FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1998
--------------------
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
Commission file number: 1-11714
CITIZENS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3178765
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
440 Lincoln Street, Worcester, Massachusetts 01653
(Address of principal executive offices) (Zip Code)
(508) 855-1000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: 35,282,100
Shares of Common Stock Outstanding, as of August 1, 1998.
20
Total Number of Pages
1
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Shareholders' Equity 5
Consolidated Statements of Comprehensive Income 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8 - 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 - 17
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
2
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CITIZENS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<S> <C> <C> <C> <C>
(Unaudited) (Unaudited)
Quarter Ended Six Months
Ended
(In millions, except per June 30, June 30,
share data)
1998 1997 1998 1997
------- ------- ------- -------
Revenues
Net premiums written $ 222.6 $ 208.0 $ 445.3 $ 419.9
Change in unearned premiums,net
of prepaid reinsurance premiums 1.3 (2.1) 6.9 (0.1)
------- ------- ------- -------
Net premiums earned 221.3 210.1 438.4 420.0
Net investment income 25.5 26.1 50.7 49.7
Net realized gains (losses) 1.6 (0.6) 5.8 19.1
on investments
Other income 1.5 1.5 2.9 3.0
------- ------- ------- -------
Total revenues 249.9 237.1 497.8 491.8
Expenses
Losses and loss adjustment
expenses 178.8 158.7 337.0 317.2
Policy acquisition and other
operating expenses 58.9 56.2 116.4 114.5
Policyholders' dividends 0.9 1.8 2.8 3.4
------- ------- ------- -------
Total expenses 238.6 216.7 456.2 435.1
------- ------- ------- -------
Income before federal income 11.3 20.4 41.6 56.7
taxes
Federal income tax expense 0.7 3.8 6.6 11.7
------- ------- ------- -------
Net Income $ 10.6 $ 16.6 $ 35.0 $ 45.0
Per share data (basic and diluted)
Net income $ 0.30 $ 0.47 $ 0.99 $ 1.27
Dividends declared to
shareholders $ 0.05 $ 0.05 $ 0.10 $ 0.10
Weighted average shares
outstanding 35.3 35.3 35.3 35.3
The accompanying notes are an integral part of these financial statements
</TABLE>
3
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CITIZENS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
(Unaudited)
(In millions, except per share data) June 30, December 31
1998 1997
----------- -----------
Assets
Investments:
Debt securities available-for-sale, at
fair value
(Amortized cost of $1,463.8 and $1,453.1) $ 1,529.4 $ 1,522.4
Equity securities available-for-sale, at
fair value (Cost of $112.4 and $110.2) 212.1 182.7
Other investments, at fair value (Cost of
$8.7 and $17.7) 7.3 16.5
----------- -----------
Total investments 1,748.8 1,721.6
Cash and cash equivalents 38.8 46.5
Accrued investment income 26.1 26.5
Premiums and notes receivable 165.5 139.4
Reinsurance recoverable on paid and unpaid
balances 481.1 474.3
Prepaid reinsurance premiums 68.3 70.4
Deferred policy acquisition expenses 52.7 54.8
Deferred federal income taxes - 3.7
Other assets 65.8 68.1
----------- -----------
Total assets $ 2,647.1 $ 2,605.3
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Reserve for losses and loss adjustment
expenses $ 1,215.3 $ 1,206.1
Unearned premiums 383.3 378.5
Deferred federal income taxes 12.7 -
Other liabilities 111.1 147.8
----------- -----------
Total liabilities 1,722.4 1,732.4
=========== ===========
Shareholder's Equity
Series A preferred stock, $0.01 par value
per share; authorized 10.0 million
shares; none issued or outstanding in
1998 and 1997 - -
Common stock, par value $0.01 per share;
authorized 100.0 million shares; issued
36.1 million shares 0.4 0.4
Additional paid-in capital 161.2 156.1
Retained earnings 671.1 639.6
Unrealized appreciation on investments,
net of deferred federal income taxes 106.7 91.6
Treasury stock, at cost (0.8 million
shares) (14.7) (14.8)
----------- -----------
Total shareholder's equity 924.7 872.9
----------- -----------
Total liabilities and shareholder's
equity $ 2,647.1 $ 2,605.3
=========== ===========
The accompanying notes are an integral part of these financial statements
</TABLE>
4
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CITIZENS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
(Unaudited)
Six Months Ended
(In millions) June 30,
1998 1997
------ ------
Preferred stock
Balance at beginning and end of period - -
------ ------
Common stock
Balance at beginning and end of period $ 0.4 $ 0.4
------ ------
Additional paid-in capital
Balance at beginning of period 156.1 156.1
Capital contributions 5.1 -
------ ------
Balance at end of period 161.2 156.1
Retained earnings
Balance at beginning of period 639.6 552.5
Net income 35.0 45.0
Dividends declared to shareholders (3.5) (3.5)
------ ------
Balance at end of period 671.1 594.0
------ ------
Unrealized appreciation on investments, net
Balance at beginning of period 91.6 60.5
Appreciation during the period 23.3 8.0
Provision for deferred federal income taxes (8.2) (2.8)
------ ------
Balance at end of period 106.7 65.7
------ ------
Treasury stock
Balance at beginning of period (14.8) (15.0)
Shares reissued 0.1 -
------ ------
Balance at end of period (14.7) (15.0)
------ ------
Total shareholders' equity $924.7 $801.2
====== ======
The accompanying notes are an integral part of these financial statements
</TABLE>
5
