FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1996
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
Commission file number: 1-11714
CITIZENS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3178765
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
440 Lincoln Street, Worcester, Massachusetts 01653
(Address of principal executive offices)
(Zip Code)
(508) 855-1000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
registrant's classes of common stock as of the latest practicable
date: 35,265,800 Shares of Common Stock Outstanding, as of November
1, 1996.
15
Total Number of Pages
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 8 - 13
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CITIZENS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
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(Unaudited) (Unaudited)
Quarter Ended Nine Months Ended
(In millions, except per share data) September 30, September 30,
1996 1995 1996 1995
Revenues
Net premiums written $ 229.7 $ 233.9 $ 651.5 $ 648.7
Change in unearned premiums,
net of prepaid reinsurance premiums 18.9 24.4 25.1 41.0
Net premiums earned 210.8 209.5 626.4 607.7
Net investment income 23.6 19.2 64.4 59.9
Net realized gains on investments (0.8) 3.9 14.2 4.1
Other income, net 0.3 (0.1) 1.4 0.6
Total revenues 233.9 232.5 706.4 672.3
Expenses
Losses and loss adjustment expenses 141.6 145.3 461.1 431.4
Policy acquisition and other operating expenses 56.1 57.4 162.3 165.0
Policyholders' dividends 2.0 1.5 5.6 4.2
Total expenses 199.7 204.2 629.0 600.6
Income before federal income taxes 34.2 28.3 77.4 71.7
Federal income tax expense 7.1 7.4 15.7 15.2
Net income $ 27.1 $ 20.9 $ 61.7 $ 56.5
Per share data
Net income $ 0.77 $ 0.58 $ 1.74 $ 1.51
Dividends declared to shareholders $ 0.05 $ 0.05 $ 0.15 $ 0.15
Weighted average shares outstanding 35.3 36.1 35.5 36.1
The accompanying notes are an integral part of these financial statements.
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<TABLE>
CITIZENS CORPORATION
CONSOLIDATED BALANCE SHEETS
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(Unaudited)
(In millions, except per share data) September 30, December 31,
1996 1995
Assets
Investments:
Debt securities available-for-sale, at fair value
(Amortized cost of $1,362.3 and $1,247.5) $ 1,378.7 $ 1,289.5
Equity securities available-for-sale, at fair value
(Cost of $130.3 and $149.6) 175.8 189.5
Other investments, at fair value (Cost of $11.4 and $9.6) 13.8 11.8
Total investments 1,568.3 1,490.8
Cash and cash equivalents 47.3 59.1
Accrued investment income 23.6 25.1
Premiums and notes receivable (less allowance for
doubtful accounts of $0.8 and $0.8) 157.3 141.0
Reinsurance recoverable on paid and unpaid losses 551.7 521.8
Prepaid reinsurance premiums 59.3 54.5
Deferred policy acquisition expenses 57.8 52.2
Deferred federal income taxes 35.2 29.7
Other assets 77.6 96.6
$ 2,578.1 $ 2,470.8
Liabilities and Shareholders' Equity
Liabilities:
Reserve for losses and loss adjustment expenses $ 1,322.0 $ 1,291.6
Unearned premiums 381.3 351.4
Other liabilities 159.5 145.0
Total liabilities 1,862.8 1,788.0
Shareholders' Equity:
Common stock, $0.01 par value per share; authorized 100.0 million shares;
36.1 million shares issued 0.4 0.4
Additional paid-in capital 156.1 156.1
Retained earnings 531.9 475.5
Unrealized appreciation on investments, net of
deferred federal income taxes 41.9 54.7
Treasury stock, at cost (0.8 million shares and 0.2 million shares) (15.0) (3.9)
Total shareholders' equity 715.3 682.8
$ 2,578.1 $ 2,470.8
The accompanying notes are an integral part of these financial statements.
