains would have declined and the segment profit totals below would have
increased by an additional $1,004,000, $922,000, and $594,000 in 2000, 1999, and
1998, respectively.
Year Ended December 31 2000 1999 1998
--------------------------------------------------------------------------
Segment Profit (Loss):
Home Service Life $ 200,479 $ 312,703 $ 211,713
Broker Life 299,777 150,317 254,189
Preneed Life (827,265) (993,560) 15,325
Dental 331,206 436,587 295,038
Other Health 32,186 (64,524) 90,174
--------------------------------------------------------------------------
Segment Totals 36,383 (158,477) 866,439
Net realized investment gains,
net of expenses 1,180,879 9,375,339 3,675,489
Interest expense 769,132 553,017 468,268
--------------------------------------------------------------------------
Income before Income Tax $ 448,130 $ 8,663,845 $ 4,073,660
--------------------------------------------------------------------------
Depreciation and amortization amounts below consist of amortization of the value
of insurance acquired, deferred policy acquisition costs and goodwill, along
with depreciation expense.
Year Ended December 31 2000 1998 1997
-------------------------------------------------------------------------
Depreciation and Amortization:
Home Service Life $ 723,255 $ 583,456 $ 710,150
Broker Life 506,016 601,640 757,154
Preneed Life 350,758 381,354 135,723
Dental 61,286 50,276 54,381
Other Health 45,888 41,661 40,708
-------------------------------------------------------------------------
Segment Totals $1,687,203 $1,658,387 $1,698,116
-------------------------------------------------------------------------
Segment asset totals are determined based on policy liabilities outstanding in
each segment.
December 31 2000 1999 1998
------------------------------------------------------------------------------
Assets:
Home Service Life $ 45,577,255 $ 47,347,032 $ 43,299,037
Broker Life 57,721,008 57,958,271 52,783,159
Preneed Life 29,421,677 29,754,353 30,869,962
Dental 799,496 913,939 674,728
Other Health 2,018,570 2,006,435 1,872,237
------------------------------------------------------------------------------
Total Assets $135,538,006 $137,980,030 $129,499,123
------------------------------------------------------------------------------
Note 12--QUARTERLY FINANCIAL DATA (Unaudited)
Below is selected consolidated quarterly financial data for each of the two
years in the period ended December 31, 2000.
Year 2000 - Quarter: 1 2 3 4
--------------------------------------------------------------------------------
Segment Revenue $ 7,191,817 $ 7,168,160 $ 7,802,964 $ 7,950,792
Investment gains (losses),
net 4,793,958 1,530,931 (1,664,106) (3,479,904)
--------------------------------------------------------------------------------
Total Revenue $11,985,775 $ 8,699,091 $ 6,138,858 $ 4,470,888
--------------------------------------------------------------------------------
Segment Profit (Loss) $ (18) $ (67,654) $ (191,938) $ 295,993
Investment gains (losses),
net 4,793,958 1,530,931 (1,664,106) (3,479,904)
Interest expense 185,222 194,085 196,435 193,390
Income tax expense (benefit) 1,700,000 440,000 (868,000) (1,062,000)
--------------------------------------------------------------------------------
Net Income (Loss) $ 2,908,718 $ 829,192 $(1,184,479) $(2,315,301)
--------------------------------------------------------------------------------
Earnings (Loss) Per Share $1.65 $0.47 $(0.67) $(1.31)
--------------------------------------------------------------------------------
Year 1999 - Quarter: 1 2 3 4
--------------------------------------------------------------------------------
Segment Revenue $ 6,468,039 $ 6,905,918 $ 6,638,010 $ 6,875,806
Investment gains, net 1,541,836 2,412,242 1,712,277 3,708,984
--------------------------------------------------------------------------------
Total Revenue $ 8,009,875 $ 9,318,160 $ 8,350,287 $10,584,790
--------------------------------------------------------------------------------
Segment Profit (Loss) $ 172,819 $ (81,263) $ (131,892) $ (118,141)
Investment gains, net 1,541,836 2,412,242 1,712,277 3,708,984
Interest expense 127,099 124,575 127,438 173,905
Income tax expense (benefit) 425,000 670,000 305,000 825,000
--------------------------------------------------------------------------------
Net Income $ 1,162,556 $ 1,536,404 $ 1,147,947 $ 2,591,938
--------------------------------------------------------------------------------
Earnings Per Share $0.65 $0.85 $0.64 $1.45
--------------------------------------------------------------------------------
Note 13--REINSURANCE
The Company currently follows the general practice of reinsuring that portion of
risk on the life of any individual which is in excess of $40,000 for individual
policies (under yearly renewable term and coinsurance agreements) and $15,000
for group policies (under a group yearly renewable term agreement). Graded death
benefit and simplified issue coverages above $4,000 are generally 50% reinsured,
with the Life Insurance Subsidiaries maintaining a maximum $10,000 risk on any
one policyholder. Individual and group accidental death coverage and major
medical accident and health coverages are 100% reinsured. To the extent that
reinsuring companies are unable to meet obligations under reinsurance
agreements, the Company would remain liable.