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CITIZENS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<S> <C> <C>
(Unaudited) (Unaudited)
Quarter Ended Six Months Ended
(In millions) June 30, June 30,
1998 1997 1998 1997
------ ------ ------ ------
Net income $ 10.6 $ 16.6 $ 35.0 $ 45.0
Other comprehensive income:
Unrealized appreciation on
investments during period 9.1 48.9 23.3 8.0
(Provision) for deferred federal
income taxes related to items of
other comprehensive income (3.2) (17.0) (8.2) (2.8)
------ ------ ------ ------
Other comprehensive income 5.9 31.9 15.1 5.2
------ ------ ------ ------
Comprehensive income $ 16.5 $ 48.5 $ 50. $ 50.2
====== ====== ====== ======
The accompanying notes are an integral part of these financial statements
</TABLE>
6
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CITIZENS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C>
(Unaudited)
Six Months Ended
(In millions) June 30,
1998 1997
-------- --------
Cash flows from operating activities
Net income $ 35.0 $ 45.0
Adjustments to reconcile net income to
net cash provided by operating activities:
Net realized gains on investments (5.8) (19.1)
Deferred federal income tax benefit (1.8) (0.1)
Change in assets and liabilities:
Deferred policy acquisition expenses 2.1 (0.2)
Premiums and notes receivable, net of
reinsurance premiums (1.0) (0.6)
Unearned premiums, net of prepaid
reinsurance premiums 6.9 (0.1)
Reserve for losses and loss adjustment
expenses, net of reinsurance recoverable 2.4 17.6)
Other liabilities (36.7) (13.0)
Other, net 10.1 7.8
-------- --------
Net cash provided by operating activities 11.2 2.1
-------- --------
Cash flows from investing activities
Proceeds from sale of available-for-sale debt
securities 88.3 220.4
Proceeds from available-for-sale debt
securities maturing or called 86.2 39.4
Proceeds from sale of available-for-sale
equity securities and other investments 17.4 59.2
Purchases of available-for-sale debt
securities (182.3) (311.9)
Purchases of sale of available-for-sale
equity securities and other investments (8.5) (5.6)
Change in net receivable from securities
transactions not settled (10.3) 3.7
Other investing activities (6.3) (0.6)
-------- --------
Net cash (used for) provided by
investing activities (15.5) 4.6
-------- --------
Cash flows from financing activities
Dividends paid to shareholders (3.5) (3.5)
Treasury stock reissued 0.1 -
-------- --------
Net cash used for financing activities (3.4) (3.5)
-------- --------
Change in cash and cash equivalents (7.7) 3.2
Cash and cash equivalents at beginning of
period 46.5 36.1
-------- --------
Cash and cash equivalents at end of period $ 38.8 $ 39.3
======== ========
The accompanying notes are an integral part of these financial statements
</TABLE>
7
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CITIZENS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of
Citizens Corporation ("the Company") have been prepared in accordance
with generally accepted accounting principles applicable to stock
property and casualty insurance companies for interim financial
information and with the requirements of Form 10-Q. Certain prior year
amounts have been reclassified to conform with the current year's
presentation.
In the opinion of management, the financial statements reflect all
adjustments of a normal recurring nature necessary for a fair
presentation of the interim periods. Interim results are not
necessarily indicative of results expected for the entire year. These
financial statements should be read in conjunction with the Company's
1997 Annual Report to Shareholders, as filed on Form 10-K with the
Securities and Exchange Commission.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (Statement No. 130), which establishes standards
for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. All
items that are required to be recognized under accounting standards as
components of comprehensive income are to be reported in a financial
statement that is displayed with the same prominence as other
financial statements. This statement stipulates that comprehensive
income reflect the change in equity of an enterprise during a period
from transactions and other events and circumstances from non-owner
sources. This statement is effective for fiscal years beginning after
December 15, 1997. The Company adopted Statement No. 130 for the
first quarter of 1998, resulting primarily in reporting unrealized
gains and losses on investments in debt and equity securities in
comprehensive income.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131, Disclosures About Segments of an Enterprise and
Related Information (Statement No. 131). Statement No. 131
establishes standards for the way that public enterprises report
information about operating segments in annual financial statements
and requires that selected information about those operating segments
be reported in interim financial statements. This statement
supersedes Statement of Financial Accounting Standards No. 14,
Financial Reporting for Segments of a Business Enterprise. Statement
No. 131 requires that all public enterprises report financial and
descriptive information about their reportable operating segments.
Operating segments are defined as components of an enterprise about
which separate financial information is available that it is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. This statement is
effective for fiscal years beginning after December 15, 1997. The
Company adopted Statement No. 131 for the first quarter of 1998,
resulting in no change in the Company's reportable segments.
