SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01
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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 19, 1996, was $9,104,243. The number of shares of the
registrant's Common Stock, $.01 par value, outstanding on March 19, 1996, was
1,661,585.
An Exhibit Index is included on page 67 of this report. The manually signed copy
of this report contains 270 pages.
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
ITEM 1. BUSINESS
GENERAL
Citizens Security Group Inc. (the "Company") is a regional insurance holding
company formed in 1986 and headquartered in Minnesota. The Company, through its
subsidiaries, Citizens Fund Insurance Company ("Citizens Fund") and Insurance
Company of Ohio ("ICO"), together with Citizens Security Mutual Insurance
Company ("Citizens Mutual"), is engaged in the preferred risk property and
casualty business.
Citizens Mutual, Citizens Fund and ICO participate in a reinsurance pooling
arrangement under which they combine all of their respective insurance business
and Citizens Fund and ICO together assume 75% of the combined business. Citizens
Mutual, Citizens Fund and ICO offer a broad line of personal and commercial
property and casualty products. The personal insurance products offered include
homeowner, automobile, tenant, inland marine and umbrella insurance, and the
commercial insurance products offered include multi-peril, automobile, general
liability, umbrella and workers' compensation insurance. These products are
marketed in Minnesota, Wisconsin, Iowa, Ohio, North Dakota, South Dakota and
Missouri through a network of approximately 500 independent agencies.
PROPOSED ACQUISITION BY MERIDIAN
Effective as of March 20, 1996, the Company and Citizens Mutual entered into an
Acquisition and Affiliation Agreement (the "Meridian Acquisition Agreement")
with Meridian Insurance Group, Inc. ("Meridian") providing for the acquisition
of the Company by Meridian (the "Meridian Acquisition") and the affiliation of
Citizens Mutual and Meridian. Pursuant to the Meridian Acquisition Agreement, a
direct or indirect wholly-owned subsidiary of Meridian would be merged with and
into the Company, with the result that the Company would become a wholly-owned
subsidiary of Meridian or a Meridian subsidiary. In the Meridian Acquisition,
each holder of shares of Common Stock of the Company would receive approximately
$12.50 per share of Common Stock in cash (an aggregate of approximately $25
million), and Citizens Mutual, as the sole holder of shares of the Company's
7.95% Series A Preferred Stock (the "Preferred Stock"), would receive
approximately $3.50 per share of Preferred Stock in cash (an aggregate of
approximately $4.4 million).
In connection with the Meridian Acquisition, Meridian would assume control of
the Citizens Mutual Board of Directors. In addition, Citizens Mutual, Citizens
Fund, ICO and the insurance companies affiliated with Meridian would enter into
a new reinsurance pooling arrangement under which they would combine all of
their respective insurance business.
The Meridian Acquisition is conditioned upon approval by the holders of the
Common Stock of the Company, Citizens Mutual, as the sole shareholder of the
Preferred Stock, the policyholders of Citizens Mutual, and insurance company
regulatory authorities in Minnesota, Ohio and Indiana, and certain other
conditions. The Company anticipates that the Meridian Acquisition will be
completed on or about June 30, 1996.
INTERCOMPANY RELATIONSHIPS
Citizens Mutual owns 1,250,000 shares of the Preferred Stock and 337,500 shares
of the Company's Common Stock. The Preferred Stock and Common Stock vote
together as one class on all matters submitted to a vote of the holders of the
Company's Common Stock. Therefore, Citizens Mutual owns 54.5% of the Company's
outstanding voting securities.
2
The Company, Citizens Mutual, Citizens Fund and ICO are parties to a reinsurance
pooling agreement (the "Pooling Agreement") under which the insurance business
of Citizens Mutual, Citizens Fund and ICO is pooled, and all premiums, losses,
loss adjustment expenses and underwriting expenses (after deduction of amounts
ceded to other insurance companies) are prorated among these companies on the
basis of their participation in the pool. Since October 20, 1989, Citizens Fund,
ICO and Citizens Mutual have participated in the pool 50%, 25% and 25%,
respectively. From December 24, 1986 to October 20, 1989, Citizens Fund and
Citizens Mutual participated in the pool 70% and 30%, respectively. Losses
incurred prior to December 24, 1986 are paid solely by Citizens Mutual.
