-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I0SSjZu8/dEXiTCIUGcST/CwcuSlar+0oUFP3liScghshPkvEouw+Oei3xRZWDbq fHhzWoVHxxpI4aNMctJAXQ== 0000912057-96-017545.txt : 19960814 0000912057-96-017545.hdr.sgml : 19960814 ACCESSION NUMBER: 0000912057-96-017545 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIZENS SECURITY GROUP INC /MN/ CENTRAL INDEX KEY: 0000802971 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 411564371 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15421 FILM NUMBER: 96611014 BUSINESS ADDRESS: STREET 1: 406 MAIN ST CITY: RED WING STATE: MN ZIP: 55066 BUSINESS PHONE: 6123887171 MAIL ADDRESS: STREET 1: 406 MAIN STREET CITY: RED WING STATE: MN ZIP: 55066 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 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 0-15421 CITIZENS SECURITY GROUP INC. (Exact name of registrant as specified in its charter) Minnesota 41-1564371 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 406 Main Street, Red Wing, Minnesota 55066 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 612-388-7171 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 ----- ----- The number of shares of the registrant's Common Stock, $.01 par value, outstanding on July 31, 1996, was 1,996,585. Page 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES Consolidated Balance Sheets
(Unaudited) June 30, December 31, ASSETS 1996 1995 ------------ ------------ Investments: Fixed maturities, at market (amortized cost of $36,300,157 and $36,174,613, respectively) . . . . . $36,697,852 $37,022,064 Equity securities, at market (cost of $648,747 and $649,278, respectively) . . . . . . . . . . . . . . 769,016 791,385 Short-term investments. . . . . . . . . . . . . . . . 2,540,386 1,462,448 ----------- ----------- Total investments . . . . . . . . . . . . . . . 40,007,254 39,275,897 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . (776,585) 1,291,173 Receivables: Insurance premiums receivable . . . . . . . . . . . . 9,184,516 8,322,717 Reinsurance recoverable . . . . . . . . . . . . . . . 5,179,868 5,214,073 ----------- ----------- Total receivables . . . . . . . . . . . . . . . 14,364,384 13,536,790 Deferred policy acquisition costs. . . . . . . . . . . . 2,671,280 2,427,418 Prepaid reinsurance premiums . . . . . . . . . . . . . . 2,052,569 2,395,744 Deferred tax asset . . . . . . . . . . . . . . . . . . . 954,000 745,000 Current income tax receivable. . . . . . . . . . . . . . 326,577 - Accrued investment income. . . . . . . . . . . . . . . . 619,744 573,303 Equipment, at cost less accumulated depreciation . . . . 459,408 594,525 Excess of cost over net assets acquired. . . . . . . . . 239,273 309,297 Other assets . . . . . . . . . . . . . . . . . . . . . . 176,293 141,896 ----------- ----------- Total assets . . . . . . . . . . . . $61,094,197 $61,291,043 ----------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Reserves for losses and loss adjustment expenses. . . $24,443,806 $24,012,866 Unearned premiums . . . . . . . . . . . . . . . . . . 17,461,074 16,632,332 Bank loan payable . . . . . . . . . . . . . . . . . . 799,000 999,000 Unearned compensation . . . . . . . . . . . . . . . . 239,999 329,999 Due to Citizens Mutual. . . . . . . . . . . . . . . . 84,933 76,616 Current income taxes payable. . . . . . . . . . . . . - 90,423 Other liabilities . . . . . . . . . . . . . . . . . . 1,685,711 2,182,897 ----------- ----------- Total liabilities . . . . . . . . . . . . . . . 44,714,523 44,324,133 ----------- ----------- Shareholders' equity: Preferred stock, $.01 par value; 7.95% Series A; 1,250,000 shares authorized, issued and outstanding. . . . . . . . . . . . . . . . . . . . 4,375,000 4,375,000 Common stock, $.01 par value; 10,000,000 shares authorized; 1,701,585 and 1,661,585 shares issued and outstanding, respectively . . . . . . . . . . . . . . . . . . . 17,016 16,616 Additional paid-in capital. . . . . . . . . . . . . . 5,230,972 5,097,360 Unearned compensation . . . . . . . . . . . . . . . . (239,999) (329,999) Unrealized appreciation of investments in fixed maturities and equity securities, net of related taxes . . . . . . . . . . . . . . . . . . . . . . 341,964 652,558 Retained earnings . . . . . . . . . . . . . . . . . . 6,654,721 7,155,375 ----------- ----------- Total shareholders' equity. . . . . . . . . . . 16,379,674 16,966,910 ----------- ----------- Total liabilities and shareholders' equity. . . $61,094,197 $61,291,043 ----------- ----------- ----------- -----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Page 2 CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES Consolidated Statements of Operation (Unaudited)