Note 14--CONTINGENCIES
During June 2000, the Company was informed of an action filed against its United
Liberty subsidiary, by two policyholders. The complaint in the action refers to
a particular class of life insurance policies that United Liberty issued over a
period of years ending around 1971. The complaint alleges that United Liberty's
dividend payments on these policies from 1993 through 1999 were less than the
required amount. The complaint does not specify the amount of the alleged
underpayment but implies a maximum of about $1 million. The plaintiffs also
allege that United Liberty is liable to pay punitive damages, also in an
unspecified amount, for breach of an implied covenant of good faith and fair
dealing to the plaintiffs in relation to the dividends. The plaintiffs are
seeking to have the action certified as a class action on behalf of all other
policyholders whose policies were still in force in 1993. United Liberty has
filed its answer denying the material allegations of the complaint and intends
to defend the action vigorously. The Company has engaged in pre-trial discovery
proceedings, in relation both to the plaintiffs' underlying allegations and
their request for class action certification. At this early stage of the
litigation, the Company is unable to determine whether an unfavorable outcome of
the action is likely to occur or, alternatively, whether the chance of such an
outcome is remote. Therefore, at this time, management has no basis for
estimating potential losses, if any. In addition, the Company is party to other
lawsuits in the normal course of business. Management believes recorded claims
liabilities are adequate to ensure these other suits will be resolved without
material financial impact to the Company.
Note 15--FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of financial instruments, and the methods used in estimating
these values, are as follows:
Fixed Maturities: The fair values for fixed maturities are based on quoted
market prices, where available. For those fixed maturities which are not
actively traded, fair values are estimated using values obtained from
independent pricing services. Available-for-sale fixed maturities are carried at
fair value in the accompanying statements of financial condition. At December
31, 2000 and 1999, the fair value of available-for-sale fixed maturities was
$71,403,674 and $69,501,248, respectively.
Equity Securities: The fair values for equity securities are based on quoted
market prices. Equity securities are carried at fair value in the accompanying
statements of financial condition. At December 31, 2000 and 1999, the fair value
of equity securities was $12,577,874 and $22,941,274, respectively.
Short-Term Investments: The carrying amount of short-term investments
approximates their fair value. At December 31, 2000 and 1999, the fair value of
short-term investments was $610,379 and $580,425, respectively.
Cash and Cash Equivalents: The carrying amount of cash and cash equivalents
approximates their fair value. At December 31, 2000 and 1999, the fair value of
cash and cash equivalents was $20,093,774 and $18,696,401, respectively.
Mortgage Loans: The carrying amount of mortgage loans approximates their fair
value. At December 31, 2000 and 1999, the fair value of mortgage loans was
$156,000 and $158,309, respectively.
Policy Loans: The carrying amount of policy loans approximates their fair value.
At December 31, 2000 and 1999, the fair value of policy loans was $4,270,588 and
$4,059,801, respectively.
Investment Contracts: The carrying amount of investment-type fixed annuity
contracts approximates their fair value. At December 31, 2000 and 1999, the fair
value of investment-type fixed annuity contracts was $7,865,030 and $8,257,568,
respectively.
Notes Payable: The carrying amounts of notes payable approximate their fair
values. At December 31, 2000 and 1999, the fair value of notes payable was
$8,000,000 and $8,500,000, respectively.