In December 1997, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position 97-3, Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments (SOP
No. 97-3). SOP 97-3 provides guidance on when a liability should be
recognized for guaranty fund and other assessments and on how to
measure the liability. This statement allows for the discounting of
the liability if the amount and timing of the cash payments are fixed
and determinable. In addition, it provides criteria for when an asset
may be recognized for a portion or all of the assessment liability or
paid assessment that can be recovered through premium tax offsets or
policy surcharges. This statement is effective for fiscal years
beginning after December 15, 1998. The Company believes that the
adoption of this statement will not have a material effect on the
results of operations or financial position.
In March 1998, the AICPA issued Statement of Position 98-1, Accounting
for the Cost of Computer Software Developed or Obtained for Internal
Use (SOP No. 98-1). SOP No. 98-1 requires that certain costs incurred
in developing internal-use computer software be capitalized and
provides guidance for determining whether computer software is to be
considered for internal use. This statement is effective for fiscal
years beginning after December 15, 1998. In the quarter ended June
30, 1998, the Company adopted SOP No. 98-1 effective January 1, 1998,
resulting in an increase in pre-tax income of $0.6 million. The
adoption of SOP No. 98-1 had no material effect on the results of
operation or financial position for the three months ended March 31,
1998.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (Statement No. 133),
which establishes accounting and reporting standards for derivative
8
=================================================================
instruments. Statement No. 133 requires that an entity recognize all
derivatives as either assets or liabilities at fair value in the
statement of financial position, and establishes special accounting
for the following three different types of hedges: fair value hedges,
cash flow hedges, and hedges of foreign currency exposures of net
investments in foreign operations. This statement is effective for
fiscal years beginning after June 15, 1999. The Company believes that
the adoption of this statement will not have a material effect on the
results of operations or financial position.
2. Earnings per Share
Earnings per share are based on the weighted average number of common
shares and common share equivalents. The Board of Directors authorized
the repurchase of 1.8 million shares or slightly less than five
percent of its issued common stock and has purchased a total of 0.8
million shares since the implementation of the repurchase program in
1995. As of June 30, 1998, the Company is holding these shares as
treasury stock for the purpose of funding current and future stock
option awards and for other purposes. In 1997, the FASB issued
Statement of Financial Accounting Standards No. 128, Earnings Per
Share (Statement No. 128) which supersedes Accounting Principles
Board Opinion No. 15, Earnings Per Share. This standard replaces the
primary and fully diluted earnings per share with a basic and diluted
earnings per share computation, and requires a dual presentation of
basic and diluted earnings per share for those companies with complex
capital structures. All earnings per share amounts for all periods
have been presented to conform to the Statement No. 128 requirements.
The adoption of the aforementioned standard had no effect on the
Company's previously reported earnings per share.
3. MCCA Assessment
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. 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 companies' policies covering automobile and motorcycles
written in Michigan. The assessment is passed on directly to
policyholders as a surcharge to premium. The Company cedes a portion
of its private passenger automobile premiums to the MCCA.
On May 11, 1998, the MCCA voted to issue a refund of $180 per insured
vehicle. The MCCA issued refunds to member companies during June of
1998. The MCCA refunded $127 million to Citizens Insurance Company of
America (CICA) based on CICA's 1997 insured vehicles, in June 1998.
The Company remitted the refund to policyholders. This had no
significant effect on the results of operations.
4. Single Employer Transfer
On January 1, 1998, substantially all of the employees of the Company
were transferred to a single employer, First Allmerica Financial Life
Insurance Company (FAFLIC), which is a subsidiary of the ultimate
parent, Allmerica Financial Corporation (AFC). On this date,
substantially all of the defined benefit, defined contribution 401(k)
and postretirement plans were merged with the existing benefit plans
of FAFLIC. The transfer of benefit plans did not impact the results
of operations . Assets equal to the fair value of the liabilities,
net of taxes, were transferred to FAFLIC. The excess of the carrying
value of the liabilities, net of taxes, was assumed by the parent
company, resulting in a capital contribution of $5.1 million.
9
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PART I - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The results of operations for Citizens Corporation and subsidiaries
(the Company) include the accounts of Citizens Corporation (Citizens),
a non-insurance holding company, and its wholly-owned subsidiaries,
Citizens Insurance Company of America, Citizens Insurance Company of
Ohio, and Citizens Insurance Company of the Midwest (collectively
Citizens Operations), and Citizens Management Inc., which is wholly-
owned by Citizens Insurance Company of America.
Results of Operations
- ---------------------
Net income
Net income for the quarter ended June 30, 1998, was $10.6 million, or
$0.30 per share, compared to $16.6 million, or $0.47 per share, for
the quarter ended June 30, 1997. Excluding net realized losses and
restructuring charges, both net of taxes, net income decreased $8.5
million, to $9.4 million for the quarter ended June 30, 1998, versus
$17.9 million during the comparable period of 1997. The decrease in
net income is primarily attributable to a $11.5 million increase in
the underwriting loss, partially offset by decreased federal income
tax expense. The decrease in underwriting results is primarily due to
catastrophe losses of $29.6, compared to $3.2 million during the same
period in 1997, partially offset by an $11.2 million increase in net
premiums earned. Federal income tax expense decreased $3.1 million,
to $0.7 million, while the effective tax rate decreased to 6.2% in the
quarter ended June 30, 1998 from 18.6% for the same period in 1997.