Three months ended Six months ended June 30, June 30, ------------------------ ------------------------ 1996 1995 1996 1995 ----------- ---------- ---------- ----------- Revenues: Premiums earned . . . . . . . . . $8,043,316 $7,378,481 15,896,803 $15,113,385 Investment income, less related expenses . . . . . . . 622,877 606,629 1,250,390 1,215,239 Realized gains on investments . . 5,513 37,649 4,998 46,433 Other income. . . . . . . 155,080 138,198 304,997 276,573 ---------- --------- ---------- ---------- Total revenues. . . . . . 8,826,786 8,160,957 17,457,188 16,651,630 ---------- --------- ---------- ---------- Losses and expenses: Losses and loss adjustment expenses incurred. . . . . . . 6,884,626 5,169,615 12,418,334 10,014,029 Policy acquisition costs. . . . . 1,527,626 1,347,552 2,943,304 2,697,434 Interest expense. . . . . . . . . 25,035 49,206 53,164 89,582 Other operating expenses. . . . . 1,416,732 1,293,362 2,620,134 2,396,235 ---------- --------- ---------- ---------- Total losses and expenses 9,854,019 7,859,735 18,034,936 15,197,280 ---------- --------- ---------- ---------- Income (loss) before income taxes. . . . . . (1,027,233) 301,222 (577,748) 1,454,350 Income tax expense (benefit). . . . . (378,000) 87,000 (251,000) 443,000 ---------- --------- ---------- ---------- Net income (loss). . . $ (649,233) $ 214,222 $ (326,748) $1,011,350 ---------- --------- ---------- ---------- ---------- --------- ---------- ---------- Weighted average common and common equivalent shares outstanding . . . 1,826,279 1,690,249 1,826,279 1,687,533 ---------- --------- ---------- ---------- Earnings (loss) per common share. . . $ (.40) $ .07 $ (.27) $ .50 ---------- --------- ---------- ---------- ---------- --------- ---------- ----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Page 3 CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows
(Unaudited) Six months ended June 30, --------------------------- 1996 1995 ------------ ---------- Cash flows from operating activities: Net income (loss). . . . . . . . . . . . . . . $ (326,748) $ 1,011,350 Adjustments to reconcile net income to net cash provided by (used in) operating activites: Change in: Insurance premiums receivable. . . . . (861,799) (949,346) Reinsurance recoverable. . . . . . . . (37,752) (1,282,814) Due from / payable to Citizens Mutual. 8,317 (332,331) Prepaid reinsurance premiums . . . . . 343,175 4,498 Deferred policy acquisition costs. . . (243,862) (7,521) Deferred income taxes. . . . . . . . . (48,000) (192,000) Reserves for losses and loss adjustment expense. . . . . . . . . . . . . . . 430,941 2,001,611 Unearned premiums. . . . . . . . . . . 828,742 349,594 Income tax payable / receivable. . . . (417,000) 35,000 Other liabilities. . . . . . . . . . . (425,229) (518,614) Depreciation and amortization . . . . . . 242,402 98,082 Realized gains. . . . . . . . . . . . . . (4,998) (46,433) Other, net. . . . . . . . . . . . . . . . (144,446) (39,570) ---------- --------- Net cash provided by (used in) operating activities . . . . . . . . (656,257) 131,506 ---------- --------- Cash flows from investing activities: Proceeds from fixed maturities called or matured. . . . . . . . . . . . . . . . . . . 3,696,504 1,215,074 Proceeds from fixed maturities sold. . . . . . 200,031 4,881,583 Proceeds from equity securities. . . . . . . . 555 - Cost of fixed maturities acquired. . . . . . . (3,956,916) (6,523,769) Cost of equity securities acquired . . . . . . - (10,605) Cost of equipment acquired . . . . . . . . . . (33,843) (50,525) ---------- --------- Net cash used in investing activities. (93,669) (488,242) ---------- --------- Cash flows from financing activities: Exercise of common stock options . . . . . . . 134,012 - Repayment of bank loan . . . . . . . . . . . . (200,000) (200,000) Series A preferred stock dividends . . . . . . (173,906) (173,906) ---------- --------- Net cash used in financing activities. (239,894) (373,906) ---------- --------- Net increase (decrease) in cash and short-term investments . . . . . . . . . . . . . . . . . . (989,820) (730,642) Cash and short-term investments at beginning of period. . . . . . . . . . . . . . . . . . . . . 2,753,621 2,721,351 ---------- ---------- Cash and short-term investments at end of period. $1,763,801 $1,990,709 ----------- ----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Page 4 CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES Consolidated Statements of Changes in Equity
