FORM 10-Q
UNITED STATES
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, 1997
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: 35,271,800
Shares of Common Stock Outstanding, as of October 1, 1997.
15
Total Number of Pages
1
==========================================================================
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
2
==========================================================================
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CITIZENS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<S> <C> <C> <C> <C>
(Unaudited) (Unaudited)
Quarter Ended Nine Months Ended
(In millions, except per share data) September 30, September 30,
1997 1996 1997 1996
--------- --------- --------- ---------
Revenues
Net premiums written $ 242.2 $ 229.7 $ 662.1 $ 651.5
Change in unearned premiums, net
of prepaid reinsurance premiums 27.6 18.9 27.5 25.1
--------- --------- --------- ---------
Net premiums earned 214.6 210.8 634.6 626.4
Net investment income 25.2 23.6 74.9 64.4
Net realized gains (losses) on investments 8.3 (0.8) 27.4 14.2
Other income 1.6 1.2 4.6 4.6
--------- --------- --------- ---------
Total revenues 249.7 234.8 741.5 709.6
Expenses
Losses and loss adjustment expenses 171.2 140.6 488.4 457.4
Policy acquisition and other operating
expenses 57.0 58.0 171.5 169.2
Policyholders' dividends 1.3 2.0 4.7 5.6
--------- --------- --------- ---------
Total expenses 229.5 200.6 664.6 632.2
--------- --------- --------- ---------
Income before federal income taxes 20.2 34.2 76.9 77.4
Federal income tax expense 2.9 7.1 14.6 15.7
--------- --------- --------- ---------
Net Income $ 17.3 $ 27.1 $ 62.3 $ 61.7
========= ========= ========= =========
Per share data
Net income $ 0.50 $ 0.77 $ 1.77 $ 1.74
========= ========= ========= =========
Dividends declared to shareholders $ 0.05 $ 0.05 $ 0.15 $ 0.15
========= ========= ========= =========
Weighted average shares outstanding 35.3 35.3 35.3 35.5
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
3
==========================================================================
CITIZENS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
(Unaudited)
(In millions, except per share data) September 30, December 31,
1997 1996
----------- -----------
Assets
Investments:
Debt securities available-for-sale, at fair value $ 1,497.7 $ 1,398.3
(Amortized cost of $1,442.1 and $1,366.9)
Equity securities available-for-sale, at fair value 177.5 192.3
(Cost of $105.1 and $132.3)
Other investments, at fair value 15.9 14.6
(Cost of $15.8 and $13.2) ----------- -----------
Total investments 1,691.1 1,605.2
Cash and cash equivalents 43.3 36.1
Accrued investment income 24.7 25.3
Premiums receivable 153.1 140.3
Reinsurance recoverable on paid and unpaid balances 480.1 476.8
Prepaid reinsurance premiums 67.6 62.8
Deferred policy acquisition expenses 57.9 54.3
Deferred federal income taxes 16.5 25.4
Other assets 67.2 76.8
----------- -----------
Total assets $ 2,601.5 $ 2,503.0
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Reserve for losses and loss adjustment expenses $ 1,230.8 $ 1,238.5
Unearned premiums 394.6 362.3
Other liabilities 141.5 147.7
----------- -----------
Total liabilities 1,766.9 1,748.5
----------- -----------
Shareholder's Equity
Series A preferred stock, $0.01 par value per share;
authorized 10.0 million shares; none issued or
outstanding in 1997 and 1996 - -
Common stock, par value $0.01 per share;
authorized 100.0 million shares; issued 36.1 0.4 0.4
million shares
Additional paid-in capital 156.1 156.1
Retained earnings 609.5 552.5
Unrealized appreciation on investments, net of
deferred federal income taxes 83.5 60.5
Treasury stock, at cost (0.8 million shares in 1997 (14.9) (15.0)
and 1996) ----------- -----------
Total shareholder's equity 834.6 754.5
----------- -----------
Total liabilities and shareholder's equity $ 2,601.5 $ 2,503.0
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
4
==========================================================================
CITIZENS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
(Unaudited)
Nine Months Ended
(In millions) September 30,
1997 1996
---------- ----------
Preferred stock
Balance at beginning and 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 552.5 475.5
Net income 62.3 61.7
Dividends declared to shareholders (5.3) (5.3)
---------- ----------
Balance at end of period 609.5 531.9
---------- ----------
Unrealized appreciation on investments, net
Balance at beginning of period 60.5 54.7