Note 16--BENEFIT PLANS
During 1997, the Company adopted a 401(k) savings plan for its full-time
employees. The Company contributes matching contributions at the discretion its
Board of Directors. Company expense associated with this plan totaled $46,353,
$34,860, and $24,337 in 2000, 1999 and 1998, respectively.
Note 17--RELATED PARTY TRANSACTIONS
The Company has various transactions with its President and Chairman of the
Board (the "Chairman") or entities he controls. The Chairman provides investment
portfolio management for the Company and its subsidiaries through SMC Advisors,
Incorporated (of which the Chairman is the principal officer, a director, and
the sole shareholder). The investment portfolio management contracts provide for
total annual fixed fees of $48,000 and incentive compensation equal to five
percent (5%) of the sum of the net realized and unrealized capital gains in the
fixed maturities and equity securities portfolios of the Company during each
contract year. Any excess of net realized and unrealized capital losses over net
realized and unrealized capital gains at the end of a contract year is not
carried forward to the next contract year. Fixed fees totaled $48,000, $39,000,
and $34,500 in 2000, 1999 and 1998, respectively. Incentive fees of $207,369,
$617,524, and $196,904 were incurred and paid for 2000, 1999 and 1998,
respectively. The Company also maintains a portion of its investments under a
Trust Agreement with a bank controlled by the Chairman. Fees to the bank are
based on assets held. Such fees were $94,660, $85,396, and $46,429 in 2000,
1999, and 1998, respectively. During 1999, the Company began managing certain
commercial real estate affiliated with its Chairman. The Company charges the
real estate projects management and leasing fees at market rates, which totaled
$150,672 and $114,628 during 2000 and 1999.
Note 18 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2001, the Company adopted Financial Accounting Standards
Board Statement (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS Nos. 137 and 138. This statement
requires that all derivatives be recognized as either assets or liabilities in
the balance sheet at their fair value, and sets forth the manner in which gains
or losses thereon are to be recorded. The treatment of such gains or losses is
dependent upon the type of exposure, if any, for which the derivative is
designated as a hedge. Currently, the Company has not designated any derivatives
as hedges. Management anticipates that adoption of SFAS No. 133 will result in a
January 1, 2001 transition adjustment which will reduce net income and increase
accumulated other comprehensive income by approximately $390,000.
Schedule I - Summary of Investments - Other than Investments in Related
Parties
Citizens Financial Corporation and Subsidiaries
At December 31, 2000
Amount at
Cost or Which Shown
Type of Investment Amortized Cost1 Fair Value Balance Sheet
-------------------------------------------------------------------------------
Fixed maturity securities
available-for-sale:
US Government and government
agencies and authorities $16,943,524 $17,257,929 $17,257,929
Public utilities 4,531,145 4,459,150 4,459,150
Convertibles and bonds with
warrants 9,354,074 7,274,752 7,274,752
All other corporate bonds 41,687,429 42,411,843 42,411,843
-------------------------------------------------------------------------------
Total $72,516,172 $71,403,674 $71,403,674
Equity securities
available-for-sale:
Commons stocks:
Banks, trusts and insurance
companies $ 457,425 $ 530,080 $ 530,080
Industrial, miscellaneous and
all other 9,627,024 8,499,994 8,499,994
Nonredeemable preferred stocks 3,592,854 3,547,800 3,547,800
-------------------------------------------------------------------------------
Total $13,677,303 $12,577,874 $12,577,874
Investment real estate 3,506,386 3,506,386 3,506,386
Mortgage loans on real estate 156,000 156,000 156,000
Policy loans 4,270,588 4,270,588 4,270,588
Short-term investments 610,379 610,379 610,379
-------------------------------------------------------------------------------
Total Investments $94,736,828 $92,524,901 $92,524,901
-------------------------------------------------------------------------------
1 Adjusted for declines in value believed to be other than temporary, totaling
$1,347,067 for fixed maturity securities and $5,948,193 for equity securities
and, as to fixed maturities, reduced by repayments and adjusted for amortization
of premium and accrual of discounts.