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<TABLE>
CITIZENS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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(Unaudited)
Nine Months Ended
(In millions) September 30,
1996 1995
Preferred stock
Balance at beginning of period $ - $ 100.0
Redemption of preferred stock - (100.0)
Balance at end of period $ - $ -
Common stock
Balance at beginning and end of period 0.4 0.4
Additional paid-in capital
Balance at beginning and end of period 156.1 156.1
Retained earnings
Balance at beginning of period 475.5 409.8
Net income 61.7 56.5
Dividends declared to shareholders (5.3) (7.4)
Balance at end of period 531.9 458.9
Unrealized appreciation (depreciation) on investments, net
Balance at beginning of period 54.7 (20.4)
(Depreciation) appreciation during the period (19.7) 93.2
Benefit (provision) for deferred federal income taxes 6.9 (32.7)
Balance at end of period 41.9 40.1
Treasury stock
Balance at beginning of period (3.9) -
Shares purchased at cost (11.1) (1.0)
Balance at end of period (15.0) (1.0)
Total shareholders' equity $ 715.3 $ 654.5
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
CITIZENS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Unaudited)
Nine Months Ended
(In millions) September 30,
1996 1995
Cash was (used for) provided by:
Operating Activities
Net income $ 61.7 $ 56.5
Adjustments to reconcile net income to net cash
provided by operating activities:
Net realized gains on investments (14.2) (4.1)
Deferred federal income tax provision (benefit) 1.5 1.9
Change in assets and liabilities:
Deferred policy acquisition expenses (5.6) (6.8)
Net premiums receivable, net of reinsurance premiums payable (13.7) (42.9)
Unearned premiums, net of prepaid reinsurance premiums 25.1 41.0
Reserve for losses and loss adjustment expenses,
net of reinsurance recoverable 0.5 35.5
Other, net 3.2 15.2
Net cash provided by operating activities 58.5 96.3
Investing Activities
Proceeds from sale of available-for-sale debt securities 315.6 398.2
Proceeds from available-for-sale debt securities maturing or called 139.2 72.0
Proceeds from held-to-maturity debt securities maturing or called - 10.1
Proceeds from sale of available-for-sale equity securities
and other investments 69.8 24.9
Purchases of available-for-sale debt securities (572.5) (478.7)
Purchases of available-for-sale equity securities and other investments (35.9) (68.1)
Change in net receivable from securities transactions not settled 32.1 12.2
Other investing activities, net (2.2) (2.7)
Net cash used for investing activities (53.9) (32.1)
Financing Activities
Dividends paid to shareholders (5.3) (7.4)
Redemption of Series A preferred stock - (100.0)
Treasury stock purchased, at cost (11.1) (1.0)
Net cash used for financing activities (16.4) (108.4)
Net decrease in cash and cash equivalents (11.8) (44.2)
Cash and cash equivalents at beginning of period 59.1 141.4
Cash and cash equivalents at end of period $ 47.3 $ 97.2
The accompanying notes are an integral part of these financial statements.
</TABLE>
CITIZENS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Earnings per Common Share
Earnings per common share for the quarters ended September 30,
1996 and 1995, are based upon weighted average common shares
outstanding of 35.3 and 36.1 million, respectively. Earnings
per common share for the nine months ended September 30, 1996 and
1995, are based upon weighted average common shares outstanding
of 35.5 million and 36.1 million, respectively. Net income
available to common shareholders for the nine months ended
September 30, 1995, was reduced by $2.0 million for dividends on
preferred stock. On July 26, 1995, the Board of Directors of
Citizens Corporation ("the Company") authorized the repurchase of
up to 0.5 million shares, or slightly more than one percent of
its outstanding common stock. On February 27, 1996, and June 7,
1996, the Board of Directors authorized the repurchase of an
additional 0.3 million shares and 1.0 million shares,
respectively, of common stock, for a total authorization of 1.8
million shares or slightly less than five percent of its issued
common stock and has purchased a total of 0.8 million shares
since the implementation of the repurchase program.
MANAGEMENT'S REPRESENTATION
In the opinion of management, the financial statements reflect
all adjustments of a normal recurring nature necessary for a fair
presentation of the interim periods. Certain reclassifications
have been made to the 1995 financial statements in order to
conform to the 1996 presentation. Interim results are not
necessarily indicative of results expected for the entire year.
These financial statements should be read in conjunction with the
Company's 1995 Annual Report to Shareholders, as filed on Form 10-
K to the Securities and Exchange Commission.
PART I - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The results of operations for Citizens Corporation and
subsidiaries ("the Company") include the accounts of Citizens
Corporation ("Citizens"), a non-insurance holding company, and
its wholly-owned subsidiaries, Citizens Insurance Company of
America, Citizens Insurance Company of Ohio, and Citizens
Insurance Company of the Midwest (collectively, "Citizens
Operations"), and Citizens Management Inc., which is wholly-owned
by Citizens Insurance Company of America.
Results of Operations
Net income
Net income for the quarter ended September 30, 1996, was $27.1
million, or $0.77 per share, compared to $20.9 million, or $0.58
per share, for the quarter ended September 30, 1995. Excluding
realized gains and losses, net of taxes, net income increased
$9.3 million, to $27.7 million for the quarter ended September
30, 1996. The increase in net income is primarily attributable
to a $3.7 million, or 2.5% decrease in losses and loss
adjustment expenses (LAE) to $141.6 million, resulting from a
favorable re-estimation of the catastrophe losses which occured
in the first half of 1996. This adjustment reduced related
reserves by $6.0 million, and resulted in a $3.8 million
catastrophe net benefit, compared to catastrophe losses of $7.7
million in the quarter ended September 30, 1995. Net investment
income increased $4.4 million, or 22.9%, to $23.6 million,
primarily as a result of a change in estimated equity earnings
from a limited partnership of $2.6 million. Federal income tax
expense decreased $0.3 million, to $7.1 million, while the
effective tax rate decreased from 26.1% in the quarter ended
September 30, 1995, to 20.8% for the same period in 1996.
