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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM: TO
1-11714
(COMMISSION FILE NUMBER)
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CITIZENS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3178765
(STATE OR OTHER JURISDICTION, (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(508) 855-1000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
(TITLE OF EACH CLASS OF STOCK) (NAME OF EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT: NONE
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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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Based on the closing sales price of February 28, 1997 the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
$153,618,050.
The number of shares outstanding of the registrant's common stock, $0.01 par
value, was 35,269,100 shares outstanding as of February 28, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Citizens Corporation's Proxy Statement for Annual Meeting of
Shareholders to be held May 20, 1997 (the Proxy Statement) are incorporated by
reference in Part III.
Total number of pages, including cover page--1 of 61
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PART I
ITEM 1. BUSINESS
ORGANIZATION
Citizens Corporation is a Delaware Corporation and non-insurance holding
company with wholly-owned subsidiaries: Citizens Insurance Company of America
(Citizens Insurance), a Michigan corporation; Citizens Insurance Company of
the Midwest, an Indiana corporation; and Citizens Insurance Company of Ohio,
an Ohio corporation; (collectively Citizens Insurance Group) and Citizens
Management Inc. (CMI). Citizens Corporation and its subsidiaries are
hereinafter collectively referred to as "the Company." Approximately 82.5% of
the Company is owned by The Hanover Insurance Company (Hanover). Hanover is a
wholly-owned subsidiary of Allmerica Property & Casualty Companies, Inc.
(APY), a Delaware corporation. Allmerica Financial Corporation (AFC)
indirectly owns 59.5%, or approximately 35.5 million shares, of APY. On
February 19, 1997, AFC and APY entered into an Agreement and Plan of Merger
pursuant to which AFC will acquire all of the outstanding shares of common
stock of APY that it does not already own. The consummation of the merger is
subject to the satisfaction of various conditions, including the approval of
regulatory authorities.
In February 1993, Citizens Insurance issued 1.0 million shares of Series A
Preferred Stock to Hanover. Effective March 31, 1993, Citizens Corporation
issued 1.0 million shares of its authorized Series A Preferred Stock to
Hanover in exchange for the Citizens Insurance Preferred Stock. On June 30,
1995, Citizens Insurance redeemed its 1.0 million shares of Series A Preferred
Stock from Citizens Corporation for $100.0 million and Citizens Corporation
redeemed its 1.0 million shares of Series A Preferred Stock from Hanover for
$100.0 million.
On November 17, 1994, Citizens Insurance Company of Ohio was established and
as of January 1, 1995, was admitted to do business in the state of Ohio.
Business operations began on February 13, 1995. On September 1, 1994, Citizens
Insurance Company of the Midwest was established and as of October 2, 1995 was
admitted to do business in the state of Indiana. Business operations began on
March 8, 1996.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company's insurance operations are segmented into personal and
commercial lines based on common underlying risks and customer types for
individual products in those lines. Information with respect to each of the
Company's segments is included in "Segment Results" on pages 14 and 15 in
Management's Discussion & Analysis of Results of Operations and Financial
Condition and in Note 15 on pages 43 and 44 of the Notes to the Consolidated
Financial Statements included in Financial Statements and Supplementary Data
of this Form 10-K.
GENERAL
The Company, through Citizens Insurance, is one of the largest underwriters
of personal and commercial property and casualty insurance, in terms of market
share, in Michigan. The Company has a historically strong regional focus and
it places heavy emphasis on underwriting profitability and loss reserve
adequacy. Through an independent agency force, the Company underwrites
personal and commercial segments of insurance including: personal automobile,
homeowners, workers' compensation, commercial automobile and commercial
multiple peril.
The Company maintains a clear focus on the core disciplines of underwriting,
pricing, claims adjusting, marketing and sales. In particular, the Company
seeks to achieve and maintain underwriting profitability in each of its five
major product lines. The Company's overall strategy is to improve
profitability through operating efficiencies and to pursue measured growth in
existing markets and, as opportunities arise, in new markets which offer long-
term growth potential. In addition, by focusing on its established major
segment product lines, the Company typically does not pursue the development
of new products with relatively unpredictable risk profiles.
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Over the last ten years, Citizens Insurance has consistently reported
stronger growth in statutory net premiums written than the property and
casualty insurance industry as a whole. Citizens Insurance's average premium
growth rate was 8.9% for the ten year period ended December 31, 1996 and its
average statutory combined ratio for the same period was 100.1. The industry
average premium growth rate was 6.2% for the ten year period ended December
31, 1996 and the industry average statutory combined ratio for the same period
was 108.2. (Industry estimates are based on data published by A.M. Best.)
The property and casualty insurance industry is highly cyclical. The
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, such as
inflationary pressures, that may affect the adequacy of reserves.
SEGMENT PRODUCT LINES
Citizens underwrites personal and commercial property and casualty insurance
coverage. The personal segment principally includes personal automobile and
homeowners coverage. The commercial segment principally includes workers'
compensation, commercial automobile and commercial multiple peril coverage.
Personal automobile coverage insures individuals against losses incurred
from personal bodily injury, bodily injury to third parties, property damage
to an insured's vehicle, and property damage to other vehicles and other
property.
Homeowners coverage insures individuals against losses to their residences
and personal property, such as those caused by fire, wind, hail, water damage
(except for flooding), theft, and vandalism, and against third party liability
claims.
Workers' compensation coverage insures employers against employee medical
and indemnity claims resulting from injuries related to work. Workers'
compensation policies are often written in conjunction with other commercial
policies.
Commercial automobile coverage insures businesses against losses incurred
from personal bodily injury, bodily injury to third parties, property damage
to an insured's vehicle and property damage to other vehicles and other
property.
Commercial multiple peril coverage insures businesses against third-party
liability from accidents occurring on their premises or arising out of their
operations, such as injuries sustained from products sold. It also insures
business property for damage, such as that caused by fire, wind, hail, water
damage (except for flooding), theft and vandalism.
The Company also offers a variety of other products, such as inland marine,
umbrella, fire, other liability and surety insurance. The Company provides
self-insurance administration services for individual risks and groups, and
writes excess reinsurance coverage for the self-insurance programs it
administers through its wholly-owned subsidiary, CMI.
CUSTOMERS, MARKETING AND DISTRIBUTION
The Company's insurance products are marketed in Michigan through
approximately 3,800 licensed independent insurance agents, who are paid on a
commission basis, associated with approximately 525 insurance agencies. The
Company also markets its products in Indiana and Ohio through approximately
1,700 licensed independent insurance agents associated with approximately 200
insurance agencies. In 1996, each agency representing the Company wrote an
average of approximately $1.2 million of Company premiums. In 1996, over 290
agencies wrote Company premiums in excess of $1.0 million, 131 wrote over $2.0
million, 68 wrote over
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$3.0 million and 32 wrote over $4.0 million. The three largest agencies wrote
approximately $19.3 million, $12.9 million, and $10.7 million of Company
premiums, respectively.
The Company seeks to establish long-term relationships with larger, well-
established agencies. In selecting agencies for new appointments, the Company
considers the following criteria: a record of profitability and financial
stability; an experienced and professional staff; a marketing plan for future
growth; and a perpetuation plan for successor management. The Company believes
that by improving its relationship and stature with its most productive
agents, it will receive a greater share of its agent's higher quality
writings. To solidify its relationships with higher quality agencies and take
advantage of local knowledge of operating territories, the Company maintains
four branch offices and twenty five claims offices located throughout
Michigan, one branch office and three claims office in Indiana and one branch
office in Ohio.
Since the Company offers its products only through independent insurance
agencies, its relationships with those agencies are critical to the continued
growth of its business. Accordingly, the Company establishes strong
relationships with quality agencies by offering enhanced profit sharing
arrangements, recognition awards and internal support for agency operations.
The Company seeks to become the preferred provider of quality insurance agents
whom the Company believes will provide it with customers with average or
above-average profit characteristics. The Company has a comprehensive program
to recognize and honor those agents who excel, as measured by profitability
and premium volume. By offering its independent agents a consistent source of
personal and commercial property and casualty insurance products, the Company
believes that an increasing number of its agents will rely on the Company as
their principal supplier of insurance products.
The Company has been successful in developing and marketing affinity
franchise groups in both personal and commercial segments that are tailored
for members of associations and organizations in Michigan, Indiana and Ohio.
The associations may choose to make the Company's programs available to their
members based on an evaluation of the Company's rates, service, and
regulation, but each risk is individually underwritten and each customer is
issued a separate policy. Associations and organizations receive no payment
for making Citizens' franchise programs available to their members. As of
December 31, 1996, the Company had approximately 110 affinity franchise
programs in-force, 82 of which were in personal segments and 28 of which were
in commercial segments.
Agents are authorized to bind the Company on risks. The agents are guided by
the Company's written underwriting rules and practices. These rules and
practices set forth eligibility rules for various policies and coverages,
unacceptable risks, and maximum and minimum limits of liability. Violation of
these rules and practices is grounds for termination of the agency's contract
to represent the Company.
During 1996, the Company began the process of consolidating certain
operations of Hanover and Citizens which are intended to achieve process
improvements and efficiencies in operations. These operations include claims,
finance, policy processing and administrative functions.
The Company is not dependent upon a single customer or any few customers for
which the loss of any one or more would have a material adverse effect upon
the Company's operations.
REINSURANCE FACILITY
Michigan's no-fault law requires insurers to provide unlimited medical
coverage to automobile accident victims. In response, the Michigan
Catastrophic Claims Association (MCCA) was established to spread the costs of
medical coverage to all insureds. The MCCA acts as a reinsurer for all
Michigan automobile insurers, reimbursing for amounts paid on personal
protection insurance losses in excess of $0.25 million. At December 31, 1996,
the MCCA was the only reinsurer which represented 10% or more of the Company's
reinsurance business. Participation is required for all Michigan-licensed
automobile and motorcycle insurers. The MCCA assesses its member companies an
annual premium on each of such member company's policies covering automobile
and motorcycles written in Michigan. The assessment is passed on directly to
policyholders. The Company cedes a significant portion of its private
passenger automobile premiums to the MCCA. Ceded
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premiums earned to MCCA in 1996, 1995, and 1994 were $50.5 million, $66.8
million and $80.0 million, respectively. Losses and LAE ceded to MCCA in 1996,
1995, and 1994 were ($52.9) million, $62.9 million and $24.2 million,
respectively. In 1996, the MCCA's favorable development on prior year reserves
exceeded the losses and LAE incurred during the year. The aggregate losses and
LAE ceded to the MCCA have no impact on the Company's consolidated statements
of income.
At December 31, 1996 and 1995, the Company had reinsurance recoverable on
paid and unpaid losses of $292.0 million and $354.9 million, respectively,
from the MCCA. The amount recoverable from the MCCA is a current estimate of
future payments to be made to the Company by the MCCA for reimbursements of
amounts for currently pending personal protection insurance (PIP) claims and
PIP claims incurred but not yet reported. The Company bills the MCCA on a
quarterly basis and all amounts have been paid when due. Because PIP claims
whose payments will be reimbursed by the MCCA involve amounts to be paid over
many years, actual amounts to be owed to the Company by the MCCA in the future
are subject to change based on claims paid. The Company bills the MCCA based
upon amounts actually paid by the Company to policyholders, however, there can
be no assurance that the Company will recover the full amount of reinsurance
payments owed to it by the MCCA. As of June 30, 1996 and 1995, the MCCA had
estimated surplus of $1.7 billion and $666.2 million, respectively, compared
to an estimated deficit of $22.0 million, as of December 31, 1994. Management
believes that in the current regulatory climate, the Company is unlikely to
incur any material loss or become unable to pay claims as a result of
nonpayment of amounts owed to it by the MCCA because (i) the MCCA is currently
in a surplus position, (ii) the payment obligations of the MCCA are extended
over many years, resulting in relatively small current payment obligations in
terms of MCCA total assets, (iii) all amounts owed to the Company by the MCCA
have been paid when due, and (iv) the MCCA is supported by assessments
permitted by statute.
COMPETITION
The property and casualty industry is highly competitive among national
agency companies, direct writers, and regional and local insurers on the basis
of both price and service. Many of these Companies are larger and have greater
financial and technical resources than Citizens. National agency companies
sell insurance through independent agents and usually concentrate on
commercial lines of property and casualty insurance. Direct writers dominate
the personal lines of property and casualty insurance and operate on a
national, regional, or single state basis. Regional and local companies sell
through independent agents in one or several states in the same region and
compete in both personal and commercial lines. In addition, because the
Company markets exclusively through independent agents, Citizens competes with
other independent agency companies for business in each of the agencies
representing it.
In Michigan, the Company competes in personal lines with a number of direct
writers and regional and local companies, several of which are larger than the
Company. Citizens Insurance is the largest writer of property and casualty
insurance in Michigan through independent agents. National agency companies
have not been important factors in Michigan in personal lines of property and
casualty insurance in previous years because of their tendency to emphasize
commercial lines and because Michigan's insurance regulatory environment would
require such companies to develop and implement special incentive programs
designed to encourage agents to identify and sell insurance to individuals
with lower risk profiles consistent with the constraints of Michigan law.
However, in February 1996, an amendment to the Essential Insurance Act became
effective in Michigan. This amendment eliminates personal automobile and
homeowners insurance territorial rating restrictions and limits merit ratings
for automobile policies. The Company cannot predict the effect of this new
legislation, but believes this law may continue to encourage national
companies to return or enter into the state in commercial and personal lines.
The Company also faces competition from the two largest direct writers in
Michigan, State Farm Group and Auto Club Michigan Group, in the personal
automobile line. In the homeowners line, the Company's principal competition
in Michigan is also from direct writers, including State Farm Group. The
Company is the second leading writer in Michigan in its three primary
commercial lines combined: commercial automobile,
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workers' compensation, and commercial multiple peril. The Company faces
competition principally from national agency companies, and regional and local
companies, many of which have financial resources substantially greater than
those of the Company.
Over the past several years, the industry has operated in a soft market. In
Michigan, Citizens workers' compensation line is the largest commercial line
in terms of premiums written. Over the past few years, competition has caused
Citizens to reduce workers' compensation insurance rates four times; 8.5%,
7.0%, 6.4% and 8.7% effective May 1, 1995, December 1, 1995, June 1, 1996 and
March 1, 1997 respectively. Beginning in 1995, Citizens Insurance Group
experienced an increase in competition in affinity franchise group sales as a
result of the January 1995 order by the Michigan Insurance Commissioner which
allowed competitors to offer similar products. While management has taken
steps to increase penetration in affinity franchise groups and initiated other
marketing programs, the Company believes that competition for affinity group
business and for other premiums in the property and casualty insurance market
will continue and may have an adverse impact on rates and profitability.
UNDERWRITING
Pricing
Citizens Insurance Group seeks to apply profit-driven underwriting and
pricing practices in both hard and soft markets, expand its quality agency
relationships and maintain a consistent presence in the markets for its five
core product lines. This strategy seeks to achieve consistent profitability
with substantial growth in net premiums during hard markets and more modest
growth during soft markets.
The Company's position as one of the largest insurers in terms of net
premiums written in Michigan allows it to use its own loss experience in
determining premium rates. The Company's rates for personal and commercial
automobile and homeowners insurance in Michigan are based on its own
experience.
In Michigan, and in Indiana, the Company develops rates for commercial lines
of general liability and property by using loss cost data from the Insurance
Service Office (ISO), an independent organization providing industry-wide loss
experience in all major product lines. To this cost data, the Company adds its
own experience in these lines. In the workers' compensation line in Michigan,
the Company uses its own experience to determine rates for its largest
classifications, and uses industry-wide experience to help set rates for
smaller classifications. In Ohio, the Company has not yet developed enough
loss experience on which to make rate calculations, and uses loss cost
information from the ISO, along with market comparisons.
Claims
The Company employs experienced claims adjusters, appraisers, medical
specialists, managers, and attorneys in order to manage its claims. The
Company has field claims offices strategically located throughout its
operating territories. To ensure efficient claims settlements, almost all
claims are settled by adjusters located in these claims offices. All claims
office staff members work closely with the agents to settle claims rapidly and
cost-effectively.
Claims office adjusting staff are supported by general adjusters on large
property losses, by automobile and heavy equipment damage appraisers on
automobile material damage losses, and by medical specialists whose principal
concentration is in workers' compensation and no-fault automobile injury
cases. In addition, the claims offices are supported by staff attorneys who
specialize in litigation defense and claim settlements. The Company also has a
special unit which investigates suspected insurance fraud and abuse.
Citizens Insurance has instituted a program under which participating agents
have settlement authority for small property loss claims. Based upon program
experience, the Company believes that this program contributes
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to low loss adjustment expense (LAE) experience and to its higher customer
satisfaction ratings by permitting the early and direct settlement of such
small claims. Approximately 26.6% and 28.1% of the number of total paid claims
reported to Citizens Insurance in the years ended December 31, 1996 and 1995,
respectively, were settled under this program.
Citizens Insurance continues to use the managed care expertise of the AFC's
Corporate Risk Management Services segment in the analysis of the provision of
medical services in the management of medical claims in both the workers'
compensation and automobile lines. The Company believes that its use of this
capability reduces costs and serves its customers more efficiently. In late
1995, Citizens Insurance introduced Citizens/Care, which is a network of
Preferred Provider Agreements which focuses on managing medical cost claims
and serving customers more efficiently.
Property and casualty insurers are subject to claims arising out of
catastrophes which may have a significant impact on their results of
operations and financial condition. The Company may experience catastrophe
losses in the future which could have a material adverse impact on the
Company. Catastrophes can be caused by various events including hurricanes,
earthquakes, tornadoes, wind, hail, fires, and explosions, and the incidence
and severity of catastrophes are inherently unpredictable. Although
catastrophes can cause losses in a variety of property and casualty lines,
homeowners and business property insurance have in the past generated the vast
majority of catastrophe related claims.
RESERVES FOR UNPAID LOSSES AND LAE
See "Reserve for Losses and Loss Adjustment Expenses" on pages 16-18 of
Management's Discussion & Analysis of Results of Operations and Financial
Condition of this Form 10-K which are incorporated into this item by
reference.
The Company's actuaries review the reserves each quarter and certify the
reserves annually as required for the Company's statutory filings. The Company
does not use discounting techniques in establishing reserves for losses and
LAE, nor has it participated in any loss portfolio transfers or other similar
transactions.
The Company regularly reviews its reserving techniques, its overall reserve
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 if 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 estimated reserves could have a material impact on the results of
operations.
Significant periods of time often elapse between the occurrence of an
insured loss, the reporting of the loss to the Company, and the Company's
payment of that loss. To recognize liabilities for unpaid losses, the Company
establishes reserves as balance sheet liabilities representing estimates of
amounts needed to pay reported and unreported losses and LAE.
