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: March 31, 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: 35,275,100
Shares of Common Stock Outstanding, as of May 1, 1998.
18
Total Number of Pages
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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 - 16
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CITIZENS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<S> <C> <C>
(Unaudited)
Quarter Ended
March 31,
(In millions, except per share data) 1998 1997
------- -------
Revenues
Net premiums written $ 222.7 $ 211.9
Change in unearned premiums, net
of prepaid reinsurance premiums 5.6 2.0
------- -------
Net premiums earned 217.1 209.9
Net investment income 25.2 23.6
Net realized gains on investments 4.2 19.7
Other income 1.4 1.5
------- -------
Total revenues 247.9 254.7
Expenses
Losses and loss adjustment expenses 158.2 158.5
Policy acquisition expenses 37.3 37.0
Other operating expenses 20.2 21.3
Policyholders' dividends 1.9 1.6
------- -------
Total expenses 217.6 218.4
------- -------
Income before federal income taxes 30.3 36.3
Federal income tax expense 5.9 7.9
------- -------
Net Income $ 24.4 $ 28.4
Per Share Data (Basic & Diluted)
Net income $ 0.69 $ 0.80
======= =======
Dividends declared to shareholders $ 0.05 $ 0.05
======= =======
Weighted average shares outstanding 35.3 35.3
======= =======
The accompanying notes are an integral part of these financial
statements
</TABLE>
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CITIZENS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
(Unaudited)
(In millions, except per share data) March 31, December 31,
1998 1997
Assets ---------- ----------
Investments:
Debt securities available-for-sale, at fair value $ 1,553.8 $ 1,522.4
(Amortized cost of $1,487.5 and $1,453.1)
Equity securities available-for-sale, at fair value 201.4 182.7
(Cost of $111.6 and $110.2)
Other investments, at fair value (Cost of $8.9 and 7.6 16.5
$17.7) ---------- ----------
Total investments 1,762.8 1,721.6
Cash and cash equivalents 25.5 46.5
Accrued investment income 25.0 26.5
Premiums and notes receivable 156.5 139.4
Reinsurance recoverable on paid and unpaid balances 476.5 474.3
Prepaid reinsurance premiums 66.3 70.4
Deferred policy acquisition expenses 54.4 54.8
Deferred federal income taxes - 3.7
Other assets 68.0 68.1
---------- ----------
Total assets $ 2,635.0 $ 2,605.3
========== ==========
Liabilities and Shareholders' Equity
Liabilities:
Reserve for losses and loss adjustment expenses $ 1,210.5 $ 1,206.1
Unearned premiums 379.9 378.5
Deferred federal income taxes 10.7 -
Other liabilities 124.1 147.8
---------- ----------
Total liabilities 1,725.2 1,732.4
========== ==========
Shareholders' 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 161.1 156.1
Retained earnings 662.3 639.6
Accumulated other comprehensive income 100.8 91.6
Treasury stock, at cost (0.8 million shares) (14.8) (14.8)
---------- ----------
Total shareholder's equity 909.8 872.9
---------- ----------
Total liabilities and shareholders' equity $ 2,635.0 $ 2,605.3
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
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CITIZENS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
(Unaudited)
Quarter Ended
(In millions) March 31,
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 5.0 -
-------- --------
Balance at end of period 161.1 156.1
-------- --------
Retained Earnings
Balance at beginning of period 639.6 552.5
Net income 24.4 28.4
Dividends declared to shareholders (1.7) (1.8)
-------- --------
Balance at end of period 662.3 579.1
-------- --------
Accumulated Other Comprehensive Income
Unrealized appreciation (depreciation) on
investments, net
Balance at beginning of period 91.6 60.5
Appreciation (depreciation) during the
period 14.2 (40.9)
(Provision) benefit for deferred federal
income taxes (5.0) 14.2
-------- --------
Other comprehensive income 9.2 (26.7)
-------- --------
Balance at end of period 100.8 33.8
-------- --------
Treasury Stock
Balance at beginning and end of period (14.8) (15.0)
-------- --------
Total Shareholders' Equity $ 909.8 $ 754.4
======== ========
The accompanying notes are an integral part of these financial
statements.