Net income for the nine months ended September 30, 1996, was
$61.7 million, or $1.74 per share, compared to $56.5 million, or
$1.51 per share, for the nine months ended September 30, 1995.
Excluding realized gains and losses, net of taxes, net income
decreased $1.3 million, to $52.5 million for the nine months
ended September 30, 1996. The increase in net income is
primarily attributable to an increase in investment income and
realized gains of $4.5 million and $10.1 million, respectively,
partially offset by a decrease in underwriting profit of $9.7
million. The decrease in underwriting profit primarily reflects
an increase in catastrophes and an increase in claims activity in
the commercial multiple peril and homeowners lines. Catastrophe
losses were $16.9 million in the nine months ended September 30,
1996, compared to $7.7 million in the nine months ended September
30, 1995. The increase in catastrophes was partially offset by
favorable claims experience in the personal automobile line.
This increase in investment income was primarily as a result of a
change in estimated equity earnings from a limited partnership of
$2.6 million. Federal income tax expense increased $0.5 million
to $15.7 million, while the effective tax rate decreased from
21.2% in the nine months ended September 30, 1995 to 20.3% for
the same period in 1996.
Revenues
Net premiums earned increased $1.3 million, or 0.6%, to $210.8
million for the quarter ended September 30, 1996, resulting from
a $4.9 million increase in the Company's personal segment which
was partially offset by a decrease of $3.6 million in the
Company's commercial segment. Net premiums earned increased
$18.7 million, or 3.1%, to $626.4 million for the nine months
ended September 30, 1996, resulting from increases of $14.2
million and $4.5 million increases in the Company's personal and
commercial segments, respectively. This growth is due to
increases in net premiums earned of $7.7 million in Ohio and
Indiana resulting from expansion in these states and to price
increases in all major lines except the workers' compensation
line. The growth is partially offset by rate reductions in the
workers' compensation line where competitive conditions continue
to increase in Michigan.
Segment Results
Personal segment
Personal segment premiums represented 66.9% and 65.0% of total
net premiums earned for the quarters ended September 30, 1996 and
1995, respectively, and 66.0% and 65.7% of total net premiums
earned for the nine months ended September 30, 1996 and 1995,
respectively.
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Three Months Nine Months
For the Periods Ended
September 30, (In millions) 1996 1995 1996 1995
Net premiums earned $ 141.0 $ 136.1 $ 413.3 $ 399.1
Losses and loss adjustment expenses 96.5 105.6 308.1 304.4
Policy acquisition and other underwriting
expenses 37.6 36.0 110.2 108.8
Underwriting (loss) profit $ 6.9 $ (5.5) $ (5.0) $ (14.1)
</TABLE>
Personal segment net premiums earned increased $4.9 million, or
3.6%, to $141.0 million for the quarter ended September 30, 1996.
Personal segment net premiums earned increased $14.2 million, or
3.6%, to $413.3 million for the nine months ended September 30,
1996. This growth is attributable to price increases in the
personal automobile and homeowners lines. The growth is
partially offset by a 2.5% decrease in policies in force in the
personal automobile line since December 31, 1995, attributable to
continued strong competition in Michigan.
The personal segment underwriting profit was $6.9 million for the
quarter ended September 30, 1996, compared to a $5.5 million
underwriting loss for the comparable period in 1995. The
improvement in the underwriting profit reflects primarily a
decrease in catastrophe losses. Catastrophe losses provided a
$2.3 million benefit during the third quarter of 1996 due to a
favorable re-estimation of catastrophe losses which occured in
the first half of 1996. The Company incurred catastrophe losses
of $6.9 million during the third quarter of 1995. Policy
acquisition costs and other underwriting expenses increased $1.6
million, to $37.6 million in the third quarter of 1996. The
increase is primarily attributable to the increase in net earned
premium and expenses associated with an ongoing policy
administration technology project, partially offset by decreases
in employee related expenses and commissions.
The personal segment underwriting loss was $5.0 million, for the
nine months ended September 30, 1996, compared to a loss of $14.1
million in the comparable 1995 period. The improvement in
underwriting results reflects the impact of a $14.2 million
increase in earned premiums, and reflects favorable claims
activity in both current and prior accident years in the personal
automobile line attributable to improvements in severity. This
was partially offset by an increase in catastrophe losses of
$8.5 million, to $15.4 million, primarily in the homeowners line.
Policy acquisition and other underwriting expenses increased
$1.4 million, to $110.2 million due to the effect of increases in
net earned premium and expenses associated with the policy
administration technology project, partially offset by reductions
in employee related expenses.