Appreciation (depreciation) during the period 35.3 (19.7)
(Provision) benefit for deferred federal income (12.3) 6.9
taxes ---------- ----------
Balance at end of period 83.5 41.9
---------- ----------
Treasury stock
Balance at beginning of period (15.0) (3.9)
Shares purchased at cost - (11.1)
Shares reissued 0.1 -
---------- ----------
Balance at end of period (14.9) (15.0)
---------- ----------
Total shareholders' equity $ 834.6 $ 715.3
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
5
==========================================================================
CITIZENS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C>
(Unaudited)
Nine Months Ended
(In millions) September 30,
1997 1996
---------- ----------
Cash flows from operating activities
Net income $ 62.3 $ 61.7
Adjustments to reconcile net income to
net cash provided by operating activities:
Net realized gains on investments (27.4) ( 14.2)
Deferred federal income tax (benefit) provision (3.4) 1.5
Change in assets and liabilities:
Deferred policy acquisition expenses (3.6) (5.6)
Premiums and notes receivable, net of reinsurance (16.9) (13.7)
premiums
Unearned premiums, net of prepaid reinsurance 27.5 25.1
premiums
Reserve for losses and loss adjustment expenses,
net of reinsurance recoverable (11.0) 0.5
Other, net 7.7 3.2
---------- ----------
Net cash provided by operating activities 35.2 58.5
---------- ----------
Cash flows from investing activities
Proceeds from sale of available-for-sale debt 284.2 315.6
securities
Proceeds from available-for-sale debt securities 71.1 139.2
maturing or called
Proceeds from sale of available-for-sale equity 115.1 69.8
securities and other investments
Purchases of available-for-sale debt securities (431.3) (572.5)
Purchases of available-for-sale equity (63.8) (35.9)
securities and other investments
Change in net receivable from securities 3.7 32.1
transactions not settled
Other investing activities (1.8) ( 2.2)
---------- ----------
Net cash used for investing activities (22.8) (53.9)
---------- ----------
Cash flows from financing activities
Dividends paid to shareholders (5.3) (5.3)
Treasury stock purchased, at cost - (11.1)
Shares reissued 0.1 -
---------- ----------
Net cash used for financing activities (5.2) (16.4)
---------- ----------
Change in cash and cash equivalents 7.2 (11.8)
Cash and cash equivalents at beginning of period 36.1 59.1
---------- ----------
Cash and cash equivalents at end of period $ 43.3 $ 47.3
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
6
==========================================================================
CITIZENS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of
Citizens Corporation ("the Company") have been prepared in accordance
with generally accepted accounting principles applicable to stock
property and casualty insurance companies for interim financial
information and with the requirements of Form 10-Q. Certain prior year
amounts have been reclassified to conform with the current year's
presentation.
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. 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
1996 Annual Report to Shareholders, as filed on Form 10-K with the
Securities and Exchange Commission.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (FAS No. 130).
FAS No. 130 established standards for the reporting and display of
comprehensive income and its components in a full set of general-
purpose financial statements. All items that are required to be
recognized under accounting standards as components of comprehensive
income are to be reported in a financial statement that is displayed
with the same prominence as other financial statements. This
statement stipulates that comprehensive income reflect the change in
equity of an enterprise during a period from transactions and other
events and circumstances from non-owner sources. Comprehensive income
will thus represent the sum of net income and other comprehensive
income, although FAS No. 130 does not require the use of the terms
comprehensive income or other comprehensive income. The accumulated
balance of other comprehensive income shall be displayed separately
from retained earnings and additional paid-in capital in the statement
of financial position. This statement is effective for fiscal years
beginning after December 15, 1997. The Company anticipates that the
adoption of FAS No. 130 will result primarily in reporting unrealized
gains and losses on investments in debt and equity securities in
comprehensive income.