Net income for the six months ended June 30, 1998, was $35.0 million,
or $0.99 per share, compared to $45.0 million, or $1.27 per share,
for the six months ended June 30, 1997. Excluding realized gains and
restructuring charges, both net of taxes, net income decreased $2.9
million, to $30.6 million for the six months ended June 30, 1998,
versus $33.5 million during the comparable period of 1997. The
decrease in net income is primarily attributable to a decrease in
realized gains of $13.3 million and a $3.2 million increase in the
underwriting loss, partially offset by decreased federal income tax
expense. Realized gains were $5.8 million for the six months ended
June 30, 1998 versus $19.1 million for the same period ended June 30,
1997. The decrease in underwriting results is primarily due to
catastrophe losses of $28.7 million, compared to $8.6 million during
the same period in 1997, partially offset by an $18.4 million increase
in net premiums earned. Federal income tax expense decreased $5.1
million, to $6.6 million, while the effective tax rate decreased to
15.9% in the six months ended June 30, 1998 from 20.6% for the same
period in 1997.
Revenues
Net premiums earned increased $11.2 million, or 5.3%, to $221.3
million for the quarter ended June 30, 1998, resulting from a $7.2
million increase in the Company's personal lines and a $4.0 million
increase in the Company's commercial lines. Net premiums earned
increased $18.4 million, or 4.4%, to $438.4 million for the six months
ended June 30, 1998, resulting from an increase of $11.4 million in
the Company's personal lines and a increase of $7.0 million in the
Company's commercial lines. Contributing to this growth were rate
increases in all major lines except the workers' compensation line,
and an increase in net premiums earned of $8.3 million for the six
months ended June 30, 1998, in Ohio and Indiana, resulting from
expansion in these states.
10
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Segment Results
- ---------------
Personal segment
Personal segment premiums represented 68.0% and 68.2% of total net
premiums earned for the quarters ended June 30, 1998 and 1997,
respectively, and 68.1% and 68.3% of total net premiums earned for the
six months ended June 30, 1998 and 1997, respectively.
<TABLE>
<S> <C> <C> <C> <C>
For the Periods Ended Three Months Six Months
June 30, (in millions) ------ ------ ------ ------
1998 1997 1998 1997
------ ------ ------ ------
Net premiums earned $150.5 $143.3 $298.4 $287.0
Losses and loss adjustment
expenses 125.5 107.9 224.6 221.7
Policy acquisition and other
underwriting expenses 39.0 37.7 77.6 77.2
------ ------ ------ ------
Underwriting loss $(14.0) $ (2.3) $ (3.8) $(11.9)
====== ====== ====== ======
</TABLE>
Personal segment net premiums earned increased $7.2 million, or 5.0%,
to $150.5 million for the quarter ended June 30, 1998, from $143.3
million for the quarter ended June 30, 1997. Personal segment net
premiums earned increased $11.4 million, or 4.0%, to $298.4 million
for the six months ended June 30, 1998, from $287.0 million for the
six months ended June 30, 1997. These increases are primarily
attributable to a twelve month average rate increase in the personal
automobile and homeowners lines of 5.9% and 15.8%, respectively. This
is partially offset by a slight decrease in policies in force in both
the personal automobile and homeowner lines. While management has
taken steps to increase penetration in the affinity groups and has
initiated other marketing programs, the Company believes that
heightened competition may result in reduced premium growth in the
personal segment.
The personal segment underwriting loss was $14.0 million and $2.3
million for the quarters ended June 30, 1998 and 1997, respectively.
Loss and LAE increased $17.6 million primarily as a result of the
increase in catastrophe losses. Catastrophe losses increased $16.6
million to $18.8 million for the quarter ended June 30, 1998, from
$2.2 million for the same period ended 1997, primarily in the
homeowner's line. Policy acquisition and other underwriting expenses
increased $1.3 million, or 3.4%, to $39.0 million, reflecting the
growth in net premiums earned and increased technology expenses,
partially offset by reductions in employee related expenses.
The personal segment underwriting loss improved to $3.8 million from
$11.9 million for the six months ended June 30, 1998 and 1997,
respectively. The decrease in the underwriting loss is attributable to
an increase in favorable development on prior year reserves, and to
improved current year claims activity in the personal automobile and
homeowner lines. This is partially offset by an increase in
catastrophe losses of $10.7 million over the prior year, primarily in
the homeowners line. Policy acquisition and other underwriting
expenses increased $0.4 million, or 0.5%, to $77.6 million, reflecting
the growth in net premiums earned and increased technology expenses,
partially offset by reductions in employee related expenses.