Commercial segment
Commercial segment premiums represented 33.1% and 35.0% of total
net premiums earned for the quarters ended September 30, 1996 and
1995, respectively, and 34.0% and 34.3% of total net premiums
earned for the nine months ended September 30, 1996 and 1995,
respectively.
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Three Months Nine Months
For the Periods Ended
September 30, (In millions) 1996 1995 1996 1995
Net premiums earned $ 69.8 $ 73.4 $ 213.1 $ 208.6
Losses and loss adjustment expenses 45.1 39.7 153.0 127.0
Policy acquisition and other underwriting
expenses 18.5 21.4 52.1 56.2
Policyholders' dividends 2.0 1.5 5.6 4.2
Underwriting (loss) profit $ 4.2 $ 10.8 $ 2.4 $ 21.2
</TABLE>
Commercial segment net premiums earned decreased $3.6 million, or
4.9%, to $69.8 million for the quarter ended September 30, 1996.
This decrease is primarily attributable to rate decreases in the
workers' compensation line. Commercial segment net premiums
earned increased $4.5 million, or 2.2%, to $213.1 million for the
nine months ended September 30, 1996. The growth during the nine
months primarily reflects a 9.5% increase in policies in force in
the commercial multiple peril line since December 31, 1995. This
growth continues to be offset by rate reductions in the workers'
compensation line as a result of continuing competition in this
line in Michigan. Rates in the workers' compensation line were
decreased 8.5%, 7.0%, and 6.4% effective May 1, 1995, December 1,
1995, and June 1, 1996, respectively.
The commercial segment underwriting profit was $4.2 million in
the quarter ended September 30, 1996, compared to $10.8 million
in the quarter ended September 30, 1995. The decline in
underwriting results is due primarily to increased loss frequency
in the commercial multiple peril and workers' compensation lines.
Catastrophe losses decreased $2.3 million to a benefit of $1.5
million. This benefit resulted from a favorable re-estimation of
catastrophe losses which occurred in the first half of 1996.
Losses and LAE in the commercial multiple peril line increased
$2.9 million, or 31.5%, to $12.1 million and losses and LAE in
the workers' compensation line increased $1.5 million, or 10.2%,
to $16.2 million. Policy acquisition and other underwriting
expenses decreased $2.9 million, or 13.6%, to $18.5 million,
primarily due to the decrease in earned premiums, as well as
reductions in employee related expenses and commissions.
The commercial segment underwriting profit was $2.4 million in
the nine months ended September 30, 1996, compared to $21.2
million in the nine months ended September 30, 1995. The decline
in underwriting profit reflects an increase in loss severity and
frequency in the commercial multiple peril line. Commercial
multiple peril losses and LAE increased $15.4 million, or 53.1%,
to $44.4 million in the nine months ended September 30, 1996.
Catastrophe losses in this segment were $1.5 million in the nine
months ended September 30, 1996 compared to $0.8 million during
the comparable period of 1995. Policy acquisition and other
underwriting expenses decreased $4.1 million, or 7.3%, to $52.1
million due to reductions in employee related expenses. This was
partially offset by the effect of increases in earned premium.
Reserve for Losses and Loss Adjustment Expenses
The Company maintains reserves to provide for its estimated
ultimate liability for losses and loss adjustment expenses with
respect to reported and unreported claims incurred as of the end
of each accounting period. These reserves are estimates,
involving actuarial projections at a given point in time, of what
management expects the ultimate settlement and administration of
claims will cost based on facts and circumstances then known,
predictions of future events, estimates of future trends in claim
severity and judicial theories of liabiltiy and other factors.
The inherent uncertainty of estimating insurance reserves is
greater for certain types of property and casualty insurance
lines, particularly workers' compensation and other liability
lines, where a longer period of time may elapse before a
definitive determination of ultimate liability may be made, and
where the technological, judicial and political climates
involving these types of claims are changing.
The Company regularly updates its reserve estimates as new
information becomes available and further events occur which may
impact the resolution of unsettled claims. Changes in prior
reserve estimates are reflected in results of operations in the
year such changes are determined to be needed and recorded. The
table below provides a reconciliation of the beginning and ending
reserve for unpaid losses and LAE as follows:
<TABLE>
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For the periods ended September 30, (in millions) 1996 1995
Reserve for losses and LAE, beginning of period $ 1,291.6 $1,196.6
Reserve for losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current period 487.1 447.8
Decrease in provision for insured events of prior years (26.0) (16.4)
Total incurred losses and LAE 461.1 431.4
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current period 253.0 209.9
Losses and LAE attributable to insured events of prior years 201.7 188.2
Total payments 454.7 398.1
Change in reinsurance recoverable on unpaid losses 24.0 18.5
Reserve for losses and LAE, end of period $ 1,322.0 $1,248.4
</TABLE>
As part of an ongoing process, the reserves have been re-
estimated for all prior accident years and were decreased by
$26.0 million, and $16.4 million for the nine months ended
September 30, 1996 and 1995, respectively. The increase in
favorable reserve development in 1996 primarily reflects reduced
medical costs in the personal automobile line.
