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 September 30, 1995
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 November 10, 1995, was 1,661,585.
Page 1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
ASSETS 1995 1994
------------- --------------
Investments:
Fixed maturities, at market (amortized cost of $35,716,939
and $34,153,963, respectively). . . . . . . . . . . . . . . . . . . . . . . . . . $35,901,071 $31,850,909
Equity securities, at market (cost of $657,203 and
$646,597, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 727,984 689,088
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,278,749 1,621,674
------------- --------------
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,907,804 34,161,671
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,783 1,099,677
Receivables:
Insurance premiums receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,336,498 7,238,448
Reinsurance recoverable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,875,743 3,826,444
Due from Citizens Mutual. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283,836 -
------------- --------------
Total receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,496,077 11,064,892
Deferred policy acquisition costs. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,448,253 2,298,703
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,395,201 2,299,649
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 916,000 1,684,000
Equipment, at cost less accumulated depreciation . . . . . . . . . . . . . . . . . . . 664,383 840,625
Accrued investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 521,587 494,943
Excess of cost over net assets acquired. . . . . . . . . . . . . . . . . . . . . . . . 344,852 451,517
Current income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,388 -
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157,439 206,259
----------- -----------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $59,036,767 $54,601,936
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses. . . . . . . . . . . . . . . . . . $22,870,378 $20,989,736
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,566,882 15,672,948
Bank loan payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,218,920 1,518,920
Unearned compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 374,999 509,999
Due to Citizens Mutual. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 215,850
Current income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 118,229
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,798,886 2,027,176
------------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,830,065 41,052,858
------------- --------------
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;
1,661,585 shares issued and outstanding, respectively. . . . . . . . . . . . . . 16,616 16,616
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,097,360 5,097,360
Unearned compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (374,999) (509,999)
Unrealized appreciation (depreciation) of investments in fixed
maturities and equity securities, net of related taxes. . . . . . . . . . . . . 167,913 (1,492,563)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,924,812 6,062,664
----------- -----------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . 16,206,702 13,549,078
----------- -----------
Total liabilities and shareholders' equity. . . . . . . . . . . . . . . . . . $59,036,767 $54,601,936
----------- -----------
----------- -----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 2
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------- --------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
Revenues:
Premiums earned. . . . . . . . . . . . . . . . . . . $7,609,319 $7,056,710 $22,722,704 $20,205,110
Investment income, less related
expenses. . . . . . . . . . . . . . . . . . . . . 617,023 529,186 1,832,262 1,578,489
Realized gains (losses) on
investments . . . . . . . . . . . . . . . . . . . (12,434) (11,860) 33,999 4,520
Other income . . . . . . . . . . . . . . . . . . . . 146,231 141,371 422,804 376,048
---------- ---------- ---------- ----------
Total revenues . . . . . . . . . . . . . . . 8,360,139 7,715,407 25,011,769 22,164,167
---------- ---------- ---------- ----------
Losses and expenses:
Losses and loss adjustment
expenses incurred . . . . . . . . . . . . . . . . 5,838,185 5,141,053 15,852,214 13,786,774
Policy acquisition costs . . . . . . . . . . . . . . 1,387,925 1,274,567 4,085,359 3,819,774
Interest expense . . . . . . . . . . . . . . . . . . 39,650 62,126 129,232 191,010
Other operating expenses . . . . . . . . . . . . . . 1,012,722 1,221,758 3,408,957 3,139,658
---------- ---------- ---------- ----------
Total losses and expenses. . . . . . . . . . 8,278,482 7,699,504 23,475,762 20,937,216
---------- ---------- ---------- ----------
Income before income taxes . . . . . . . . . 81,657 15,903 1,536,007 1,226,951
Income tax expense (benefit) . . . . . . . . . . . . . . (30,000) (80,000) 413,000 239,000
---------- ---------- ---------- ----------
Net income. . . . . . . . . . . . . . $ 111,657 $ 95,903 $1,123,007 $ 987,951
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common and common
equivalent shares outstanding . . . . . . . . . . . . 1,699,251 1,666,399 1,694,873 2,073,106
---------- ---------- ---------- ----------
Earnings per common share. . . . . . . . . . . . . . . . $ .01 $ .01 $ .51 $ .39
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 3
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
---------------------------
1995 1994
---------- ----------