2. Earnings per Share
Earnings per share are based on the weighted average number of common
shares and common share equivalents. The Board of Directors authorized
the repurchase 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 in
1995. As of September 30, 1997, the Company is holding these shares
as treasury stock for the purpose of funding current and future stock
option awards and for other purposes.
Recently the FASB issued Statement of Financial Accounting Standards
No. 128, Earnings Per Share, which supersedes APB Opinion No. 15,
Earnings Per Share. This standard replaces the primary EPS
requirements with a basic EPS computation and requires a dual
presentation of basic and diluted EPS for those companies with complex
capital structures. The Company intends to adopt the standards of
Statement No. 128 for financial statements issued after December 15,
1997. The impact of this statement is expected to be immaterial on
the Company's EPS calculation.
7
==========================================================================
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, 1997, was $17.3
million, or $0.50 per share, compared to $27.1 million, or $0.77 per
share, for the quarter ended September 30, 1996. Excluding realized
gains (losses) and restructuring charges, both net of taxes, net
income decreased $15.5 million, to $12.2 million for the quarter ended
September 30, 1997, versus $27.7 million during the comparable period
of 1996. The decrease in net income is primarily attributable to a
decrease in the underwriting profit of $24.5 million, offset by an
increase in net realized gains of $9.1 million and a decrease in
federal income tax expense. The decline in underwriting results is
primarily due to an increase in catastrophe losses of $12.9 million,
lower net premiums earned in the workers' compensation line, less
favorable prior year claims experience in the personal automobile
line, and less favorable current year claims experience in the
commercial multiple peril and commercial automobile lines. Net
investment income increased $1.6 million reflecting the growth in
invested assets and higher yields on debt securities partially offset
by lower income from limited partnerships. Federal income tax expense
decreased $4.2 million, to $2.9 million, while the effective tax rate
decreased to 14.1% in the quarter ended September 30, 1997 from 20.8%
for the same period in 1996.
Net income for the nine months ended September 30, 1997, was $62.3
million, or $1.77 per share, compared to $61.7 million, or $1.74 per
share, for the nine months ended September 30, 1996. Excluding
realized gains and restructuring charges, both net of taxes, net
income decreased $6.8 million, to $45.7 million for the nine months
ended September 30, 1997, versus $52.5 million during the comparable
period of 1996. The increase in net income is primarily attributable
to an increase in realized gains of $13.2 million and an increase in
net investment income of $10.5 million, offset by a $22.5 million
increase in the underwriting loss. The growth in net investment
income resulted primarily from an increase in average invested assets
and the Company's shift to higher yielding debt securities, including
longer durations and non-investment grade securities. The decline in
underwriting results is primarily due to lower net premiums earned in
the workers' compensation line and less favorable current year claims
experience in the commercial multiple peril line. Federal income tax
expense decreased $1.1 million, to $14.6 million, while the effective
tax rate decreased to 18.9% in the nine months ended September 30,
1997 from 20.3% for the same period in 1996.
Revenues
Net premiums earned increased $3.8 million, or 1.8%, to $214.6 million
for the quarter ended September 30, 1997, resulting from a $4.7
million increase in the Company's personal lines partially offset by a
$0.9 million decrease in the Company's commercial lines. Net premiums
earned increased $8.2 million, or 1.3%, to $634.6 million for the nine
months ended September 30, 1997, resulting from an increase of $19.4
million in the Company's personal segments and a decrease of $11.2
million in the Company's commercial segments. Contributing to premium
growth are an increase in net premiums earned of $11.3 million in Ohio
and Indiana resulting from expansion in these states, a nonrecurring
$3.0 million decrease in premiums ceded to the Michigan Catastrophic
Claims Association (MCCA) in the first quarter of 1997, and an
increase in personal automobile and homeowners rates. These factors
were partially offset by rate reductions in the workers' compensation
line, where competitive conditions continue in Michigan.