The percentages of participation in the pool were determined based on the
relative amounts of statutory surplus of Citizens Mutual, Citizens Fund and ICO.
If there are significant changes in the relative amounts of surplus, the
participation of Citizens Fund and ICO in the pooled business may be adjusted to
reflect such changes. The Pooling Agreement has a one-year term expiring
December 31, 1996 and is subject to automatic renewal for additional one-year
terms. Subject to approval by Minnesota and Ohio state regulatory authorities,
the Pooling Agreement may be terminated by any party on December 31 of any year
upon 180 days' prior notice. Any amendments to the Pooling Agreement must be
approved by Minnesota and Ohio state regulatory authorities.
The operations of the Company are interrelated with the operations of Citizens
Mutual, which provides facilities, employees and services required to conduct
the business of the Company on a cost-allocated basis. See "Business-Employees
and Management Services" below. All executive officers of the Company are
officers of Citizens Mutual, and four members of the Company's seven-person
Board of Directors are directors of Citizens Mutual. The Company is a publicly
held stock company owned by its shareholders, and Citizens Mutual is a mutual
insurance company owned by its policyholders. Conflicts of interest regarding
business philosophy, profit objectives, determination of premium rates and other
matters may arise between the Company and Citizens Mutual because of the
potential varying interests of the Company's shareholders and Citizens Mutual's
policyholders. An advisory committee of four persons is required to approve any
changes in the Pooling Agreement and pass upon matters involving actual or
potential conflicts of interest that may arise between the Company and Citizens
Mutual. The advisory committee consists of two outside directors from each of
the Company and Citizens Mutual, none of whom holds a seat on both Boards. The
decisions of the advisory committee are binding on the two companies. The
Company's advisory committee members must conclude that any intercompany
transactions and compensation arrangements with the officers of Citizens Mutual
and the Company are fair and equitable to the Company.
LINES OF INSURANCE
The property and casualty insurance business underwritten by Citizens Fund is
personal lines of insurance. Citizens Mutual and ICO offer personal and
commercial lines of insurance. The personal insurance products offered by
Citizens Mutual, Citizens Fund and ICO include homeowner, automobile, tenant,
inland marine and umbrella insurance. The commercial insurance products offered
by Citizens Mutual and ICO include multi-peril, automobile, general liability
and umbrella insurance. Commercial insurance products offered by Citizens Mutual
and ICO are oriented toward retail stores, restaurants, trade contractors and
members of various trade associations, including funeral directors, newspaper
publishers and veterinarians. Citizens Mutual's commercial insurance products
also include workers' compensation insurance.
The following table sets forth by lines of insurance Citizens Fund's and ICO's
75% proportional share of the pool's direct premiums written under the Pooling
Agreement in 1995, 1994 and 1993.
3
Direct Premiums Written
---------------------------------------------------------------------
Year ended December 31,
---------------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- -------------------
Personal automobile. . . . . . $10,490,828 28% $ 9,660,372 27% $ 7,966,418 26%
Homeowner. . . . . . . . . . . 6,264,233 17 6,178,376 18 6,049,460 20
Other personal lines . . . . . 924,537 2 960,849 3 1,052,094 3
----------- --- ----------- --- ----------- ---
Total personal lines . . . . 17,679,598 47 16,799,597 48 15,067,972 49
----------- --- ----------- --- ----------- ---
Commercial multi-peril . . . . 8,769,142 2 8,358,662 24 7,471,397 24
Workers' compensation. . . . . 7,391,125 20 6,739,105 19 5,681,998 19
Commercial automobile. . . . . 2,741,908 7 2,336,308 7 1,929,447 6
Other commercial lines . . . . 1,221,569 3 805,024 2 719,440 2
----------- --- ----------- --- ----------- ---
Total commercial lines . . . 20,123,744 53 18,239,099 52 5,802,282 51
----------- --- ----------- --- ----------- ---
Total. . . . . . . . . . . $37,803,342 100% $35,038,696 100% $30,870,254 100%
----------- --- ----------- --- ----------- ---
----------- --- ----------- --- ----------- ---
UNDERWRITING
Citizens Mutual, Citizens Fund and ICO apply a conservative underwriting
approach and underwrite only standard lines of property and casualty insurance
rather than those lines which are considered higher risk lines, such as
aviation, pollution and liquor liability. In addition, Citizens Mutual, Citizens
Fund and ICO generally write lines of insurance only for persons and businesses
in the "preferred risk" category.