</TABLE>
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CITIZENS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<S> <C> <C>
(Unaudited)
Quarter Ended
(In millions) March 31,
1998 1997
-------- --------
Net income $ 24.4 $ 28.4
Other comprehensive income:
Unrealized appreciation (depreciation) on
investments during period 14.2 (40.9)
(Provision) benefit for deferred federal
income taxes related to items of other
comprehensive income (5.0) 14.2
-------- --------
Other comprehensive income 9.2 (26.7)
-------- --------
Comprehensive income $ 33.6 $ 1.7
======== ========
The accompanying notes are an integral part of these financial
statements.
</TABLE>
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CITIZENS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C>
(Unaudited)
Quarter Ended
(In millions) March 31,
1998 1997
-------- --------
Cash flows from operating activities
Net income $ 24.4 $ 28.4
Adjustments to reconcile net income to
net cash provided by operating activities:
Net realized gains on investments (4.2) (19.7)
Deferred federal income tax (benefit)provision (0.6) 0.1
Change in assets and liabilities:
Deferred policy acquisition expenses 0.4 (0.3)
Premiums and notes receivable, net of (12.8) (0.5)
reinsurance premiums
Unearned premiums, net of prepaid 5.5 1.9
reinsurance premiums
Reserve for losses and loss adjustment
expenses,net of reinsurance recoverable 2.2 (5.9)
Other, net 1.9 (1.6)
-------- --------
Net cash provided by operating activities 16.8 2.4
======== ========
Cash flows from investing activities
Proceeds from sale of available-for-sale debt
securities 39.2 128.6
Proceeds from available-for-sale debt
securities maturing or called 52.6 32.8
Proceeds from available-for-sale equity
securities and other investments 12.4 59.6
Purchases of available-for-sale debt
securities (123.9) (214.2)
Purchases of available-for-sale equity
securities and other investments (3.6) (3.0)
Change in net payable/receivable from
securities transactions not settled (10.9) 6.7
Other investing activities (1.9) (0.3)
-------- --------
Net cash (used for) provided by
investing activities (36.1) 10.2
-------- --------
Cash flows from financing activities
Dividends paid to shareholders (1.7) (1.8)
-------- --------
Net cash used for financing activities (1.7) (1.8)
-------- --------
Change in cash and cash equivalents (21.0) 10.8
Cash and cash equivalents at beginning of period 46.5 36.1
-------- --------
Cash and cash equivalents at end of period $ 25.5 $ 46.9
======== ========
The accompanying notes are an integral part of these financial
statements.
</TABLE>
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CITIZENS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of
Citizens Corporation ("the Company") have been prepared in accordance
with generally accepted accounting principles applicable to stock
property and casualty insurance companies for interim financial
information and with the requirements of Form 10-Q. Certain prior year
amounts have been reclassified to conform with the current year's
presentation.
In the opinion of management, the financial statements reflect all
adjustments of a normal recurring nature necessary for a fair
presentation of the interim periods. Interim results are not
necessarily indicative of results expected for the entire year. These
financial statements should be read in conjunction with the Company's
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 has 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 has 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 interal-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 the
fiscal years beginning after December 15, 1998. The Company is
currently determining the impact of adoption of SOP No. 98-1.
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 March 31, 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 Company's
previously reported earnings per share.
8
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3. MCCA Assessment
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.
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 significant 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 plans to issue refunds to member companies during
June of 1998. It is expected that a refund of approximately $117
million will be paid to Citizens Insurance Company of America (CICA)
from the MCCA based on CICA's 1997 insured vehicles. The refund will
be passed on directly to policyholders. The Company believes that
this transaction will not have a material effect on the results of
operations. A final MCCA assessment will be determined and adjusted
based on insured vehicles as of March 18,1998.