8
==========================================================================
Segment Results
- ---------------
Personal segment
Personal segment premiums represented 67.9% and 66.9% of total net
premiums earned for the quarters ended September 30, 1997 and 1996,
respectively, and 68.2% and 66.0% of total net premiums earned for the
nine months ended September 30, 1997 and 1996, respectively.
<TABLE>
<S> <C> <C> <C> <C>
-------------------- --------------------
For the Periods Ended Three Months Nine Months
September 30, (in millions) 1997 1996 1997 1996
-------------------- --------------------
Net premiums earned $ 145.7 $ 141.0 $ 432.7 $ 413.3
Losses and loss adjustment expenses 113.9 95.6 335.6 305.6
Policy acquisition and other underwriting expenses
37.3 38.5 114.5 112.7
-------------------- --------------------
Underwriting (loss) gain $ (5.5) $ 6.9 $ (17.4) $ (5.0)
==================== ====================
</TABLE>
Personal segment net premiums earned increased $4.7 million, or 3.3%
to $145.7 million for the quarter ended September 30, 1997, from
$141.0 million for the quarter ended September 30, 1996. Personal
segment net premiums earned increased $19.4 million, or 4.7%, to
$432.7 million for the nine months ended September 30, 1997, from
$413.3 million for the nine months ended September 30, 1996. This
increase is primarily attributable to rate increases in the personal
automobile and homeowners lines, a 3.2% increase in policies in force
in the homeowners line, and a decrease in premiums ceded to the MCCA.
The non-recurring decrease in premiums ceded to MCCA was a result of a
lower surcharge effective January 1, 1997 for personal automobile
policies written. These factors were partially offset by a 0.5%
decrease in policies in force in the personal automobile line since
September 30, 1996, attributable to continued strong competition in
Michigan.
The personal segment underwriting loss was $5.5 million for the
quarter ended September 30, 1997 compared to an underwriting gain of
$6.9 million for the quarter ended September 30, 1996. The decline in
underwriting results is primarily due to an increase in catastrophe
losses of $9.2 million, primarily in the homeowners line, and less
favorable claims activity in prior accident years in the personal
automobile line. Policy acquisition and other underwriting expenses
decreased $1.2 million, or 3.1%, to $37.3 million, reflecting
reductions in employee related expenses, partially offset by an
increase in policy acquisition expenses reflecting the growth in net
premiums earned.
The personal segment underwriting loss was $17.4 million for the nine
months ended September 30, 1997 compared to $5.0 million in the
comparable 1996 period. The decline in underwriting results is
primarily due to less favorable claims activity in prior accident
years in the personal automobile line. Additionally, the Company
experienced an increase in claim severity in the homeowners line for
the current accident year, primarily in the first quarter. Policy
acquisition and other underwriting expenses increased $1.8 million, or
1.6%, to $114.5 million, reflecting the growth in net premiums earned,
partially offset by reductions in employee related expenses.
9
==========================================================================
Commercial segment
Commercial segment premiums represented 32.1% and 33.1% of total net
premiums earned for the quarters ended September 30, 1997 and 1996,
respectively. Commercial segment premiums represented 31.8% and 34.0%
of the total net premiums earned for the nine months ended September
30, 1997 and 1996 respectively.