The Company regularly reviews its reserving techniques, its
overall reserving position and its reinsurance. Based on (i)
review of historical data, legislative enactments, judicial
decisions, legal developments in impositions of damages, changes
in political attitudes and trends in general economic conditions,
(ii) review of per claim information, (iii) historical loss
experience of the Company and the industry, and (iv) the
relatively short-term nature of most policies, and (v) periodic
estimates of required reserves by an independent actuarial
consulting firm, management believes that adequate provision has
been made for loss reserves. However, establishment of
appropriate reseves is an inherently uncertain process and there
can be no certainty that current established reserves will prove
adequate in light of subsequent actual experience. A significant
change to the estimated reserves could have a material impact on
the results of operations.
Investment Results
Net investment income before taxes was $23.6 million and $19.2
million for the quarters ended September 30, 1996 and 1995,
respectively. This increase is primarily the result of a change
in estimated equity earnings from a limited partnership of $2.6
million. The average yield on debt securities was 6.0% during
the quarter ended September 30, 1996 as compared to 5.7% for the
quarter ended September 30, 1995. Net investment income after
taxes was $19.2 million and $15.1 million for the quarters ended
September 30, 1996 and 1995, respectively.
Net investment income before taxes was $64.4 million and $59.9
million for the nine months ended September 30, 1996 and 1995,
respectively. This increase is primarily the result of a change
in estimated equity earnings from a limited partnership of $2.6
million. The average yield on debt securities was 6.1% and 6.0%
for the nine months ended September 30, 1996 and 1995,
respectively. Net investment income after taxes was $53.3
million and $49.3 million for the nine months ended September 30,
1996 and 1995, respectively.
Investment Portfolio
The Company's investment portfolio increased $77.5 million, from
$1,490.8 million at December 31, 1995, to $1,568.3 million at
September 30, 1996. Debt securities increased $89.2 million, to
$1,378.7 million, from $1,289.5 million, and represented 87.9%
and 86.5% of the carrying value of all investments at September
30, 1996, and December 31, 1995, respectively. This increase is
consistent with the Company's strategy of increasing the level
of debt securities in the portfolio. This was accomplished by
reducing the level of equities in the portfolio, which resulted
in a $13.7 million decrease in equity securities to $175.8
million in the first nine months of 1996. Tax-exempt securities
increased $48.8 million, to $967.1 million, from $918.3 million,
during the period. Tax-exempt securities represented 70.1% of
total debt securities at September 30, 1996, compared to 71.2% at
December 31, 1995.
Net unrealized appreciation in the investment portfolio at
September 30, 1996 was $64.3 million compared to $84.1 million at
December 31, 1995. Unrealized depreciation in the nine months
was $25.4 million for bonds, and unrealized appreciation on
equity securities and other investments was $5.7 million.
Liquidity and Capital Resources
Liquidity describes the ability of a company to generate
sufficient cash flows to meet the cash requirements of business
operations. As a holding company, Citizens' primary source of
cash for payment of dividends to its shareholders is dividends
from its insurance subsidiaries, which are subject to limitations
imposed by state regulators. Such limitations require that
dividends be paid only out of statutory earned surplus
(unassigned funds) and a restriction on the payment of
"extraordinary" dividends without prior approval of the state
authorities.
Underwriting and investing, typically the two distinct, but not
separate operations in an insurance company, are the sources of
cash for Citizens Insurance. The primary sources of cash are
premiums collected, investment income and maturing investments.
Primary cash outflows are paid losses and LAE, policy acquisition
expenses, other underwriting expenses and purchases of
investments. Cash outflows related to claim losses and LAE can
be variable because of uncertainties surrounding settlement dates
for unpaid losses and the potential for large losses either
individually or in the aggregate. The Company periodically
adjusts its investment policy to respond to changes in short-term
and long-term cash requirements.
Net cash provided by operating activities for the nine months
ended September 30, 1996, was $58.5 million compared to $96.3
million in the comparable prior year period. This decrease is
primarily attributable to the increase in underwriting losses
during the first nine months of 1996 and to the timing of claims
payments.
Net cash used for investing activities by the Company was $53.9
million for the first nine months of 1996 compared to net cash
used of $32.1 million for the comparable prior year period. Cash
used for investing activity in the 1995 period was historically
low due to the need to provide for the $100.0 million Series A
Preferred Stock redemption on June 30, 1995.