(Unaudited) Six months ended Year ended June 30, December 31, 1996 1995 ------------ ------------ Preferred stock, beginning of period. . . . . $ 4,375,000 $ 4,375,000 ----------- ------------ Preferred stock, end of period. . . . . 4,375,000 4,375,000 ----------- ------------ Common stock, beginning of period . . . . . . 16,616 16,616 Exercise of common stock options . . . . . 400 - ----------- ------------ Common stock, end of period . . . . . . . 17,016 16,616 ----------- ------------ Additional paid-in capital, beginning of period. . . . . . . . . . . . . . . . . . . 5,097,360 5,097,360 Exercise of common stock options . . . . . 133,612 - ----------- ------------ Additional paid-in capital, end of period . . . . . . . . . . . . . . . . 5,230,972 5,097,360 ----------- ------------ Unearned compensation, beginning of period. . (329,999) (509,999) ESOP principal payments. . . . . . . . . . 90,000 180,000 ----------- ------------ Unearned compensation, end of period. . (239,999) (329,999) ----------- ------------ Unrealized appreciation (depreciation), beginning of period . . . . . . . . . . . . 652,558 (1,492,563) Change in unrealized appreciation (depreciation), net of taxes . . . . . . . (310,594) 2,145,121 ----------- ------------ Unrealized appreciation, end of period. 341,964 652,558 ----------- ------------ Retained earnings, beginning of period. . . . 7,155,375 6,062,664 Net income (loss). . . . . . . . . . . . . (326,748) 1,440,523 Series A preferred stock dividend. . . . . (173,906) (347,812) ----------- ------------ Retained earnings, end of period. . . . 6,654,721 7,155,375 ----------- ------------ Total shareholders' equity. . . . . . . $16,379,674 $16,966,910 ------------ ------------ ------------ ------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Page 5 CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements Unaudited June 30, 1996 and 1995 (1) BASIS OF PRESENTATION The consolidated financial statements include the accounts of Citizens Security Group Inc. (the "Company") and the Company's wholly owned subsidiaries, Citizens Fund Insurance Company ("Citizens Fund") and Insurance Company of Ohio ("ICO"), and have been prepared in conformity with generally accepted accounting principles. All significant intercompany balances have been eliminated in consolidation. The Consolidated Balance Sheet as of June 30, 1996, the related Consolidated Statements of Operation and Cash Flows for the three and six months ended June 30, 1996 and 1995, the Consolidated Statements of Changes in Equity for the six months ended June 30, 1996 are unaudited. In the opinion of management, all necessary adjustments for a fair presentation of such financial statements have been included. The operating results for the periods are not necessarily indicative of the results to be expected for the entire year. The consolidated financial statements and notes should be read in conjunction with the financial statements and notes contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. On July 31, 1996, the Company was acquired by Meridian Insurance Group, Inc. ("Meridian") (the "Meridian Acquisition"). In the Meridian Acquisition, each holder of shares of Common Stock of the Company received $12.50 per share of Common Stock in cash (an aggregate of approximately $25.0 million), and Citizens Security Mutual Insurance Company ("Citizens Mutual"), as the sole holder of shares of the Company's 7.95% Series A Preferred Stock (the "Preferred Stock"), received $3.50 per share of Preferred Stock in cash (an aggregate of approximately $4.4 million). In connection with the Meridian Acquisition, Meridian assumed control of the Citizens Mutual Board of Directors. In addition, Citizens Mutual, Citizens Fund, ICO and the insurance companies affiliated with Meridian entered into a new reinsurance pooling arrangement under which they combined all of the respective insurance business. (2) EARNINGS PER COMMON SHARE Earnings per common share are calculated based on the weighted average number of common and common equivalent shares outstanding and after net income is reduced by dividends on the Company's Series A preferred stock. Declared