<TABLE>
<S> <C> <C> <C> <C>
-------------------- --------------------
For the Periods Ended Three Months Nine Months
September 30, (in millions) 1997 1996 1997 1996
-------------------- --------------------
Net premiums earned $ 68.9 $ 69.8 $ 201.9 $ 213.1
Losses and loss adjustment expenses 57.3 45.0 151.4 151.8
Policy acquisition and other underwriting expenses
18.2 18.6 53.5 53.3
Policyholders' dividends 1.3 2.0 4.7 5.6
-------------------- --------------------
Underwriting (loss) profit $ (7.9) $ 4.2 $ (7.7) $ 2.4
==================== ====================
</TABLE>
Commercial segment net premiums earned decreased $0.9 million, or
1.3%, to $68.9 million for the quarter ended September 30, 1997
compared to $69.8 million for the quarter ended September 30, 1996.
Commercial segment net premiums earned decreased $11.2 million, or
5.3%, to $201.9 million for the nine months ended September 30, 1997
from $213.1 million for the nine months ended September 30, 1996.
This decrease is attributable to decreases in rates for workers'
compensation, resulting from continued competitive conditions in
Michigan, partially offset by growth in the commercial multiple peril
and commercial automobile lines. Rates in the workers' compensation
line were decreased 6.4% and 8.7% effective June 1, 1996 and March 1,
1997, respectively. Management believes competitive conditions in
Michigan in the workers' compensation line may impact future growth in
net premiums earned.
The commercial segment underwriting loss was $7.9 million for the
quarter ended September 30, 1997 compared to a profit of $4.2 million
in September 30, 1996. The decline in underwriting results is
primarily attributable to lower net premiums earned in the workers'
compensation line, an increase in catastrophe losses of $3.7 million,
primarily in the commercial multiple peril line, and increased current
year claim severity in the commercial multiple peril and commercial
automobile lines. Policy acquisition and other underwriting expenses
decreased $0.4 million, or 2.2%, to $18.2 million, reflecting
reductions in employee related expenses in 1997.
The commercial segment underwriting loss was $7.7 million for the nine
months ended September 30, 1997, compared to an underwriting gain of
$2.4 million for the same period 1996. The decline in underwriting
results is primarily attributable to lower net premiums earned in the
workers' compensation line and increased current year claim severity
in the commercial multiple peril line, partially offset by an increase
in favorable development of prior year claims in the workers'
compensation line. Policy acquisition and other underwriting expenses
increased $0.2 million, or 0.4%, to $53.5 million, reflecting
increased technology expenses partially offset by reductions in
employee related expenses in 1997.
10
==========================================================================
Reserve for Losses and Loss Adjustment Expenses
- -----------------------------------------------
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>
<S> <C> <C>
For the period ended September 30, (in millions) 1997 1996
------------ ------------
Reserve for losses and LAE, beginning of period $ 1,238.5 $ 1,291.6
Reserve for losses and LAE, net of reinsurance
recoverable:
Provision for insured events of the current 526.2 483.4
period
Decrease in provision for insured events of prior (37.8) (26.0)
years
------------ ------------
Total incurred losses and LAE 488.4 457.4
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of 272.9 249.3
current period
Losses and LAE attributable to insured events of 223.7 201.7
prior years
------------ ------------
Total payments 496.6 451.0
Change in reinsurance recoverable on unpaid losses 0.5 24.0
------------ ------------
Reserve for losses and LAE, end of period $ 1,230.8 $ 1,322.0
============ ============
</TABLE>
As part of an ongoing process, the reserves have been re-estimated for
all prior accident years and were decreased by $37.8 million and $26.0
million, for the nine months ended September 30, 1997 and 1996,
respectively. The favorable reserve development in both years
primarily reflects the initiatives taken by the Company to manage
medical costs in the personal automobile and workers' compensation
lines, as well as the impact of the Michigan Supreme Court ruling on
workers' compensation indemnity payments, which decreases the maximum
amount to be paid for indemnity cases on all existing and future
claims. The decrease in reserves for all prior accident years was
$2.2 million, and $11.7 million, for the three months ended September
30, 1997 and 1996, respectively. The Company believes reduced
favorable reserve development may continue to impact future earnings.