Schedule II - Condensed Financial Information of Registrant
Citizens Financial Corporation
(Parent Company Only)
Condensed Balance Sheets
December 31 2000 1999
------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 5,843,949 $ 17,812
Equity securities available-for-sale (cost of
$2,423,152 and $5,125,733 in 2000 and 1999,
respectively) 2,290,923 6,811,919
Net option positions 14,375 1,144,750
Investments in subsidiaries* 22,243,083 29,359,590
Furniture and equipment 1,507,164 554,225
Intercompany receivable* --- 302,221
Current and deferred federal income tax 98,851 248,851
Other assets 128,824 173,022
------------------------------------------------------------------------------
Total Assets $ 32,127,169 $ 38,612,390
------------------------------------------------------------------------------
Liabilities:
Note payable to bank $ 8,000,000 $ 8,500,000
Intercompany payable* 137,382 ---
Current and deferred federal income tax 169,559 1,127,820
Other liabilities 546,119 948,113
------------------------------------------------------------------------------
Total Liabilities 8,853,060 10,575,933
Shareholders' Equity:
Common stock 1,758,215 1,767,215
Additional paid-in capital 7,640,988 7,736,201
Accumulated other comprehensive income (loss) (87,271) 1,112,883
Equity (deficit) in accumulated other
comprehensive
income (loss) of subsidiaries* (1,486,023) 2,210,088
Retained earnings 15,448,200 15,210,070
------------------------------------------------------------------------------
Total Shareholders' Equity 23,274,109 28,036,457
------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 32,127,169 $ 38,612,390
------------------------------------------------------------------------------
* Eliminated in consolidation.
These consolidated financial statements should be read in conjunction with the
Consolidated Financial Statements and accompanying footnotes of Citizens
Financial Corporation and Subsidiaries.
Schedule II - Condensed Financial Information of Registrant
Citizens Financial Corporation
(Parent Company Only)
Condensed Statements of Income
Year Ended December 31 2000 1999 1998
-------------------------------------------------------------------------------
Revenues:
Net realized investment gains $ 4,282,893 $ 4,115,408 $ 690,778
Service fees from subsidiaries 4,497,590 4,198,106 2,011,024
Interest and dividend income 159,124 20,143 20,569
Other income 47,018 83,329 41,911
-------------------------------------------------------------------------------
Total Revenues 8,986,625 8,416,986 2,764,282
Expenses:
Administrative and general expenses 4,323,967 4,006,129 1,925,693
Interest expense 769,132 553,017 495,390
-------------------------------------------------------------------------------
Total Expenses 5,093,099 4,559,146 2,421,083
-------------------------------------------------------------------------------
Income before income taxes and
undistributed earnings of
subsidiaries 3,893,526 3,857,840 343,199
Income taxes 1,435,000 1,525,000 85,000
-------------------------------------------------------------------------------
Income before equity in undistributed
earnings of subsidiaries 2,458,526 2,332,840 258,199
Equity in undistributed earnings (loss)
of subsidiaries (2,220,396) 4,106,005 3,041,461
-------------------------------------------------------------------------------
Net Income 238,130 6,438,845 3,299,660
Dividends on redeemable convertible
preferred stock --- --- 279,650
-------------------------------------------------------------------------------
Net Income Applicable to Common
Stock $ 238,130 $ 6,438,845 $ 3,020,010
-------------------------------------------------------------------------------
* Eliminated in consolidation.
These consolidated financial statements should be read in conjunction with the
Consolidated Financial Statements and accompanying footnotes of Citizens
Financial Corporation and Subsidiaries.
Schedule II - Condensed Financial Information of Registrant
Citizens Financial Corporation
(Parent Company Only)
Condensed Statements of Cash Flows
Year Ended December 31 2000 1999 1998
------------------------------------------------------------------------------
Cash from operations $(1,732,507) $(1,416,297) $ (509,437)
Cash flow from investing activities:
Purchases of available-for-sale
securities (20,401,917) (37,514,433) (20,991,407)
Sales of available-for-sale
securities 28,718,945 40,458,637 21,017,433
Purchase of affiliated preferred
stock* --- --- (3,400,000)
Redemption of affiliated preferred
stock* 1,200,000 2,200,000 1,500,000
Purchase of subsidiaries* --- (3,556,469) (400,000)
Investment management fees (201,179) (150,022) (203,591)
Additions to property and
equipment, net (1,065,533) (197,603) (433,075)
Change in investments, other 13,425 13,425 40,396
------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 8,263,741 1,253,535 (2,870,244)
Cash flow from financing activities:
Proceeds from note payable - bank --- 2,500,000 3,400,000
Payments on notes payable - bank (500,000) (510,000) (400,000)
Repurchase of capital stock (104,213) (391,024) (169,139)
Net brokerage account loan proceeds
(repayment) (100,884) (1,406,524) 989,014
Repayment of intercompany note --- --- (471,441)
Dividends on redeemable convertible
preferred stock --- --- (279,650)
Issuance of common stock --- --- 45,000
------------------------------------------------------------------------------
Net cash provided by (used in )
financing activities (705,097) 192,452 3,113,784
------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 5,826,137 29,690 (265,897)
Cash and cash equivalents at
beginning of year 17,812 (11,878) 254,019
------------------------------------------------------------------------------
Cash and cash equivalents at end of
year $ 5,843,949 $ 17,812 $ (11,878)
------------------------------------------------------------------------------
* Eliminated in consolidation.