In general, the underwriting experience of a property and casualty insurer is
indicated by its statutory combined ratio, which is the sum of (i) the loss
ratio, calculated by dividing losses and loss adjustment expenses by premiums
earned, and (ii) the expense ratio, calculated by dividing underwriting
expenses, less miscellaneous income, by premiums written. A combined ratio below
100% indicates an underwriting profit, while a combined ratio above 100%
indicates an underwriting loss. The following table sets forth statutory loss,
expense and combined ratios for Citizens Fund and ICO for 1995, 1994 and 1993.
Combined Ratio
Year ended December 31,
-------------------------
1995 1994 1993
---- ---- ----
Loss ratio . . . . . . . . . . . . . . . . . 69.7% 67.9% 67.1%
Expense ratio. . . . . . . . . . . . . . . . 30.0 30.3 30.1
---- ---- ----
Combined ratio . . . . . . . . . . . . . . . 99.7% 98.2% 97.2%
---- ---- ----
---- ---- ----
MARKETING
Citizens Mutual's insurance products are marketed through a network of
approximately 400 independent insurance agencies located in Minnesota,
Wisconsin, Iowa, North Dakota, South Dakota and Missouri. Citizens Fund's
insurance products are marketed through approximately 45 independent insurance
agencies located in Minnesota, Iowa, Wisconsin, North Dakota, Ohio and South
Dakota. ICO's insurance products are marketed through a network of approximately
110 independent insurance agencies in Ohio.
Citizens Mutual, Citizens Fund and ICO are selective in determining which
independent agencies to retain. They generally retain only prominent agencies
that employ full-time, professional agents. Because of the long period of time
Citizens Mutual, Citizens Fund and ICO have been engaged in the property and
casualty business, Citizens Mutual, Citizens Fund and ICO have long-standing
relationships with the majority of their independent agencies.
4
The majority of the agencies retained by Citizens Mutual, Citizens Fund and ICO
are located in the communities in which their customers reside, and,
accordingly, they provide fast, fair and personalized service. Since the agents
generally handle competing property and casualty insurance products, the ability
of Citizens Mutual, Citizens Fund and ICO to market their products is dependent
upon the extent to which their agents promote them.
In 1995, a hierarchy of agencies was established in order to deliver services
that are consistent with each agency's performance. Citizens Mutual's, Citizens
Fund's and ICO's marketing strategy is to sell its personal insurance products
through certain select "Partner" agencies with the use of automation systems.
The Company's goal is to electronically accept and transmit the majority of
Citizens Mutual's, Citizens Fund's and ICO's business within the independent
agency system. The Company has developed a microcomputer-based automation system
to streamline underwriting, rating and policy production functions. This system,
which has been installed in the offices of approximately 110 independent
agencies in six states, enables agents to provide customers with rate quotations
and electronically transfer information to Citizens Mutual, Citizens Fund or
ICO. The Company believes the automation system will reduce the cost of
processing business while making it easier for independent agents to place
policies with Citizens Mutual, Citizens Fund and ICO.
Citizens Mutual, Citizens Fund and ICO market their insurance products so that
the products of one company are distinguishable from those of the other
companies. Because all business is combined and allocated pursuant to the
Pooling Agreement, such arrangements do not improve the operating results of one
company to the detriment of the others.