11
=============================================================
Commercial segment
Commercial segment premiums represented 32.0% and 31.8% of total net
premiums earned for the quarters ended June 30, 1998 and 1997,
respectively. Commercial segment premiums represented 31.9% and 31.7%
of the total net premiums earned for the six months ended June 30,
1998 and 1997 respectively.
<TABLE>
<S> <C> <C> <C> <C>
Three Months Six Months
For the Periods Ended ------ ------ ------ ------
June 30, (in millions) 1998 1997 1998 1997
------ ------ ------ ------
Net premiums earned 70.8 66.8 140.0 133.0
Losses and loss adjustment
expenses 53.3 49.4 112.4 94.1
Policy acquisition and other
underwriting expenses 18.4 17.6 35.9 35.3
Policyholders' dividends 0.9 1.8 2.8 3.4
------ ------ ------ ------
Underwriting (loss) profit $ (1.8) $ (2.0) $(11.1) $ 0.2
====== ====== ====== ======
</TABLE>
Commercial segment net premiums earned increased $4.0 million, or
6.0%, to $70.8 million for the quarter ended June 30, 1998 from $66.8
million for the quarter ended June 30, 1997. Commercial segment net
premiums earned increased $7.0 million, or 5.3%, to $140.0 million for
the six months ended June 30, 1998 from $133.0 million for the six
months ended June 30, 1997. The increases in net premiums earned
primarily reflects growth in policies in force of 14.0% in the
commercial multiple peril line and a twelve month average rate
increase of 8.3% and 6.2% in commercial multiple peril and commercial
automobile lines, respectively. These increases are partially offset
by a 10.2% decrease in policies in force and a twelve month average
rate decrease of 3.1% in the workers' compensation line. Management
believes that competitive conditions in Michigan in the workers'
compensation line may continue to impact future growth in net premiums
earned.
The commercial segment underwriting loss was $1.8 million and $2.0
million for the quarters ended June 30, 1998 and 1997, respectively.
The decrease in underwriting loss is attributable to favorable current
year claims activity in all major commercial lines. This is partially
offset by a $9.8 million increase in catastrophe losses, primarily in
the commercial multiple peril line. Policy acquisition and other
underwriting expenses increased $0.8 million as a result of an
increase in net premiums earned and increased technology expenses,
partially offset by a decrease in employee related costs.
The commercial segment underwriting loss was $11.1 million for the six
months ended June 30, 1998, compared to a $0.2 million underwriting
profit for the six months ended June 30, 1997. The deterioration in
underwriting profit is attributable to a $9.4 million increase in
catastrophe losses, primarily in the commercial multiple peril line,
as well as a $9.2 million decrease in favorable development on prior
year reserves, primarily in the workers' compensation line. These
increases are partially offset by favorable current year claims
activity in the commercial multiple peril and commercial automobile
lines. Policy acquisition and other underwriting expenses increased
$0.6 million as a result of an increase in net premiums earned and
increased technology expenses, partially offset by a decrease in
employee related costs.
12
==============================================================
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. The table below provides a reconciliation of the
beginning and ending reserve for unpaid losses and LAE as follows:
<TABLE>
<S> <C> <C>
For the six months ended June 30, 1998 1997
(in millions) -------- --------
Reserve for losses and LAE, beginning of
period $1,206.1 $1,238.5
Reserve for losses and LAE, net of
reinsurance recoverable:
Provision for insured events of the
current period 366.9 352.8
Decrease in provision for insured
events of prior years (29.9) (35.6)
-------- --------
Total incurred losses and LAE 337.0 317.2
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured
events of current period 151.5 157.6
Losses and LAE attributable to insured
events of prior years 176.3 170.8
-------- --------
Total payments 327.8 328.4
Change in reinsurance recoverable on
unpaid losses - 5.2
-------- --------
Reserve for losses and LAE, end of period $1,215.3 $1,232.5
======== ========
</TABLE>
As part of an ongoing process, the reserves have been re-estimated for
all prior accident years and were decreased by $29.9 million, and
$35.6 million, for the six months ended June 30, 1998 and 1997,
respectively. The decline in favorable development is primarily due
to a decrease in workers' compensation favorable development and
unfavorable development in the commercial automobile line for the six
months ended June 30, 1998. The overall favorable reserve development
in both years primarily reflects a modest shift over the past few
years of the workers' compensation business to Western and Northern
Michigan, which have demonstrated more favorable loss experience than
Eastern Michigan, and the initiatives taken by the Company to manage
medical costs primarily in the personal automobile and workers'
compensation lines.
This favorable development reflects the Company's reserving philosophy
consistently applied over the periods. Conditions and trends that
have affected development of the losses and LAE reserves in the past
may not necessarily occur in the future.
13
==============================================================
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
reserving position and its reinsurance. Based on (i) review of
historical data, legislative enactment, 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 allocated LAE activity. This
includes 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. The Company determines the appropriate amount of
reinsurance based on the Company's evaluation of the risks accepted
and analyses prepared by consultants and reinsurers and on market
conditions including the availability and pricing of reinsurance. The
Company has reinsurance for casualty business.