preferred stock dividends were $173,906 for the six months ended June 30, 1996 and 1995. Page 6 CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued (3) INVESTMENTS The Company classifies its entire fixed maturity and equity investment portfolios as "available-for-sale." Accordingly, these investments are reported at estimated market value with unrealized gains and losses, net of deferred taxes, recorded in shareholders' equity. Classifying these portfolios as "available-for-sale" does not impact net income. Estimated market value is based on quoted market prices where available. Where quoted market prices are not available, market value is estimated using values obtained from independent pricing services. Short-term investments include investments maturing within one year, money market instruments and mutual funds. Short-term investments with original maturities of three months or less are considered cash equivalents for purposes of the Consolidated Statements of Cash Flows. The carrying amount reported in the balance sheets for cash and short-term investments approximate their fair value. Realized gains or losses on sales of investments, based on specific identification of the investments sold, are credited or charged to income. Changes in unrealized appreciation or depreciation resulting from changes in the market value of investments are credited or charged to shareholders' equity, net of deferred income taxes, if any. Realized gains on investments were as follows: Three months ended Six months ended June 30, June 30, -------------------- ------------------- 1996 1995 1996 1995 -------- ------- -------- -------- Fixed maturities. . . . . $ 5,513 $ 37,649 $ 4,998 $ 46,433 -------- -------- -------- -------- Realized gains on investments. . . . . . $ 5,513 $ 37,649 $ 4,998 $ 46,433 -------- -------- -------- -------- -------- -------- -------- -------- Change in unrealized appreciation (depreciation) is summarized as follows: Three months ended Six months ended June 30, June 30, --------------------- -------------------- 1996 1995 1996 1995 -------- -------- --------- --------- Equity securities . . . . $(12,030) $ 16,592 $ (21,838) $ 18,119 Fixed maturities. . . . . 397,374 1,182,830 (449,756) 2,322,492 -------- ---------- --------- ---------- Total change in unrealized appreciation (depreciation). . . . $385,344 $1,199,422 $(471,594) $2,340,611 -------- ---------- --------- ---------- -------- ---------- --------- ---------- (4) FEDERAL INCOME TAXES The primary objective under the Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," is to ensure the deferred tax asset or liability on the balance sheet properly reflects the amount due to or from the government in the future. As a consequence, the portion of the tax expense resulting from the change in the deferred tax asset or liability may not always be consistent with the income reported in the Consolidated Statements of Income. Page 7 CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued Some items of revenue and expense included in the Consolidated Statements of Income may not be currently taxable or deductible on income tax returns. Therefore, the income tax assets and liabilities are divided into a current portion, which is the amount attributable to the current year's tax return, and a deferred portion, which is the amount attributable to another year's tax return. The revenue and expense items not currently taxable or deductible are called temporary differences. Income tax expense or benefits are recorded in various places in the Company's financial statements. A summary of these amounts is as follows:
Three months ended Six months ended June 30, June 30, ---------------------- -------------------- 1996 1995 1996 1995 --------- -------- --------- -------- Statements of Operation Income tax attributable to operations . . . . $(378,000) $87,000 $(251,000) $443,000 Shareholders' Equity Income tax attributable to unrealized appreciation (depreciation) of investments. . . . . . . . . . . . . . 131,000 407,000 (161,000) 795,000 --------- -------- --------- -------- $(247,000) $494,000 $ (412,000) $1,238,000 --------- -------- --------- -------- --------- -------- --------- --------
The components of income tax expense (benefit) related to the operations are as follows:
Three months ended Six months ended June 30, June 30, ---------------------- -------------------- 1996 1995 1996 1995 --------- -------- --------- -------- Federal current . . . . . . . . . . . . . . . $(255,000) $232,000 $(204,000) $ 613,000 Federal deferred. . . . . . . . . . . . . . . (123,000) (156,000) (49,000) (192,000) State . . . . . . . . . . . . . . . . . . . . - 11,000 2,000 22,000 --------- --------- -------- --------- Total income tax expense (benefit). . . . (378,000) $ 87,000 $(251,000) $443,000 --------- --------- -------- --------- --------- --------- -------- ---------
Federal income tax expense (benefit) is less than the U.S. Federal income tax rate of 34 percent applied to income (loss) before income taxes. The reasons for this difference and the related tax effects are as follows:
Three months ended Six months ended June 30, June 30, ---------------------- -------------------- 1996 1995 1996 1995 --------- --------- --------- -------- Tax expense (benefit) calculated at the Federal rate . . . . . . . . . . $(349,259) $102,415 $(196,434) $494,479 Reduction attributable to nontaxable investment income (municipal bond interest and domestic dividends) (32,697) (32,538) (62,794) (71,098) State tax expense . . . . . . . . . . . . . - 7,260 1,320 14,520 Other . . . . . . . . . . . . . . . . . . . 3,956 9,863 6,908 5,099 --------- -------- --------- -------- Total income tax expense (benefit). . . . . $(378,000) $ 87,000 $(251,000) $443,000 --------- -------- --------- -------- --------- -------- --------- --------
Page 8 CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows: June 30, December 31, 1996 1995 ---------- ------------ DEFERRED TAX ASSETS Loss reserves . . . . . . . . . . . . . . $1,136,457 $ 1,108,125 Unearned premium reserves . . . . . . . . 1,047,778 968,087 Other . . . . . . . . . . . . . . . . . . 12,765 10,788 ---------- ------------ Total gross deferred tax assets. . . . 2,197,000 2,087,000 ---------- ------------ DEFERRED TAX LIABILITIES Deferred acquisition costs. . . . . . . . 908,236 825,322 Excess of cost over net assets acquired . 79,505 101,464 Unrealized appreciation of investments. . 176,108 336,450 Prepaid expenses. . . . . . . . . . . . . 35,121 37,279 Other . . . . . . . . . . . . . . . . . . 44,030 41,485 ---------- ------------ Total gross deferred tax liabilities . 1,243,000 1,342,000 ---------- ------------ Net deferred tax assets. . . . . . . . $ 954,000 $ 745,000 ---------- ------------ ---------- ------------ The Company has determined it is not necessary to establish a valuation allowance for the deferred tax asset as it is more likely than not the deferred tax asset will be realized principally through future reversal of existing taxable temporary differences and future taxable income. Income tax payments totaled $215,000 and $600,000 in the first six months of 1996 and 1995, respectively. (5) PROPERTY-LIABILITY REINSURANCE AND RELATED RESERVES Ceded reinsurance involves having other insurance companies agree to share certain risks with the Company. The primary purpose of ceded reinsurance is to protect the Company from potential losses in excess of the amount it is prepared to accept. Reinsurance may be on an individual policy basis or to protect against catastrophic losses. The Company expects the companies with whom reinsurance is placed to honor their obligations to the Company. In the event these companies are unable to honor their obligations, the Company will pay these amounts. As of December 31, 1995, approximately 74 percent of the Company's prepaid reinsurance premiums was with Mutual Reinsurance Bureau ("MRB"). All business written with MRB is automatically assumed on an equal and joint basis by its six owner/assuming companies. The six companies are rated from "A" to "A++" by A.M. Best Company. As of December 31, 1995, approximately 54 percent of the Company's total reinsurance recoverable was with Swiss Reinsurance America Corporation, formerly known as North American Reinsurance Corporation. Swiss Reinsurance America Corporation is rated "A" by A.M. Best Company and "AAA" by Standard and Poor's for its property/liability claims-paying ability. Page 9 CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued In 1994, the Company received refunds of $592,398 of excess ceded reinsurance premiums from the Minnesota Workers' Compensation Reinsurance Association. These refunds were required to be distributed to certain workers' compensation policyholders under legislation passed by the State of Minnesota in 1992. This legislation was challenged by a group of insurers and on January 31, 1995 the U.S. Court of Appeals for the Eighth Circuit upheld a lower court ruling that found the legislation to be unconstitutional. At December 31, 1994 the Company recorded the refund as a reduction of ceded written premium and ceded unearned premium, with no effect on earned premium. The Company recorded these refunds as premiums earned in 1995. The effect of assumed and ceded reinsurance on premiums written, premiums earned and insurance losses and loss adjustment expenses is as follows:
Three months ended Six months ended June 30, June 30, ---------------------- ----------------------- 1996 1995 1996 1995 --------- --------- --------- -------- Premiums written: Direct . . . . . . . . . . . . . . . . . $10,682,059 $9,660,377 $19,883,049 $18,520,096 Ceded. . . . . . . . . . . . . . . . . . 1,692,329 1,651,996 2,814,329 3,052,619 ----------- ---------- ----------- ----------- Net premiums written . . . . . . . . $ 8,989,730 $8,008,381 $17,068,720 $15,467,477 ----------- ---------- ----------- ----------- ----------- ---------- ----------- ----------- Premiums earned: Direct . . . . . . . . . . . . . . . . . $ 9,660,072 $8,923,313 $19,054,307 $17,578,104 Ceded. . . . . . . . . . . . . . . . . . 1,616,756 1,544,832 3,157,504 2,464,719 ----------- ---------- ----------- ----------- Net premiums earned. . . . . . . . . $ 8,043,316 $7,378,481 $15,896,803 $15,113,385 ----------- ---------- ----------- ----------- ----------- ---------- ----------- ----------- Losses and loss adjustment expenses: Direct . . . . . . . . . . . . . . . . . $ 9,221,844 $6,505,713 $15,661,393 $12,302,645 Ceded. . . . . . . . . . . . . . . . . . 2,337,218 1,336,098 3,243,059 2,288,616 ----------- ---------- ----------- ----------- Net losses and loss adjustment expenses. . . . . . $ 6,884,626 $5,169,615 $12,418,334 $10,014,029 ----------- ---------- ----------- ----------- ----------- ---------- ----------- -----------
Page 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The consolidated financial statements and the related notes should be read in conjunction with the following discussion, since they contain important information for evaluation of the Company's financial condition and operating results. RESULTS OF OPERATIONS Direct premiums written increased 9.6 percent and 10.3 percent in 1996 over 1995 for the three and six month periods ended June 30, respectively. Premiums earned for the three and six month periods rose 10.0 percent and 15.0 percent, respectively, over the comparable 1995 amounts. The 1995 earned premiums were positively affected by a $592,398 refund of excess ceded premiums received from the Minnesota Workers' Compensation Reinsurance Association ("MWCRA"). Net investment income was $622,877 for the second quarter of 1996 compared to $606,629 for the second quarter of 1995. For the first six months of 1996, net investment income was $1,250,390 compared to $1,215,239 in 1995. Such increases over 1995 results were primarily a result of an increase in invested assets. The Company experienced a realized gain on investments of $5,513 in the second quarter of 1996 compared to $37,649 in the same period in 1995. For the first six months of 1996, realized gains on investments were $4,998 compared to $46,433 in 1995. The Company's loss ratio (loss and loss adjustment expenses incurred to premiums earned) was 85.6 percent for the second quarter of 1996 compared to 70.1 percent in the second quarter of 1995. The Company experienced an increase in the severity of claims during 1996. For the six months ended June 30, 1996, the loss ratio was 78.1 percent compared to 66.3 percent for the same period in 1996. Effective January 1, 1996, Citizens Fund, ICO and Citizens Mutual entered into an aggregate excess of loss contract which reinsures losses and allocated loss adjusting expenses in excess of 62 percent in any accident year. The reinsurer's obligation is limited to 5 percent of accident year subject net earned premium. Losses and allocated adjusting expenses in excess of 67 percent are retained by Citizens Fund, ICO and Citizens Mutual. In 1996, the Company's loss ratio was positively effected by the 5 percent benefit of the excess of loss contract. The Company's expense ratio (total operating expenses to premiums earned) for the second quarter of 1996 was 36.9 percent as compared to 36.5 percent for the second quarter of 1995. The expense