One important aspect of Citizens Mutual's and ICO's marketing strategy is to
sell commercial insurance products through various state trade associations.
Citizens Mutual is the endorsed property and casualty insurance provider for
various trade associations, including associations for funeral directors,
newspaper publishers and veterinarians in Minnesota, Wisconsin, Iowa, North
Dakota, South Dakota and Missouri. ICO is the endorsed property and casualty
insurance provider for one trade association in Ohio and is currently pursuing
additional association endorsements.
To encourage their agents to sell their products, Citizens Mutual, Citizens Fund
and ICO emphasize policyholder service, multi-line insurance coverage packages
and a policyholder-oriented premium payment plan. Citizens Mutual, Citizens Fund
and ICO offer excellent service to their agents and policyholders by providing
24-hours-a-day claims service and rapid turnaround for rate quotations, policy
issuances and policy endorsements. The Company believes the broad range of
personal and commercial insurance products written by Citizens Mutual, Citizens
Fund and ICO, and the ability to offer these products together in multi-line
packages, provide Citizens Mutual, Citizens Fund and ICO with an important
marketing tool. The personal insurance products offered by Citizens Mutual,
Citizens Fund and ICO permit agencies to offer policyholders automobile,
homeowner, inland marine and umbrella insurance together in a comprehensive
package. In addition, the broad line of retail store, restaurant and trade
contractor coverages offered by Citizens Mutual and ICO permit agents to tailor
insurance policies to their customers' needs. The Company believes the
availability of comprehensive insurance packages provides an incentive for the
agent to sell Citizens Mutual's, Citizens Fund's and ICO's products because the
agent is better able to retain all of the customer's insurance business.
Citizens Mutual, Citizens Fund and ICO emphasize claims service as a marketing
tool. Programs have been implemented to make the claims process easier for
agents and insureds, while decreasing the claim cost. Programs include a
catastrophe team, the Streamlined Auto Repair Program, a National Glass
5
Program, an Approved Contractor Repair Program and on-site loss prevention
seminars.
The Citizens Account Plan, known as "CAP", is designed to offer policyholders
convenience and flexibility in paying premiums. Policyholders are billed for
premiums on a monthly basis and have the option of making a minimum monthly
payment or prepaying all or a portion of the premiums. A single, easy-to-read
bill covering the aggregate amount of premiums for all policies written by
Citizens Mutual, Citizens Fund and ICO is sent to policyholders. In 1995,
approximately 93% of all premium amounts were billed directly to policyholders
by Citizens Mutual, Citizens Fund and ICO through an automated billing process.
Each independent agency receives a percentage of direct premiums written as a
commission. Citizens Mutual, Citizens Fund and ICO have various agency
commission schedules. Citizens Mutual and ICO have a single profit sharing
program under which agents may earn additional compensation. Citizens Fund also
has a profit sharing program for its agents. Agency commissions are primarily
based on direct premiums written by an agency. The agency profit sharing
programs are based on the profitability, retention and growth of business
obtained from the agencies and are intended to provide additional compensation
to the agencies exceeding certain productivity levels.
The independent insurance agencies are currently retained under agency
contracts. Under the agency contracts, agents are authorized to sell and bind
insurance policies in accordance with procedures specified in the contracts. No
one agency or group of related agencies accounted for more than 3.2% of direct
premiums written by Citizens Mutual, Citizens Fund and ICO in 1995.
REINSURANCE
Citizens Mutual, Citizens Fund and ICO have reinsurance contracts with various
reinsurers to reduce their liability on individual risks and to protect against
catastrophic losses. Under a reinsurance contract, an insurance company cedes a
portion of its exposure and premiums received to another insurance company. The
ceding of insurance does not legally discharge the insurer from its primary
liability for the full amount of the policies. Therefore, the ceding company
remains liable to pay the loss if the reinsurer is unable to meet its obligation
under the reinsurance contract.