Net cash used for financing activities by the Company was $16.4
million and $108.4 million, for the first nine months of 1996 and
1995, respectively. This decrease in net cash used for financing
activities reflects the redemption of the Series A Preferred
Stock for $100.0 million from The Hanover Insurance Company in
1995 and is partially offset by an increase of $10.1 million of
treasury stock purchased in 1996.
Shareholders' equity was $715.3 million at September 30, 1996, or
$20.26 per common share, compared to $682.8 million at December
31, 1995, or $19.04 per common share. Shareholders' equity
reflects a decrease of $12.8 million due to a decrease, net of
deferred income taxes, in the fair values of available-for-sale
debt securities. Changes in shareholders' equity related to the
unrealized values of underlying portfolio investments will
continue to be volatile as market prices of debt securities
fluctuate with changes in the interest rate environment.
The Company expects to continue to pay dividends in the
foreseeable future. However, payment of future dividends is
subject to the Board of Directors' approval and is dependent,
among other things, upon earnings and the financial condition of
the Company.
Based on current trends, the Company expects to continue to
generate sufficient positive operating cash to meet all short-
term and long-term cash requirements. The Company maintains a
high degree of liquidity within the investment portfolio in
fixed maturity investments, common stock and short-term
investments.
Forward-Looking Statements
The Company wishes to caution readers that the following
important factors, among others, in some cases have affected and
in the future could affect, the Company's actual results and
could cause the Company's actual results for 1996 and beyond to
differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. When used in
the MD&A discussion, the words "believes," "anticipated,"
"expects" and similar expressions are intended to identify
forward looking statements. See "Important Factors Regarding
Forward-Looking Statements" filed herewith as Exhibit 99-1 and
incorporated herein by reference.
Factors that may cause actual results to differ materially from
those contemplated or projected, forecast, estimated or budgeted
in such forward looking statements include among others, the
following possibilities: (i) adverse catastrophe experience and
severe weather; (ii) adverse loss development for events the
Company insured in prior years; (iii) heightened competition,
including the intensification of price competition, the entry of
new competitors, and the introduction of new products by new and
existing competitors; (iv) adverse state and federal legislation,
including decreases in rates, limitations on premium levels, and
increases in minimum capital and reserve requirements; (v)
changes in interest rates causing a reduction of investment
income and in the market value of interest rate sensitive
investments; (vi) failure to obtain new customers, retain
existing customers or reductions in policies in force by existing
customers; (vii) higher service, administrative, or general
expense due to the need for additional advertising, marketing,
administrative or management information systems expenditures;
(viii) loss or retirement of key executives; (ix) adverse changes
in the ratings obtained by independent rating agencies such as
Moody's, Standard and Poors and A.M. Best.
PART II - OTHER INFORMATION
ITEM 6
Exhibits and Reports on Form 8-K
(a) Exhibits
EX-11 Statement regarding computation of per share earnings
EX-27 Financial Data Schedule
EX-99.1 Important Factors Regarding Forward-Looking Statements.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CITIZENS CORPORATION
Registrant
Dated November 12, 1996 /s/ John F. O'Brien
John F. O'Brien
President and Chief Executive
Officer
Dated November 12, 1996 /s/ James R. McAuliffe
James R. McAuliffe
Vice President
Dated November 12, 1996 /s/ Edward J. Parry III
Edward J. Parry III
Vice President, Treasurer and
Principal Accounting Officer
Exhibit 99.1
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The Company wishes to caution readers that the following
important factors, among others, in some cases have affected the
Company's results and in the future could cause actual results
and needs of the Company to vary materially from forward-looking
statements made from time to time by the Company on the basis of
management's then-current expectations. The businesses in which
the Company is engaged are in rapidly changing and competitive
markets and involve a high degree of risk, and accuracy with
respect to forward-looking projections is difficult.
Geographic Concentration in the Property and Casualty
----------------------------------------------------------
Insurance Business
------------------
Substantially all of the Company's net premiums written and
earnings are generated in Michigan. The revenues and
profitability of the Company are therefore subject to prevailing
economic, regulatory, demographic and other conditions, including
adverse weather, in Michigan.
Cyclicality in the Property and Casualty Insurance Industry
-----------------------------------------------------------
Historically, the property and casualty insurance industry has
been highly cyclical. The property and casualty industry's
profitability can be affected significantly by price competition,
volatile and unpredictable developments such as extreme weather
conditions and natural disasters, legal developments affecting
insurer liability and the size of jury awards, fluctuations in
interest rates and other factors that affect investment returns
and other general economic conditions and trends that may affect
the adequacy of reserves.
Over the past several years, the property and casualty
insurance industry as a whole has been in a soft market.
Competition for premiums in the property and casualty insurance
markets may continue to have an adverse impact on the Company's
rates and profitability.