Effective January 1, 1998, the Company modified its catastrophe
reinsurance program to include a higher retention. Under the Company's
1998 catastrophe reinsurance program, the Company retains the first
$45.0 million. For losses in excess of $45.0 million and up to $180.0
million, the Company retains 10% of the loss. Effective June 1, 1998,
the Company purchased an additional treaty for losses in excess of
$180.0 million and up to $230.0 million, of which the Company retains
10% of the loss. Amounts in excess of $230.0 million are retained
100% by the Company. Under the Company's 1997 catastrophe reinsurance
program, the Company retained 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 retained 10% of the loss. Amounts in
excess of $180.0 million were retained 100% by the Company.
Under the Company's casualty reinsurance program, the reinsurers are
responsible for 100% of the amount of each loss in excess of $0.5
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. Amounts in excess of $60.5 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 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.
Investment Results
- ------------------
Net investment income before taxes was $25.5 million and $26.1 million
for the quarters ended June 30, 1998 and 1997, respectively. The
decrease is the result of a $2.2 million decrease in income from
limited partnerships to a $0.2 million net loss for the quarter ended
June 30, 1998 from a $2.0 million net income for the same period in
1997. The limited partnerships pursue investment opportunities
primarily through global fixed-income trading strategies. The average
pre-tax yields on debt securities were 6.6% and 6.8% for the quarters
ended June 30, 1998 and 1997, respectively. Net investment income
after taxes was $21.3 million and $21.2 million for the quarters ended
14
===============================================================
June 30, 1998 and 1997, respectively. Net realized gains on
investments before taxes were $1.6 million during the second quarter
of 1998 and net realized losses on investments before taxes were $0.6
million in 1997.
Net investment income before taxes was $50.7 million and $49.7 million
for the six months ended June 30, 1998 and 1997, respectively. The
increase is the result of an increase in dividend income from equity
securities and reduced investment expenses, which were partially
offset by the decrease in income from limited partnerships. The
average pre-tax yield on debt securities was 6.6% during the first six
months of 1998 and 6.8% for the same period in 1997. Net investment
income after taxes was $42.3 million and $41.0 million for the six
months ended June 30, 1998 and 1997, respectively. Net realized gains
on investments before taxes were $5.8 million and $19.1 million during
the first six months of 1998 and 1997 respectively. Net realized
gains primarily resulted from sales of appreciated fixed maturities in
1998 due to normal trading of securities to manage cash flows, and
appreciated equity securities in 1997 due to the Company's strategy of
shifting to a higher level of debt securities.
Investment Portfolio
- --------------------
The Company's investment portfolio increased $27.2 million, to
$1,748.8 million during the first six months of 1998, from $1,721.6
million at December 31, 1997, primarily due to market appreciation of
equity securities. Debt securities increased $7.0 million, to
$1,529.4 million, from $1,522.4 million, and represented 87.5% and
88.5% of the carrying value of all investments at June 30, 1998 and
December 31, 1997, respectively. Tax-exempt securities represented
69.0% of total debt securities at June 30, 1998 compared to 66.1% at
December 31, 1997. The Company may make modest extensions in
portfolio incremental credit risk and adjustments to its taxable and
tax-exempt positions in the future to seek to maximize after tax
income.
The unrealized appreciation in the investment portfolio at June 30,
1998 was $163.9 million compared to $140.6 million at December 31,
1997. Unrealized depreciation during the first six months of the year
was $3.7 million for bonds, and unrealized appreciation on equity
securities and other investments was $27.0 million.
Liquidity and Capital Resources
- -------------------------------
Liquidity describes the ability of a company to generate sufficient
cash flows to meet the cash requirements of business operations. As a
holding company, Citizens' primary source of cash for payment of
dividends to its shareholders is dividends from its insurance
subsidiaries, which are subject to limitations imposed by state
regulators. Such limitations require that dividends be paid only out
of statutory earned surplus (unassigned funds) and a restriction on
the payment of "extraordinary" dividends without prior approval of the
state authorities.
Underwriting and investing, typically the two distinct, but not
separate operations in an insurance company, are the sources of cash
for Citizens Insurance. The primary sources of cash are premiums
collected, investment income and maturing investments. Primary cash
outflows are paid losses and LAE, policy acquisition expenses, other
underwriting expenses, and purchases of investments. Cash outflows
related to claim losses and LAE can be variable because of
uncertainties surrounding settlement dates for unpaid losses and the
potential for large losses either individually or in the aggregate.
Accordingly, the Company's strategy is to monitor available cash and
short-term investment balances in relation to projected cash needs by
matching the maturities of its investments to expected payments of
current and long-term liabilities.
Net cash provided by operating activities, for the six months ended
June 30, 1998, was $11.2 million compared to $2.1 million in the prior
year period. This increase primarily reflects an increase in premiums
collected.
Net cash (used for) provided by investing activities for the Company
was ($15.5) million and $4.6 million for the first six months of 1998
and 1997, respectively, resulting primarily from the settlement of
investment transactions.
Net cash used for financing activities for the Company was $3.4
million and $3.5 million, for the first six months of 1998 and 1997,
respectively, representing dividends paid to shareholders.