The reinsurance agreements maintained by Citizens Mutual, Citizens Fund and ICO
are of two general types, consisting of (i) excess of loss reinsurance, which
covers losses in excess of a specified retained amount, and (ii) pro rata
reinsurance, under which premiums and losses are shared on a proportionate basis
up to a specified amount. Effective January 1, 1996, Citizens Mutual, Citizens
Fund and ICO entered into a pro rata reinsurance contract covering 40% of each
homeowner policy. Previously, this contract covered 50% of each homeowner
policy. Under other reinsurance contracts currently in force, Citizens Mutual,
Citizens Fund and ICO retain the first $300,000 (previous to January 1, 1996,
this was set at $100,000) of loss on any one risk on property coverage. Citizens
Mutual, Citizens Fund and ICO have pro rata reinsurance contracts for property
risks covering losses between $300,000 (previously $100,000) and $4,600,000
(previously $3,600,000) per risk. For property risks in excess of $4,600,000
(previously $3,600,000), Citizens Mutual, Citizens Fund and ICO negotiate
reinsurance arrangements for each risk on an individual basis. The casualty
insurance written by Citizens Mutual, Citizens Fund and ICO is reinsured for
losses in excess of $250,000 (previously $100,000) up to a maximum of $5,000,000
per occurrence.
Citizens Mutual, Citizens Fund and ICO also maintain catastrophe reinsurance to
protect against property loss occurrences that involve more than one risk.
Citizens Mutual, Citizens Fund and ICO have a catastrophe reinsurance contract
6
under which they recover 95.0% of accumulated catastrophic losses in excess of
$600,000 up to $1,250,000 and 97.5% of the next $18,750,000 of catastrophic
losses. Effective January 1, 1996 Citizens Mutual, Citizens Fund and ICO also
reinsure 100% of each umbrella policy up to and including $5,000,000. Prior to
this time, Citizens Mutual, Citizens Fund and ICO reinsured 95% of the first
$1,000,000 of risk on each umbrella policy and 100% of any umbrella risk in
excess of $1,000,000.
Effective January 1, 1996, Citizens Mutual, Citizens Fund and ICO entered
into an aggregate excess of loss contract which reinsures losses and
allocated loss adjusting expenses in excess of 62% in any accident year. The
reinsurer's obligation is limited to 5% of accident year subject net earned
premium. Losses and allocated adjusting expenses in excess of 67% are
retained by Citizens Mutual, Citizens Fund and ICO.
The reinsurance contracts maintained by Citizens Mutual, Citizens Fund and ICO
either have one-year terms or have indefinite terms and may be terminated by the
reinsurer or Citizens Mutual, Citizens Fund and ICO on January 1 of any year
upon 60 days' notice. The availability and rates of future reinsurance contracts
are subject to future market conditions. If the reinsurance market were to
become more expensive or restrictive, Citizens Mutual, Citizens Fund and ICO may
face greater exposure and higher costs. The inability of Citizens Mutual,
Citizens Fund and ICO to obtain reinsurance on acceptable terms or the
insolvency of any of their principal reinsurers could have a material adverse
effect on the Company.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
When claims are made by or against policyholders, any amounts paid or expected
to be paid by Citizens Mutual, Citizens Fund or ICO to the claimant are referred
to as losses. The costs of investigating, resolving and processing these claims
are referred to as loss adjustment expenses ("LAE"). Citizens Mutual, Citizens
Fund and ICO establish reserves which reflect the estimated unpaid total costs
of losses and LAE. These reserves include estimates of the total costs of claims
already reported but not yet settled and estimates of the costs of claims that
have been incurred but which have not been reported. Among other things, these
estimates are based on past claims experience of Citizens Mutual, Citizens Fund
and ICO and consider current claim trends as well as changes in social and
economic conditions. The effects of inflation are implicitly reflected in the
reserving process through analysis of cost trends and review of historical
reserve results. Citizens Mutual, Citizens Fund and ICO do not have an internal
actuary, but management employs actuarial techniques to analyze and develop
reserves. In addition, Citizens Mutual, Citizens Fund and ICO contract with
outside actuarial consultants to certify reserves for losses and LAE.