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, (iv) the relatively short-term nature of most policies and
(v) internal estimates of required reserves, management believes that
adequate provision has been made for loss reserves. However,
establishment of appropriate reserves 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.
11
==========================================================================
Investment Results
- ------------------
Net investment income before taxes was $25.2 million and $23.6 million
for the quarters ended September 30, 1997 and 1996, respectively. The
increase is the result of an increase in average invested assets and
the Company's portfolio shift from equity securities to higher
yielding debt securities, including longer duration and non-investment
grade securities, partially offset by a $2.2 million decrease in
income from limited partnership investments. Investment income for
the quarter ended September 30, 1996 included the result of a change
in estimated equity earnings from a limited partnership of $2.6
million. The average pre-tax yields on debt securities were 6.7% in
1997 and 6.5% in 1996. Net investment income after taxes was $20.8
million and $19.2 million for the quarters ended September 30, 1997
and 1996, respectively. Net realized gains on investments before
taxes were $8.3 million during the third quarter of 1997 and net
realized losses on investments before taxes were $0.8 million in 1996.
Net investment income before taxes was $74.9 million and $64.4 million
for the nine months ended September 30, 1997 and 1996, respectively.
The increase is the result of an increase in average invested assets
and the Company's portfolio shift from equity securities to higher
yielding debt securities, including longer duration and non-investment
grade securities. The average pre-tax yields on debt securities were
6.7% in 1997 and 6.3% in 1996. Net investment income after taxes was
$61.8 million and $53.3 million for the nine months ended September
30, 1997 and 1996, respectively. Net realized gains on investments
before taxes were $27.4 million and $14.2 million during the first
nine months of 1997 and 1996 respectively. Net realized gains in 1997
and 1996 primarily resulted from sales of appreciated equity
securities.
Investment Portfolio
- --------------------
The Company's investment portfolio increased $85.9 million, to
$1,691.1 million during the first nine months of 1997, from $1,605.2
million at December 31, 1996. Debt securities increased $99.4
million, to $1,497.7 million, from $1,398.3 million, and represented
88.6% and 87.1% of the carrying value of all investments at September
30, 1997 and December 31, 1996, 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 $14.8 million
decrease in equity securities to $177.5 million as of September 30,
1997. Tax-exempt securities represented 64.9% of total debt
securities at September 30, 1997 compared to 69.9% at December 31,
1996. The Company may make modest extensions in portfolio incremental
credit risk and adjustments to its taxable and tax-exempt positions in
the future to seek to maximize after tax income.
The unrealized appreciation in the investment portfolio at September
30, 1997 was $128.1 million compared to $92.8 million at December 31,
1996. Unrealized appreciation during the first nine months of the year
was $24.2 million for bonds, and unrealized appreciation on equity
securities and other investments was $11.1 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.
Accordingly, the Company's strategy is to monitor available cash and
short-term investment balances in relation to projected cash needs by
matching the maturities of its investments to expected payments of
current and long-term liabilities.
12
==========================================================================
Net cash provided by operating activities, for the nine months ended
September 30, 1997, was $35.2 million compared to $58.5 million in the
prior year period. This decrease is primarily attributable to a $22.5
million increase in underwriting loss.
Net cash used for investing activities for the Company was $22.8
million and $53.9 million for the first nine months of 1997 and 1996,
respectively. The decrease in net cash used for investing activities
is consistent with the decrease in net cash provided by operating
activities, which is typically invested in fixed income securities.
Net cash used for financing activities for the Company was $5.2
million and $16.4 million, for the first nine months of 1997 and 1996,
respectively. This decrease in net cash used for financing activities
was due to the repurchase of $11.1 million of treasury stock in 1996.