Cash flows provided by operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . $1,123,007 $ 987,951
Adjustments to reconcile net income to net
cash provided by operating activities:
Change in:
Insurance premiums receivable . . . . . . . . . . (1,098,050) (1,407,045)
Reinsurance recoverable . . . . . . . . . . . . . (1,049,299) (250,053)
Due from Citizens Mutual. . . . . . . . . . . . . (499,686) (320,826)
Prepaid reinsurance premiums. . . . . . . . . . . (95,552) (174,154)
Deferred policy acquisition costs . . . . . . . . (149,550) (102,819)
Deferred income taxes . . . . . . . . . . . . . . (87,000) (135,000)
Reserves for losses and loss adjustment expense . 1,880,642 1,005,219
Unearned premiums . . . . . . . . . . . . . . . . 893,934 1,829,293
Current income tax. . . . . . . . . . . . . . . . (195,617) (335,000)
Other liabilities . . . . . . . . . . . . . . . . (228,290) 401,983
Depreciation and amortization. . . . . . . . . . . . 176,005 281,685
Realized gains . . . . . . . . . . . . . . . . . . . (33,999) (4,520)
Other, net . . . . . . . . . . . . . . . . . . . . . 5,443 (124,589)
---------- ----------
Net cash provided by operating activities . . . . 641,988 1,652,125
---------- ----------
Cash flows used in investing activities:
Proceeds from fixed maturities called or matured. . . . . 1,569,190 1,836,923
Proceeds from fixed maturities sold . . . . . . . . . . . 5,630,278 5,784,690
Proceeds from equity securities . . . . . . . . . . . . . - 5,550
Cost of fixed maturities acquired . . . . . . . . . . . . (8,527,615) (7,479,111)
Cost of equity securities acquired. . . . . . . . . . . . (10,605) (44,826)
Cost of equipment acquired. . . . . . . . . . . . . . . . (77,196) (1,376,172)
---------- ----------
Net cash used in investing activities . . . . . . (1,415,948) (1,272,946)
---------- ----------
Cash flows used in financing activities:
Cost of issuance of Series A preferred stock. . . . . . . - (149,814)
Repayment of bank loan. . . . . . . . . . . . . . . . . . (300,000) (300,000)
Series A preferred stock dividends. . . . . . . . . . . . (260,859) (173,906)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . - (28,211)
---------- ----------
Net cash used in financing activities . . . . . . (560,859) (651,931)
---------- ----------
Net decrease in cash and short-term investments. . . . . . . (1,334,819) (272,752)
Cash and short-term investments at beginning of period . . . 2,721,351 2,558,277
---------- ----------
Cash and short-term investments at end of period . . . . . . $1,386,532 $2,285,525
---------- ----------
---------- ----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 4
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
(Unaudited)
Nine
months ended Year ended
September 30, December 31,
1995 1994
----------- -----------
Preferred stock, beginning of period . . . . . . . . . . . . . . . . $ 4,375,000 $ -
Issuance of 7.95% Series A. . . . . . . . . . . . . . . . . . . . - 4,375,000
----------- -----------
Preferred stock, end of period . . . . . . . . . . . . . . . . 4,375,000 4,375,000
----------- -----------
Common stock, beginning of period. . . . . . . . . . . . . . . . . . 16,616 29,116
Common stock exchanged. . . . . . . . . . . . . . . . . . . . . . - (12,500)
----------- -----------
Common stock, end of period. . . . . . . . . . . . . . . . . . 16,616 16,616
----------- -----------
Additional paid-in capital, beginning of period. . . . . . . . . . . 5,097,360 9,609,674
Common stock exchanged. . . . . . . . . . . . . . . . . . . . . . - (4,512,314)
----------- -----------
Additional paid-in capital, end of period. . . . . . . . . . . 5,097,360 5,097,360
----------- -----------
Unearned compensation, beginning of period . . . . . . . . . . . . . (509,999) (689,998)
ESOP principal payments . . . . . . . . . . . . . . . . . . . . . 135,000 179,999
----------- -----------
Unearned compensation, end of period . . . . . . . . . . . . . (374,999) (509,999)
----------- -----------
Unrealized appreciation (depreciation), beginning of period. . . . . (1,492,563) 641,691
Change in unrealized appreciation (depreciation),
net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . 1,660,476 (2,134,254)
----------- -----------
Unrealized appreciation (depreciation), end of period. . . . . 167,913 (1,492,563)
----------- -----------
Retained earnings, beginning of period . . . . . . . . . . . . . . . 6,062,664 4,941,985
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,123,007 1,381,538
Series A preferred stock dividend . . . . . . . . . . . . . . . . (260,859) (260,859)
----------- -----------
Retained earnings, end of period . . . . . . . . . . . . . . . 6,924,812 6,062,664
----------- -----------
Total shareholders' equity . . . . . . . . . . . . . . . . . . $16,206,702 $13,549,078
----------- -----------
----------- -----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 5
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
Unaudited
September 30, 1995 and 1994
(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 and Insurance Company of Ohio, 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 September 30, 1995, the related
Consolidated Statements of Income for the three and nine months ended September
30, 1995 and 1994, the related Consolidated Statements of Cash Flows for the
nine months ended September 30, 1995 and 1994, and the related Consolidated
Statement of Changes in Equity for the nine months ended September 30, 1995, 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 ended September 30, 1995 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
to Shareholders for the year ended December 31, 1994.