Catastrophes and Severe Weather Losses in the Property and
----------------------------------------------------------
Casualty Insurance Industry
---------------------------
Property and casualty insurers are subject to claims arising
out of catastrophes, and other severe weather related losses,
which may have a significant impact on their results of
operations and financial condition. The Company may experience
catastrophes and other severe weather losses in the future which
could have a material adverse impact on the Company. Catastrophes
and severe weather losses can be caused by various events
including hurricanes, earthquakes, tornadoes, wind, hail, fires,
severe winter weather and explosions, and the frequency and
severity of catastrophes are inherently unpredictable. The extent
of losses from catastrophes and severe weather is a function of
two factors: the total amount of insured exposure in the area
affected by the event and the severity of the event. Although
catastrophes and severe weather can cause losses in a variety of
property and casualty lines, homeowners and commercial property
insurance have in the past generated the vast majority of the
Company's catastrophe-related claims. The Company purchases
catastrophe reinsurance as protection against catastrophe losses.
The Company believes, based upon its review of its reinsurers'
financial statements and reputations in the reinsurance
marketplace, that the financial condition of its reinsurers is
sound. However, there can be no assurance that reinsurance will
be adequate to protect the Company against such losses or that
such reinsurance will continue to be available to the Company in
the future at commercially reasonable rates.
Uncertainty Regarding Adequacy of Property and Casualty Loss
---------------------------------------------------------------
Reserves
---------
The Company maintains reserves to cover its estimated ultimate
liability for losses and loss adjustment expenses ("LAE") with
respect to reported and unreported claims incurred as of the end
of each accounting period. These reserves are estimates,
involving actuarial projections at a given time, of what the
Company expects the ultimate settlement and administration of
claims will cost based on facts and circumstances then known,
predictions of future events, estimates of future trends in
claims severity and judicial theories of liability, legislative
activity and other factors. The inherent uncertainties of
estimating reserves are greater for certain types of property and
casualty insurance lines, particularly workers' compensation,
where a longer period of time may elapse before a definitive
determination of ultimate liability may be made, and
environmental liability, where the technological, judicial and
political climates involving these types of claims are changing.
The Company regularly reviews reserving techniques, reinsurance
and overall reserve adequacy. Based upon (i) review of historical
data, legislative enactments, judicial decisions, legal
developments in imposition of damages, changes in political
attitudes and trends in general economic conditions; (ii) review
of per claim information; (iii) historical loss experience of the
Company and the industry; and (iv) the relatively short-term
nature of most of its property and casualty insurance policies,
management believes that adequate provision has been made for
reserves. However, establishment of appropriate reserves is an
inherently uncertain process involving estimates of future losses
and there can be no certainty that currently established reserves
will prove adequate in light of subsequent actual experience. The
Company's reserves are annually certified as required by
insurance regulatory authorities.
Regulatory, Surplus, Capital, Rating Agency and Related Matters
---------------------------------------------------------------
Insurance companies are subject to supervision and regulation
by the state insurance authority in each state in which they
transact business. Such supervision and regulation relate to
numerous aspects of an insurance company's business and financial
condition, including limitations on the authorization of lines of
business, underwriting limitations, the setting of premium rates,
the establishment of standards of solvency, the licensing of
insurers and agents, concentration of investments, levels of
reserves, the payment of dividends, transactions with affiliates,
changes of control and the approval of policy forms. Such
regulation is concerned primarily with the protection of
policyholders.
State regulatory oversight and various proposals at the federal
level (including the proposed adoption of a federal regulatory
framework for insurance companies) may in the future adversely
affect the Company's ability to sustain adequate returns in
certain lines of business. In recent years, the state insurance
regulatory framework has come under increased federal scrutiny,
and certain state legislatures have considered or enacted laws
that alter and, in many cases, increase state authority to
regulate insurance companies and insurance holding company
systems. Further, the National Association of Insurance
Commissioners ("NAIC") and state insurance regulators are
reexamining existing laws and regulations, and as a condition to
accreditation have required the adoption of certain model laws
which specifically focus on insurance company investments, issues
relating to the solvency of insurance companies, risk-based
capital ("RBC") guidelines, interpretations of existing laws, the
development of new laws, and the definition of extraordinary
dividends.
The capacity for an insurance company's growth in premiums is
in part a function of its statutory surplus. Maintaining
appropriate levels of statutory surplus, as measured by state
insurance regulators, is considered important by state insurance
regulatory authorities and the private agencies that rate
insurers' claims-paying abilities and financial strength. Failure
to maintain certain levels of statutory surplus could result in
increased regulatory scrutiny, action by state regulatory
authorities or a downgrade by the private agencies referred to
below.