These consolidated financial statements should be read in conjunction with the
Consolidated Financial Statements and accompanying footnotes of Citizens
Financial Corporation and Subsidiaries.
Schedule III - Supplementary Insurance Information
Citizens Financial Corporation
For the Years Ended December 31, 2000, 1999, and 1998
Other Policy Net
Year Ended Deferred Policy and Claims and Investment Policy Amortization Other
December 31/ Acquisition Claim Unearned Benefits Premium and Other Benefits of Policy Operating
Segment Costs Reserves Premiums Payable Revenue Income1 and Claims2 Costs3 Costs4
------------------------------------------------------------------------------------------------------------------------------------
Column: A B C D E F G H I J
2000:
Home Service
Life ....... $2,739,204 $30,865,491 $ --- $ 678,066 $ 6,906,473 $2,129,532 $ 4,697,315 $ 585,396 $ 3,552,815
Broker Life 3,184,922 44,046,164 3,577 581,758 3,425,795 2,664,812 3,604,342 413,698 1,904,679
Preneed Life 425,320 22,902,433 --- 192,397 4,221,225 1,362,982 4,914,699 281,809 1,083,075
Dental ..... --- 303,550 7,680 298,881 7,892,356 41,242 5,369,742 --- 2,232,650
Other Health 162,502 1,667,389 206,413 269,445 1,376,575 92,741 814,299 24,657 598,174
------------------------------------------------------------------------------------------------------------------------------------
Total ...... $6,511,948 $99,785,027 $217,670 $2,020,547 $23,822,424 $6,291,309 $19,400,397 $1,305,560 $ 9,371,393
------------------------------------------------------------------------------------------------------------------------------------
1999:
Home Service
Life ....... $2,178,003 $29,690,250 $ --- $ 609,975 $ 6,697,932 $2,047,212 $ 4,553,823 $ 476,814 $ 3,401,804
Broker Life 2,379,344 41,202,757 4,404 511,787 3,447,440 2,555,585 3,768,763 515,582 1,568,363
Preneed Life 10,336 21,427,254 --- 82,011 2,298,013 1,316,745 3,237,316 318,841 1,052,161
Dental ..... --- 316,914 7,433 309,404 7,105,627 35,781 4,717,677 --- 1,987,144
Other Health 123,091 2,682,213 164,942 184,355 1,295,816 87,622 760,854 19,298 667,810
------------------------------------------------------------------------------------------------------------------------------------
Total ...... $4,690,774 $95,319,388 $176,779 $1,697,532 $20,844,828 $6,042,945 $17,038,433 $1,330,535 $ 8,677,282
------------------------------------------------------------------------------------------------------------------------------------
1998:
Home Service
Life ....... $1,545,079 $28,495,819 $ --- $ 471,930 $ 6,551,375 $1,764,290 $ 4,186,896 $ 604,649 $ 3,312,407
Broker Life 2,458,157 41,349,599 4,843 459,702 3,040,231 2,300,873 3,129,293 670,191 1,287,431
Preneed Life 1,879 21,304,781 --- 75,011 1,066,069 1,033,515 1,587,799 102,778 393,682
Dental ..... --- 233,577 27,430 224,743 6,414,720 20,960 4,370,454 --- 1,770,188
Other Health 115,100 2,605,059 176,251 215,852 1,299,233 110,250 662,460 15,803 641,046
------------------------------------------------------------------------------------------------------------------------------------
Total ...... $4,120,215 $93,988,835 $208,524 $1,447,238 $18,371,628 $5,229,888 $13,936,902 $1,393,421 $ 7,404,754
------------------------------------------------------------------------------------------------------------------------------------
1 Amounts are allocated based on average policy reserves and deposits.
2 Includes interest on policyholder deposits and dividends credited to
participating policyholders.