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ANALYSIS OF LOSSES AND LOSS ADJUSTMENT EXPENSES RESERVE DEVELOPMENT
The following table sets forth the development of net reserves for unpaid
losses and LAE from 1986 through 1996 for the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net reserve for losses
and LAE(1)............. $772.1 $772.7 $739.9 $673.7 $598.8 $534.9 $429.6 $387.8 $329.8 $265.2 $200.0
Cumulative amount paid
as of(2):
One year later......... -- 239.1 223.4 204.5 195.3 196.2 160.2 152.4 130.8 108.5 86.7
Two years later........ -- -- 333.4 309.0 295.0 295.4 255.4 227.9 202.7 167.6 134.9
Three years later...... -- -- -- 363.3 351.4 349.2 306.8 281.4 240.7 203.8 166.3
Four years later....... -- -- -- -- 378.3 380.0 334.7 310.8 269.7 220.9 182.9
Five years later....... -- -- -- -- -- 393.4 351.0 325.1 287.8 237.0 192.8
Six years later........ -- -- -- -- -- -- 360.1 335.9 296.5 246.9 201.7
Seven years later...... -- -- -- -- -- -- -- 343.0 303.7 254.0 208.2
Eight years later...... -- -- -- -- -- -- -- -- 308.9 259.4 213.5
Nine years later....... -- -- -- -- -- -- -- -- -- 263.4 217.5
Ten years later........ -- -- -- -- -- -- -- -- -- -- 220.6
Net reserve re-estimated
as of(3):
End of year............ 772.1 772.7 739.9 673.7 598.8 534.9 429.6 387.8 329.8 265.2 200.0
One year later......... -- 714.3 692.9 661.3 592.4 530.3 436.2 376.8 330.7 275.2 220.4
Two years later........ -- -- 634.0 609.3 578.4 530.5 451.0 388.1 326.9 272.9 228.7
Three years later...... -- -- -- 562.6 543.9 518.6 457.9 404.5 329.3 266.1 225.6
Four years later....... -- -- -- -- 518.4 507.7 454.4 415.2 353.5 277.4 226.9
Five years later....... -- -- -- -- -- 496.4 443.9 413.3 361.4 293.7 232.7
Six years later........ -- -- -- -- -- -- 437.8 407.0 361.4 300.8 243.9
Seven years later...... -- -- -- -- -- -- -- 405.0 359.2 302.5 248.6
Eight years later...... -- -- -- -- -- -- -- -- 359.2 300.7 250.5
Nine years later....... -- -- -- -- -- -- -- -- -- 303.9 248.8
Ten years later........ -- -- -- -- -- -- -- -- -- -- 256.0
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Cumulative Redundancy
(Deficiency)(4,5)...... $ -- $ 58.4 $105.9 $111.1 $ 80.4 $ 38.5 $ (8.2) $(17.2) $(29.4) $(38.7) $(56.0)
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- --------
(1) Sets forth the net estimated liability for unpaid losses and LAE recorded
at the balance sheet date for each of the indicated years; represents the
net estimated amount of losses and LAE for claims arising in the current
and all prior years that are unpaid at the balance sheet date, including
incurred but not reported ("IBNR") reserves.
(2) Cumulative loss and LAE payments made in succeeding years for losses
incurred prior to the balance sheet date.
(3) Re-estimated amount of the previously recorded liability based on
experience for each succeeding year; increased or decreased as payments
are made and more information becomes known about the severity of the
remaining unpaid claims.
(4) Cumulative deficiency or redundancy at December 31, 1996 of the net
reserve amounts shown on the top line of the corresponding column. A
redundancy in reserves means the reserves established in prior years
exceeded actual losses and LAE or were reevaluated at more than the
original reserved amount. A deficiency in reserves means the reserves
established in prior years were less than actual losses and LAE or were
reevaluated at more than the original reserved amount.
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(5) The following table sets forth the development of gross reserve for unpaid
losses and LAE from 1992 through 1996 for the Company:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Reserve for losses and LAE:
Gross liability................. $1,238.5 $1,291.6 $1,196.6 $1,076.7 $867.8
Reinsurance recoverable......... 466.4 518.9 456.7 403.0 269.0
-------- -------- -------- -------- ------
Net liability................... $ 772.1 $ 772.7 $ 739.9 $ 673.7 $598.8
======== ======== ======== ======== ======
One year later:
Gross re-estimated liability.... $1,111.0 $1,063.8 $1,004.6 $898.2
Re-estimated recoverable........ 396.7 370.9 343.3 305.8
-------- -------- -------- ------
Net re-estimated liability...... $ 714.3 $ 692.9 $ 661.3 $592.4
======== ======== ======== ======
Two years later:
Gross re-estimated liability.... $ 986.5 $ 896.9 $853.0
Re-estimated recoverable........ 352.5 287.6 274.6
-------- -------- ------
Net re-estimated liability...... $ 634.0 $ 609.3 $578.4
======== ======== ======
Three years later:
Gross re-estimated liability.... $ 862.0 $785.4
Re-estimated recoverable........ 299.4 241.5
-------- ------
Net re-estimated liability...... $ 562.6 $543.9
======== ======
Four years later:
Gross re-estimated liability.... $780.9
Re-estimated recoverable........ 262.5
------
Net re-estimated liability...... $518.4
======
</TABLE>
RATING AGENCIES
In each year since 1970, Citizens Insurance has been rated "A+ (Superior)"
by A.M. Best. This is the second highest rating out of fifteen rating levels
established by A.M. Best for the insurance industry. Ratings range from "A++
(Superior)" to "F (In Liquidation)." According to A.M. Best, the objective of
this rating is to evaluate factors that effect the overall performance of an
insurance company. A.M. Best uses this information to provide an opinion of a
company's operating performance, financial strength and ability to meet the
obligations to policy holders. The quantitative and qualitative evaluations
are used to determine financial condition and operating performance. The
quantitative evaluations are based on an analysis of each company's reported
financial performance for at least the previous five fiscal years. Management
believes that its A.M. Best rating is an important factor in marketing its
products to agents and customers.
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EMPLOYEES
At December 31, 1996, the Company had approximately 1,625 employees, none of
whom were represented by a labor union. Management believes that its relations
with employees are good.
REINSURANCE
See "Reinsurance" on pages 18 and 19 of Management's Discussion and Analysis
of Results of Operations and Financial Condition and Note 6 on pages 36 and
37, respectively, of the Notes to Consolidated Financial Statements included
in Financial Statements and Supplementary Data of this Form 10-K which are
incorporated into this item by reference. See also "Reinsurance Facility" on
page 4 of this Form 10-K which is incorporated into this item by reference.
INVESTMENT OPERATIONS
See "Investment Portfolio" on page 19 of Management's Discussion and
Analysis of Results of Operations and Financial Condition and Note 3 on pages
31-34 of the Notes to Consolidated Financial Statements included in Financial
Statements and Supplementary Data of this Form 10-K which are incorporated
into this item by reference.
ITEM 2. PROPERTIES
The Company owns a 110,600 square foot office building in Howell, Michigan,
approximately 40 miles outside of Detroit. This building serves as the
Company's headquarters and accommodates corporate administration, marketing,
information services, claims, and treasury. The Company also owns a 175,000
square foot facility in Howell near its current headquarters which
accommodates underwriting, claims, marketing functions, and the Eastern
Michigan branch operations.
In addition, the Company leases an aggregate of approximately 55,000 square
feet in three Michigan branch offices--in Grand Rapids, Gaylord, and
Escanaba--one branch office located in Indianapolis, Indiana--and one branch
office located in Columbus, Ohio. The Company also leases space for its claims
offices throughout Michigan and Indiana.
Management believes that the Company's owned and leased office space is
adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth
quarter of the fiscal year covered by this Form 10-K.
10
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
COMMON STOCK AND SHAREHOLDER OWNERSHIP
The common stock of Citizens Corporation is traded on the New York Stock
Exchange under the symbol "CZC." On February 28, 1997, the Company had 202
shareholders of record and 35.3 million shares outstanding. On the same date,
the trading price of the Company's common stock was $24 7/8 per share.
COMMON STOCK PRICES AND DIVIDENDS
<TABLE>
<CAPTION>
HIGH LOW DIVIDENDS
------- ------- ---------
<S> <C> <C> <C>
1996
First Quarter....................................... $20 1/4 $18 1/2 $0.05
Second Quarter...................................... $19 5/8 $17 5/8 $0.05
Third Quarter....................................... $22 3/8 $18 3/8 $0.05
Fourth Quarter...................................... $22 3/4 $20 1/8 $0.05
1995
First Quarter....................................... $17 7/8 $16 1/8 $0.05
Second Quarter...................................... $18 1/8 $16 3/8 $0.05
Third Quarter....................................... $19 1/4 $16 5/8 $0.05
Fourth Quarter...................................... $19 5/8 $17 3/8 $0.05
</TABLE>
1997 DIVIDEND SCHEDULE
Citizens Corporation declared a cash dividend of $0.05 on March 4, 1997,
which is payable on May 15, 1997. The record date for such dividend is May 1,
1997.
Dividends by the Company are funded from dividends paid to the Company from
Citizens Insurance, which are subject to restrictions imposed by state
insurance laws and regulations with respect to dividends paid to the Company.
See "Liquidity and Capital Resources" on pages 19 and 20 of Management's
Discussion & Analysis of Results of Operations and Financial Condition and
Note 14 on page 43 of the Notes to Consolidated Financial Statements included
in Financial Statements and Supplementary Data of this Form 10-K which are
incorporated into this item by reference.
The payment of any future dividends will be a business decision to be made
by the Board of Directors from time to time based upon the results of
operations and financial condition of the Company and such other factors as
the Board of Directors consider to be relevant.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net premiums written........... $ 838 $ 834 $ 779 $ 743 $ 698
REVENUE:
Net premiums earned.......... 836 818 763 713 675
Net investment income........ 89 79 75 74 77
Net realized gain (loss) on
investments................. 15 4 (1) 31 9
Total revenues............... 941 901 839 819 761
Statutory underwriting (loss)
gain........................ (3) 7 (39) 0 8
GAAP underwriting gain
(loss)...................... 1 13 (31) 10 9
STATUTORY COMBINED RATIO(1):
Losses and loss adjustment
expenses.................... 72.3 71.0 76.2 71.2 70.8
Underwriting expenses........ 27.2 26.8 27.6 27.0 26.6
Dividends to policyholders... 0.9 0.8 0.7 0.7 0.5
Combined ratio............... 100.4 98.6 104.5 98.9 97.9
Industry combined ratio...... 107.0 106.5 108.5 106.9 115.8
Income before cumulative ef-
fect of changes in account-
ing......................... 84 75 45 88 73
Net income................... 84 75 45 83 73
PER COMMON SHARE DATA(2):
Income before realized gain
(loss) on investments, net
of federal income taxes..... 2.10 1.95 1.16 1.82 1.73
Realized gain (loss) on
investments, net of federal
income taxes................ 0.27 0.07 (0.01) 0.57 0.17
Cumulative effect of changes
in accounting............... -- -- (0.02) (0.14) --
Net income................... 2.37 2.02 1.13 2.25 1.90
Dividends declared to common
shareholders................ 0.20 0.20 0.20 0.20 N/A
Book value per share......... 21.39 19.04 15.13 14.96 11.42
Market value per share....... 22.50 18.63 17.00 19.63 N/A
AT YEAR END(3):
Total assets................. 2,503 2,471 2,334 2,153 1,655
Total shareholders' equity... 755 683 646 640 412
Total statutory surplus...... 624 504 539 532 322
RESERVES:
Losses and loss adjustment
expenses.................... 1,239 1,292 1,197 1,077 868
Unearned premiums............ 362 351 332 310 270
</TABLE>
- --------
(1) Industry data is from Best's Aggregates and Averages for the Property
Casualty Industry-Stock Companies.
(2) Earnings per common share prior to 1993 reflects the reorganization and
exchange of common and preferred shares between Citizens Corporation, The
Hanover Insurance Company and Citizens Insurance Company of America, which
occurred in February 1993, and the shares issued in conjunction with the
initial public offering. Certain per common share data not applicable
prior to 1993.
(3) Total assets and reserve for losses and loss adjustment expenses have been
restated to retroactively apply the provisions of Statement of Financial
Accounting Standards No. 113, "Accounting and Reporting for Reinsurance of
Short-duration and Long-duration Contracts."
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
INTRODUCTION
The results of operations for Citizens Corporation and subsidiaries ("the
Company") include the accounts of Citizens Corporation ("Citizens"), a non-
insurance holding company, Citizens Insurance Company of America ("Citizens
Insurance"), Citizens Insurance Company of Ohio, Citizens Insurance Company of
the Midwest, and Citizens Management Inc.
RESULTS OF OPERATIONS
Consolidated Overview
1996 COMPARED TO 1995
Net income in 1996 increased $9.2 million to $84.1 million, compared to
$74.9 million in 1995. Excluding net realized gains of $9.7 million and
severance charges of $0.7 million, both net of taxes, net income increased
$2.6 million to $75.1 million in 1996. The increase in net income is primarily
attributable to an increase in investment income and realized gains of $10.1
million and $11.2 million, respectively, partially offset by a decrease in
underwriting profit of $12.7 million. The increase in investment income and
realized gains was primarily the result of the Company's portfolio shift, in
1996, from equity securities to higher yielding debt securities. 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 $15.3 million in 1996 compared to $8.0 million
in 1995. The increases in catastrophes and claims activity were partially
offset by favorable claims experience on current and prior accident years in
the personal automobile line. Federal income tax expense decreased $0.3
million to $21.4 million, while the effective tax rate decreased from 22.5% in
1995 to 20.3% in 1996.
Net premiums earned increased $17.7 million, or 2.2%, to $835.5 million
during 1996, representing increases of $18.4 million, or 3.4% in the personal
segment, and decreases of $0.7 million, or 0.2%, in the commercial segment.
This overall growth is due to increases in net premiums earned of $11.4
million, or 22.5%, to $62.1 million in Ohio and Indiana resulting from
expansion in these states. Price increases contributed to net premium growth
in all major lines except the workers' compensation line where rate reductions
and competitive conditions continue in Michigan. Continued growth in policies
in force in the commercial automobile and commercial multiple peril lines of
3.7% and 13.2%, respectively, were offset by decreases in personal automobile
and workers' compensation policies in force of 3.0% and 1.4% respectively.
1995 COMPARED TO 1994
Net income in 1995 increased $30.3 million to $74.9 million, compared to
$44.6 million in 1994. Excluding realized gains and losses and cumulative
effect of changes in accounting, both net of taxes, net income increased $26.5
million to $72.5 million in 1995. The increase in net income is primarily
attributable to an increase of $44.1 million in overall underwriting results
from a loss of $30.7 million in 1994 to a gain of $13.4 million in 1995. This
increase resulted primarily from a return to more normal weather conditions in
Michigan and to favorable claims experience on current and prior accident
years in the workers' compensation and personal automobile lines. These
factors were somewhat offset by an increase in the effective tax rate from
virtually zero in 1994 to 22.5% in 1995, resulting from the improvement in
underwriting results, increases in realized gains and a decrease in the
proportion of pre-tax income attributable to tax-exempt interest.
Net premiums earned increased $55.1 million, or 7.2%, to $817.8 million
during 1995, representing increases of $40.1 million, or 8.1%, and $15.0
million, or 5.6%, in the personal and commercial segments, respectively. These
increases are attributable to price increases in the homeowners and automobile
lines. Continued growth in policies in force in the commercial automobile and
commercial multiple peril lines of 12.5% and 11.6%, respectively, also
contributed to the increase in net premiums earned. These items were partially
offset by a 5.8% decrease in personal automobile policies in force.
13
<PAGE>
SEGMENT RESULTS
Personal Segment
Personal segment premiums represented 66.4%, 65.6% and 65.0% of total net
premiums earned in 1996, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Net premiums earned....................... $ 554.6 $ 536.2 $ 496.1
Losses and loss adjustment expenses (LAE)
incurred................................. 404.1 413.6 391.0
Policy acquisition expenses............... 112.5 108.1 99.5
Other underwriting expenses............... 39.3 41.1 37.9
---------- ---------- ----------
Underwriting loss......................... $ (1.3) $ (26.6) $ (32.3)
========== ========== ==========
</TABLE>
Personal segment net premiums earned increased $18.4 million, or 3.4%, to
$554.6 million in 1996. This growth is attributable to price increases in the
personal automobile and homeowners lines. The growth is partially offset by a
3.0% decrease in policies in force in the personal automobile line,
attributable to the Company's selective reduction of writings in Michigan when
rates were viewed as inadequate and to continued strong competition in
Michigan. While management has taken steps to increase penetration in affinity
groups and has initiated other marketing programs, heightened competition may
continue to result in reduced growth in the personal segment.
Personal segment net premiums earned increased $40.1 million, or 8.1%, to
$536.2 million in 1995. This increase reflects price increases in the personal
automobile and homeowners lines, and was partially offset by the decrease in
personal automobile policies in force of 5.8%. This decrease is attributable
to the Company's selective reduction of writings in Michigan when rates were
viewed as inadequate and to increased competition in affinity group franchise
sales as a result of the January 1995 order by the Michigan Insurance
Commissioner which has permitted competitors to offer similar products.
The personal segment underwriting loss in 1996 was $1.3 million compared to
$26.6 million in 1995. The improvement in underwriting results reflects
favorable claims activity in both current and prior accident years in the
personal automobile line attributable to continued improvements in severity.
This was partially offset by an increase in catastrophe losses of $6.2
million, to $13.4 million, primarily in the homeowners line. The increase in
policy acquisition expenses of $4.4 million, or 4.1%, to $112.5 million in
1996 primarily reflects the growth in net premiums earned. Other underwriting
expenses decreased $1.8 million, or 4.4%, to $39.3 million due to reductions
in employee related expenses and commissions, partially offset by expenses
associated with a policy administration technology project. Management
anticipates an increase in its expense levels due to further planned
investments.
The personal segment underwriting loss in 1995 was $26.6 million compared to
$32.3 million in 1994. The improvement in underwriting results reflects a
return to more normal weather conditions in Michigan as well as favorable
claims activity in both current and prior accident years in the personal
automobile line attributable to improvements in severity. The 1995
underwriting results improved despite a $3.4 million increase in catastrophe
losses in the personal segment, primarily in the homeowners line. Catastrophe
losses were $7.2 million and $3.8 million in the personal segment in 1995 and
1994, respectively. The increase in policy acquisition expenses of $8.6
million, or 8.6%, to $108.1 million in 1995 primarily reflects the growth in
net premiums earned. Other underwriting expenses increased $3.2 million, or
8.4%, to $41.1 million reflecting the growth in net premiums earned.
