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: June 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: 35,269,100
Shares of Common Stock Outstanding, as of August 1, 1997.
16
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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
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 Six Months Ended
June 30, June 30,
(In millions, except per share data) 1997 1996 1997 1996
-------- -------- -------- -------
Revenues
Net premiums written $ 208.0 $ 205.9 $ 419.9 $ 421.8
Change in unearned premiums, net
of prepaid reinsurance premiums (2.1) (5.2) (0.1) 6.2
-------- -------- -------- --------
Net premiums earned 210.1 211.1 420.0 415.6
Net investment income 26.1 21.2 49.7 40.8
Net realized (losses) gains on investments (0.6) 0.3 19.1 15.0
Other income 1.5 1.8 3.0 3.4
-------- -------- -------- --------
Total revenues 237.1 234.4 491.8 474.8
Expenses
Losses and loss adjustment expenses 158.7 162.6 317.2 316.8
Policy acquisition and other operating expenses 56.2 55.0 114.5 111.2
Policyholders' dividends 1.8 1.8 3.4 3.6
-------- -------- -------- --------
Total expenses 216.7 219.4 435.1 431.6
-------- -------- -------- --------
Income before federal income taxes 20.4 15.0 56.7 43.2
Federal income tax expense 3.8 2.9 11.7 8.6
-------- -------- -------- --------
Net Income $ 16.6 $ 12.1 $ 45.0 $ 34.6
======== ======== ======== ========
Per share data
Net income $ 0.47 $ 0.34 $ 1.27 $ 0.97
======== ======== ======== ========
Dividends declared to shareholders $ 0.05 $ 0.05 $ 0.10 $ 0.10
======== ======== ======== ========
Weighted average shares outstanding 35.3 35.6 35.3 35.7
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
3
==========================================================================
<TABLE>
<S> <C> <C>
CITIZENS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except per share data) June 30, December 31,
1997 1996
Assets ---------- ----------
Investments:
Debt securities available-for-sale, at fair value $ 1,451.0 $ 1,398.3
(Amortized cost of $1,417.9 and $1,366.9)
Equity securities available-for-sale, at fair value 163.1 192.3
(Cost of $95.4 and $132.3)
Other investments, at fair value (Cost of 15.5 14.6
$15.3 and 13.2) ---------- ----------
Total investments 1,629.6 1,605.2
Cash and cash equivalents 39.3 36.1
Accrued investment income 26.0 25.3
Premiums receivable 137.7 140.3
Reinsurance recoverable on paid and unpaid balances 488.4 476.8
Prepaid reinsurance premiums 66.9 62.8
Deferred policy acquisition expenses 54.5 54.3
Deferred federal income taxes 22.7 25.4
Other assets 69.6 76.8
---------- ----------
Total assets $ 2,534.7 $ 2,503.0
========== ==========
Liabilities and Shareholders' Equity
Liabilities:
Reserve for losses and loss adjustment expenses $ 1,232.5 $ 1,238.5
Unearned premiums 366.3 362.3
Other liabilities 134.7 147.7
---------- ----------
Total liabilities 1,733.5 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 594.0 552.5
Unrealized appreciation on investments, net of
deferred federal income taxes 65.7 60.5
Treasury stock, at cost (0.8 million shares in 1997 (15.0) (15.0)
and 1996) ---------- ----------
Total shareholder's equity 801.2 754.5
---------- ----------
Total liabilities and shareholder's equity $ 2,534.7 $ 2,503.0
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
4
==========================================================================
<TABLE>
<S> <C> <C>
CITIZENS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
Six Months Ended
(In millions) June 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 45.0 34.6
Dividends declared to shareholders (3.5) (3.5)
-------- --------
Balance at end of period 594.0 506.6
-------- --------
Unrealized appreciation on investments, net
Balance at beginning of period 60.5 54.7
Appreciation (depreciation) during the period 8.0 (30.8)
(Provision) benefit for deferred federal income taxes (2.8) 10.8
-------- --------
Balance at end of period 65.7 34.7
-------- --------
Treasury stock
Balance at beginning of period (15.0) (3.9)
Shares purchased at cost - (10.8)
-------- --------
Balance at end of period (15.0) (14.7)
-------- --------
Total shareholders' equity $ 801.2 $ 683.1
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
5
==========================================================================
<TABLE>
<S> <C> <C>
CITIZENS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
(In millions) June 30,
1997 1996
--------- --------
Cash flows from operating activities
Net income $ 45.0 $ 34.6
Adjustments to reconcile net income to
net cash provided by operating activities:
Net realized gains on investments (19.1) (15.0)
Deferred federal income tax (benefit) provision (0.1) 0.7
Change in assets and liabilities:
Deferred policy acquisition expenses (0.2) (2.3)
Premiums and notes receivable, net of (0.6) (2.2)
reinsurance premiums
Unearned premiums, net of prepaid (0.1) 6.2
reinsurance premiums
Reserve for losses and loss adjustment expenses, (17.6) 8.2
net of reinsurance recoverable
Other, net (5.2) (16.2)
--------- --------
Net cash provided by operating activities 2.1 14.0
--------- --------
Cash flows from investing activities
Proceeds from sale of available-for-sale debt 220.4 241.9
securities
Proceeds from available-for-sale debt 39.4 90.1
securities maturing or called
Proceeds from sale of available-for-sale 59.2 64.4
equity securities and other investments
Purchases of available-for-sale debt securities (311.9) (401.6)
Purchases of sale of available-for-sale (5.6) (22.0)
equity securities and other investments
Change in net receivable from securities 3.7 5.9
transactions not settled
Other investing activities (0.6) (1.2)
--------- --------
Net cash provided by (used for) investing activities 4.6 (22.5)
--------- --------
Cash flows from financing activities
Dividends paid to shareholders (3.5) (3.5)
Treasury stock purchased, at cost - (10.8)
--------- --------
Net cash used for financing activities (3.5) (14.3)
--------- --------
Change in cash and cash equivalents 3.2 (22.8)
Cash and cash equivalents at beginning of period 36.1 59.1
--------- --------
Cash and cash equivalents at end of period $ 39.3 $ 36.3
========= ========
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.
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 June 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 June 30, 1997, was $16.6 million, or
$0.47 per share, compared to $12.1 million, or $0.34 per share, for
the quarter ended June 30, 1996. Excluding net realized losses and
restructuring charges, both net of taxes, net income increased $6.0
million, to $17.9 million for the quarter ended June 30, 1997, versus
$11.9 million during the comparable period of 1996. The increase in
net income is primarily attributable to an increase in net investment
income of $4.9 million, in addition to a $2.8 million decrease in the
underwriting loss. The growth in net investment income resulted
primarily from an increase in average invested assets, the Company's
shift to higher yielding debt securities, including longer durations
and non-investment grade securities, and an increase in partnership
income. The slight improvement in underwriting results is primarily
due to a decrease in catastrophe losses of $12.7 million and
favorable workers' compensation claims activity in both current and
prior accident years, partially offset by less favorable current year
claims experience in the personal automobile line. Federal income
tax expense increased $0.9 million, to $3.8 million, while the
effective tax rate decreased to 18.6% in the quarter ended June 30,
1997 from 19.3% for the same period in 1996.
Net income for the six months ended June 30, 1997, was $45.0 million,
or $1.27 per share, compared to $34.6 million, or $0.97 per share,
for the six months ended June 30, 1996. Excluding realized gains and
restructuring charges, both net of taxes, net income increased $8.7
million, to $33.5 million for the six months ended June 30, 1997,
versus $24.8 million during the comparable period of 1996. The
increase in net income is primarily attributable to an increase in
net investment income of $8.9 million, increase in realized gains of
$4.1 million and a $2.0 million decrease in the underwriting loss.
The growth in net investment income resulted primarily from an
increase in average invested assets, the Company's shift to higher
yielding debt securities, including longer durations and non-
investment grade securities, and an increase in partnership income.
Realized gains were $19.1 million for the six months ended June 30,
1997 versus $15.0 million for the same period ended June 30, 1996.
The slight improvement in underwriting results is primarily due to a
decrease in catastrophe losses of $12.1 million and favorable
workers' compensation claims activity in both current and prior
accident years, partially offset by less favorable current year
claims experience in the commercial multiple peril and homeowners
lines. Federal income tax expense increased $3.1 million, to $11.7
million, while the effective tax rate increased to 20.6% in the six
months ended June 30, 1997 from 19.9% for the same period in 1996.