(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
for the amount of dividends declared on the Company's Series A preferred stock.
Declared preferred stock dividends were $260,859 and $173,906 for the nine
months ended September 30, 1995 and 1994, respectively.
(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.
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.
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.
Page 6
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
Realized gains (losses) on investments were as follows:
Three months ended Nine months ended
September 30, September 30,
------------------------ -----------------------
1995 1994 1995 1994
---------- ---------- -------- ---------
Fixed maturities . . . . . $ (12,434) $ (11,860) $ 33,999 $ (1,030)
Equity securities. . . . . - - - 5,550
--------- --------- -------- --------
Realized gains (losses)
on investments . . . . $ (12,434) $ (11,860) $ 33,999 $ 4,520
--------- --------- -------- --------
--------- --------- -------- --------
Change in unrealized appreciation (depreciation) is summarized as follows:
Three months ended Nine months ended
September 30, September 30,
------------------------ -----------------------
1995 1994 1995 1994
---------- ---------- -------- ---------
Equity securities. . . . . $ 10,171 $ 1,115 $ 28,290 $ (24,712)
Fixed maturities . . . . . 164,694 (945,318) 2,487,186 (2,713,190)
--------- --------- ---------- -----------
Total change in
unrealized appreciation
(depreciation). . . . . $ 174,865 $(944,203) $2,515,476 $(2,737,902)
--------- --------- ---------- -----------
--------- --------- ---------- -----------
(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.
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:
Page 7
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
Three months ended Nine months ended
September 30, September 30,
--------------------- -------------------
1995 1994 1995 1994
---------- ---------- ---------- ---------
STATEMENTS OF INCOME
Income tax attributable to operations . . . . . . . . $ (30,000) $ (80,000) $ 413,000 $ 239,000
SHAREHOLDERS' EQUITY
Income tax attributable to unrealized
appreciation (depreciation)
of investments . . . . . . . . . . . . . . . . . . . 60,000 (320,000) 855,000 (931,000)
---------- --------- ---------- ---------
$ 30,000 $(400,000) $1,268,000 $(692,000)
---------- --------- ---------- ----------
---------- --------- ---------- ----------
The components of income tax expense (benefit) related to the operations are as
follows:
Three months ended Nine months ended
September 30, September 30,
------------------------ -----------------------
1995 1994 1995 1994
--------- -------- -------- --------
Federal current. . . . . . . . . . . . . . . . . . . . $(113,000) $(29,000) $500,000 $382,000
Federal deferred . . . . . . . . . . . . . . . . . . . 105,000 (28,000) (87,000) (135,000)
State . . . . . . . . . . . . . . . . . . . . . . . . (22,000) (23,000) - (8,000)
--------- -------- -------- --------
Total income tax expense (benefit) . . . . . . . . $ (30,000) $(80,000) $413,000 $239,000
--------- -------- -------- --------
--------- -------- -------- --------
Federal income tax expense is less than the U.S. Federal income tax rate of 34
percent applied to income before income taxes. The reasons for this difference
and the related tax effects are as follows:
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
1995 1994 1995 1994
-------- -------- -------- -------
Tax expense calculated at
the Federal rate . . . . . . . . . . . . . . . . . $ 27,763 $ 5,406 $522,242 $417,163
Reduction attributable to nontaxable
investment income (municipal bond
interest and domestic dividends) . . . . . . . . . (30,419) (50,891) (101,517) (142,787)
State tax expense. . . . . . . . . . . . . . . . . . . (14,520) (15,180) - (5,280)
Other. . . . . . . . . . . . . . . . . . . . . . . . . (12,824) (19,335) (7,725) (30,096)
-------- -------- -------- -------
Total income tax expense (benefit) . . . . . . . . . . $(30,000) $(80,000) $413,000 $239,000
-------- -------- -------- -------
-------- -------- -------- -------
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:
September 30, December 31,
1995 1994
------------- ------------
DEFERRED TAX ASSETS
Loss reserves. . . . . . . . . . . . . . . . . . $1,059,756 $ 1,009,292