3 Amortization of Policy Costs:
2000 1999 1998
------------------------------------
Deferred acquisition costs $ 539,062 $ 491,221 $ 696,719
Present value of insurance
acquired ................. 766,498 839,314 696,702
------------------------------------
$1,305,560 $1,330,535 $1,393,421
====================================
4 Includes commissions, general expense, goodwill amortization, and
depreciation expense.
Schedule IV - Reinsurance
Citizens Financial Corporation
For the Years Ended December 31, 2000, 1999, and 1998
Percentage
Ceded to Assumed of Amount
Year Ended Gross To Other From Other Net Assumed
December 31 Amount Companies Companies Amount To Net
--------------------------------------------------------------------------------
2000:
Life insurance
in force: .... $799,576,000 $100,829,000 $7,297,000 $706,044,000 1.0%
Premiums:
Life
insurance .... $ 15,458,588 $ 940,202 $ 35,107 $ 14,553,493 0.2%
Accident &
health insurance 9,341,114 72,183 --- 9,268,931 0.0%
--------------------------------------------------------------------------------
Total ....... $ 24,799,702 $ 1,012,385 $ 35,107 $ 23,822,424 0.1%
--------------------------------------------------------------------------------
1999:
Life insurance
in force: ......$757,391,000 $119,001,000 $8,049,000 $646,439,000 1.2%
Premiums:
Life insurance .$ 13,300,690 $ 914,541 $ 57,236 $ 12,443,385 0.5%
Accident &
health insurance 8,539,338 137,895 --- 8,401,443 0.0%
--------------------------------------------------------------------------------
Total ..........$ 21,840,028 $ 1,052,436 $ 57,236 $ 20,844,828 0.3%
--------------------------------------------------------------------------------
1998:
Life insurance
in force: ......$748,776,000 $122,993,000 $8,795,000 $634,578,000 1.4%
Premiums:
Life
insurance ......$ 11,489,782 $ 911,968 $ 78,785 $ 10,656,599 0.7%
Accident &
health insurance 7,834,392 119,363 --- 7,715,029 0.0%
--------------------------------------------------------------------------------
Total ..........$ 19,324,174 $ 1,031,331 $ 78,785 $ 18,371,628 0.4%
--------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no change in accountants nor have there been any disagreements on
accounting and financial disclosure requiring disclosure pursuant to the
Instructions to this Item.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this Item is set forth under the captions: "Election
of Directors", "Executive Officers of the Company", and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Board of Director's Proxy
Statement for the Annual Meeting of Shareholders of the Company now scheduled
for May 24, 2001, and such information is here incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the captions:
"Executive Compensation", "Board of Directors Report on Executive Compensation",
"Performance Graph" and "Compensation Committee Interlocks and Insider
Participation" of the Board of Directors' Proxy Statement for the Annual Meeting
of Shareholders of the Company now scheduled for May 24, 2001, and such
information is here incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information required by this Item is set forth under the caption: "Security
Ownership of Certain Beneficial Owners and Management" in the Board of
Directors' Proxy Statement for the Annual Meeting of Shareholders of the Company
now scheduled for May 24, 2001, and such information is here incorporated by
reference.
ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS
The information required by this Item is set forth under the caption: "Certain
Transactions Involving Directors and Executive Officers" in the Board of
Directors' Proxy Statement for the Annual Meeting of Shareholders of the Company
now scheduled for May 24, 2001, and such information is here incorporated by
reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-K:
(a) Financial Statements and Financial Statement Schedules.
The audited Consolidated Financial Statements of the Company and its
subsidiaries, the Financial Statements Schedules, and the related Report
of Independent Auditors listed in the Index to Financial Statements and
Financial Statement Schedules appearing under Item 8 of this Form 10-K.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
The exhibits listed in the Index to Exhibits appearing on page 57.
Pursuant to paragraph (b)(4)(iii) of Item 601 of Regulation S-K, the Company
agrees to furnish to the Commission upon request copies of instruments defining
the rights of holders of the Company's long term debt.