14
<PAGE>
Commercial Segment
Commercial segment premiums represented 33.6%, 34.4% and 35.0% of total net
premiums earned in 1996, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
--------------------------------
1996 1995 1994
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Net premiums earned........................... $ 280.9 $ 281.6 $ 266.6
Losses and LAE incurred....................... 200.3 164.7 188.5
Policy acquisition expenses................... 51.6 51.5 47.3
Other underwriting expenses(1)................ 27.0 25.4 29.2
---------- ---------- ----------
Underwriting profit........................... $ 2.0 $ 40.0 $ 1.6
========== ========== ==========
</TABLE>
- --------
(1) Includes policyholders' dividends
Commercial segment net premiums earned decreased $0.7 million, or 0.2%, to
$280.9 million in 1996. This decrease primarily reflects rate reductions and a
1.4% decrease in policies in force in the workers' compensation line due to
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. This decrease is partially
offset by an increase in policies in force in the commercial multiple peril
and commercial automobile lines of 13.2% and 3.7%, respectively. Management
believes competitive conditions in Michigan in the workers' compensation line
may impact future growth in net premiums earned.
Commercial segment net premiums earned increased $15.0 million, or 5.6%, to
$281.6 million in 1995. This increase primarily reflects growth of 8.1% in
total commercial policies in force. The overall growth includes increases in
policies in force in the commercial automobile and commercial multiple peril
lines of 12.5% and 11.6%, respectively, along with a decrease in workers'
compensation policies in force of 4.6% and rate decreases of 15.5% in the
workers' compensation line during 1995. These decreases in workers'
compensation premiums were more than offset by increased workforce exposures
due to full employment in Michigan. Price increases in the commercial
automobile line also contributed to the increase in net premiums earned.
The commercial segment underwriting profit in 1996 was $2.0 million compared
to $40.0 million in 1995. The decline in underwriting profit is primarily
attributable to an increase in loss severity and frequency in the commercial
multiple peril line. Commercial multiple peril losses and LAE increased $16.9
million, or 42.4%, to $56.8 million in 1996, partially offset by a $5.1
million, or 9.4%, increase to $59.1 million in net premiums earned. Workers'
compensation net premiums earned decreased $17.6 million, or 11.9%, to $130.7
million in 1996 while losses and LAE increased $9.6 million, or 15.0%, to
$73.4 million in this line, primarily due to reduced favorable development of
prior year reserves. Catastrophe losses in this segment were $1.9 million in
1996 compared to $0.8 million during 1995. Policy acquisition expenses
remained consistent between years, primarily as a result of flat net earned
premiums. Other underwriting expenses increased $1.6 million, or 6.3%, to
$27.0 million due to investments in technology and increased policyholders'
dividends, partially offset by reductions in employee related expenses and
commissions. Management anticipates an increase in its expense levels due to
further planned investments in technology.
The commercial segment underwriting profit in 1995 was $40.0 million
compared to $1.6 million in 1994. The improvement in underwriting results in
1995 reflects favorable claims activity in both current and prior accident
years in the workers' compensation line attributable to improvements in
severity and frequency, and to severe weather and large claims in the first
half of 1994 which had an adverse impact on the commercial multiple peril and
commercial automobile lines. The increase in policy acquisition expenses of
$4.2 million, or 8.9%, to $51.5 million in 1995, primarily reflects the growth
in net premiums earned. The decrease in other underwriting expenses reflects
the unusually high level of expenses incurred during 1994 resulting from the
expansion into Ohio, including the cost of preparing to write multi-state and
cross-state commercial line policies, as well as a reduction in 1995 in
administration expenses resulting from process improvements in the commercial
segment.
15
<PAGE>
INVESTMENT RESULTS
Net investment income before taxes was $88.9 million, $78.8 million and
$74.8 million in 1996, 1995, and 1994, respectively. The increase in 1996 is
primarily the result of an increase in average invested assets, $4.4 million
of income from limited partnerships, and the Company's portfolio shift, in
1996, 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 6.3% in 1996 and 5.9% in both 1995 and 1994.
Average invested assets increased $86.5 million, or 6.2%, to $1,490.0 million
in 1996 primarily attributable to cash from operations. The increase in 1995
reflects an increase in average invested assets of $74.7 million, or 5.6%, to
$1,403.5 million in 1995 from $1,328.8 million in 1994, primarily attributable
to unrealized appreciation and to an increase in cash from operations, which
was partially offset by the redemption of the $100.0 million Series A
Preferred Stock. Net investment income after-tax was $73.4 million in 1996,
$64.9 million in 1995, and $64.8 million in 1994. The investment results
reflect average pre-tax yields of 6.0% in 1996 and 5.6% in both 1995 and 1994.
Net realized gains on investments before taxes were $15.0 million and $3.8
million in 1996 and 1995, respectively, compared to net realized losses of
$1.1 million in 1994. Net realized gains in 1996 primarily resulted from sales
of appreciated equity securities due to the Company's strategy of shifting to
a higher level of debt securities. Net realized gains in 1995 were primarily
the result of the sales of equity securities impacted by the overall rise in
the market. Net realized losses in 1994 resulted primarily from increases in
prevailing interest rates.
FEDERAL INCOME TAXES
The provision for federal income taxes was $21.4 million and $21.7 million
in 1996 and 1995, respectively. There was relatively no provision for federal
income taxes in 1994. These provisions resulted in consolidated effective
federal tax rates of 20.3% and 22.5% in 1996 and 1995, respectively. The
effective tax rate was virtually zero in 1994. The decrease in the effective
tax rate in 1996 from 1995 resulted from higher tax-exempt interest, partially
offset by higher pre-tax income. The increase in the effective tax rate in
1995 from 1994 resulted from the improvement in underwriting results,
increases in realized gains and a decrease in the proportion of pre-tax income
attributable to tax-exempt interest.
FINANCIAL CONDITION
Reserve for Losses and Loss Adjustment Expenses
The Company maintains reserves to provide for its estimated ultimate
liability for losses and 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 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 claims severity and judicial theories of liability and
other factors. The inherent uncertainty of estimating insurance reserves is
greater for certain types of property and casualty insurance lines,
particularly workers' compensation, where a longer period may elapse before a
definitive determination of ultimate liability may be made, and liability
lines, 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.
16
<PAGE>
The table below provides a reconciliation of the beginning and ending
reserve for unpaid losses and LAE for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of year.... $1,291.6 $1,196.6 $1,076.7
Incurred losses and LAE, net of reinsurance
recoverable:
Provision for insured events of current year... 662.8 625.3 591.9
Decrease in provision for insured events of
prior years................................... (58.4) (47.0) (12.4)
-------- -------- --------
Total incurred losses and LAE.................... 604.4 578.3 579.5
-------- -------- --------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events
of current year............................... 365.9 322.1 308.7
Losses and LAE attributable to insured events
of prior years................................ 239.1 223.4 204.5
-------- -------- --------
Total payments................................... 605.0 545.5 513.2
-------- -------- --------
Change in reinsurance recoverable on unpaid
losses.......................................... (52.5) 62.2 53.6
-------- -------- --------
Reserve for losses and LAE, end of year.......... $1,238.5 $1,291.6 $1,196.6
======== ======== ========
</TABLE>
As part of an ongoing process, the reserves, net of reinsurance, have been
re-estimated for all prior accident years and were decreased by $58.4 million,
$47.0 million and $12.4 million in 1996, 1995, and 1994, respectively. The
increase in favorable development of $11.4 million in 1996 reflects improved
severity in the personal automobile line, where favorable development
increased $28.6 million to $33.0 million in 1996, partially offset by less
favorable development in the workers' compensation line. In 1995, the workers'
compensation line had favorable development of $32.7 million, primarily as a
result of the Company re-estimating reserves to reflect the Company's new
claims cost management programs and the Michigan Supreme Court ruling, which
decreases the maximum to be paid for indemnity cases on all existing and
future claims. In 1996, the favorable development in the workers' compensation
line of $21.8 million also reflected these developments.
The increase in favorable development of $34.6 million in 1995 from 1994
reflects improved severity in the personal automobile and workers'
compensation lines. Favorable development in the personal automobile line
increased $16.6 million from unfavorable development of $12.2 million in 1994
to favorable development of $4.4 million in 1995. Favorable development in the
workers' compensation line increased $15.5 million from $17.2 million in 1994
to $32.7 million in 1995, due to the aforementioned change in claims cost
management and the Michigan Supreme Court ruling.
This favorable development reflects the Company's reserving philosophy
consistently applied over these periods. Conditions and trends that have
affected development of the loss and LAE reserves in the past may not
necessarily occur in the future.
Due to the nature of business written by the Company, the exposure to
environmental liabilities is relatively small. Losses and LAE reserves related
to environmental damage and toxic tort liability, included in the total
reserve for losses and LAE were $20.6 million and $22.3 million at the end of
1996 and 1995, respectively, both net of reinsurance of $3.5 million. The
Company does not specifically underwrite policies that include this coverage,
but as case law expands policy provisions and insurers' liability beyond the
intended coverage, the Company has been required to defend such claims. Due to
their unusual nature and absence of historical claims data, reserves for these
claims are not determined using historical experience to project future
losses. Although these claims are not material, their existence gives rise to
uncertainty and is discussed because of the possibility, however remote, that
they may become material. The environmental liability could be revised in the
near term if the estimates used in determining the liability are revised.
Management believes that, notwithstanding the evolution of case law expanding
liability in environmental claims, recorded reserves related to these claims
are adequate and the Company is not aware of any litigation or pending claims
that may result in additional material liabilities in excess of recorded
reserves.
17
<PAGE>
Inflation generally increases the cost of losses covered by insurance
contracts. The effect of inflation on the Company varies by product. Property
and casualty insurance premiums are established before the amount of losses
and LAE, and the extent to which inflation may affect such expenses, are
known. Consequently, the Company attempts, in establishing rates, to
anticipate the potential impact of inflation in the projection of ultimate
costs. The impact of inflation has been relatively insignificant in recent
years. However, inflation could contribute to increased losses and LAE in the
future.
The Company regularly reviews its reserving techniques, its overall reserve
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.
REINSURANCE
The Company maintains a reinsurance program designed to protect against
large or unusual losses and LAE activity. This includes both excess of loss
reinsurance and catastrophe reinsurance. Catastrophe reinsurance serves to
protect the ceding insurer from significant aggregate losses arising from a
single event such as windstorm, hail, hurricane, tornado, riot or other
extraordinary events. The Company determines the appropriate amount of
reinsurance based on the Company's evaluation of the risks accepted and
analysis prepared by consultants and reinsurers and on market conditions
including the availability and pricing of reinsurance. The Company has
reinsurance for casualty business. Under the 1996 casualty program, the
reinsurers are responsible for 100% of the amount of each loss in excess of
$1.0 million per occurrence up to $30.5 million for general liability and
workers' compensation. Additionally, this reinsurance covers workers'
compensation losses in excess of $30.5 million to $60.5 million per
occurrence. Under the Company's 1996 catastrophe reinsurance program, Citizens
retains 5% of losses in excess of $10.0 million, up to $25.0 million. For
losses in excess of $25.0 million and up to $180.0 million, the Company
retains 10% of the loss. Amounts in excess of $180.0 million are retained 100%
by the Company. In 1996, Citizens purchased aggregate catastrophe coverage
which reinsures 90% of $5.0 million for aggregated catastrophe losses in
excess of $5.0 million which individually exceed $1.0 million. Under this
aggregate catastrophe coverage, Citizens is expected to recover $4.5 million.
In the years ended December 31, 1996, 1995 and 1994, the Company did not
exceed the minimum catastrophe levels, either individually or in the
aggregate, to obtain recovery under its reinsurance agreements, except as
described above.
Effective January 1, 1997, the Company modified its reinsurance program. The
1997 modifications include the purchase of additional casualty reinsurance and
higher retention under the Company's catastrophe reinsurance program. Under
the 1997 casualty reinsurance program, the Company added a layer which
reinsured 100% of each loss in excess of $.5 million up to $1.0 million per
occurrence. Under the 1997 catastrophe reinsurance program. Citizens retains
the first $10 million of loss per occurrence, 5% of losses in excess of $10.0
million, up to $25.0 million, 55% of all aggregate loss amounts in excess of
$25.0 million up to $45.0 million, and 10% of all aggregate loss amounts in
excess of $45.0 million up to $180.0 million. Amounts in excess of $180.0
million are retained 100% by the Company.
The Company cedes to reinsurers a portion of its risk and pays a fee based
upon premiums received on all policies subject to such reinsurance.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result
in losses to the Company. The Company determines the appropriate amount of
reinsurance based on evaluation of the risks accepted, analyses prepared by
consultants and reinsurers, and on market conditions (including the
availability and pricing of reinsurance). The Company also believes that the
terms of its reinsurance contracts are consistent with industry practice in
that they contain standard terms with respect to lines of business covered,
limit and retention,
18
<PAGE>
arbitration and occurrence. Based on its review of its reinsurers' financial
statements and reputations in the reinsurance marketplace, the Company
believes that its reinsurers are financially sound.
As a condition to the ability to conduct personal automobile business in the
state of Michigan, the Company is required under Michigan law to participate
in a pooling arrangement with the Michigan Catastrophic Claims Association
(MCCA). The Company is indemnified by the MCCA for personal protection
insurance losses in excess of $0.25 million. At December 31, 1996 the MCCA was
the only reinsurer which represented 10% or more of the Company's reinsurance
business.
The Company cedes a significant portion of its private passenger automobile
premiums to the MCCA. Ceded premiums earned to MCCA in 1996, 1995 and 1994
were $50.5 million, $66.8 million and $80.0 million, respectively. Losses and
LAE ceded to MCCA in 1996, 1995 and 1994 were ($52.9) million, $62.9 million
and $24.2 million, respectively. In 1996, the MCCA's favorable development on
prior year reserves exceeded the losses and LAE incurred during the current
year. The aggregate losses and LAE ceded to the MCCA have no impact on the
Company's consolidated statements of income.
At December 31, 1996 and 1995, the Company had reinsurance recoverable from
the MCCA on paid and unpaid losses of $292.0 million and $354.9 million,
respectively. Because MCCA is supported by assessments permitted by statute
and all amounts billed by the Company to MCCA have been paid when due, the
Company believes that it has no significant exposure to uncollectible
reinsurance balances.
The reserve for losses and LAE at December 31, 1996 and 1995, is shown gross
of reinsurance recoverable on unpaid losses of $466.4 million and $518.9
million, respectively. Losses and LAE ceded were $51.4 million, $134.1 million
and $124.7 million in 1996, 1995, and 1994, respectively. Ceded premiums
earned were $201.1 million, $206.3 million and $212.9 million in 1996, 1995,
and 1994, respectively.
INVESTMENT PORTFOLIO
The Company's investment policy is structured with emphasis on maximizing
after tax income while providing liquidity and preserving asset quality. The
portfolio is dominated by fixed income securities. The fixed income portfolio
maintains a laddered maturity structure with a duration of 5.74 years. The
Company continually evaluates credit quality throughout the investment holding
period. The Company's investment portfolio increased $114.4 million to
$1,605.2 million at December 31, 1996, from $1,490.8 million at December 31,
1995, primarily attributable to the investment of cash provided by operations
of $73.5 million. Approximately 87.1% of the portfolio was invested in debt
securities at December 31, 1996, compared to 86.5% at December 31, 1995.
At December 31, 1996, $1,233.5 million, or 88.2%, of debt securities held by
the Company were rated by the National Association of Insurance Commissioners
("NAIC") as investment grade (1 or 2 by the NAIC). The remaining $164.8
million were rated non-investment grade. At December 31, 1995, $1,202.3
million, or 93.2%, of the debt securities were rated investment grade. At
December 31, 1996, 69.9% of debt securities were tax-exempt investments,
compared to 71.2% at December 31, 1995. 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.
At December 31, 1996, $192.3 million, or 12.0%, of the investment portfolio
was invested in equity securities compared to $189.5 million, or 12.7%, at
December 31, 1995. Dividend income from equity securities was $4.2 million, or
4.5%, of investment income in 1996, compared to $4.5 million, or 5.3%, in
1995.
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
impose a restriction on the payment of "extraordinary" dividends without prior
approval of the state authorities. The maximum dividend that may be paid to
Citizens Corporation at January 1, 1997, without prior approval from the
Michigan Commissioner of Insurance, is $39.9 million.
19
<PAGE>
Sources of cash for the Company's insurance subsidiaries are from premiums
collected, investment income and maturing investments. Primary cash outflows
are paid losses and LAE, policy acquisition expenses, other underwriting
expenses and investment purchases. Cash outflows related to claim losses and
LAE can be variable because of uncertainties regarding settlement dates for
liabilities for unpaid losses and because of 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 maturities of its investments with expected
payments of current and longer term liabilities. 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 Company was $73.5 million,
$120.0 million and $112.5 million in 1996, 1995, and 1994, respectively. The
decrease in cash provided by operating activities in 1996 from 1995 is
attributable primarily to the increase in payments for losses and LAE of $59.5
million to $605.0 million in 1996 compared to $545.5 million in 1995. The cash
provided by operations in 1995 reflects more normal underwriting results and
an increase over 1994 due to the high level of weather-related claims during
1994.
Net cash used for investing activities for the Company was $78.3 million and
$89.2 million in 1996 and 1995, respectively. Net cash provided by investing
activities was $2.1 million in 1994. Net cash used for investing activities
has declined in 1996 from 1995 primarily due to the decrease in cash flow from
operations. Net cash used for investing activities increased in 1995 from 1994
primarily due to a reduction in the Company's cash and cash equivalents.
Net cash used for financing activities was $18.2 million, $113.1 million and
$11.2 million in 1996, 1995, and 1994, respectively. Net cash used in 1996
reflects the purchase of $11.1 million of treasury stock and dividends paid to
shareholders of $7.1 million. The relatively higher level of net cash used in
1995 reflects the redemption of 1.0 million shares of Series A Preferred Stock
from The Hanover Insurance Company for $100.0 million.
Shareholders' equity was $754.5 million, or $21.39 per share, at December
31, 1996, compared to $682.8 million, or $19.04 per share, at December 31,
1995. Shareholders' equity reflects net income for the year, the repurchase of
treasury stock and the impact of a net increase of $5.8 million in the fair
values of available-for-sale debt and equity securities. Changes in
shareholders' equity related to changes in the fair value of the investment
portfolio will continue to be volatile as market prices of debt and equity
securities fluctuate with changes in interest rates and economic conditions.
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 dependent upon earnings and the financial condition of the
Company.