Unearned premium reserves. . . . . . . . . . . . 963,674 909,384
Unrealized depreciation of investments . . . . . - 768,591
Other. . . . . . . . . . . . . . . . . . . . . . 8,570 14,733
---------- -----------
Total gross deferred tax assets. . . . . . . . 2,032,000 2,702,000
---------- -----------
DEFERRED TAX LIABILITIES
Deferred acquisition costs . . . . . . . . . . . 832,406 781,559
Excess of cost over net assets acquired. . . . . 112,444 145,383
Prepaid expenses . . . . . . . . . . . . . . . . 37,191 38,084
Unrealized appreciation of investments . . . . . 86,670 -
Other. . . . . . . . . . . . . . . . . . . . . . 47,289 52,974
---------- -----------
Total gross deferred tax liabilities . . . . . 1,116,000 1,018,000
---------- -----------
Net deferred tax assets. . . . . . . . . . . . $ 916,000 $ 1,684,000
---------- -----------
---------- -----------
If the Company believes that all of its deferred tax assets will not result in
future tax benefits, the Company must establish a "valuation allowance" for the
portion of these assets that it thinks will not be realized. Based upon review
of the Company's refundable taxes, anticipated future earnings, and all other
available evidence, both positive and negative, the Company has concluded it is
"more likely than not" that its net deferred tax assets will be realized.
Income tax payments in the first nine months of 1995 and 1994 were $695,617 and
$709,000, 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.
SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts," requires the Company to report balances pertaining to
reinsurance transactions "gross" on the balance sheet. The Company now records
reinsurance recoverables on unpaid losses and ceded unearned premiums as assets
in contrast to the Company's prior practice of netting these amounts against the
corresponding liabilities.
Page 9
CITIZENS SECURITY GROUP INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
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, 1994, approximately 66 percent and 77 percent of the total reinsurance
recoverable and prepaid reinsurance premiums, respectively, were with Swiss
Reinsurance America Corporation, formerly known as the North American
Reinsurance Corporation. That company is rated "A" by A.M. Best Company and
"AAA" by Standard and Poor's for its property/liability claims-paying
ability. The effect of ceded reinsurance on premiums written, premiums earned
and insurance losses and loss adjustment expenses is as follows:
Three months ended Nine months ended
September 30, September 30,
------------------------- --------------------------
1995 1994 1995 1994
---------- ----------- ----------- -----------
Premiums written:
Direct . . . . . . . . . . . . . . . . $9,713,411 $9,449,996 $28,233,507 $26,243,771
Ceded. . . . . . . . . . . . . . . . . 1,659,802 1,613,858 4,712,421 4,383,522
---------- ---------- ----------- -----------
Net premiums written . . . . . . . . $8,053,609 $7,836,138 $23,521,086 $21,860,249
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Premiums earned:
Direct . . . . . . . . . . . . . . . . $9,169,071 $8,530,041 $26,747,175 $24,414,479
Ceded. . . . . . . . . . . . . . . . . 1,559,752 1,473,331 4,024,471 4,209,369
---------- ---------- ----------- -----------
Net premiums earned. . . . . . . . . $7,609,319 $7,056,710 $22,722,704 $20,205,110
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Losses and loss
adjustment expenses:
Direct . . . . . . . . . . . . . . . . $7,498,268 $6,137,296 $19,800,913 $16,801,757
Ceded. . . . . . . . . . . . . . . . . 1,660,083 996,243 3,948,699 3,014,983
---------- ---------- ----------- -----------
Net losses and loss adjustment
expenses . . . . . . . . . . . . . . $5,838,185 $5,141,053 $15,852,214 $13,786,774
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
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 5.1 percent and 7.6 percent in 1995 over 1994
for the three and nine month periods ended September 30, respectively. The
growth is attributable to an increase in policies written with agents that the
Company has designated as "Partner" agencies. As anticipated, the Company lost
a portion of its premium base as a result of its decision not to write new
business with certain agencies that do not fit within the Company's long term
marketing strategies.