Shareholders' equity was $834.6 million, or $23.64 per share at
September 30, 1997, compared to $715.3, or $20.26 per share at
December 31, 1996, resulting from higher unrealized appreciation on
investments. 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 1997 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 as Exhibit 99.1 to
the Company's 1996 Annual Report to Shareholders 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, increases in minimum capital and reserve requirements,
benefit mandates, limitations on the ability to manage care and
utilization, liabilities related to tobacco products, and tax
treatment of insurance products; (v) changes in interest rates causing
a reduction of investment income or 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) increases in medical costs,
including increases in utilization, costs of medical services,
pharmaceuticals, durable medical equipment and other covered items;
(x) termination of provider contracts or renegotiation at less cost-
effective rates or terms of payment; (xi) changes in the Company's
liquidity due to changes in asset and liability matching; (xii)
restrictions on insurance underwriting, based on certain criteria,
(xiii) adverse changes in the ratings obtained by independent rating
agencies such as Moody's, Standard and Poors and A.M. Best.
13
==========================================================================
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
.
(b) Reports on Form 8-K
On July 11, 1997, a report on Form 8-K was filed under Item 5,
Other Events, the Registrant's announcement
that third quarter results will be impacted by an estimated $10
million in pre-tax catastrophe losses resulting
from tornadoes and windstorms which struck Michigan during the
first week of July 1997.
14
==========================================================================
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 13, 1997 /s/ John F. O'Brien
----------------- -----------------------------
John F. O'Brien
President and Chief Executive
Officer, and
Chairman of the Board
Dated November 13, 1997 /s/ Edward J. Parry, III
----------------- -----------------------------
Edward J. Parry, III
Vice President, Chief Financial
Officer, Treasurer and Principal
Accounting Officer
15
==========================================================================
Exhibit 11
CITIZENS CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
For the Periods Ended September 1997 and 1996
(in millions, except per share data)
<TABLE>
<S> <C> <C> <C> <C>
(Unaudited) (Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
------------------- -------------------
Primary:
Average shares outstanding 35.3 35.3 35.3 35.5
Net effect of dilutive stock options based on the
treasury stock method using average market price - - - -
------------------- -------------------
TOTALS 35.3 35.3 35.3 35.5
=================== ===================
Net income available to shareholders $ 17.3 $ 27.1 $ 62.3 $ 61.7
=================== ===================
Per share amount $ 0.50 $ 0.77 $ 1.77 $ 1.74
=================== ===================
Fully diluted:
Average shares outstanding 35.3 35.3 35.3 35.5
Net effect of dilutive stock options based on the
treasury stock method using the higher of period-
end or average market price - - - -
------------------- -------------------
TOTALS 35.3 35.3 35.3 35.5
=================== ===================
Net income available to shareholders $ 17.3 $ 27.1 $ 62.3 $ 61.7
=================== ===================
Per share amount $ 0.50 $ 0.77 $ 1.77 $ 1.74
=================== ===================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 1498
<DEBT-CARRYING-VALUE> 1442
<DEBT-MARKET-VALUE> 1498
<EQUITIES> 178
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1691
<CASH> 43
<RECOVER-REINSURE> 13
<DEFERRED-ACQUISITION> 58
<TOTAL-ASSETS> 2602
<POLICY-LOSSES> 1231
<UNEARNED-PREMIUMS> 395
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 5
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 835
<TOTAL-LIABILITY-AND-EQUITY> 2602
635
<INVESTMENT-INCOME> 75
<INVESTMENT-GAINS> 27
<OTHER-INCOME> 5
<BENEFITS> 488
<UNDERWRITING-AMORTIZATION> 123
<UNDERWRITING-OTHER> 54
<INCOME-PRETAX> 77
<INCOME-TAX> 15
<INCOME-CONTINUING> 62
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62
<EPS-PRIMARY> 1.77
<EPS-DILUTED> 1.77
<RESERVE-OPEN> 1239
<PROVISION-CURRENT> 526
<PROVISION-PRIOR> (38)
<PAYMENTS-CURRENT> 273
<PAYMENTS-PRIOR> 224
<RESERVE-CLOSE> 1231
<CUMULATIVE-DEFICIENCY> 1
</TABLE>