ratio for the six months ended June 30, 1996 increased 1 percentage point as compared to the same period a year ago. For the second quarter of 1996, the Company experienced a net loss of $649,233, or a loss of $.40 per common share, compared to net income of $214,222, or $.07 per common share, for the second quarter of 1995. For the first six months of 1996, the net loss was $326,748, or $.27 per common share, versus net income of $1,011,350, or $.50 per common share, for the same period in 1995. The MWCRA refund, in addition to accrued interest income associated with such refund, accounted for net income of approximately $410,000, or $.25 per common share, in the first quarter of 1995. The Company's results of operations are affected by seasonal weather variations. Accordingly, results reflected for any interim period are not necessarily indicative of those to be expected for the entire year. Page 11 LIQUIDITY AND CAPITAL RESOURCES The primary sources of liquidity for Citizens Fund and ICO are funds generated from insurance premiums and net investment income. The Company's subsidiaries' funds are generally invested in fixed maturity securities. At June 30, 1996, the Company and its subsidiaries held cash and short-term investments of $1,763,801. Management believes that these funds provide adequate liquidity for the payment of claims and other short-term cash needs. On November 3, 1989, the Company obtained a $6,000,000, seven-year bank loan from First Bank National Association, which has subsequently been purchased on November 9, 1995 by Goodhue County National Bank, Red Wing, Minnesota. The principal balance of the bank loan remaining to be paid as of June 30, 1996 was $799,000. The current interest rate is 8.75 percent, but the rate is variable and is tied to the prime rate. The Company agreed to certain restrictive covenants which limit the amount of subsequent indebtedness, capital expenditures and business acquisitions. As a holding company, the Company depends on dividends from Citizens Fund and ICO and fees payable under a Capital Access Fee Agreement to provide funds for bank loan payments, Preferred Stock dividends and other operating expenses. As of June 30, 1996, the Company had no material commitments for capital expenditures. On February 8, 1996, the Company announced that the Company and Citizens Mutual entered into an Acquisition and Affiliation Agreement with Meridian providing for the acquisition of the Company by Meridian and the affiliation of Citizens Mutual and Merdian. A definitive acquisition agreement was executed effective March 20, 1996 and the subsequent transactions were closed on July 31, 1996. Page 12 Part II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None ITEM 2. CHANGES IN SECURITIES. None ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company held a special meeting of shareholders on July 31, 1996. A proposal to approve and adopt an Acquisition and Affiliation Agreement, dated as of March 20, 1996, by and among the Company, Citizens Mutual and Meridian, and the related Plan of Merger was submitted to a vote of security holders. Of the 1,223,808 shares represented at the meeting, 1,220,865 shares were voted in favor of the proposal, 2,507 shares were voted against the proposal, and 438 shares abstained from voting on the proposal. ITEM 5. OTHER INFORMATION. None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. Exhibit Number Description ------ --------------------------------------- (27) Financial Data Schedule (b) Reports on Form 8-K. None Page 13 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 SECURITY GROUP INC. (Registrant) Date: July 31, 1996 By: /s/ Scott S. Broughton ------------------------------- Scott S. Broughton President, Chief Operating Officer (duly authorized officer) and Chief Financial Officer (principal financial and accounting officer) Page 14 EXHIBIT INDEX Page Exhibit Description Number - ------- -------------------------------------------- ------ (27) Financial Data Schedule Page 15 EX-27 2 EXHIBIT 27 (FDS)
7 6-MOS DEC-31-1995 JAN-01-1996 JUN-30-1996 36,697,852 0 0 769,016 0 0 40,007,254 (776,585) 5,179,868 2,671,280 61,094,197 24,443,806 17,461,074 0 0 799,000 0 4,375,000 17,016 11,987,658 61,094,197 15,896,803 1,250,390 4,998 304,997 12,418,334 2,943,304 2,673,298 (577,748) (251,000) (326,748) 0 0 0 (326,748) (.27) 0 0 0 0 0 0 0 0
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