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 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
20
<PAGE>
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, 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Report of Independent Accountants..................................... 22
Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994.................................................. 24
Consolidated Balance Sheets as of December 31, 1996 and 1995.......... 25
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994..................................... 26
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994.................................................. 27
Notes to Consolidated Financial Statements............................ 28-45
INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedule I--Summary of Investments--Other than Investments in Related
Parties.............................................................. 52
Schedule II--Condensed Financial Information of the Registrant........ 53-55
Schedule III--Supplementary Insurance Information..................... 56-58
Schedule IV--Reinsurance.............................................. 59
Schedule V--Valuation and Qualifying Accounts......................... 60
Schedule VI--Supplemental Information Concerning Property/Casualty
Insurance Operations................................................. 61
</TABLE>
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholdersof Citizens Corporation
In our opinion, the consolidated financial statements and financial
statement schedules listed in the accompanying index present fairly, in all
material respects, the financial position of Citizens Corporation and its
subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
The Company adopted certain new accounting pronouncements in 1994 as
discussed in Note 1 to the consolidated financial statements.
/s/ Price Waterhouse LLP
Milwaukee, Wisconsin
January 24, 1997
22
<PAGE>
CITIZENS CORPORATION
MANAGEMENT REPORT ON RESPONSIBILITY
FOR FINANCIAL REPORTING
The management of Citizens Corporation has the responsibility for preparing
the accompanying consolidated financial statements and for their integrity and
objectivity. The statements were prepared in conformity with generally
accepted accounting principles and include amounts based on management's
informed estimates and judgments. We believe that these statements present
fairly the Company's financial position and results of operations and that the
other information contained in the annual report is accurate and consistent
with the financial statements.
Citizens Corporation's Board of Directors annually appoints independent
accountants to perform an audit of its consolidated financial statements. The
financial statements have been audited by Price Waterhouse LLP, independent
accountants, in accordance with generally accepted auditing standards. Their
audit included consideration of the Company's system of internal control in
order to determine the audit procedures required to express their opinion on
the consolidated financial statements.
Management of Citizens Corporation has established and maintains a system of
internal control that provides reasonable assurance that assets are
safeguarded and that transactions are properly authorized and recorded. The
system of internal control provides for appropriate division of responsibility
and is documented by written policies and procedures that are communicated to
employees with significant roles in the financial reporting process and
updated as necessary. Management continually monitors the system of internal
control for compliance. Citizens Corporation and its subsidiaries maintain a
strong internal audit program that independently assesses the effectiveness of
the internal controls and recommends possible improvements thereto. Management
recognizes the inherent limitations in all internal control systems and
believes that our system of internal control provides an appropriate balance
between the costs and benefits desired. Management believes that the Company's
system of internal control provides reasonable assurance that errors or
irregularities that would be material to the financial statements are
prevented or detected in the normal course of business.
The Audit Committee of the Board of Directors, composed solely of outside
directors, oversees management's discharge of its financial reporting
responsibilities. The committee meets periodically with management, our
internal auditors and independent accountants, Price Waterhouse LLP. Both our
internal auditors and Price Waterhouse LLP have direct access to the Audit
Committee.
Management recognizes its responsibility for fostering a strong ethical
climate. This responsibility is reflected in the Company's policies which
address, among other things, potential conflicts of interest; compliance with
all domestic and foreign laws including those relating to financial disclosure
and the confidentiality of proprietary information. Citizens Corporation
maintains a systematic program to assess compliance with these policies.
/s/ John F. O'Brien /s/ Edward J. Parry, III
_____________________________________ _____________________________________
JOHN F. O'BRIEN EDWARD J. PARRY, III
PRESIDENT AND CHIEF VICE PRESIDENT, CHIEF FINANCIAL
EXECUTIVE OFFICER OFFICER,
TREASURER AND PRINCIPAL
ACCOUNTING OFFICER
23
<PAGE>
CITIZENS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------- ---------- ----------
(IN MILLIONS, EXCEPT
PER COMMON SHARE DATA)
<S> <C> <C> <C>
REVENUES
Net premiums written..................... $ 838.2 $ 833.7 $ 778.8
Change in unearned premiums, net of
prepaid reinsurance premiums............ 2.7 15.9 16.1
---------- ---------- ----------
Net premiums earned...................... 835.5 817.8 762.7
Net investment income.................... 88.9 78.8 74.8
Net realized gains (losses) on
investments............................. 15.0 3.8 (1.1)
Other income, net........................ 2.0 0.6 2.2
---------- ---------- ----------
Total revenues......................... 941.4 901.0 838.6
---------- ---------- ----------
EXPENSES
Losses and loss adjustment expenses...... 604.4 578.3 579.5
Policy acquisition expenses.............. 164.1 159.6 146.8
Other underwriting expenses.............. 60.2 59.9 61.3
Policyholders' dividends................. 7.2 6.6 5.8
---------- ---------- ----------
Total expenses......................... 835.9 804.4 793.4
---------- ---------- ----------
Income before federal income taxes and
cumulative effect of a change in
accounting................................ 105.5 96.6 45.2
Federal income tax expense (benefit)
Current.................................. 20.3 17.6 10.0
Deferred................................. 1.1 4.1 (10.0)
---------- ---------- ----------
Total federal income tax expense....... 21.4 21.7 --
---------- ---------- ----------
Income before cumulative effect of a change
in accounting............................. 84.1 74.9 45.2
Cumulative effect of a change in
accounting................................ -- -- (0.6)
---------- ---------- ----------
Net income................................. 84.1 74.9 44.6
Dividends on Series A preferred stock...... -- (2.0) (4.0)
---------- ---------- ----------
Net income available to common
shareholders.............................. $ 84.1 $ 72.9 $ 40.6
========== ========== ==========
PER COMMON SHARE DATA
Income before cumulative effect of a
change in accounting.................... $ 2.37 $ 2.02 $ 1.15
Cumulative effect of a change in
accounting.............................. -- -- (0.02)
---------- ---------- ----------
Net income available to common
shareholders............................ $ 2.37 $ 2.02 $ 1.13
========== ========== ==========
Weighted average common shares
outstanding............................... 35.5 36.1 36.1
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
CITIZENS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
(IN MILLIONS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
ASSETS
Investments:
Debt securities available-for-sale, at fair value
(amortized cost of $1,366.9 and $1,247.5)......... $ 1,398.3 $ 1,289.5
Equity securities available-for-sale, at fair value
(cost of $132.3 and $149.6)....................... 192.3 189.5
Other investments, at fair value (cost of $13.2 and
$9.6)............................................. 14.6 11.8
----------- -----------
Total investments................................ 1,605.2 1,490.8
Cash and cash equivalents.......................... 36.1 59.1
Accrued investment income.......................... 25.3 25.1
Premiums and notes receivable (less allowance for
doubtful accounts of $0.9 and $0.8)............... 140.3 141.0
Reinsurance recoverable on paid and unpaid losses.. 476.8 521.8
Prepaid reinsurance premiums....................... 62.8 54.5
Deferred policy acquisition expenses............... 54.3 52.2
Deferred federal income taxes...................... 25.4 29.7
Other assets....................................... 76.8 96.6
----------- -----------
Total assets..................................... $ 2,503.0 $ 2,470.8
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Reserve for losses and loss adjustment expenses.... $ 1,238.5 $ 1,291.6
Unearned premiums.................................. 362.3 351.4
Other liabilities.................................. 147.7 145.0
----------- -----------
Total liabilities................................ 1,748.5 1,788.0
----------- -----------
Commitments and contingent liabilities (Note 13)
Shareholders' equity:
Series A preferred stock, $0.01 par value per
share; authorized 10.0 million shares; none issued
or outstanding in 1996 and 1995................... -- --
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.................................. 552.5 475.5
Unrealized appreciation on investments, net of
deferred federal income taxes..................... 60.5 54.7
Treasury stock, at cost (0.8 million and 0.2
million shares)................................... (15.0) (3.9)
----------- -----------
Total shareholders' equity....................... 754.5 682.8
----------- -----------
Total liabilities and shareholders' equity....... $ 2,503.0 $ 2,470.8
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
CITIZENS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
---------- ----------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
PREFERRED STOCK
Balance at beginning of year............ -- $ 100.0 $ 100.0
Redemption of preferred stock........... -- (100.0) --
---------- ----------- ----------
Balance at end of year.................. -- -- 100.0
---------- ----------- ----------
COMMON STOCK
---------- ----------- ----------
Balance at beginning and end of year.... $ 0.4 0.4 0.4
---------- ----------- ----------
ADDITIONAL PAID-IN CAPITAL
---------- ----------- ----------
Balance at beginning and end of year.... 156.1 156.1 156.1
---------- ----------- ----------
RETAINED EARNINGS
Balance at beginning of year............ 475.5 409.8 376.4
Net income.............................. 84.1 74.9 44.6
Dividends declared to shareholders...... (7.1) (9.2) (11.2)
---------- ----------- ----------
Balance at end of year.................. 552.5 475.5 409.8
---------- ----------- ----------
UNREALIZED APPRECIATION (DEPRECIATION) ON
INVESTMENTS,
NET OF DEFERRED FEDERAL INCOME TAXES
Balance at beginning of year............ 54.7 (20.4) 6.9
Cumulative effect of changes in
accounting:
Net appreciation on available-for sale
debt securities...................... -- -- 53.9
Provision for deferred federal income
taxes................................ -- -- (18.9)
---------- ----------- ----------
Total................................... -- -- 35.0
---------- ----------- ----------
Effect of transfer of securities from
held-to-maturity to available-for-sale:
Net appreciation on available-for-sale
debt securities...................... -- 1.5 --
Provision for deferred federal income
taxes................................ -- (0.5) --
---------- ----------- ----------
Total................................... -- 1.0 --
---------- ----------- ----------
Appreciation (depreciation) on
investments during the year:
Net appreciation (depreciation) on
available-for-sale securities........ 9.0 114.1 (95.9)
(Provision) benefit for deferred
federal income taxes................. (3.2) (40.0) 33.6
---------- ----------- ----------
Total................................... 5.8 74.1 (62.3)
---------- ----------- ----------
Balance at end of year.................. 60.5 54.7 (20.4)
---------- ----------- ----------
TREASURY STOCK
Balance at beginning of year............ (3.9) -- --
Shares purchased at cost................ (11.1) (3.9) --
---------- ----------- ----------
Balance at end of year.................. (15.0) (3.9) --
---------- ----------- ----------
Total shareholders' equity................ $ 754.5 $ 682.8 $ 645.9
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
CITIZENS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................. $ 84.1 $ 74.9 $ 44.6
Adjustments to reconcile net income to net
cash provided by
operating activities:
Cumulative effect of a change in
accounting.............................. -- -- 0.6
Net realized (gains) losses on
investments............................. (15.0) (3.8) 1.1
Deferred federal income tax provision
(benefit)............................... 1.1 4.1 (10.0)
Changes in assets and liabilities:
Deferred policy acquisition expenses... (2.1) (2.9) (4.5)
Premiums and notes receivable, net of
reinsurance payable................... 5.4 (23.1) (11.4)
Unearned premiums, net of prepaid
reinsurance premiums.................. 2.6 15.9 16.1
Reserve for losses and loss adjustment
expenses, net of reinsurance
recoverable........................... (8.1) 35.3 66.7
Other, net............................. 5.5 19.6 9.3
---------- ---------- ----------
Net cash provided by operating
activities.............................. 73.5 120.0 112.5
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of available-for-sale
debt securities........................... 470.4 511.3 308.8
Proceeds from available-for-sale debt
securities maturing or called............. 148.3 95.2 69.8
Proceeds from held-to-maturity debt
securities maturing or called............. -- 10.6 16.9
Proceeds from sale of available-for-sale
equity securities and other investments... 73.7 47.8 33.8
Purchases of available-for-sale debt
securities................................ (741.4) (637.2) (363.1)
Purchases of available-for-sale equity
securities and other investments.......... (42.5) (93.9) (72.7)
Change in net receivable from security
transactions not settled.................. 16.1 (19.2) 15.9
Other investing activities, net............ (2.9) (3.8) (7.3)
---------- ---------- ----------
Net cash (used for) provided by investing
activities.............................. (78.3) (89.2) 2.1
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders............. (7.1) (9.2) (11.2)
Treasury stock purchased, at cost.......... (11.1) (3.9) --
Redemption of Series A preferred stock..... -- (100.0) --
---------- ---------- ----------
Net cash used for financing activities... (18.2) (113.1) (11.2)
---------- ---------- ----------
Net (decrease) increase in cash and cash
equivalents............................... (23.0) (82.3) 103.4
Cash and cash equivalents at beginning of
year...................................... 59.1 141.4 38.0
---------- ---------- ----------
Cash and cash equivalents at end of year... $ 36.1 $ 59.1 $ 141.4
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFOR-
MATION
Cash paid during the year:
Federal income taxes..................... $ 17.3 $ 20.8 $ 10.7
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
CITIZENS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Citizens
Corporation, a Delaware corporation and non-insurance holding company;
Citizens Insurance Company of America (Citizens Insurance), a Michigan
corporation; Citizens Insurance Company of the Midwest, an Indiana
corporation; and Citizens Insurance Company of Ohio, an Ohio corporation;
(collectively Citizens Insurance Operations) and Citizens Management Inc.
(collectively, the Company). Approximately 82.5% of the Company is owned by
The Hanover Insurance Company (Hanover). Hanover is a wholly-owned subsidiary
of Allmerica Property & Casualty Companies, Inc. (APY), a Delaware
corporation.
In February 1993, Citizens Insurance issued 1.0 million shares of Series A
Preferred Stock to Hanover. Effective March 31, 1993, Citizens Corporation
issued 1.0 million shares of its authorized Series A Preferred Stock to
Hanover in exchange for the Citizens Insurance Preferred Stock. On June 30,
1995, Citizens Insurance redeemed its 1.0 million shares of Series A Preferred
Stock from Citizens Corporation for $100.0 million and Citizens Corporation
redeemed its 1.0 million shares of Series A Preferred Stock from Hanover for
$100.0 million.
On November 17, 1994, Citizens Insurance Company of Ohio was established and
as of January 1, 1995, was admitted to do business in the state of Ohio.
Business operations began on February 13, 1995. On September 1, 1994, Citizens
Insurance Company of the Midwest was established and as of October 2, 1995 was
admitted to do business in the state of Indiana. Business operations began on
March 8, 1996.
The accounting and reporting policies of the Company are in accordance with
generally accepted accounting principles and the general practices within the
insurance industry. All significant intercompany transactions and balances
have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
B. PREMIUM REVENUE
Premiums are recognized as earned using the daily pro rata method over the
terms of the policies. Unearned premiums represent the portion of premiums
written that relate to the unexpired term of the policies in force.
C. INVESTMENTS
Effective January 1, 1994, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for
Certain Investments in Debt and Equity Securities". SFAS No. 115 requires that
an enterprise classify debt and equity securities into one of three
categories: held-to-maturity, available-for-sale or trading. SFAS No. 115 also
requires that unrealized holding gains and losses for trading securities be
included in earnings, while unrealized gains and losses for available-for-sale
securities be excluded from earnings and reported as a separate component of
shareholders' equity until realized. The effect of implementing SFAS No. 115,
as of January 1, 1994, was an increase in the carrying value of debt
securities of $53.9 million and an increase in shareholders' equity of $35.0
million, net of deferred federal income taxes, which resulted from changing
the carrying value of the debt securities from amortized cost to fair value.
The implementation had no effect on net income.
28
<PAGE>
CITIZENS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In November 1995, the Financial Accounting Standards Board issued a Special
Report, A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities, which permitted companies to
reclassify securities, where appropriate, based on the new guidance. As a
result, the Company transferred all of its held-to-maturity category
securities, with amortized cost and fair value of $35.0 million and $36.5
million, respectively, to the available-for-sale category, which resulted in a
net increase in shareholders' equity of $1.0 million.
Fair values for debt and equity securities are primarily based on quoted
market prices. For securities not actively traded, fair values are estimated
using values obtained from independent pricing services.
Realized gains or losses on sale of investments, which are included in the
determination of net income, are determined on the specific-identification
basis using amortized cost for debt securities and cost for equity securities
and other investments. Investments with other than temporary declines in fair
value are written down to estimated fair value. The related losses are
recognized as realized losses.
D. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions
involving various types of financial instruments, including investments in
debt and equity securities. These instruments involve credit risk and also may
be subject to risk of loss due to currency and interest rate fluctuations.
Financial instruments which are subject to fair value disclosure requirements
are carried in the financial statements at amounts which approximate fair
value, unless otherwise indicated in the notes to the consolidated financial
statements.
E. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid short-term investments. The Company considers all short-term
investments with an original maturity of three months or less to be cash
equivalents.
F. DEFERRED POLICY ACQUISITION EXPENSES
Deferred policy acquisition expenses consist of commissions, premium taxes
and other costs that vary with and are primarily related to the production of
new and renewal business. The deferral is subject to ultimate recoverability
and is charged to expense over the period in which the related premiums are
earned. Deferred policy acquisition expenses are reviewed for each product to
determine that they do not exceed recoverable amounts, after considering
anticipated investment income. If such costs are determined to be
unrecoverable, they are expensed at the time of determination.
Although realization of deferred policy acquisition costs is not assured,
management believes that all these costs will be realized. The amount of
deferred policy acquisition costs considered realizable, however, could be
reduced in the near term if the estimates of investment income discussed above
are reduced, and this would impact the amortization of deferred policy
acquisition costs.
G. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The reserve for losses and loss adjustment expenses (LAE) represents the
accumulation of individual case estimates for reported losses and actuarial
estimates for incurred but not reported losses and LAE. Assumed reserves are
recorded as reported by the ceding organization. The reserve for losses and
LAE is intended to cover the ultimate net cost of all losses and LAE incurred
through the balance sheet date. The reserve is stated net of anticipated
salvage and subrogation and gross of reinsurance ceded. Reinsurance
recoverable on paid and unpaid
29
<PAGE>
CITIZENS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
losses is shown as a separate line of the balance sheet. The reserve estimates
are continually reviewed and updated. The ultimate liability may be more or
less than the current estimate. The effects of changes in the estimated
reserve are included in the results of operations in the period in which the
estimates are revised.
The Company periodically purchases annuity contracts from various life
insurance companies to settle claims currently. The present value of such
annuities, where the Company remains primarily liable, is recorded in the
accounts of the Company as both an other asset and other liability and
amounted to $16.8 million and $16.2 million at December 31, 1996 and 1995,
respectively.