Shareholders' equity was $924.7 million, or $26.21 per share at June
30, 1998, compared to $872.9, or $24.75 per share at December 31,
1997, resulting from higher net income and unrealized appreciation on
investments. Changes in shareholders' equity related to the
unrealized values of underlying portfolio investments will continue to
be volatile as market prices of debt securities fluctuate with changes
in the interest rate environment.
15
===============================================================
The Company expects to continue to pay dividends in the foreseeable
future. However, payment of future dividends is subject to the Board
of Directors' approval and is dependent, among other things, upon
earnings and the financial condition of the Company.
Based on current trends, the Company expects to continue to generate
sufficient positive operating cash to meet all short-term and long-
term cash requirements. The Company maintains a high degree of
liquidity within the investment portfolio in fixed maturity
investments, common stock and short-term investments.
Impact of the Year 2000 Issue
- -----------------------------
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
of the Company's computer programs that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
Based on a recent assessment, the Company determined that it will be
required to modify or replace significant portions of its software so
that its computer systems will properly utilize dates beyond December
31, 1999. The Company presently believes that with modifications to
existing software and conversions to new software, the Year 2000 Issue
can be resolved. However, if such modifications and conversions are
not made, or are not completed timely, the Year 2000 Issue could have
a material impact on the operations of the Company.
The Company has initiated formal communications with all of its
significant suppliers and large customers to determine the extent to
which the Company is vulnerable to those third parties' failure to
remediate their own Year 2000 Issue. The Company's total Year 2000
project cost and estimates to complete the project include the
estimated costs and time associated with the impact of a third party's
Year 2000 Issue, and are based on presently available information.
However, there can be no guarantee that the systems of other companies
on which the Company's systems rely will be timely converted, or that
a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have material
adverse effect on the Company. The Company does not believe that it
has material exposure to contingencies related to the Year 2000 Issue
for the products it has sold. Although the Company does not believe
that there is a material contingency associated with the Year 2000
project, there can be no assurance that exposure for material
contingencies will not arise.
The Company will utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000
modifications. The Company plans to complete the mission critical
elements of the Year 2000 project by December 31, 1998. The cost of
the Year 2000 project will be expensed as incurred over the next two
years, and is being funded primarily through a reallocation of
resources from discretionary projects. Therefore, the Year 2000
project is not expected to result in significant incremental
technology costs or to have material effect on the results of
operations. Through June 30, 1998, the Company has incurred and
expensed approximately $14.1 million related to the assessment of, and
preliminary efforts in connection with, the project and the
development of a remediation plan. The total remaining cost of the
Year 2000 project is estimated at $13.9 million.
The Company's contingency plans related to the Year 2000 issue are
addressed in its Continuity of Operations Plan (COOP), developed
jointly with an outside vendor. The COOP contains immediate steps to
keep business functions operating while unforeseen Year 2000 issues
are being addressed. The COOP outlines responses to situations that
may affect critical business functions. The COOP also provides
triage guidance,a documented order of actions to respond to problems.
During the triage process, business priorities are established and
"Critical Points of Failure" are identified as having a significant
impact on the business. The Company's contingency plans are designed
to keep a business unit's operation functioning in the event of a
failure or delay due to Year 2000 record format and date calculation
changes.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources,
third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual
results could differ materially from those plans. Specific factors
that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this
area, the ability to locate and correct all relevant computer codes,
and similar uncertainties.
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 1998 and beyond to differ materially from
those expressed in any forward-looking statements made by, or on
behalf of, the Company. When used in the MD&A discussion, the words
"believes," "anticipated," "expects" and similar expressions are
intended to identify forward-looking statements. See "Important
Factors Regarding Forward-Looking Statements" filed as Exhibit 99.1 to
the Company's 1997 Annual Report to Shareholders and incorporated
herein by reference.
16
============================================================
Factors that may cause actual results to differ materially from those
contemplated or projected, forecast, estimated or budgeted in such
forward looking statements include among others, the following
possibilities: (i) adverse catastrophe experience and severe weather;
(ii) adverse loss development for events the Company insured in prior
years; (iii) heightened competition, including the intensification of
price competition, the entry of new competitors, and the introduction
of new products by new and existing competitors; (iv) adverse state
and federal legislation, including decreases in rates, limitations on
premium levels, increases in minimum capital and reserve requirements,
benefit mandates, limitations on the ability to manage care and
utilization, liabilities related to tobacco products, and tax
treatment of insurance products; (v) changes in interest rates causing
a reduction of investment income or in the market value of interest
rate sensitive investments; (vi) failure to obtain new customers,
retain existing customers or reductions in policies in force by
existing customers; (vii) higher service, administrative, or general
expense due to the need for additional advertising, marketing,
administrative or management information systems expenditures; (viii)
loss or retirement of key executives; (ix) increases in medical costs,
including increases in utilization, costs of medical services,
pharmaceuticals, durable medical equipment and other covered items;
(x) termination of provider contracts or renegotiation at less cost-
effective rates or terms of payment; (xi) changes in the Company's
liquidity due to changes in asset and liability matching; (xii)
restrictions on insurance underwriting, based on certain criteria;
(xiii) adverse changes in the ratings obtained by independent rating
agencies such as Moody's, Standard and Poors and A.M. Best; and (xiv)
uncertainty related to the Year 2000 Issue.