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 aforementioned 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 $5.0 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 March 31, 1998, was $24.4 million, or
$0.69 per share, compared to $28.4 million, or $0.80 per share, for
the quarter ended March 31, 1997. The decrease in net income is
primarily attributable to a decrease in net realized gains, net of
taxes, of $9.6 million, partially offset by an increase in the
underwriting profit of $8.3 million and an increase in net investment
income of $1.6 million. Excluding realized gains and losses, net of
taxes, net income increased $5.6 million, to $21.2 million for the
quarter ended March 31, 1998, versus $15.6 million during the
comparable period of 1997. The improvement in underwriting results is
primarily due to an increase in net premiums earned in all lines
except workers' compensation, more favorable claims activity in the
homeowners and personal automobile lines, and a reduction in
catastrophe losses of $6.3 million, partially offset by adverse claims
activity in the commercial lines. Net investment income increased
$1.6 million, primarily reflecting the growth in invested assets.
Federal income tax expense decreased $2.0 million, to $5.9 million,
while the overall effective tax rate decreased to 19.5% in the quarter
ended March 31, 1998 from 21.8% for the same period in 1997.
Revenues
Net premiums earned increased $7.2 million, or 3.4%, to $217.1 million
for the quarter ended March 31, 1998, resulting from a $4.2 million
increase in the Company's personal lines and a $3.0 million increase
in the Company's commercial lines. Contributing to premium growth for
1998 is an increase in net premiums earned of $5.4 million in Ohio and
Indiana resulting from expansion in these states, rate increases in
the personal automobile and homeowners lines, and an increase in
policies in force in the commercial multiple peril line. These
factors were partially offset by rate reductions in the workers'
compensation line, where competitive conditions continue in Michigan,
and a decrease attributable to Michigan Catastrophic Claims
Association (MCCA) surcharges.
10
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Segment Results
- ---------------
Personal segment
Personal segment premiums represented 68.1% and 68.5% of total net
premiums earned for the quarters ended March 31, 1998 and 1997.
<TABLE>
<S> <C> <C>
-------- --------
For the Quarters Ended 1998 1997
March 31 (in millions) -------- --------
Net premiums earned $ 147.9 $ 143.7
Losses and loss adjustment expenses 99.1 113.8
Policy acquisition and other underwriting
expenses 38.6 39.5
-------- --------
Underwriting profit (loss) $ 10.2 $ (9.6)
======== ========
</TABLE>
Personal segment net premiums earned increased $4.2 million, or 2.9%,
to $147.9 million for the quarter ended March 31, 1998, from $143.7
million for the quarter ended March 31, 1997. This growth is
attributable to rate increases in the personal automobile and
homeowners lines and a 2.6% increase in policies in force in the
homeowners line. This increase is partially offset by a decrease
attributable to changes in the MCCA surcharges effective January 1,
1997 and January 1, 1998, respectively, for personal automobile
policies written. While management has taken steps to increase
penetration in 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 gain was $10.2 million for the
quarter ended March 31, 1998 compared to an underwriting loss of $9.6
million for the quarter ended March 31, 1997. The improvement in
underwriting results is primarily due to more favorable claims
activity in the homeowners and personal automobile lines and a
reduction in catastrophe losses of $5.9 million, primarily in the
homeowners line. Policy acquisition and other underwriting expenses
decreased $0.9 million, or 2.3%, to $38.6 million, primarily
reflecting reductions in employee related expenses.
Commercial segment
Commercial segment premiums represented 31.9% and 31.5% of total net
premiums earned for the quarters ended March 31, 1998 and 1997,
respectively.