H. FEDERAL INCOME TAXES
The Company is included in the consolidated federal tax return of its
parent, APY. Current taxes are allocated among all affiliated companies based
on a written tax sharing agreement. Under this agreement, allocation is made
primarily on a separate return basis with current payment for losses and other
tax items utilized in the consolidated return.
Deferred income taxes are generally recognized when assets and liabilities
have different values for financial statement and tax reporting purposes, and
for other temporary taxable and deductible differences as defined by Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
No. 109). These differences result primarily from loss reserves, policy
acquisition expenses, unearned premiums and unrealized appreciation or
depreciation on investments.
I. EARNINGS PER COMMON SHARE
Earnings per common 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 December 31, 1996, the
Company is holding these shares as treasury stock for the purpose of funding
current and future stock option awards and for other purposes.
J. ACCOUNTING CHANGE
The cumulative effect of a change in accounting for postemployment benefits
was $(0.6) million, net of deferred income taxes, or $(0.02) per share for the
year ended December 31, 1994.
K. RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1994 consolidated
financial statements in order to conform to the 1996 presentation.
2. BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP), which may vary in certain
respects from statutory accounting practices followed by the Company that are
prescribed or permitted by the Michigan, Ohio and Indiana state insurance
regulatory authorities.
30
<PAGE>
CITIZENS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the Company's statutory net income and surplus to GAAP
net income and shareholders' equity is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
OR
AS OF DECEMBER 31,
----------------------
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
NET INCOME
Statutory net income.................................. $ 84.7 $ 71.2 $ 28.6
Holding company net loss.............................. (0.8) (0.7) (0.2)
Deferred policy acquisition expenses.................. 2.1 2.9 4.6
Deferred federal income tax (provision) benefit....... (1.1) (4.1) 10.0
Postretirement benefits............................... 1.6 0.5 0.5
Other, net............................................ (2.4) 5.1 1.1
------ ------ ------
GAAP net income....................................... $ 84.1 $ 74.9 $ 44.6
====== ====== ======
SHAREHOLDERS' EQUITY
Statutory surplus..................................... $611.0 $496.2 $522.3
Holding company investments........................... 13.3 7.3 16.8
Deferred policy acquisition expenses.................. 54.3 52.2 49.3
Non-admitted assets and statutory reserves............ 22.4 54.7 19.9
Deferred federal income taxes......................... 25.4 29.7 74.3
Postretirement benefit obligation..................... (7.5) (9.1) (9.6)
Fair value of available-for-sale debt securities in
excess of (less than) statutory carrying value....... 31.4 42.0 (38.8)
Other, net............................................ 4.2 9.8 11.7
------ ------ ------
GAAP shareholders' equity............................. $754.5 $682.8 $645.9
====== ====== ======
</TABLE>
3. INVESTMENTS
Summary of Investments
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of SFAS No. 115. The
amortized cost and fair value of available-for-sale investments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST APPRECIATION DEPRECIATION VALUE
--------- ------------ ------------ --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. government obligations....... $ 18.4 $ 1.2 $ -- $ 19.6
States and political
subdivisions..................... 955.0 19.2 (2.8) 971.4
Foreign government................ 4.2 0.7 -- 4.9
Corporate debt securities......... 334.6 13.4 (0.7) 347.3
Mortgage-backed securities........ 54.7 0.6 (0.2) 55.1
-------- ----- ----- --------
Total debt securities available-
for-sale....................... $1,366.9 $35.1 $(3.7) $1,398.3
======== ===== ===== ========
Equity securities................. $ 132.3 $60.1 $(0.1) $ 192.3
======== ===== ===== ========
</TABLE>
31
<PAGE>
CITIZENS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST APPRECIATION DEPRECIATION VALUE
--------- ------------ ------------ --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. government obligations....... $ 41.4 $ 2.9 $ -- $ 44.3
States and political
subdivisions..................... 900.1 24.1 (1.5) 922.7
Foreign government................ 16.4 1.3 -- 17.7
Corporate debt securities......... 207.9 13.7 (0.4) 221.2
Mortgage-backed securities........ 81.7 1.9 -- 83.6
-------- ----- ----- --------
Total debt securities available-
for-sale....................... $1,247.5 $43.9 $(1.9) $1,289.5
======== ===== ===== ========
Equity securities................. $ 149.6 $40.1 $(0.2) $ 189.5
======== ===== ===== ========
</TABLE>
Debt securities with an amortized cost of $8.5 million were on deposit with
various states or government authorities as of December 31, 1996.
Unrealized gains and losses on available-for-sale securities are summarized
as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
---------------------------------------
DEBT EQUITY OTHER
SECURITIES SECURITIES INVESTMENTS TOTAL
---------- ---------- ----------- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net appreciation, beginning of year... $ 27.2 $26.0 $ 1.5 $54.7
Net (depreciation) appreciation on
available-for-sale securities...... (10.4) 20.1 (0.7) 9.0
Provision (benefit) for deferred
federal income taxes............... 3.7 (7.1) 0.2 (3.2)
------ ----- ----- -----
Net appreciation, end of year......... $ 20.5 $39.0 $ 1.0 $60.5
====== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
----------------------------------------
DEBT EQUITY OTHER
SECURITIES SECURITIES INVESTMENTS TOTAL
---------- ---------- ----------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net (depreciation) appreciation,
beginning of year.................. $(25.3) $ 4.7 $ 0.2 $(20.4)
------ ------ ----- ------
Effect of transfers of securities
from held-to-maturity to available-
for-sale:
Net appreciation on available-for-
sale securities.................. 1.5 -- -- 1.5
Provision for deferred federal
income taxes..................... (0.5) -- -- (0.5)
------ ------ ----- ------
1.0 -- -- 1.0
------ ------ ----- ------
Net unrealized appreciation during
the year, net of deferred federal
income taxes:
Net appreciation.................. 79.3 32.8 2.0 114.1
Provision for deferred federal
income taxes..................... (27.8) (11.5) (0.7) (40.0)
------ ------ ----- ------
51.5 21.3 1.3 74.1
------ ------ ----- ------
Net appreciation, end of year....... $ 27.2 $ 26.0 $ 1.5 $ 54.7
====== ====== ===== ======
</TABLE>
32
<PAGE>
CITIZENS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1994
----------------------------------------
DEBT EQUITY OTHER
SECURITIES SECURITIES INVESTMENTS TOTAL
---------- ---------- ----------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net appreciation (depreciation),
beginning of year.................. $ -- $ 7.4 $(0.5) $ 6.9
------ ----- ----- ------
Cumulative effect of a change in
accounting:
Net appreciation on available-for-
sale securities.................. 53.9 -- -- 53.9
Provision for deferred federal
income taxes..................... (18.9) -- -- (18.9)
------ ----- ----- ------
35.0 -- -- 35.0
------ ----- ----- ------
Net unrealized (depreciation)
appreciation during the year, net
of deferred federal income taxes:
Net (depreciation) appreciation... (92.8) (4.1) 1.0 (95.9)
Benefit (provision) for deferred
federal income taxes............. 32.5 1.4 (0.3) 33.6
------ ----- ----- ------
(60.3) (2.7) 0.7 (62.3)
------ ----- ----- ------
Net (depreciation) appreciation, end
of year............................ $(25.3) $ 4.7 $ 0.2 $(20.4)
====== ===== ===== ======
</TABLE>
Expected Maturities of Debt Securities
The amortized cost and fair value of debt securities, by contractual
maturity, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------
AMORTIZED FAIR
COST VALUE
--------- --------
(IN MILLIONS)
<S> <C> <C>
Due in one year or less..................................... $ 45.3 $ 45.6
Due after one year through five years....................... 330.2 343.4
Due after five years through ten years...................... 363.0 371.6
Due after ten years......................................... 628.4 637.7
-------- --------
$1,366.9 $1,398.3
======== ========
</TABLE>
Mortgage-backed securities are included above in the category representing
their ultimate maturity. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Net Investment Income
The following is a summary of the sources of net investment income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Debt securities............................. $ 82.6 $ 73.1 $ 73.8
Equity securities........................... 4.2 4.5 2.4
Other investments........................... 5.6 2.4 1.7
Cash and cash equivalents................... 1.8 4.4 2.0
---------- ---------- ----------
Total investment income................... 94.2 84.4 79.9
Investment expenses......................... (5.3) (5.6) (5.1)
---------- ---------- ----------
Net investment income..................... $ 88.9 $ 78.8 $ 74.8
========== ========== ==========
</TABLE>
33
<PAGE>
CITIZENS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Included in income from other investments was income from limited
partnerships of $4.4 million for the year ended December 31, 1996. The Company
had no income from limited partnerships for the years ended December 31, 1995
and 1994.
The carrying value of debt securities that did not produce income in the
preceding twelve months was not significant. The Company had no concentration
in an individual issuer that exceeded 10% of shareholders' equity at December
31, 1996.
Net Realized Gains and Losses
Realized gains (losses) were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Debt securities..................................... $ (2.4) $ (1.7) $ (4.5)
Equity securities................................... 17.4 5.5 3.1
Other investments................................... -- -- 0.3
------- ------- -------
$ 15.0 $ 3.8 $ (1.1)
======= ======= =======
Voluntary Sales and Related Gross Gains and Gross Losses on Available-for-
Sale Securities
Proceeds from voluntary sales of debt securities in 1996, 1995, and 1994
were $470.4 million, $511.3 million and $308.8 million, respectively. Gross
gains in 1996, 1995, and 1994 of $3.2 million, $6.3 million and $2.2 million
were realized on those sales, respectively. Gross losses in 1996, 1995, and
1994 of $5.6 million, $8.0 million and $6.7 million were realized on those
sales, respectively. Proceeds from voluntary sales of equity securities in
1996, 1995, and 1994 were $70.6 million, $45.8 million and $33.2 million,
respectively. Gross gains in 1996, 1995, and 1994 of $17.8 million, $7.7
million, and $4.9 million were realized on these sales, respectively. Gross
losses in 1996, 1995, and 1994 of $0.4 million, $2.2 million, and $1.8 million
were realized on those sales, respectively.
4. DEFERRED POLICY ACQUISITION EXPENSES
The following reflects the amounts of policy acquisition expenses deferred
and amortized:
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Balance, beginning of year.......................... $ 52.2 $ 49.3 $ 44.7
Policy acquisition expenses deferred................ 166.2 162.5 151.4
Amortization expense................................ (164.1) (159.6) (146.8)
------- ------- -------
Balance, end of year................................ $ 54.3 $ 52.2 $ 49.3
======= ======= =======
</TABLE>
5. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with
the provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the consolidated statements of income is as follows:
34
<PAGE>
CITIZENS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
------------------
1996 1995 1994
----- ----- ------
(IN MILLIONS)
<S> <C> <C> <C>
Current..................................................... $20.3 $17.6 $ 10.0
Deferred.................................................... 1.1 4.1 (10.0)
----- ----- ------
Total..................................................... $21.4 $21.7 $ --
===== ===== ======
</TABLE>
Deferred federal income tax assets and liabilities are comprised of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------- -------
(IN MILLIONS)
<S> <C> <C>
DEFERRED FEDERAL INCOME TAX ASSETS
Discount of reserve for losses and loss adjustment expenses.... $ 46.1 $ 48.7
Unearned premiums.............................................. 21.0 20.8
Postretirement benefits........................................ 5.5 5.5
Pension benefits............................................... 2.9 2.1
Alternative minimum tax carry forward.......................... 1.2 2.2
Other.......................................................... 5.6 4.4
------- -------
Total deferred federal income tax assets..................... 82.3 83.7
------- -------
DEFERRED FEDERAL INCOME TAX LIABILITIES
Deferred policy acquisition expenses........................... 19.0 18.3
Unrealized appreciation on available-for-sale securities....... 32.5 29.3
Other.......................................................... 5.4 6.4
------- -------
Total deferred federal income tax liabilities................ 56.9 54.0
------- -------
Net deferred federal income tax asset.......................... $ 25.4 $ 29.7
======= =======
</TABLE>
Management believes, based on the Company's recent earnings history and its
future expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies, including the
sale of investment assets, that could be implemented, if necessary.
The provision for federal income tax expense differs from the amount of
income tax determined by applying the applicable U.S. statutory federal income
tax rate (35%) to income before federal income taxes and cumulative effect of
a change in accounting. The sources of the difference and the tax effects of
each were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
----------------------
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Tax provision at statutory rate......................... $ 36.9 $ 33.8 $ 15.8
Tax-exempt interest..................................... (15.0) (13.0) (15.9)
Dividends received...................................... (0.6) (0.7) (0.3)
Other, net.............................................. 0.1 1.6 0.4
------ ------ ------
Federal income tax expense.............................. $ 21.4 $ 21.7 $ --
====== ====== ======
Effective tax rate...................................... 20.3% 22.5% --
====== ====== ======
</TABLE>
35
<PAGE>
CITIZENS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. REINSURANCE
The Company maintains a reinsurance program designed to protect against
large or unusual losses and allocated LAE activity. This includes both pro
rata excess of loss reinsurance and catastrophe reinsurance. Catastrophe
reinsurance serves to protect the ceding insurer from significant aggregate
losses arising from a single event such as windstorm, hail, hurricane,
tornado, riot or other extraordinary events. Most reinsurance treaties are
negotiated by the Company's parent through a broker and provide coverage for
all of the subsidiaries of Allmerica Property & Casualty Companies, Inc.,
including the Company. The Company remains contingently liable in the event
that a reinsurer is unable to meet the obligations assumed under the
reinsurance agreements.
Under the Company's 1996 casualty program, the reinsurers are responsible
for 100% of the amount of each loss in excess of $1.0 million per occurrence
up to $30.5 million for general liability and workers' compensation.
Additionally, this reinsurance covers workers' compensation losses in excess
of $30.5 million to $60.5 million per occurrence. Under the Company's 1996
catastrophe reinsurance program, the Company retains 5% of losses in excess of
$10.0 million, up to $25.0 million. For losses in excess of $25.0 million and
up to $180.0 million, the Company retains 10% of the loss. Amounts in excess
of $180.0 million are retained 100% by the Company. In addition, in 1996 the
Company purchased aggregate catastrophe coverage which reinsures 90% of $5.0
million for aggregated catastrophe losses in excess of $5.0 million which
individually exceed $1.0 million. Under this aggregate catastrophe coverage,
Citizens is expected to recover $4.5 million. Citizens Insurance cedes 100% of
business written in specific states to Hanover. Citizens Insurance also
assumes certain business from Hanover which was written by Hanover on behalf
of Citizens Insurance. Premiums receivable at both December 31, 1996 and 1995,
include $1.6 million of premiums due to Citizens Insurance from Hanover on
assumed business. In addition, other liabilities at December 31, 1996 and
1995, include $2.7 million and $2.0 million, respectively, of claim payments
due from Citizens Insurance to Hanover on business assumed. Unearned premiums
at December 31, 1996 and 1995, include $4.1 million and $3.7 million,
respectively, and reserve for losses and LAE at December 31, 1996 and 1995,
include $22.9 million and $24.1 million, respectively, from Hanover assumed
business.
The Company cedes to reinsurers a portion of its risk and pays a fee based
upon premiums received on all policies subject to such reinsurance.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result
in losses to the Company. The Company determines the appropriate amount of
reinsurance based on evaluation of the risks accepted, analyses prepared by
consultants and reinsurers, and on market conditions (including the
availability and pricing of reinsurance). The Company also believes that the
terms of its reinsurance contracts are consistent with industry practice in
that they contain standard terms with respect to lines of business covered,
limit and retention, arbitration and occurrence. Based on its review of its
reinsurers' financial statements and reputations in the reinsurance
marketplace, the Company believes that its reinsurers are financially sound.
The Company is subject to concentration of risk with respect to reinsurance
ceded through a pooling arrangement. As a condition to the ability to conduct
personal automobile business in the state of Michigan, the Company is required
under Michigan law to participate in a pooling arrangement with the Michigan
Catastrophic Claims Association (MCCA). The Company is indemnified by the MCCA
for personal protection insurance losses in excess of $0.25 million. At
December 31, 1996, the MCCA was the only reinsurer which represented 10% or
more of the Company's reinsurance business. The Company cedes a significant
portion of its private passenger automobile premiums to the MCCA. Ceded
premiums earned to MCCA in 1996, 1995, and 1994 were $50.5 million, $66.8
million and $80.0 million, respectively. Losses and LAE ceded to MCCA in 1996,
1995, and 1994 were ($52.9) million, $62.9 million and $24.2 million,
respectively. In 1996, the MCCA's favorable development on prior year reserves
exceeded the losses and LAE incurred during the year. The aggregate losses and
LAE ceded to the MCCA have no impact on the Company's consolidated statements
of income.
36
<PAGE>
CITIZENS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net written and earned premiums and losses and LAE incurred included
reinsurance activity as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
----------- ----------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Net premiums written
Direct...................................... $ 1,030.0 $ 1,024.3 $ 974.6
Assumed..................................... 17.4 19.5 23.2
Ceded:
Hanover................................... 124.2 112.3 102.7
Nonaffiliates............................. 85.0 97.8 116.3
----------- ----------- ---------
Net premiums written.................... $ 838.2 $ 833.7 $ 778.8
=========== =========== =========
Net premiums earned
Direct...................................... $ 1,019.6 $ 1,003.7 $ 946.3
Assumed..................................... 17.0 20.4 29.3
Ceded:
Hanover................................... 117.8 107.2 96.6
Nonaffiliates............................. 83.3 99.1 116.3
----------- ----------- ---------
Net premiums earned..................... $ 835.5 $ 817.8 $ 762.7
=========== =========== =========
Losses and LAE incurred
Direct...................................... $ 645.5 $ 695.6 $ 675.7
Assumed..................................... 10.3 16.8 28.5
Ceded:
Hanover................................... 85.1 63.5 68.9
Nonaffiliates............................. (33.7) 70.6 55.8
----------- ----------- ---------
Losses and LAE incurred................. $ 604.4 $ 578.3 $ 579.5
=========== =========== =========
</TABLE>
Reinsurance recoverables on paid and unpaid losses and ceded prepaid premiums
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
Reinsurance recoverable on paid and unpaid losses
Hanover........................................................ $115.7 $ 96.7
MCCA........................................................... 292.0 354.9
Nonaffiliates.................................................. 69.1 70.2
------ ------
$476.8 $521.8
====== ======
Prepaid premiums
Hanover........................................................ $ 56.8 $ 50.4
Nonaffiliates.................................................. 6.0 4.1
------ ------
$ 62.8 $ 54.5
====== ======
</TABLE>
37
<PAGE>
CITIZENS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. 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 for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of year.... $1,291.6 $1,196.6 $1,076.7
Incurred losses and LAE, net of reinsurance
recoverable:
Provision for insured events of current year... 662.8 625.3 591.9
Decrease in provision for insured events of
prior years................................... (58.4) (47.0) (12.4)
-------- -------- --------
Total incurred losses and LAE.................... 604.4 578.3 579.5
-------- -------- --------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events
of current year............................... 365.9 322.1 308.7
Losses and LAE attributable to insured events
of prior years................................ 239.1 223.4 204.5
-------- -------- --------
Total payments................................... 605.0 545.5 513.2
-------- -------- --------
Change in reinsurance recoverable on unpaid
losses.......................................... (52.5) 62.2 53.6
-------- -------- --------
Reserve for losses and LAE, end of year.......... $1,238.5 $1,291.6 $1,196.6
======== ======== ========
</TABLE>
Loss Development
As part of an ongoing process, the reserves, net of reinsurance, have been
re-estimated for all prior accident years and were decreased by $58.4 million,
$47.0 million and $12.4 million in 1996, 1995, and 1994, respectively. The
favorable development in 1996 and 1995 primarily reflects the initiatives
taken by the Company to manage medical costs in both the 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 increase in favorable development of $11.4 million in 1996
reflects improved severity in the personal automobile line, where favorable
development increased $28.6 million to $33.0 million in 1996, partially offset
by less favorable development in the workers' compensation line. In 1995, the
workers' compensation line had favorable development of $32.7 million,
primarily as a result of the Company re-estimating reserves to reflect the
Company's new claims cost management programs and the Michigan Supreme Court
ruling, which decreases the maximum to be paid for indemnity cases on all
existing and future claims. In 1996, the favorable development in the workers'
compensation line of $21.8 million also reflected these developments.