17
===============================================================
PART II - OTHER INFORMATION
ITEM 4
------
Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The registrant's annual shareholders' meeting was held on May 12,
1998. All six directors nominated for re-election by the board of
directors were named in the proxies for the meeting, which proxies
were solicited pursuant to Regulation 14A of the Securities Exchange
Act of 1934. The following individuals were elected to serve a one
year term:
VOTES FOR WITHHELD
----------- ----------
James A. Cotter, Jr. 34,910,309 33,598
Neal J. Curtin 34,910,309 33,598
Dona Scott Laskey 34,910,309 33,598
J. Barry May 34,910,309 33,598
James R. McAuliffe 34,910,309 33,598
John F. O'Brien 34,909,809 34,098
Eric A. Simonsen 34,909,759 34,148
Shareholders ratified the appointment of PricewaterhouseCoopers LLP as
the Independent Public Accountants of Citizens Corporation for 1998:
for 34,936,512; against 3,895; withheld 3,500.
Shareholders voted against a shareholder sponsored proposal with
respect to commissioning a study as set forth in more detail in the
Proxy Statement: for 28,875; against 34,408,635; withheld 52,908; non-
vote 453,489.
18
===============================================================
ITEM 6
------
Exhibits and Reports on Form 8-K
(a) Exhibits
EX-11 Statement regarding computation of per share
earnings.
EX-27 Financial Data Schedule
.
(b) Reports on Form 8-K
On June 10, 1998, a report on Form 8-K was filed under Item 5,
Other Events, the Registrant's announcement that second quarter
results will be impacted by catastrophe losses resulting from
electrical, rain and wind storms which struck Michigan during the
final days of May 1998. The impact of this catastrophe loss was
$29.6 million for the period ended June 30, 1998.
On July 31, 1998, a report on Form 8-K was filed under Item 5,
Other Events, the Registrant's announcement that third quarter results
will be negatively impacted by catastrophe losses resulting from
electrical, rain and wind storms which struck the Detroit, Michigan
metropolitan area on July 22, 1998. Currently, the company expects
approximately $6.8 million in pre-tax catastrophe losses.
19
===============================================================
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Citizens Corporation
--------------------
Registrant
Dated August 13, 1998 /s/ John F.O'Brien
--------------- ------------------------
John F. O'Brien
President and Chief Executive
Officer, and Chairman of the Board
Dated August 13, 1998 /s/ Edward J. Parry, III
--------------- -------------------------
Edward J. Parry, III
Vice President, Chief Financial
Officer,Treasurer and Principal
Accounting Officer
20
============================================================
Exhibit 11
CITIZENS CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
For the Periods Ended June 30, 1998 and 1997
(in millions, except per share data)
<TABLE>
<S> <C> <C> <C> <C>
(Unaudited) (Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------ ------ ------ ------
Primary:
Average shares outstanding 35.3 35.3 35.3 35.3
Net effect of dilutive
stock options based on the
treasury stock method using
average market price - - - -
------ ------ ------ ------
TOTALS 35.3 35.3 35.3 35.3
====== ====== ====== ======
Net income available to $ 10.6 $ 16.6 $ 35.0 $ 45.0
shareholders ====== ====== ====== ======
Per share amount $ 0.30 $ 0.47 $ 0.99 $ 1.27
Fully diluted:
Average shares outstanding 35.3 35.3 35.3 35.3
Net effect of dilutive
stock options based on the - - - -
treasury stock method using
average market price
------ ------ ------ ------
TOTALS 35.3 35.3 35.3 35.3
====== ====== ====== ======
Net income available to $ 10.6 $ 16.6 $ 35.0 $ 45.0
shareholders ====== ====== ====== ======
Per share amount $ 0.30 $ 0.47 $ 0.99 $ 1.27
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 1529
<DEBT-CARRYING-VALUE> 1464
<DEBT-MARKET-VALUE> 1529
<EQUITIES> 212
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1748
<CASH> 39
<RECOVER-REINSURE> 481
<DEFERRED-ACQUISITION> 53
<TOTAL-ASSETS> 2647
<POLICY-LOSSES> 1215
<UNEARNED-PREMIUMS> 383
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 5
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 925
<TOTAL-LIABILITY-AND-EQUITY> 2647
438
<INVESTMENT-INCOME> 51
<INVESTMENT-GAINS> 6
<OTHER-INCOME> 3
<BENEFITS> 340
<UNDERWRITING-AMORTIZATION> 116
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 42
<INCOME-TAX> 7
<INCOME-CONTINUING> 35
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0.99
<RESERVE-OPEN> 1206
<PROVISION-CURRENT> 367
<PROVISION-PRIOR> (30)
<PAYMENTS-CURRENT> 152
<PAYMENTS-PRIOR> 176
<RESERVE-CLOSE> 1215
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