<TABLE>
<S> <C> <C>
-------- --------
For the Quarters Ended 1998 1997
March 31 (in millions) -------- --------
Net premiums earned $ 69.2 $ 66.2
Losses and loss adjustment expenses 59.1 44.7
Policy acquisition and other underwriting
expenses 17.5 17.7
Policyholders' dividends 1.9 1.6
-------- --------
Underwriting (loss) profit $ (9.3) $ 2.2
======== ========
</TABLE>
11
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Commercial segment net premiums earned increased $3.0 million, or
4.5%, to $69.2 million for the quarter ended March 31, 1998 compared
to $66.2 million for the quarter ended March 31, 1997. This increase
is primarily attributable to growth in the commercial multiple peril
and commercial automobile lines, partially offset by decreases in
rates in the workers' compensation line, resulting from continued
competitive conditions in Michigan. Policies in force in the
commercial multiple peril and commercial automobile lines increased
20.4% and 5.0%, respectively. Rates in the workers' compensation line
were decreased 8.7% and 1.9% effective March 1, 1997 and January 1,
1998, respectively. 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 $9.3 million compared to
a $2.2 million profit for the quarters ended March 31, 1998 and 1997,
respectively. The decline in underwriting profit is primarily
attributable to increased current year claims activity and less
favorable development of prior year reserves in the commercial
automobile and workers' compensation lines. Policy acquisition and
other underwriting expenses decreased $0.2 million, or 1.1%, to $17.5
million, primarily reflecting reductions in employee related expenses.
Reserve for Losses and Loss Adjustment Expenses
- -----------------------------------------------
The Company regularly updates its reserve estimates as new information
becomes available and further events occur which may impact the
resolution of unsettled claims. Changes in prior reserve estimates
are reflected in results of operations in the year such changes are
determined to be needed and recorded. The table below provides a
reconciliation of the beginning and ending reserve for unpaid losses
and LAE as follows:
<TABLE>
<S> <C> <C>
For the period ended March 31, (in millions) 1998 1997
--------------------
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 173.3 179.0
Decrease in provision for insured
events of prior years (15.1) (20.5)
-------- --------
Total incurred losses and LAE 158.2 158.5
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured
events of current period 50.0 57.9
Losses and LAE attributable to insured
events of prior years 107.9 104.7
-------- --------
Total payments 157.9 162.6
Change in reinsurance recoverable on unpaid
losses 4.1 (10.3)
-------- --------
Reserve for losses and LAE, end of period $1,210.5 $1,224.1
======== ========
</TABLE>
As part of an ongoing process, the reserves have been re-estimated for
all prior accident years and were decreased by $15.1 million and $20.5
million, for the quarters ended March 31, 1998 and 1997, respectively.
The decline in favorable development is primarily due to unfavorable
development in the commercial automobile line for the quarter ended
March 31, 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.
12
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This favorable development reflects the Company's reserving philosophy
consistently applied over these periods. Conditions and trends that
have affected development of the losses and LAE reserves in the past
may not necessarily occur in the future.
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 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.
The Company believes that 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. Amounts in excess of
$180.0 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 $25.2 million and $23.6 million
for the quarters ended March 31, 1998 and 1997, respectively. The
increase is primarily the result of an increase in average invested
assets. The average pre-tax yields on debt securities were 6.6% in
1998 and 6.8% in 1997. Net investment income after taxes was $21.0
million and $19.8 million for the quarters ended March 31, 1998 and
1997, respectively. Net realized gains on investments before taxes
were $4.2 million and $19.7 million during the first quarter 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.
13
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Investment Portfolio
- --------------------
The Company's investment portfolio increased $41.2 million, to
$1,762.8 million during the quarter, from $1,721.6 million at December
31, 1997. Debt securities increased $31.4 million, to $1,553.8
million, from $1,522.4 million, and represented 88.1% and 88.4% of the
carrying value of all investments at March 31, 1998 and December 31,
1997, respectively. Tax-exempt securities represented 67.6% of
total debt securities at March 31, 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 March 31,
1998 was $154.8 million compared to $140.6 million at December 31,
1997. Unrealized depreciation during the first three months of the
year was $3.0 million for bonds, and unrealized appreciation on equity
securities and other investments was $17.2 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 quarter ended March
31, 1998, was $16.8 million compared to $2.4 million in the prior year
period. This increase is primarily attributable to improved
underwriting results and an increase in net investment income
received.