The increase in favorable development of $34.6 million in 1995 from 1994
reflects improved severity in the personal automobile and workers'
compensation lines. Favorable development in the personal automobile line
increased $16.6 million from unfavorable development of $12.2 million in 1994
to favorable development of $4.4 million in 1995. Favorable development in the
workers' compensation line increased $15.5 million from $17.2 million in 1994
to $32.7 million in 1995, due to the aforementioned change in claims cost
management and the Michigan Supreme Court ruling.
This favorable development reflects the Company's reserving philosophy
consistently applied over these periods. Conditions and trends that have
affected development of the loss and LAE reserves in the past may not
necessarily occur in the future.
38
<PAGE>
CITIZENS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Due to the nature of business written by the Company, the exposure to
environmental liabilities is relatively small. Losses and LAE reserves related
to environmental damage and toxic tort liability, included in the total
reserve for losses and LAE were $20.6 million and $22.3 million at the end of
1996 and 1995, respectively, both net of reinsurance of $3.5 million. The
Company does not specifically underwrite policies that include this coverage,
but as case law expands policy provisions and insurers' liability beyond the
intended coverage, the Company has been required to defend such claims. Due to
their unusual nature and absence of historical claims data, reserves for these
claims are not determined using historical experience to project future
losses. Although these claims are not material, their existence gives rise to
uncertainty and is discussed because of the possibility, however remote, that
they may become material. The environmental liability could be revised in the
near term if the estimates used in determining the liability are revised.
Management believes that, notwithstanding the evolution of case law expanding
liability in environmental claims, recorded reserves related to these claims
are adequate and the Company is not aware of any litigation or pending claims
that may result in additional material liabilities in excess of recorded
reserves.
Inflation generally increases the cost of losses covered by insurance
contracts. The effect of inflation on the Company varies by product. Property
and casualty insurance premiums are established before the amount of losses
and LAE, and the extent to which inflation may affect such expenses, are
known. Consequently, the Company attempts, in establishing rates, to
anticipate the potential impact of inflation in the projection of ultimate
costs. The impact of inflation has been relatively insignificant in recent
years. However, inflation could contribute to increased losses and LAE in the
future.
The Company regularly reviews its reserving techniques, its overall reserve
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.
8. PENSION PLANS
The Company provides retirement benefits to substantially all of its
employees, under a defined benefit pension plan (the "Plan"). Through December
31, 1994, retirement benefits were based primarily on employees' years of
service and compensation during the highest five consecutive plan years of
employment. Benefits under this defined benefit formula were frozen for most
employees effective December 31, 1994. In its place, the Company adopted a
defined benefit cash balance formula, under which the Company annually
provides an allocation to each eligible employee as a percentage of that
employee's salary, similar to a defined contribution plan arrangement. The
1996 and 1995 allocations were based on 7.0% of each employee's salary. The
Company's policy for the Plan is to fund at least the minimum amount required
by the Employee Retirement Income Security Act of 1974.
39
<PAGE>
CITIZENS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net pension expense included the following components:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
----------------------
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost--benefits earned........................... $ 3.8 $ 3.9 $ 2.6
Interest cost on projected benefit obligation........... 2.3 1.7 2.0
Actual return on Plan assets............................ (1.3) (9.3) --
Net amortization and deferral........................... (2.4) 6.5 (1.7)
------ ------ ------
Net pension expense................................... $ 2.4 $ 2.8 $ 2.9
====== ====== ======
</TABLE>
The following table sets forth the Plan's funded status and amounts
recognized in the Company's financial statements.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS
Vested benefit obligation.................................... $ 34.5 $ 30.5
Unvested benefit obligation.................................. 1.3 1.1
------ ------
Accumulated benefit obligation............................. $ 35.8 $ 31.6
====== ======
PENSION LIABILITY INCLUDED IN CONSOLIDATED BALANCE SHEETS
Projected benefit obligation................................. $ 39.1 $ 36.8
Plan assets at fair value.................................... 34.1 33.8
------ ------
Plan assets less than projected benefit obligation......... (5.0) (3.0)
Unrecognized net loss from past experience................... 5.0 6.2
Unrecognized prior service benefit........................... (6.7) (7.4)
Unamortized transition asset................................. (1.7) (1.8)
------ ------
Net pension liability...................................... $ (8.4) $ (6.0)
====== ======
</TABLE>
Determination of the projected benefit obligation was based on a weighted
average discount rate of 7.0% at December 31, 1996 and 1995. The assumed long-
term rate of return on plan assets was 9.0% for both years. The actuarial
present value of the projected benefit obligation was determined using assumed
rates of increase in future compensation levels of 5.5%. Plan assets are
invested primarily in various separate accounts and the general account of
First Allmerica Financial Life Insurance Company (FAFLIC), an affiliate of the
Company. The Plan also holds stock of Allmerica Financial Corporation, the
ultimate parent of the Company.
The Company also has a 401(k) Matched Savings Plan, a defined contribution
plan. Effective with the 1995 plan year, the Company began matching employee
elective 401(k) contributions, up to a maximum percentage determined annually
by the Board of Directors. During both 1996 and 1995, the Company matched 50%
of employees' contributions up to 6% of eligible compensation. Prior to
January 1, 1995, a profit sharing formula was used under which the Company's
contributions to the plan were determined by a formula based upon the
statutory combined ratio, including policyholders' dividends, and were subject
to certain limitations. The total expenses related to these plans were $1.8
million, $1.4 million and $1.9 million, in 1996, 1995, and 1994, respectively.
40
<PAGE>
CITIZENS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. POSTRETIREMENT BENEFIT PLANS
In addition to the Company's pension plans, the Company provides
postretirement medical and death benefits to certain full-time employees and
dependents. Generally, employees become eligible at age 55 with at least 15
years of service.
Spousal coverage is generally provided for up to two years after death of
retiree. Benefits include hospital, major medical, and a payment at death
equal to retirees' final compensation up to certain limits. Effective January
1, 1996, the Company revised these benefits so as to establish limits on
future benefit payments, restrict eligibility for current employees and
eliminate eligibility for new employees. The medical plans have varying co-
payments and deductibles, depending on the plan. Participation in the medical
plan requires some retiree contributions, which are defined in the plan. The
life insurance plan is a non-contributory plan. These plans are unfunded.
The plan changes effective January 1, 1996 resulted in an unrecognized
negative prior service cost (change in eligibility and medical benefits) of
$8.1 million and a curtailment (no future increases in life insurance) of $1.2
million. The negative prior service cost will be amortized over the average
number of years to full eligibility (approximately 9 years or $0.9 million per
year). The curtailment gain has been deducted from unrecognized loss.
The components of net periodic postretirement benefit expense were as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
--------------------
1996 1995 1994
------ ------------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost............................................... $ 0.6 $ 1.2 $ 0.8
Interest cost.............................................. 0.7 1.3 1.0
Net amortization........................................... 0.1 0.1 0.1
Prior service cost......................................... (0.9) -- --
------ ----- -----
Net postretirement benefit expense......................... $ 0.5 $ 2.6 $ 1.9
====== ===== =====
</TABLE>
The plans' status and the amounts recognized in the Company's consolidated
balance sheets were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees...................................................... $ 6.4 $ 5.6
Other fully eligible plan participants........................ 1.2 3.5
Other active plan participants................................ 4.0 11.9
------ ------
Accumulated postretirement benefit obligation................... 11.6 21.0
Unrecognized prior service cost................................. 7.2 --
Unrecognized loss............................................... (3.1) (5.4)
------ ------
Accrued postretirement benefit cost............................. $ 15.7 $ 15.6
====== ======
</TABLE>
For purposes of measuring the accumulated postretirement benefit obligation
at December 31, 1996, health care costs were assumed to decrease to 9.0% in
1997, declining thereafter until the ultimate rate of 5.5% is reached in 2001
and remaining at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. To illustrate,
increasing the assumed health care cost trend rates by 1% in each
41
<PAGE>
CITIZENS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
year would increase the medical accumulated postretirement benefit obligation
as of December 31, 1996, by $0.8 million, or 8.7%, and the aggregate of the
service and interest cost components of annual net periodic postretirement
benefit expense by $0.1 million, or 9.7%.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% as of December 31, 1996 and 1995.
The assumed rate of future annual salary increases was 5.5% at both valuation
dates.
10. POSTEMPLOYMENT BENEFITS
Effective January 1, 1994, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 112 (SFAS No. 112), "Employers'
Accounting for Postemployment Benefits," which requires employers to recognize
the costs and obligations of severance, disability, and related life insurance
and health care benefits to be paid to inactive or former employees after
employment but before retirement. Prior to adoption, the Company had
recognized the cost of these benefits on an accrual or paid basis, depending
on the plan. Implementation of SFAS No. 112 resulted in a transition
obligation of $0.6 million, net of deferred federal income taxes, reported as
a cumulative effect of a change in accounting in the consolidated statement of
income. The 1996, 1995 and 1994 expenses, after recognition of the cumulative
effect, are not significant.
11. STOCK OPTIONS
In October 1995 the FASB issued Statement of Financial Accounting Standards
(SFAS No. 123) "Accounting for Stock-Based Compensation". The standard is
effective for fiscal years beginning after December 15, 1995, and requires the
Company either to apply a fair value measure to any stock-based compensation
granted by the Company after December 31, 1994, or continue to apply the
valuation provisions of existing accounting standards, but with pro-forma net
income and earnings per share disclosures using a fair value methodology to
value the stock-based compensation. Beginning the year ended December 31,
1996, the Company has elected to continue to apply the valuation provisions of
existing accounting standards (APB 25). The pro-forma effect of applying SFAS
No. 123 is not material.
Effective March 9, 1994, the Company adopted a Long Term Stock Incentive
Plan (the "Plan"). Key employees of the Company and Citizens Insurance are
eligible for awards pursuant to the Plan administered by the Compensation
Committee of the Board of Directors (the "Committee") of Citizens Insurance.
Under the terms of the Plan, options may be granted to eligible employees at a
price not less than the market price of the Company's common stock on the date
of grant. At December 31, 1996, 11,000, 9,000, 32,500, 40,000 and 8,000 option
shares were outstanding at an option price of $15.25, $16.625, $16.875, $18.25
and $18.875 per share, respectively. At December 31, 1995, 70,500 option
shares were outstanding at an option price of $16.50 per share. Option shares
may be exercised subject to the terms prescribed by the Committee at the time
of grant, otherwise options vest at the rate of 20% annually for five
consecutive years and must be exercised not later than ten years from the date
of grant. There were 1,500 options exercised during 1996. There were no
options exercised in 1995. At December 31, 1996, there were 12,700 options
exercisable and 98,000 option shares were available for future grant.
12. RELATED PARTY TRANSACTIONS
The Company declared dividends to Hanover as follows:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
--------------------
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Common stock dividends.................................... $ 5.8 $ 5.8 $ 5.8
Preferred stock dividends................................. -- 2.0 4.0
------ ------ ------
Total declared dividends to Hanover..................... $ 5.8 $ 7.8 $ 9.8
====== ====== ======
</TABLE>
42
<PAGE>
CITIZENS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has agreements under which FAFLIC, APY, and Hanover provide
management, space, and other services. Charges for these services are based on
full cost including all direct and indirect overhead costs and amounted to
$12.5 million, $9.7 million and $3.4 million in 1996, 1995, and 1994,
respectively.
The Company provides data processing, claims adjusting, underwriting, and
bond operation services to Hanover on business assumed from Hanover. These
items are treated as assumed expenses by the Company.
13. COMMITMENTS AND CONTINGENT LIABILITIES
The Company has certain operating lease agreements for property and
equipment. At December 31, 1996, future minimum rental payments under non-
cancelable long-term operating leases were $12.0 million, payable as follows:
1997--$3.1 million; 1998--$2.8 million; 1999--$2.2 million; 2000--$1.6
million; 2001--$1.1 million; and $1.2 million thereafter. All leases expire
prior to the year 2005. It is expected that, in the normal course of business,
leases that expire will be renewed or replaced by leases on other property and
equipment; thus, it is anticipated that future minimum lease commitments will
not be less than the amounts shown for 1997. Certain equipment and fixture
leases are subject to buy out options. Rent expense, excluding related party
charges, was $3.3 million, $3.3 million, and $5.6 million in 1996, 1995, and
1994, respectively.
Litigation
The Company has been named a defendant in various legal proceedings arising
in the normal course of business. In the opinion of management, based on the
advice of legal counsel, the ultimate resolution of these proceedings will not
have a material effect on the consolidated financial statements. However,
liabilities related to these proceedings could be established in the near term
if estimates of the ultimate resolution of these proceedings are revised.
14. DIVIDEND RESTRICTION AND REGULATORY MATTERS
Michigan limits the payment of dividends and other distributions to
shareholders. Under current law, cash dividends may only be paid from earnings
and policyholders' surplus. In addition, a Michigan insurer may not pay an
"extraordinary" dividend to its stockholders without the prior approval of the
Michigan Insurance Commissioner. An extraordinary dividend or distribution is
defined as a dividend or distribution of cash or other property whose fair
market value, together with that of other dividends and distributions made
within the preceding 12 months, exceeds the greater of 10% of policyholders'
surplus as of December 31 of the immediately preceding year or the statutory
net income less realized gains, for the immediately preceding calendar year.
Based upon the 1996 statutory financial statements of Citizens Insurance, the
maximum dividend that may be paid to Citizens Corporation at January 1, 1997,
without prior approval from the Michigan Commissioner of Insurance, is $39.9
million.
15. SEGMENT INFORMATION
The Company is engaged primarily in the property and liability insurance
business. The Company operates predominately in Michigan, with operations in
the adjoining states of Indiana and Ohio. Substantially all of the Company's
earnings are generated in the state of Michigan. The Company's insurance
operations are segmented into personal and commercial lines of business, based
on common underlying risks and customer types for individual products in those
segments. The personal segment includes products such as automobile insurance
and homeowners insurance. The commercial segment includes products such as
automobile insurance, commercial multiple-peril insurance, and workers'
compensation insurance.
43
<PAGE>
CITIZENS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a review of results by segment. Investments are available
for payments of claims and expenses for all products. Investment income,
realized gains and total assets have not been identified to specific segments.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
INCOME
BEFORE
REALIZED FEDERAL
NET PREMIUMS INVESTMENT GAIN UNDERWRITING INCOME TOTAL
EARNED INCOME (LOSS) PROFIT (LOSS) TAXES ASSETS
------------ ---------- -------- ------------- ------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
1996
Personal..... $554.6 $ (1.3)
Commercial... 280.9 2.0
------ ----- ----- ------ ------ --------
Total...... $835.5 $88.9 $15.0 $ 0.7 $105.5 $2,503.0
====== ===== ===== ====== ====== ========
1995
Personal..... $536.2 $(26.6)
Commercial... 281.6 40.0
------ ----- ----- ------ ------ --------
Total...... $817.8 $78.8 $ 3.8 $ 13.4 $ 96.6 $2,470.8
====== ===== ===== ====== ====== ========
1994
Personal..... $496.1 $(32.3)
Commercial... 266.6 1.6
------ ----- ----- ------ ------ --------
Total...... $762.7 $74.8 $(1.1) $(30.7) $ 45.2 $2,333.5
====== ===== ===== ====== ====== ========
</TABLE>
16. QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED, 1996
---------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- ---------- ----------- ----------
(IN MILLIONS, EXCEPT COMMON SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues.................. $ 239.3 $ 233.2 $ 233.9 $ 235.0
Net income...................... $ 22.5 $ 12.1 $ 27.1 $ 22.4
Net income available to common
shareholders' per share........ $ 0.63 $ 0.34 $ 0.77 $ 0.63
Dividends declared per common
share.......................... $ 0.05 $ 0.05 $ 0.05 $ 0.05
<CAPTION>
FOR THE THREE MONTHS ENDED, 1995
---------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- ---------- ----------- ----------
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues.................. $ 215.3 $ 224.5 $ 232.5 $ 228.7
Net income...................... $ 11.6 $ 24.0 $ 20.9 $ 18.4
Net income available to common
shareholders' per share........ $ 0.29 $ 0.64 $ 0.58 $ 0.51
Dividends declared per common
share.......................... $ 0.05 $ 0.05 $ 0.05 $ 0.05
</TABLE>
44
<PAGE>
CITIZENS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED, 1994
----------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- ---------- ----------- ----------
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues.................. $ 200.2 $ 209.1 $ 215.9 $ 213.4
(Loss) income before cumulative
effect of a change in
accounting..................... $ (1.7) $ 8.1 $ 23.4 $ 15.4
Cumulative effect of a change in
accounting..................... $ (0.6) $ -- $ -- $ --
Net (loss) income............... $ (2.3) $ 8.1 $ 23.4 $ 15.4
(Loss) income before cumulative
effect of a change in
accounting, per common share... $ (0.07) $ 0.19 $ 0.62 $ 0.40
Cumulative effect of a change in
accounting, per common share... $ (0.02) $ -- $ -- $ --
Net (loss) income available to
common shareholders' per
share.......................... $ (0.09) $ 0.19 $ 0.62 $ 0.40
Dividends declared per common
share.......................... $ 0.05 $ 0.05 $ 0.05 $ 0.05
</TABLE>
Note: Due to the use of weighted average shares outstanding when calculating
earnings per common share, the sum of the quarterly per common share data may
not equal the per common share data for the year.