SIGNATURES
In accordance with of Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CITIZENS FINANCIAL CORPORATION
March 22, 2001 By: /s/ Darrell R. Wells
---------------------------------
Darrell R. Wells
President
In accordance with the requirements of the Exchange Act, this Report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ Darrell R. Wells
---------------------------
Darrell R. Wells Director and President March 22, 2001
(principal executive officer)
/s/ Lane A. Hersman
---------------------------
Lane A. Hersman Director and Executive March 22, 2001
Vice President
/s/ Brent L. Nemec
---------------------------
Brent L. Nemec Vice President, Accounting, March 22, 2001
Chief Financial Officer,
and Treasurer (principal
financial and accounting officer)
/s/ John H. Harralson, Jr.
---------------------------
John H. Harralson, Jr. Director March 22, 2001
/s/ Frank T. Kiley
---------------------------
Frank T. Kiley Director March 22, 2001
/s/ Charles A. Mays
---------------------------
Charles A. Mays Director March 22, 2001
/s/ Earle V. Powell
---------------------------
Earle V. Powell Director March 22, 2001
/s/ Thomas G. Ward
---------------------------
Thomas G. Ward Director March 22, 2001
/s/ Margaret A. Wells
---------------------------
Margaret A. Wells Director March 22, 2001
INDEX TO EXHIBITS
(Item 14(c))
The documents listed in the following table are filed as Exhibits in response to
Item 14(c). Exhibits listed that are not filed herewith are incorporated herein
by reference.
Exhibit No. Description
3.1 Restated Articles of Incorporation of the
Company dated August 12, 1996 (filed as
Exhibit 3.1 to the Company's Form 10-KSB
dated March 31, 1999)
3.2 Bylaws of the Company adopted September 12,
1990 as amended March 25, 1994 (filed as
Exhibit 3.2 to the Company's Form 10-K dated
March 28, 1996)
4 Provisions of Articles of Incorporation of
the Company Defining the Rights of Holders
of Class A Stock (filed as Exhibit 4 to the
Company's Form 10 Registration Statement)
10.1 Investment Management Agreements dated July
1, 1994 between Citizens Security and the
Company and SMC Advisors, Incorporated
(filed as Exhibit 10.1 to the Company's Form
10-K dated March 29, 1995)
10.1B Investment Management Agreement dated June
1, 1998 between United Liberty and SMC
Advisors, Incorporated (filed as Exhibit
10.1B to the Company's Form 10-KSB dated
March 31, 1999)
10.1C Investment Management Agreement dated
February 6, 2000 between Kentucky Insurance
and SMC Advisors, Incorporated (filed
herewith)
10.9 Form of Employment Agreement with Certain
Executives of the Company and Schedule of
Data (filed as Exhibit 10.9 to the Company's
Form 10-K dated March 28, 1996)*
10.10 1999 Stock Option Plan (filed as exhibit to
the Company's proxy statement for annual
meeting of shareholders held on May 20,
1999)*
21.1 Subsidiaries of the registrant (filed
herewith)
23.2 Consent of Independent Auditors (filed
herewith)
----- ------- ----------------------------------------------
* Management contract or compensatory plan or arrangement.
EXHIBIT 21.1
Subsidiaries of the Registrant
-----------------------
Citizens Financial
Corporation
(Kentucky Corporation)
-----------------------
100%
----------------------- ----------------------
Citizens Security Kentucky Insurance
Life Insurance Company 100% Company
(Kentucky Corporation) (Kentucky Corporation)
----------------------- ----------------------
100%
----------------------- ----------------------
United Liberty Life Corporate Realty
Insurance Company 100% Service, Inc.*
(Kentucky Corporation) (Kentucky Corporation)
----------------------- ----------------------
* Corporate Realty Service, Inc. was previously named Citizens Financial
Properties, Inc.
EXHIBIT 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-86519) pertaining to the Citizens Financial Corporation 1999 Stock
Option Plan of our report dated March 22, 2001 with respect to the consolidated
financial statements and schedules of Citizens Financial Corporation included in
the Annual Report (Form 10-K) for the year ended December 31, 2000.
/s/ Ernst & Young LLP
March 22, 2001
Louisville, Kentucky