Revenues
Net premiums earned decreased $1.0 million, or 0.5%, to $210.1
million for the quarter ended June 30, 1997, resulting from a $7.1
million decrease in the Company's commercial lines partially offset
by a $6.1 million increase in the Company's personal lines. Net
premiums earned increased $4.4 million, or 1.1%, to $420.0 million
for the six months ended June 30, 1997, resulting from an increase of
$14.7 million in the Company's personal segments and a decrease of
$10.3 million in the Company's commercial segments. Contributing to
premium growth are an increase in net premiums earned of $6.6 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 68.2% and 65.0% of total net
premiums earned for the quarters ended June 30, 1997 and 1996,
respectively, and 68.3% and 65.5% of total net premiums earned for
the six months ended June 30, 1997 and 1996, respectively.
<TABLE>
<S> <C> <C> <C> <C>
------------------------------------------
For the Periods Ended Three Months Six Months
June 30, (in millions) 1997 1996 1997 1996
------------------------------------------
Net premiums earned $ 143.3 $ 137.2 $ 287.0 $ 272.3
Losses and loss adjustment expenses 107.9 103.4 221.7 210.0
Policy acquisition and other underwriting expenses 37.7 37.0 77.2 74.2
--------- --------- --------- ---------
Underwriting loss $ (2.3) $ (3.2) $ (11.9) $ (11.9)
========= ========= ========= =========
</TABLE>
Personal segment net premiums earned increased $6.1 million, or 4.4%,
to $143.3 million for the quarter ended June 30, 1997, from $137.2
million for the quarter ended June 30, 1996. Personal segment net
premiums earned increased $14.7 million, or 5.4%, to $287.0 million
for the six months ended June 30, 1997, from $272.3 million for the
six months ended June 30, 1996. This increase is primarily
attributable to a decrease in premiums ceded to the MCCA and to rate
increases in personal automobile and homeowners. 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 0.8% decrease in policies in
force in the personal automobile line since June 30, 1996,
attributable to continued strong competition in Michigan.
The personal segment underwriting loss was $2.3 million and $3.2
million for the quarters ended June 30, 1997 and 1996, respectively.
Catastrophe losses decreased $11.4 million over the prior year second
quarter, primarily in the homeowners line. This was partially offset
by an increase in claim severity in the personal automobile line for
the current accident year. Policy acquisition and other underwriting
expenses increased $0.7 million, or 1.9%, to $37.7 million,
reflecting the growth in net premiums earned and increased technology
expenses, partially offset by reductions in employee related
expenses.
The personal segment underwriting loss was $11.9 million for the six
months ended both, June 30, 1997 and 1996. Catastrophe losses
decreased $10.2 million over the prior year, primarily in the
homeowners line. This was partially offset by 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 $3.0 million, or 4.0%, to $77.2
million, reflecting the growth in net premiums earned and increased
technology expenses, partially offset by reductions in employee
related expenses.
9
=========================================================================
Commercial segment
Commercial segment premiums represented 31.8% and 35.0% of total net
premiums earned for the quarters ended June 30, 1997 and 1996,
respectively. Commercial segment premiums represented 31.7% and
34.5% of the total net premiums earned for the six months ended June
30, 1997 and 1996 respectively.
<TABLE>
<S> <C> <C> <C> <C>
------------------------------------------
For the Periods Ended Three Months Six Months
June 30, (in millions) 1997 1996 1997 1996
------------------------------------------
Net premiums earned $ 66.8 $ 73.9 $ 133.0 $ 143.3
Losses and loss adjustment expenses 49.4 59.2 94.1 106.8
Policy acquisition and other underwriting expenses 17.6 16.8 35.3 34.7
Policyholders' dividends 1.8 1.8 3.4 3.6
--------- --------- --------- ---------
Underwriting (loss) profit $ (2.0) $ (3.9) $ 0.2 $ (1.8)
========= ========= ========= =========
</TABLE>
Commercial segment net premiums earned decreased $7.1 million, or
9.6%, to $66.8 million for the quarter ended June 30, 1997 from $73.9
million for the quarter ended June 30, 1996. Commercial segment net
premiums earned decreased $10.3 million, or 7.2%, to $133.0 million
for the six months ended June 30, 1997 from $143.3 million for the
six months ended June 30, 1996. This decrease is attributable to
rate decreases in rates for workers' compensation, resulting from
continued competitive conditions in Michigan in this line. 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 $2.0 million and $3.9
million for the quarters ended June 30, 1997 and 1996, respectively.