45
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A description of the directors, including those nominated for election as
directors at the Annual Meeting of Shareholders of the Registrant is
incorporated herein by reference from the Proxy Statement for the Annual
Meeting of Shareholders to be held May 20, 1997, to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is biographical information concerning the executive
officers of the Company. Officers of the Company hold office until the first
meeting of the Board of Directors following the next annual meeting of the
shareholders and until their respective successor is chosen and qualified
unless a shorter period is specified by the terms of their election or
appointment.
JOHN F. O'BRIEN, 53
Chairman of the Board and Chief Executive Officer of the Company since 1992
President of the Company since 1994
John F. O'Brien has been a Director of Citizens Insurance since March 1992
and Citizens, for which he also serves as President and Chief Executive
Officer, since December 1992. Mr. O'Brien has also served as Director,
President and Chief Executive Officer of Allmerica Property & Casualty since
August 1992, and has also been a Director of Hanover since September 1989. In
addition, Mr. O'Brien has served as a Director, Chief Executive Officer and
President of Allmerica Financial Corporation ("AFC") since February 1995 and
of First Allmerica Financial Life Insurance Company ("FAFLIC") since August
1989. Mr. O'Brien is also a trustee or director and executive officer of
Allmerica Investment Trust, Allmerica Securities Trust, and Allmerica Funds.
Additionally, Mr. O'Brien is a director and/or holds offices at various other
non-public FAFLIC affiliates including SMA Financial Corp. and Allmerica
Financial Life Insurance and Annuity Company ("AFLIAC"). Mr. O'Brien also
currently serves as a Director of The TJX Companies, Inc., an off-price family
apparel retailer, ABIOMED, Inc., a medical device company, Cabot Corporation,
a diversified specialty chemicals and materials and energy company, The Life
Insurance Association of Massachusetts, and The American Council of Life
Insurance. He also currently serves as a member of the executive committee of
the Mass Capital Resource Company, a Massachusetts investment partnership.
Prior to joining FAFLIC, Mr. O'Brien served as an officer of FMR Corp., the
parent company of various financial services companies in the Fidelity Group
and a director and/or an executive officer at various other of FMR Corp.'s
affiliates.
BRUCE C. ANDERSON, 53
Vice President of the Company since 1997
Bruce C. Anderson has been Vice President of Citizens and APY since March
1997 and of AFC since February 1995. Mr. Anderson has been employed by FAFLIC
since 1967 and has been Vice President of FAFLIC since October 1984.
JOHN P. KAVANAUGH, 42
Vice President and Chief Investment Officer of the Company since 1996
John P. Kavanauvgh has been Vice President and Chief Investment Officer of
Citizens, AFC and APY since September 1996. Mr. Kavanaugh has been employed by
FAFLIC since 1983, and has been Vice President of
46
<PAGE>
FAFLIC since December 1991 and Vice President of AFLIAC since January 1992.
Mr. Kavanaugh has also served as Director and Chief Investment Officer of
FAFLIC, Hanover, Citizens Insurance and AFLIAC since August 1996. Mr.
Kavanaugh is also a director and/or executive officer at various other non-
public affiliates.
JOHN F. KELLY, 58
Vice President, General Counsel and Assistant Secretary of the Company since
1993
John F. Kelly has been Assistant Secretary of Citizens since December 1992,
Vice President and General Counsel of Citizens since September 1993, Vice
President and General Counsel of APY since August 1992, and Assistant
Secretary of APY since May 1995. Mr. Kelly has been Vice President, Assistant
Secretary and General Counsel of AFC since February 1995, has been employed by
FAFLIC since July 1968, and has been Senior Vice President and General Counsel
of FAFLIC since February 1986. Mr. Kelly also served as Secretary of APY from
August 1992 to May 1995. In addition to his positions with AFC and FAFLIC, Mr.
Kelly has been a Director of AFLIAC since October 1982 and is a director
and/or executive officer at various other non-public affiliates.
J. BARRY MAY, 49
Vice President of the Company since 1997
Director of the Company since 1996
J. Barry May has been Vice President and Director of Citizens since March
1997 and September 1996, respectively, and has served as President and
Director of Hanover since September 1996. Mr. May has also been Vice President
of APY since September 1996 and Vice President of AFC since February 1997. Mr.
May served as Vice President of Hanover from May 1995 to September 1996, as
Regional Vice President from February 1993 to May 1995 and as a General
Manager of Hanover from June 1989 to May 1995. Mr. May has been employed by
Hanover since 1985.
JAMES R. MCAULIFFE, 52
Vice President and Director of the Company since 1992
James R. McAuliffe has been a Director and Vice President of Citizens since
December 1992, President of Citizens Insurance since December 1994 and Vice
President of APY since August 1992. Mr. McAuliffe has been employed by FAFLIC
since 1968, and served as Vice President and Chief Investment Officer of
FAFLIC from November 1986 through December 1994. Mr. McAuliffe was Vice
President of AFC from February 1995 to December 1995 and since February 1997.
Mr. McAuliffe was also a Director, Vice President and Chief Investment Officer
of APY from August 1992 through December 1994, and a Director of AFLIAC from
April 1987 through May 1995 and since May 1996. Mr. McAuliffe also served as
Vice President and Chief Investment Officer of AFLIAC from December 1986
through May 1995. Additionally, Mr. McAuliffe is a director and/or executive
officer at various other non-public affiliates.
EDWARD J. PARRY, III, 37
Chief Financial Officer of the Company since 1996
Vice President of the Company since 1993
Treasurer of the Company since 1992
Edward J. Parry, III has been Chief Financial Officer of Citizens and
Citizens Insurance since December 1996 and Vice President and Treasurer of
Citizens since September 1993 and December 1992, respectively. He has served
as Chief Financial Officer of APY, AFC, FAFLIC, AFLIAC, and Hanover since
December 1996 and has been Vice President and Treasurer of APY, FAFLIC, AFLIAC
and Hanover since February 1993 and of AFC since February 1995. Mr. Parry is
also director and/or executive officer at various other non-public affiliates.
Prior to joining FAFLIC in July 1992, Mr. Parry was employed by the accounting
firm of Price Waterhouse from July 1987 through July 1992.
47
<PAGE>
RICHARD M. REILLY, 58
Vice President of the Company since 1997
Richard M. Reilly has been Vice President of Citizens and APY since March
1997 and Vice President of AFC and FAFLIC since February 1997 and November
1990, respectively. He has also been a Director and Vice President of AFLIAC
since November 1990 and President and Chief Executive Officer of AFLIAC since
August 1995. Mr. Reilly was Vice President of AFC from February 1995 through
December 1995. Additionally, Mr. Reilly has been the President of Allmerica
Investment Trust, Allmerica Funds, and Allmerica Securities Trust, each a
registered investment company, since February 1991, April 1991 and February
1991, respectively. Mr. Reilly is also a director and/or holds an executive
office at various other non-public affiliates. Prior to his affiliation with
FAFLIC, he was an executive officer of Fidelity Management and Research
Company from 1969 to 1987 and Oppenheimer Capital from 1987 to 1990.
LARRY C. RENFRO, 46
Vice President of the Company since 1997
Larry C. Renfro has been a Vice President of Citizens and APY since March
1997 and of AFC and FAFLIC since February 1997 and April 1990, respectively.
He has served as a Director, President and Chief Executive Officer of 440
Financial Group of Worcester, Inc. (a former subsidiary of FAFLIC) from May
1990 to March 1995. Mr. Renfro has also served as Vice President of APY from
October 1992 through December 1995 and as Vice President of AFC from February
1995 through December 1995. From August 1989 through March 1990, Mr. Renfro
was an Executive Vice President at State Street Bank & Trust Company. From
March 1988 through July 1989, Mr. Renfro served as President and Chief
Executive Officer of Boston Financial Data Services, Incorporated, a
subsidiary of State Street Bank & Trust Company. From April 1981 through March
1988, Mr. Renfro held various executive offices at Fidelity Investments,
including Managing Director of Fidelity Managements & Research Company. Mr.
Renfro is currently a Director of LoJack Corporation, a manufacturer of anti-
theft systems.
ERIC A. SIMONSEN, 51
Vice President and Director of the Company since 1992
Eric A. Simonsen has been a Director and Vice President of Citizens since
December 1992, of APY since August 1992, of AFLIAC since September 1990 and a
Vice President of AFC since February 1995. In addition, Mr. Simonsen has been
Vice President and Director of FAFLIC since September 1990 and April 1996,
respectively. Mr. Simonsen has been President of Allmerica Service Company,
Inc. Since December 1996. Mr. Simonsen was Chief Financial Officer of AFC from
February 1995 to December 1996, of FAFLIC and AFLIAC from September 1990 to
December 1996, of APY from August 1992 to December 1996 and of Citizens from
December 1992 to December 1996. Mr. Simonsen is also a director and/or
executive officer at various other non-public affiliates. From April 1987 to
September 1990, Mr. Simonsen served as Principal and Chief Financial Officer
of The Lincoln Group, Inc., a privately owned group of manufacturing
companies.
PHILLIP E. SOULE, 47
Vice President of the Company since 1997
Phillip E. Soule has been Vice President of Citizens, APY and FAFLIC since
March 1997, September 1996 and February 1987, respectively, and of AFC since
February 1997. He was a Vice President of AFC from February 1995 through
December 1995. Mr. Soule has been employed by FAFLIC since 1972 in various
capacities.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Proxy Statement for the Annual
Meeting of Shareholders to be held May 20, 1997, to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934.
48
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
MANAGEMENT
Incorporated herein by reference from the Proxy Statement for the Annual
Meeting of Shareholders to be held May 20, 1997, to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Proxy Statement for the Annual
Meeting of Shareholders to be held May 20, 1997, to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS AND INDEX:
The consolidated financial statements of Citizens Corporation are listed
under Item 8 of this Form 10-K.
(a)(2) FINANCIAL STATEMENT SCHEDULES AND INDEX:
<TABLE>
<CAPTION>
PAGE NO. IN
SCHEDULE THIS REPORT
-------- -----------
<C> <S> <C>
I Summary of Investments--Other than Investments in
Related Parties........................................ 52
II Condensed Financial Information of the Registrant...... 53-55
III Supplementary Insurance Information.................... 56-58
IV Reinsurance............................................ 59
V Valuation and Qualifying Accounts...................... 60
VI Supplemental Information Concerning Property/Casualty
Insurance Operations................................... 61
</TABLE>
Schedules other than those listed above are omitted as they are not
required, not applicable, or the required information is disclosed elsewhere
in the financial statements and related notes.
(a)(3) EXHIBITS:
Exhibits filed as part of this Form 10-K are as follows:
<TABLE>
<C> <C> <S>
(3.1) Amended Articles of Incorporation*
(3.2) By-Laws of the Registrant*
(4) Form of Common Stock Certificate*
(10) Material Contracts*
(10.1) The Hanover Insurance Company/Citizens Insurance Company of
America Excess Benefit Retirement Plan*
(10.2) Citizens Insurance Company of America Supplemental Employee
Retirement Plan.* Amended November 15, 1994.
(10.3) The Citizens Insurance Company of America Management Reward
Plan.* Amended November 15, 1994. Further amended September 6,
1995.
(10.4) Consolidated Income Tax Agreement dated December 31, 1992.*
(10.5) Citizens-Hanover Service Agreement dated December 18, 1979.*
(10.7) Intercompany Reinsurance Agreement between Hanover and Citizens
Insurance dated December 13, 1983, together with addenda.*
</TABLE>
49
<PAGE>
<TABLE>
<C> <C> <S>
(10.8) Intercompany Reinsurance Agreement between Citizens Insurance
and Hanover dated September 16, 1992, together with addenda.*
Further amended January 1, 1995.
(10.10) Lease between Citizens Insurance and Bavarian Group
Partnership dated August 19, 1989 related to leased premises
in Gaylord, Michigan.*
(10.11) Lease between Citizens Insurance and Upper Peninsula
Commission for Area Progress, Inc. dated January 26, 1995
related to leased premises in Escanaba, Michigan,* with
addendum dated March 9, 1995. ***
(10.12) Addendum to the lease between Citizens Insurance and The
Precedent dated May 4, 1992 related to leased premises in
Indianapolis, Indiana.**
(10.13) Loan Agreement between Citizens Insurance and The Economic
Development Corporation of the County of Livingston ("EDC")
dated August 1, 1986.*
(10.14) Indenture between EOL and the First National Bank of Howell
dated August 1, 1986.*
(10.15) Noncompetition and Confidentiality Agreement dated as of
February 12, 1993 by and among Citizens Insurance, Hanover,
Allmerica, AFC, Beacon and Ohio Farmers Insurance Company.*
(10.16) Consolidated Service Agreement between AFC Life Assurance
Company of America and their subsidiaries dated September 30,
1993.*
(10.17) Lease between Citizens Insurance and CICOA, L.L.C., entered
into November 7, 1994, related to leased premises in
construction in Grand Rapids, Michigan. **
(10.18) Citizens Insurance Company of America Stock Option Plan dated
June 3, 1994. **
(10.19) Lease between Citizens Insurance and Eastrich No. 152
Corporation, effective March 1, 1995, related to leased
premises in Columbus, Ohio.***
(10.20) Intercompany Reinsurance Agreement between Citizens Insurance
Company of America and Citizens Insurance Company of Ohio
dated January 1, 1995.***
(10.21) Citizens Insurance Company of America Employees' 401(k)
Matched Savings Plan.*****
(10.22) Allmerica Financial Cash Balance Pension Plan.*****
(11) Statement regarding computation of per share earnings
(21) Subsidiaries of the Registrant
(23) Consent of Independent Accountants in reference to the Registration
Statement on Form S-8 (No. 33-97066)
(24) Power of Attorney
(99.1) Important factors regarding forward-looking statements
</TABLE>
- --------
* Incorporated by reference to the similarly numbered exhibit in the
Company's Registration Statement on Form S-1, No. 33-56240, filed March
18, 1993.
** Incorporated by reference to the similarly numbered exhibit in the
Company's Annual Report for the year ended December 31, 1994 on Form 10-
K, filed March 29, 1995.
*** Incorporated by reference to the similarly numbered exhibit in the
Company's Quarterly Report for the period ended March 31, 1995 on Form
10-K, filed May 11, 1995
**** Incorporated by reference to the similarly numbered exhibit in the
Company's Quarterly Report for the period ended June 30, 1995 on Form
10-K, filed August 10, 1995.
***** Incorporated by reference to the similarly numbered exhibit in the
Company's Quarterly Report for the period ended September 30, 1995 on
Form 10-K, filed November 10, 1995.
(b) REPORTS ON FORM 8-K FILED IN THE FOURTH QUARTER OF 1996:
None.
50
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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
/s/ John F. O'Brien
Dated March 18, 1997 By: _________________________________
JOHN F. O'BRIEN
PRESIDENT, CHIEF EXECUTIVE
OFFICER AND CHAIRMAN OF THE BOARD
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Dated March 18, 1997 /s/ John F. O'Brien
_____________________________________
JOHN F. O'BRIEN
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND CHAIRMAN OF THE BOARD
Dated March 18, 1997 *
_____________________________________
JAMES R. MCAULIFFE
VICE PRESIDENT AND DIRECTOR
Dated March 18, 1997 *
_____________________________________
ERIC A. SIMONSEN
VICE PRESIDENT AND DIRECTOR
Dated March 18, 1997 /s/ Edward J. Parry, III
_____________________________________
EDWARD J. PARRY, III
VICE PRESIDENT, CHIEF FINANCIAL
OFFICER, TREASURER AND PRINCIPAL
ACCOUNTING OFFICER
Dated March 18, 1997 *
_____________________________________
JAMES A. COTTER, JR.
DIRECTOR
Dated March 18, 1997 *
_____________________________________
NEAL J. CURTIN
DIRECTOR
Dated March 18, 1997 *
_____________________________________
DONA SCOTT LASKEY
DIRECTOR
/s/ John F. O'Brien
*By: ________________________________
JOHN F. O'BRIEN,
ATTORNEY-IN-FACT
51
<PAGE>
SCHEDULE I
CITIZENS CORPORATION
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
AMOUNT AT WHICH
SHOWN IN THE
FAIR CONSOLIDATED
TYPE OF INVESTMENT COST(1) VALUE(1) BALANCE SHEET
------------------ -------- -------- ---------------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
U.S. government obligations.............. $ 62.1 $ 63.6 $ 63.6
States and political subdivisions........ 949.6 966.0 966.0
Foreign governments...................... 4.2 4.9 4.9
Public utilities......................... 39.7 41.3 41.3
Convertibles and bonds with warrants..... 0.2 0.2 0.2
All other corporate bonds................ 263.0 272.3 272.3
Redeemable preferred stock................. 48.1 50.0 50.0
-------- -------- --------
Total fixed maturities................. 1,366.9 1,398.3 1,398.3
-------- -------- --------
Equity securities:
Common stocks:
Public utilities......................... 2.5 2.8 2.8
Banks, trusts and insurance companies.... 13.3 24.8 24.8
Industrial, miscellaneous and all other.. 110.2 158.3 158.3
Nonredeemable preferred stocks............. 6.3 6.4 6.4
-------- -------- --------
Total equity securities................ 132.3 192.3 192.3
-------- -------- --------
Other investments............................ 13.2 14.6 14.6
-------- -------- --------
Total investments.................... $1,512.4 $1,605.2 $1,605.2
======== ======== ========
</TABLE>
- --------
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums and
accretion of discounts.
52
<PAGE>
SCHEDULE II
CITIZENS CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
CONDENSED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Net investment income.................................. $ 0.2 $ 0.6 $ 0.4
----- ----- -----
Total revenues....................................... 0.2 0.6 0.4
----- ----- -----
EXPENSES
Miscellaneous expenses................................. 1.2 1.7 0.7
----- ----- -----
Total expenses....................................... 1.2 1.7 0.7
----- ----- -----
Loss before federal income taxes and equity in net oper-
ating results of subsidiaries........................... (1.0) (1.1) (0.3)
Federal income tax benefit............................... 0.2 0.4 0.1
Equity in net operating results of subsidiaries.......... 84.9 75.6 44.8
----- ----- -----
Net income............................................... $84.1 $74.9 $44.6
===== ===== =====
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in this Form 10-K.