Premiums earned for the three and nine month periods rose 7.8 percent and
12.5 percent, respectively, over the comparable 1994 amounts. In the first
quarter of 1995 earned premiums were positively affected by a $592,398 refund
of excess ceded premiums received from the Minnesota Workers' Compensation
Reinsurance Association ("MWCRA").
The property and casualty insurance market continues to be competitive.
Although revenues from the Company's association business grew 30 percent
compared to association revenues during the first nine months of 1994,
commercial business in Minnesota and Wisconsin is intensely competitive in
the workers' compensation line. The Company's current strategy is to
maintain rate adequacy in order not to jeopardize underwriting results.
Net investment income was $617,023 for the third quarter of 1995 compared to
$529,186 for the third quarter of 1994. For the first nine months of 1995,
net investment income was $1,832,262 compared to $1,578,489 in 1994. Such
increases over 1994 results were primarily a result of an increase in
invested assets. The Company experienced realized losses on investments of
$12,434 in the third quarter of 1995 compared to realized losses of $11,860
in the same period in 1994. For the first nine months of 1995, realized
gains on investments were $33,999 compared to $4,520 in 1994. The Company
continues to shorten the duration of the investment portfolio in order to
decrease its exposure to interest rate volatility.
The Company's loss ratio (losses incurred to premiums earned) was 69.8 percent
for the third quarter of 1995 compared to 66.1 percent in the third quarter of
1994. For the nine months ended September 30, 1995, the loss ratio was 61.6
percent compared to 59.3 percent for the same period in 1994. The Company
experienced an increase in the severity of claims during 1995. The majority of
the increase in severity occurred in the homeowners line of business as a result
of catastrophe hailstorms in Iowa, North Dakota and South Dakota, and in the
personal automobile line of business due to major accidents. The increase in
severity was partially offset by favorable development of prior years' workers'
compensation losses during the first nine months of 1995.
The Company's loss adjustment expense ratio (loss adjustment expenses to
premiums earned) was 7.0 percent for the third quarter of 1995 compared to 6.8
percent in the third quarter of 1994. This increase was primarily because of
legal costs incurred to settle larger claims during the third quarter. For the
nine months ended September 30, 1995, the loss adjustment expense ratio was 8.2
percent compared to 8.9 percent for the same period in 1994. The majority of
this decrease occurred as a result of utilizing one outside vendor to handle
certain adjusting functions previously handled by many outside vendors.
Page 11
The Company's expense ratio (total operating expenses to premiums earned) for
the third quarter of 1995 was 32.1 percent as compared to 36.3 percent for
the third quarter of 1994. The change was primarily due to a decreased
contingent agency commission as a result of higher than anticipated loss
ratios. The expense ratio for the nine months ended September 30, 1995
decreased 1.8 percent as compared to the same period a year ago.
For the third quarter of 1995, net income was $111,657, or $.01 per common
share, compared to net income of $95,903, or $.01 per common share, for the
third quarter of 1994. For the first nine months of 1995, net income was
$1,123,007, or $.51 per common share, versus $987,951, or $.39 per common share,
for the same period in 1994. 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.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of liquidity for the Company's subsidiaries are funds
generated from insurance premiums and net investment income. The Company's
subsidiaries' funds are generally invested in fixed maturity securities. At
September 30, 1995, the Company and its subsidiaries held cash and short-term
investments of $1,386,532. 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
by Goodhue County National Bank, Red Wing, Minnesota, on November 9, 1995.
The principal balance of the bank loan remaining to be paid as of September
30, 1995 was $1,218,920. The current interest rate is 9.25 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 its subsidiaries and
fees payable under the Capital Access Fee Agreement to provide funds for bank
loan payments, preferred stock dividends and other operating expenses.
As of September 30, 1995, the Company had no material commitments for capital
expenditures.
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.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Number Description
------ ----------------------------------------------------------------
(10) Waiver letter dated November 9, 1995 to Citizens Security
Group Inc. from Goodhue County National Bank
(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: November 10, 1995 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
- ------- ---------------------------------------------------------- ------
(10) Waiver letter dated November 9, 1995 to Citizens Security
Group Inc. from Goodhue County National Bank
(27) Financial Data Schedule
Page 15