The NAIC has created a new system for assessing the adequacy of
statutory capital for property and casualty insurers. The new
system, known as risk-based capital, is in addition to the
states' fixed dollar minimum capital and other requirements. The
new system is based on risk-based formulas (separately defined
for life and health insurers and property and casualty insurers)
that apply prescribed factors to the various risk elements in an
insurer's business to report a minimum capital requirement
proportional to the amount of risk assumed by the insurer.
State Guaranty Funds, Shared Markets Mechanisms and Pooling
---------------------------------------------------------------
Arrangements
--------------
All fifty states of the United States have insurance guaranty
fund laws requiring all life and health and property and casualty
insurance companies doing business within the state to
participate in guaranty associations, which are organized to pay
contractual obligations under insurance policies issued by
impaired or insolvent insurance companies. These associations
levy assessments (up to prescribed limits) on all member insurers
in a particular state on the basis of the proportionate share of
the premiums written by member insurers in the lines of business
in which the impaired or insolvent insurer is engaged. Mandatory
assessments by state guaranty funds are used to cover losses to
policyholders of insolvent or rehabilitated companies and can be
partially recovered through a reduction in future premium taxes
in many states. These assessments may increase in the future
depending upon the rate of insolvencies of insurance companies.
In addition, as a condition to the ability to conduct business
in various states, the Company is required to participate in
mandatory property and casualty shared market mechanisms or
pooling arrangements, which provide various insurance coverages
to individuals or other entities that otherwise are unable to
purchase such coverage voluntarily provided by private insurers.
The Company cannot predict whether its participation in these
shared market mechanisms or pooling arrangements will provide
underwriting profits or losses to the Company.
Competition
------------
The Property and Casualty Insurance industry in general is
highly competitive. Many of the Company's competitors are larger
and have greater financial, technical and operating resources
than those of the Company.
Retention of Key Executives
----------------------------
The future success of the Company will be affected by its
continued ability to attract and retain qualified executives. The
Company's success is dependent in large part on John F. O'Brien,
the loss of whom could adversely affect the Company's business.
The Company does not have an employment agreement with Mr.
O'Brien.
<TABLE>
EXHIBIT 11
CITIZENS CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER COMMON SHARE EARNINGS
For the Periods Ended September 30, 1996 and 1995
<S> <C> <C> <C> <C>
(In millions, except per common share data)
Quarter Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Primary Net Income Per Common Share
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 27.1 $ 20.9 $ 61.7 $ 56.5
Preferred dividend . . . . . . . . . . . . . . . . . . . . . . . . - - - 2.0
Net income available to common shareholders . . . . . . . . . . $ 27.1 $ 20.9 $ 61.7 $ 54.5
Net income per share available to common shareholders . . . . . $ 0.77 $ 0.58 $ 1.74 $ 1.51
Average shares outstanding. . . . . . . . . . . . . . . . . . . . . . 35.3 36.1 35.5 36.1
Net shares to be issued upon exercise of dilutive
stock options after applying the treasury stock method - - - -
Adjusted shares outstanding . . . . . . . . . . . . . . . . . . . . . 35.3 36.1 35.5 36.1
Fully Diluted Net Income Per Common Share
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 27.1 $ 20.9 $ 61.7 $ 56.5
Preferred dividend . . . . . . . . . . . . . . . . . . . . . . . . - - - 2.0
Net income available to common shareholders . . . . . . . . . . $ 27.1 $ 20.9 $ 61.7 $ 54.5
Net income per share available to common shareholders . . . . . $ 0.77 $ 0.58 $ 1.74 $ 1.51
Average shares outstanding. . . . . . . . . . . . . . . . . . . . . . 35.3 36.1 35.5 36.1
Net shares to be issued upon exercise of dilutive
stock options after applying the treasury stock method - - - -
Adjusted shares outstanding . . . . . . . . . . . . . . . . . . . . . 35.3 36.1 35.5 36.1
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 1379
<DEBT-CARRYING-VALUE> 1362
<DEBT-MARKET-VALUE> 1379
<EQUITIES> 176
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1568
<CASH> 47
<RECOVER-REINSURE> 9
<DEFERRED-ACQUISITION> 58
<TOTAL-ASSETS> 2578
<POLICY-LOSSES> 1322
<UNEARNED-PREMIUMS> 381
<POLICY-OTHER> 3
<POLICY-HOLDER-FUNDS> 7
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 715
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626
<INVESTMENT-INCOME> 64
<INVESTMENT-GAINS> 14
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<UNDERWRITING-AMORTIZATION> 123
<UNDERWRITING-OTHER> 45
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<INCOME-TAX> 16
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62
<EPS-PRIMARY> 2
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<PROVISION-CURRENT> 487
<PROVISION-PRIOR> (26)
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<PAYMENTS-PRIOR> 202
<RESERVE-CLOSE> 1322
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</TABLE>