53
<PAGE>
SCHEDULE II (CONTINUED)
CITIZENS CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT COMPANY ONLY
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
ASSETS
Cash and cash equivalents............................ $ 5.1 $ 9.3
Debt securities available-for-sale, at fair value
(Amortized cost of $0.2 in 1995).................... -- 0.2
Investment in subsidiaries........................... 741.2 675.5
Other assets......................................... 10.0 --
---------- ----------
Total assets....................................... $ 756.3 $ 685.0
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Total liabilities.................................... $ 1.8 $ 2.2
---------- ----------
SHAREHOLDERS' EQUITY
Common stock, $0.01 par value per share; authorized
100.0 million shares; 36.1 million shares issued;
35.9 million shares outstanding..................... 0.4 0.4
Additional paid-in capital........................... 156.1 156.1
Retained earnings.................................... 552.5 475.5
Unrealized appreciation on investments, net of
deferred federal income taxes....................... 60.5 54.7
Treasury stock, at cost (0.8 million and 0.2 million
shares)............................................. (15.0) (3.9)
---------- ----------
Total shareholders' equity......................... 754.5 682.8
---------- ----------
Total liabilities and shareholders' equity......... $ 756.3 $ 685.0
========== ==========
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in this Form 10-K.
54
<PAGE>
SCHEDULE II (CONTINUED)
CITIZENS CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------ ------- ------
(IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.......................................... $ 84.1 $ 74.9 $ 44.6
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in undistributed net income of
subsidiaries..................................... (54.9) (64.1) (25.3)
Change in liabilities............................. (0.4) 0.5 (0.2)
Change in other assets............................ (10.0) 4.0 (4.3)
------ ------- ------
Net cash provided by operating activities....... 18.8 15.3 14.8
------ ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiaries.......................... (5.0) (7.0) --
Sale of available-for-sale debt securities.......... 0.2 1.2 --
Purchases of available-for-sale debt securities..... -- (0.2) (1.2)
Proceeds from subsidiary redemption of Series A
preferred stock.................................... -- 100.0 --
------ ------- ------
Net cash (used for) provided by investing activ-
ities.......................................... (4.8) 94.0 (1.2)
------ ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders...................... (7.1) (9.2) (11.2)
Treasury stock purchased............................ (11.1) (3.9) --
Redemption of Series A preferred stock.............. -- (100.0) --
------ ------- ------
Net cash used for financing activities.......... (18.2) (113.1) (11.2)
------ ------- ------
Net (decrease) increase in cash and cash
equivalents........................................ (4.2) (3.8) 2.4
Cash and cash equivalents at beginning of the
period............................................. 9.3 13.1 10.7
------ ------- ------
Cash and cash equivalents at end of the period...... $ 5.1 $ 9.3 $ 13.1
====== ======= ======
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in this Form 10-K.
55
<PAGE>
SCHEDULE III
CITIZENS CORPORATION
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
RESERVE FOR
DEFERRED LOSSES AND
POLICY LOSS NET NET
ACQUISITION ADJUSTMENT UNEARNED PREMIUMS INVESTMENT
EXPENSES(1) EXPENSES(1) PREMIUMS(1) EARNED INCOME(2)
----------- ----------- ----------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Private passenger auto-
mobile................. $19.8 $ 582.7 $170.3 $436.1
Homeowners.............. 11.4 53.6 60.9 104.4
Other personal lines.... 1.3 2.3 8.5 14.1
----- -------- ------ ------ -----
Total personal lines.. 32.5 638.6 239.7 554.6
----- -------- ------ ------ -----
Commercial automobile... 6.8 106.5 33.7 67.6
Commercial multiple per-
il..................... 7.3 143.7 31.5 59.1
Workers' compensation... 5.3 320.4 42.7 130.7
Other commercial lines.. 2.4 29.3 14.7 23.5
----- -------- ------ ------ -----
Total commercial
lines................ 21.8 599.9 122.6 280.9
----- -------- ------ ------ -----
Totals.............. $54.3 $1,238.5 $362.3 $835.5 $88.9
===== ======== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
LOSSES AND LOSS POLICY OTHER NET
ADJUSTMENT ACQUISITION UNDERWRITING PREMIUMS
EXPENSES EXPENSES EXPENSES(3) WRITTEN
--------------- ----------- ------------ --------
<S> <C> <C> <C> <C>
Private passenger automo-
bile....................... $299.0 $ 87.5 $30.9 $433.8
Homeowners.................. 97.3 22.2 7.5 107.7
Other personal lines........ 7.8 2.8 1.6 14.5
------ ------ ----- ------
Total personal lines...... 404.1 112.5 40.0 556.0
------ ------ ----- ------
Commercial automobile....... 53.8 14.6 4.6 70.4
Commercial multiple peril... 56.8 14.3 6.9 63.3
Workers' compensation....... 73.4 17.4 6.6 125.0
Other commercial lines...... 16.3 5.3 2.1 23.5
------ ------ ----- ------
Total commercial lines.... 200.3 51.6 20.2 282.2
------ ------ ----- ------
Totals.................. $604.4 $164.1 $60.2 $838.2
====== ====== ===== ======
</TABLE>
- --------
(1) As of December 31, 1996
(2) Total invested assets which generate investment income are not recorded or
allocated by line of business; therefore, net investment income is stated
in total.
(3) Includes $1.1 of severance charges and excludes policyholders' dividends
of $7.2
56
<PAGE>
SCHEDULE III
(CONTINUED)
CITIZENS CORPORATION
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
RESERVE FOR
DEFERRED LOSSES AND
POLICY LOSS NET NET
ACQUISITION ADJUSTMENT UNEARNED PREMIUMS INVESTMENT
EXPENSES(1) EXPENSES(1) PREMIUMS(1) EARNED INCOME(2)
----------- ----------- ----------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Private passenger
automobile............. $20.5 $ 653.9 $128.5 $424.4
Homeowners.............. 10.9 50.2 73.8 98.7
Other personal lines.... 1.3 3.5 9.4 13.1
----- -------- ------ ------ -----
Total personal lines.. 32.7 707.6 211.7 536.2
----- -------- ------ ------ -----
Commercial automobile... 5.7 121.1 35.6 59.8
Commercial multiple
peril.................. 5.6 119.1 34.6 54.0
Workers' compensation... 5.9 323.6 56.4 148.3
Other commercial lines.. 2.3 20.2 13.1 19.5
----- -------- ------ ------ -----
Total commercial
lines................ 19.5 584.0 139.7 281.6
----- -------- ------ ------ -----
Totals.............. $52.2 $1,291.6 $351.4 $817.8 $78.8
===== ======== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
LOSSES AND LOSS POLICY OTHER NET
ADJUSTMENT ACQUISITION UNDERWRITING PREMIUMS
EXPENSES EXPENSES EXPENSES(3) WRITTEN
--------------- ----------- ------------ --------
<S> <C> <C> <C> <C>
Private passenger
automobile................. $326.1 $ 86.8 $30.7 $425.5
Homeowners.................. 80.0 18.8 8.8 102.2
Other personal lines........ 7.5 2.5 1.6 13.8
------ ------ ----- ------
Total personal lines...... 413.6 108.1 41.1 541.5
------ ------ ----- ------
Commercial automobile....... 51.3 13.1 4.7 64.0
Commercial multiple peril... 39.9 10.9 8.3 58.4
Workers' compensation....... 63.8 23.7 2.8 147.2
Other commercial lines...... 9.7 3.8 3.0 22.6
------ ------ ----- ------
Total commercial lines.... 164.7 51.5 18.8 292.2
------ ------ ----- ------
Totals.................. $578.3 $159.6 $59.9 $833.7
====== ====== ===== ======
</TABLE>
- --------
(1) As of December 31, 1995.
(2) Total invested assets which generate investment income are not recorded or
allocated by line of business; therefore, net investment income is stated
in total.
(3) Excludes policyholders' dividends of $6.6.
57
<PAGE>
SCHEDULE III
(CONTINUED)
CITIZENS CORPORATION
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
RESERVE FOR
DEFERRED LOSSES AND
POLICY LOSS NET NET
ACQUISITION ADJUSTMENT UNEARNED PREMIUMS INVESTMENT
EXPENSES(1) EXPENSES(1) PREMIUMS(1) EARNED INCOME(2)
----------- ----------- ----------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Private passenger auto-
mobile................. $20.4 $ 586.6 $125.6 $390.2
Homeowners.............. 10.1 45.7 68.6 93.9
Other personal lines.... 1.2 2.9 8.6 12.0
----- -------- ------ ------ -----
Total personal lines.. 31.7 635.2 202.8 496.1
----- -------- ------ ------ -----
Commercial automobile... 5.2 92.7 31.0 54.8
Commercial multiple per-
il..................... 4.5 109.7 29.2 52.8
Workers' compensation... 6.1 336.4 57.9 142.6
Other commercial lines.. 1.8 22.6 11.1 16.4
----- -------- ------ ------ -----
Total commercial
lines................ 17.6 561.4 129.2 266.6
----- -------- ------ ------ -----
Totals.............. $49.3 $1,196.6 $332.0 $762.7 $74.8
===== ======== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
LOSSES AND LOSS POLICY OTHER NET
ADJUSTMENT ACQUISITION UNDERWRITING PREMIUMS
EXPENSES EXPENSES EXPENSES(3) WRITTEN
--------------- ----------- ------------ --------
<S> <C> <C> <C> <C>
Private passenger automo-
bile....................... $303.8 $ 78.3 $27.6 $401.9
Homeowners.................. 81.5 19.0 8.7 94.9
Other personal lines........ 5.7 2.2 1.6 12.4
------ ------ ----- ------
Total personal lines...... 391.0 99.5 37.9 509.2
------ ------ ----- ------
Commercial automobile....... 44.5 12.2 5.6 58.1
Commercial multiple peril... 42.6 11.1 7.9 48.8
Workers' compensation....... 87.5 20.8 6.5 145.6
Other commercial lines...... 13.9 3.2 3.4 17.1
------ ------ ----- ------
Total commercial lines.... 188.5 47.3 23.4 269.6
------ ------ ----- ------
Totals.................. $579.5 $146.8 $61.3 $778.8
====== ====== ===== ======
</TABLE>
- --------
(1) As of December 31, 1994.
(2) Total invested assets which generate investment income are not recorded
or allocated by line of business; therefore, net investment income is
stated in total.
(3) Excludes policyholders' dividends of $5.8.
58
<PAGE>
SCHEDULE IV
CITIZENS CORPORATION
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
DIRECT OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------- --------- ---------- ------ ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1996:
Property and liability
insurance premiums earned... $1,019.6 $201.1 $17.0 $835.5 2.0%
======== ====== ===== ====== ===
1995:
Property and liability
insurance premiums earned... $1,003.7 $206.3 $20.4 $817.8 2.5%
======== ====== ===== ====== ===
1994:
Property and liability
insurance premiums earned... $ 946.3 $212.9 $29.3 $762.7 3.8%
======== ====== ===== ====== ===
</TABLE>
59
<PAGE>
SCHEDULE V
CITIZENS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
DEDUCTIONS
FROM
ADDITIONS PREMIUM
BALANCE AT CHARGED TO BALANCES TO BALANCE AT
BEGINNING OF COSTS AND ALLOWANCE END OF
PERIOD EXPENSES ACCOUNT PERIOD
------------ ---------- ----------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
1996:
Allowance for doubtful
accounts..................... $0.8 $1.8 $1.7 $0.9
==== ==== ==== ====
1995:
Allowance for doubtful
accounts..................... $0.7 $1.9 $1.8 $0.8
==== ==== ==== ====
1994:
Allowance for doubtful
accounts..................... $0.5 $1.4 $1.2 $0.7
==== ==== ==== ====
</TABLE>
60
<PAGE>
SCHEDULE VI
CITIZENS CORPORATION
SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY/CASUALTY INSURANCE OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
DISCOUNT,
IF ANY,
DEFERRED DEDUCTED
POLICY RESERVE FOR FROM NET NET
ACQUISITION LOSSES AND PREVIOUS UNEARNED PREMIUMS INVESTMENT
AFFILIATION WITH REGISTRANT EXPENSES LAE(2) COLUMN(1) PREMIUMS EARNED INCOME
- --------------------------- ----------- ----------- --------- -------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
1996
Citizens Insurance
Group.................. $54.3 $1,238.5 $ -- $362.3 $835.5 $88.9
===== ======== ===== ====== ====== =====
1995
Citizens Insurance
Group.................. $52.2 $1,291.6 $ -- $351.4 $817.8 $77.7
===== ======== ===== ====== ====== =====
1994
Citizens Insurance
Group.................. $49.3 $1,196.6 $ -- $332.0 $762.7 $74.0
===== ======== ===== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
AMORTIZATION
LOSSES AND LAE OF DEFERRED
-------------- POLICY PAID NET
CURRENT PRIOR ACQUISITION LOSSES PREMIUMS
YEAR YEAR EXPENSES AND LAE WRITTEN
------- ------ ------------ ------- --------
<S> <C> <C> <C> <C> <C>
1996
Citizens Insurance Group........ $662.8 $(58.4) $164.1 $605.0 $838.2
====== ====== ====== ====== ======
1995
Citizens Insurance Group........ $625.3 $(47.0) $159.6 $545.5 $833.7
====== ====== ====== ====== ======
1994
Citizens Insurance Group........ $591.9 $(12.4) $146.8 $513.2 $778.8
====== ====== ====== ====== ======
</TABLE>
- --------
(1) The Company does not employ any discounting techniques.
(2) Reserves for losses and LAE are shown gross of $466.4 million, $518.9
million and $456.7 million of reinsurance recoverable on unpaid losses in
1996, 1995 and 1994, respectively. Unearned premiums are shown gross of
prepaid premiums of $62.8 million, $54.5 million and $51.0 million in 1996,
1995 and 1994, respectively.
61
<PAGE>
EXHIBIT 11
CITIZENS CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER COMMON SHARE EARNINGS
FOR THE PERIODS ENDED DECEMBER 31, 1996 AND 1995
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------- -------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Primary:
Average shares outstanding........................ 35.3 36.0 35.5 36.1
Net effect of dilutive stock options based on the
treasury stock method using average market
price............................................ -- -- -- --
------ ------ ------ ------
Totals.......................................... 35.3 36.0 35.5 36.1
====== ====== ====== ======
Net income........................................ $ 22.4 $ 18.4 $ 84.1 $ 74.9
Preferred dividend................................ -- -- -- $ 2.0
------ ------ ------ ------
Net income available to common shareholders....... $ 22.4 $ 18.4 $ 84.1 $ 72.9
Per share amount.................................. $ 0.63 $ 0.51 $ 2.37 $ 2.02
Fully diluted:
Average shares outstanding........................ 35.3 36.0 35.5 36.1
Net effect of dilutive stock options based on the
treasury stock method using average market
price............................................ -- -- -- --
------ ------ ------ ------
Totals.......................................... 35.3 36.0 35.5 36.1
====== ====== ====== ======
Net income........................................ $ 22.4 $ 18.4 $ 84.1 $ 74.9
Preferred dividend................................ -- -- -- $ 2.0
------ ------ ------ ------
Net income available to common shareholders....... $ 22.4 $ 18.4 $ 84.1 $ 72.9
====== ====== ====== ======
Per share amount.................................. $ 0.63 $ 0.51 $ 2.37 $ 2.02
</TABLE>
<PAGE>
EXHIBIT 21
CITIZENS CORPORATION
SUBSIDIARIES OF REGISTRANT
Citizens Insurance Company of America (Michigan)
Citizens Management Inc. (Michigan)
Citizens Insurance Company of Ohio (Ohio)
Citizens Insurance Company of the Midwest (Indiana)
<PAGE>
EXHIBIT 23
CITIZENS CORPORATION
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-97066) of Citizens Corporation of our report
dated January 24, 1997, which appears in this Annual Report on Form 10-K.
/s/ Price Waterhouse LLP
_____________________________________
Price Waterhouse LLP
Milwaukee, Wisconsin
March 18, 1997
<PAGE>
EXHIBIT 24
CITIZENS CORPORATION
POWER OF ATTORNEY
We, the undersigned, hereby severally constitute and appoint John F. O'Brien,
John F. Kelly, and Edward J. Parry III , and each of them singly, our true and
lawful attorneys, with full power in each of them, sign for and in our names
and in any and all capacities, Form 10-K of Citizens Corporation (the
"Company") and any other filings made on behalf of said Company pursuant to
the requirements of the Securities Exchange Act of 1934, and to file the same
with all exhibits and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys and each of
them, acting alone, full power and authority to do and perform each and every
act and thing requisite or necessary to be done, hereby ratifying and
confirming all that said attorneys or any of them may lawfully do or cause to
be done by virtue hereof. Witness our hands and common seal on the date set
forth below.
SIGNATURE TITLE DATE
/s/ John F. O'Brien Director, Chairman February 24, 1997
- ------------------------------------- of the Board, CEO
JOHN F. O'BRIEN and President
/s/ James A. Cotter, Jr. Director February 24, 1997
- -------------------------------------
JAMES A. COTTER, JR.
/s/ Neal J. Curtin Director February 24, 1997
- -------------------------------------
NEAL J. CURTIN
/s/ Dona Scott Laskey Director February 24, 1997
- -------------------------------------
DONA SCOTT LASKEY
/s/ James R. McAuliffe Director, Vice February 24, 1997
- ------------------------------------- President
JAMES R. MCAULIFFE
/s/ Eric A. Simonsen Director, Vice February 24, 1997
- ------------------------------------- President
ERIC A. SIMONSEN
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 1,398
<DEBT-CARRYING-VALUE> 1,367
<DEBT-MARKET-VALUE> 1,398
<EQUITIES> 192
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,605
<CASH> 36
<RECOVER-REINSURE> 10
<DEFERRED-ACQUISITION> 54
<TOTAL-ASSETS> 2,503
<POLICY-LOSSES> 1,239
<UNEARNED-PREMIUMS> 362
<POLICY-OTHER> 5
<POLICY-HOLDER-FUNDS> 6
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 755
<TOTAL-LIABILITY-AND-EQUITY> 2,503
836
<INVESTMENT-INCOME> 89
<INVESTMENT-GAINS> 15
<OTHER-INCOME> 2
<BENEFITS> 604
<UNDERWRITING-AMORTIZATION> 164
<UNDERWRITING-OTHER> 67
<INCOME-PRETAX> 105
<INCOME-TAX> 21
<INCOME-CONTINUING> 84
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 84
<EPS-PRIMARY> 2
<EPS-DILUTED> 2
<RESERVE-OPEN> 1,292
<PROVISION-CURRENT> 663
<PROVISION-PRIOR> (58)
<PAYMENTS-CURRENT> 366
<PAYMENTS-PRIOR> 239
<RESERVE-CLOSE> 1,239
<CUMULATIVE-DEFICIENCY> (53)
</TABLE>