Losses and LAE in the workers' compensation line decreased $12.2
million, or 54.2%, to $10.3 million primarily as a result of
favorable claims activity in both current and prior accident years.
Policy acquisition and other underwriting expenses increased $0.8
million, or 4.8%, to $17.6 million, reflecting increased technology
expenses in 1997.
The commercial segment underwriting profit was $0.2 million for the
six months ended June 30, 1997, compared to a $1.8 million
underwriting loss for the six months ended June 30, 1996. Losses
and LAE in the workers' compensation line decreased $17.7 million, or
42.1%, to $24.3 million primarily as a result of favorable claims
activity in both current and prior accident years. Additionally, the
Company experienced less favorable claims experience in the
commercial multiple peril line. Policy acquisition and other
underwriting expenses increased $0.6 million, or 1.7%, to $35.3
million, reflecting increased technology expenses in 1997.
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:
10
=========================================================================
<TABLE>
<S> <C> <C>
For the period ended June 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 352.8 331.1
current period
Decrease in provision for insured events of (35.6) (14.3)
prior years
----------- -----------
Total incurred losses and LAE 317.2 316.8
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of 157.6 146.6
current period
Losses and LAE attributable to insured events of 170.8 155.2
prior years
----------- -----------
Total payments 328.4 301.8
Change in reinsurance recoverable on unpaid losses 5.2 21.0
----------- -----------
Reserve for losses and LAE, end of period $ 1,232.5 $ 1,327.6
=========== ===========
</TABLE>
As part of an ongoing process, the reserves have been re-estimated
for all prior accident years and were decreased by $35.6 million, and
$14.3 million, for the six months ended June 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 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.
Investment Results
- ------------------
Net investment income before taxes was $26.1 million and $21.2
million for the quarters ended June 30, 1997 and 1996, respectively.
The increase is the result of an increase in average invested assets,
the Company's portfolio shift from equity securities to higher
yielding debt securities, including longer duration and non-
investment grade securities, and increased income from limited
partnership investments of $1.9 million. The average pre-tax yields
on debt securities were 6.8% in 1997 and 6.2% in 1996. Net
investment income after taxes was $21.2 million and $17.9 million for
the quarters ended June 30, 1997 and 1996, respectively. Net
realized losses on investments before taxes were $0.6 million during
the second quarter of 1997 and net realized gains on investments
before taxes were $0.3 million in 1996.
11
=========================================================================
Net investment income before taxes was $49.7 million and $40.8
million for the six months ended June 30, 1997 and 1996,
respectively. The increase is the result of an increase in average
invested assets, the Company's portfolio shift from equity securities
to higher yielding debt securities, including longer duration and non-
investment grade securities, and to increased income from limited
partnership investments of $2.2 million. The average pre-tax yields
on debt securities were 6.8% in 1997 and 6.1% in 1996. Net
investment income after taxes was $41.0 million and $34.1 million for
the six months ended June 30, 1997 and 1996, respectively. Net
realized gains on investments before taxes were $19.1 million and
$15.0 million during the first six 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 $24.4 million, to
$1,629.6 million during the first six months of 1997, from $1,605.2
million at December 31, 1996. Debt securities increased $52.7
million, to $1,451.0 million, from $1,398.3 million, and represented
89.0% and 87.1% of the carrying value of all investments at June 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 $29.2
million decrease in equity securities to $163.1 million in the as of
June 30, 1997. Tax-exempt securities represented 65.5% of total debt
securities at June 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 June 30,
1997 was $101.0 million compared to $92.8 million at December 31,
1996. Unrealized appreciation during the first six months of the year
was $1.7 million for bonds, and unrealized appreciation on equity
securities and other investments was $6.5 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.
Net cash provided by operating activities, for the six months ended
June 30, 1997, was $2.1 million compared to $14.0 million in the
prior year period. This decrease is primarily attributable to an
increase in claim payments during the first six months of 1997.