Net cash (used for) provided by investing activities for the Company
was $(36.1) million and $10.2 million for the first quarter of 1998
and 1997, respectively. The increase in net cash used for investing
activities results from increased net cash provided by operating
activities, which is typically invested in fixed income securities,
and the timing of investments in long-term securities.
Net cash used for financing activities for the Company was $1.7
million and $1.8 million for the first quarter of 1998 and 1997,
respectively, representing dividends paid to shareholders.
Shareholders' equity was $909.8 million, or $25.92 per share at March
31, 1998, compared to $872.9, or $24.75 per share at December 31,
1997, resulting from additional unrealized appreciation on investments
and net income. Changes in shareholders' equity related to the
unrealized values of underlying portfolio investments will continue to
be volatile as market prices of debt securities fluctuate with changes
in the interest rate environment.
The Company expects to continue to pay dividends in the foreseeable
future. However, payment of future dividends is subject to the Board
of Directors' approval and is dependent, among other things, upon
earnings and the financial condition of the Company.
14
======================================================================
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 March 31, 1998, the Company has incurred and
expensed approximately $10.5 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 $16.1 million.
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.
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
15
======================================================================
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.
16
======================================================================
PART II - OTHER INFORMATION
ITEM 6
------
Exhibits and Reports on Form 8-K
(a)Exhibits
EX-11 Statement regarding computation of per share
earnings.
EX-27 Financial Data Schedule
.
(b)Reports on Form 8-K
None
17
======================================================================
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 May 13, 1998 /s/ John F. O'Brien
------------ ---------------------------------------
John F. O'Brien
President and Chief Executive Officer,
and Chairman of the Board
Dated May 13, 1998 /s/ Edward J. Parry, III
------------ ---------------------------------------
Edward J. Parry, III
Vice President, Chief Financial Officer,
Treasurer and Principal Accounting Officer
18
======================================================================
Exhibit 11
CITIZENS CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
For the Periods Ended March 31, 1998 and 1997
(in millions, except per share data)
<TABLE>
<S> <C> <C>
Quarter Ended
March
31,
1998 1997
-------- --------
Basic:
Average shares outstanding
35.3 35.3
======== ========
Net income available to common
shareholders $ 28.4 $ 28.4
======== ========
Per share amount $ 0.69 $ 0.80
Diluted:
Average shares outstanding 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
======== ========
Net income available to common
shareholders $ 28.4 24.4
========= ========
Per share amount $ 0.69 $ 0.80
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 1554
<DEBT-CARRYING-VALUE> 1488
<DEBT-MARKET-VALUE> 1554
<EQUITIES> 201
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1763
<CASH> 26
<RECOVER-REINSURE> 14
<DEFERRED-ACQUISITION> 54
<TOTAL-ASSETS> 2635
<POLICY-LOSSES> 1211
<UNEARNED-PREMIUMS> 380
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 5
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 910
<TOTAL-LIABILITY-AND-EQUITY> 2635
217
<INVESTMENT-INCOME> 25
<INVESTMENT-GAINS> 4
<OTHER-INCOME> 1
<BENEFIT> 160
<UNDERWRITING-AMORTIZATION> 37
<UNDERWRITING-OTHER> 20
<INCOME-PRETAX> 30
<INCOME-TAX> 6
<INCOME-CONTINUING> 24
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24
<EPS-BASIC> 0.69
<EPS-DILUTED> 0.69
<RESERVE-OPEN> 1206
<PROVISION-CURRENT> 173
<PROVISION-PRIOR> (15)
<PAYMENTS-CURRENT> 50
<PAYMENTS-PRIOR> 108
<RESERVE-CLOSE> 1211
<CUMULATIVE-DEFICIENCY> 4
</TABLE>