Net cash provided by (used for) investing activities for the Company
was $4.6 million and ($22.5) million for the first six months of 1997
and 1996, respectively. The increase in net cash provided by
investing activities was attributable to decreased purchases of debt
securities.
Net cash used for financing activities for the Company was $3.5
million and $14.3 million, for the first six months of 1997 and 1996,
respectively. This decrease in net cash used for financing
activities was due to the repurchase of $10.8 million of treasury
stock in 1996.
Shareholders' equity was $801.2 million, or $22.72 per share at June
30, 1997, compared to $754.5, or $21.39 per share at December 31,
1996, resulting from higher net income and 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.
12
=========================================================================
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 4
------
Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The registrant's annual shareholders' meeting was held on May 20,
1997. All six directors nominated for re-election by the board of
directors were named in the proxies for the meeting, which proxies
were solicited pursuant to Regulation 14A of the Securities Exchange
Act of 1934. The following individuals were elected to serve a one
year term:
VOTES FOR WITHHELD
--------- --------
James A. Cotter, Jr. 34,891,177 7,434
Neal J. Curtin 34,890,077 8,534
Dona Scott Laskey 34,889,877 8,734
James R. McAuliffe 34,891,177 7,434
John F. O'Brien 34,885,177 13,434
Eric A. Simonsen 34,890,877 7,734
Shareholders ratified the appointment of Price Waterhouse LLP as the
Independent Public Accountants of Citizens Corporation for 1997:
for 34,885,811; against 1,275; withheld 11,525.
14
=========================================================================
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.
15
=========================================================================
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 August 13, 1997 /s/ John F.O'Brien
--------------- -----------------------------
John F. O'Brien
President and Chief Executive
Officer, and
Chairman of the Board
Dated August 13, 1997 /s/ Edward J. Parry, III
--------------- ------------------------------
Edward J. Parry, III
Vice President, Chief Financial
Officer, Treasurer and Principal
Accounting Officer
16
=========================================================================
Exhibit 11
CITIZENS CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
For the Periods Ended June 30, 1997 and 1996
(in millions, except per share data)
(Unaudited) (Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
---------------- ----------------
1997 1996 1997 1996
---------------- ----------------
Primary:
Average shares outstanding 35.3 35.6 35.3 35.7
Net effect of dilutive
stock options based on the
treasury stock method using
average market price - - - -
---------------- ----------------
TOTALS 35.3 35.6 35.3 35.7
================ ================
Net income available to
shareholders $ 16.6 $ 12.1 $ 45.0 $ 34.6
================ ================
Per share amount $ 0.47 $ 0.34 $ 1.27 $ 0.97
Fully diluted:
Average shares outstanding 35.3 35.6 35.3 35.7
Net effect of dilutive
stock options based on the
treasury stock method using
average market price - - - -
---------------- ----------------
TOTALS 35.3 35.6 35.3 35.7
================ ================
Net income available to
shareholders $ 16.6 $ 12.1 $ 45.0 $ 34.6
================ ================
Per share amount $ 0.47 $ 0.34 $ 1.27 $ 0.97
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 1451
<DEBT-CARRYING-VALUE> 1418
<DEBT-MARKET-VALUE> 1451
<EQUITIES> 163
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1630
<CASH> 39
<RECOVER-REINSURE> 17
<DEFERRED-ACQUISITION> 54
<TOTAL-ASSETS> 2535
<POLICY-LOSSES> 1233
<UNEARNED-PREMIUMS> 366
<POLICY-OTHER> (1)
<POLICY-HOLDER-FUNDS> 6
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 801
<TOTAL-LIABILITY-AND-EQUITY> 2535
420
<INVESTMENT-INCOME> 50
<INVESTMENT-GAINS> 19
<OTHER-INCOME> 3
<BENEFITS> 317
<UNDERWRITING-AMORTIZATION> 80
<UNDERWRITING-OTHER> 38
<INCOME-PRETAX> 57
<INCOME-TAX> 12
<INCOME-CONTINUING> 45
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.27
<RESERVE-OPEN> 1239
<PROVISION-CURRENT> 353
<PROVISION-PRIOR> (36)
<PAYMENTS-CURRENT> 158
<PAYMENTS-PRIOR> 171
<RESERVE-CLOSE> 1233
<CUMULATIVE-DEFICIENCY> 5
</TABLE>