The Company believes the reserves currently established by Citizens Fund and ICO
for losses and LAE are adequate to cover the ultimate costs. Citizens Fund and
ICO do not discount loss reserves. See the table in Part II, Item 8, "Financial
Statements and Supplementary Data" concerning the reserves of Citizens Fund and
ICO.
The following table shows the development of balance sheet reserves for unpaid
losses and LAE for Citizens Fund from 1986 through 1995 and for ICO from October
20, 1989 through December 31, 1995 on a combined basis. The top line of the
table represents the estimated amounts of net losses and LAE for claims arising
in all prior years that were unpaid at the respective balance sheet dates,
including losses that had been incurred but not yet reported. The next portion
of the table shows the re-estimated amount of the previously recorded net
reserves based on experience as of the end of each succeeding year. The estimate
is modified as more information becomes known about the frequency and severity
of claims for individual years. The "cumulative redundancy
7
(deficiency) on net liability" represents the aggregate change in the estimates
over all prior years. The last portion of the table shows gross balance sheet
reserves less the reinsurance recoverable on unpaid losses as of the respective
balance sheet dates and the gross re-estimated reserves less the reinsurance
recoverable on unpaid losses as of the current year. This information is
available for 1995, 1994, 1993 and 1992 and is a result of the implementation of
Statement of Financial Accounting Standard No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts." This statement
requires the Company to report gross balances on the balance sheet before the
effect of reinsurance transactions. The Company now records reinsurance
recoverables on paid and unpaid losses and ceded unearned premiums as assets, in
contrast to the Company's prior practice of netting these amounts against the
corresponding liabilities.
8
Year ended December 31,
----------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands)
Net liability for unpaid
losses and LAE. . . . . . . . . . . $139 $1,974 $4,212 $6,853 $9,672 $12,463 $14,061 $15,588 $17,171 18,848
Net liability re-estimated as of:
One year later. . . . . . . . . . . 139 1,688 3,657 7,588 10,839 12,885 13,266 14,651 16,617
Two years later.. . . . . . . . . . 139 1,767 4,333 8,791 11,727 12,889 13,149 14,142
Three years later . . . . . . . . . 139 2,033 4,945 8,804 11,832 12,813 12,785
Four years later. . . . . . . . . . 139 1,949 4,738 9,169 11,798 13,031
Five years later. . . . . . . . . . 139 1,790 5,025 9,259 11,813
Six years later . . . . . . . . . . 139 1,893 4,965 9,215
Seven years later . . . . . . . . . 139 1,887 4,912
Eight years later . . . . . . . . . 139 1,874
Nine years later. . . . . . . . . . 139
Cumulative redundancy
(deficiency) on net liability . . . - 100 (700) (2,362) (2,141) (568) 1,276 1,446 554 -
Cumulative amount of net
liability paid through:
One year later. . . . . . . . . . . 139 890 1,778 3,535 5,358 6,352 6,119 6,198 7,277 -
Two years later . . . . . . . . . . 139 1,327 2,727 5,871 8,591 9,395 9,042 9,601
Three years later . . . . . . . . . 139 1,594 3,741 7,547 10,141 11,110 11,211
Four years later. . . . . . . . . . 139 1,662 4,303 8,375 10,943 12,260
Five years later. . . . . . . . . . 139 1,716 4,535 8,770 11,407
Six years later . . . . . . . . . . 139 1,805 4,727 8,998
Seven years later . . . . . . . . . 139 1,819 4,804
Eight years later . . . . . . . . . 139 1,827
Nine years later. . . . . . . . . . 139
Gross liability - end of year . . . . 16,608 19,392 20,990 24,013
Reinsurance recoverable(1). . . . . . 2,547 3,804 3,819 5,165
------ ------ ------ ------
Net liability - end of year . . . . . 14,061 15,588 17,171 18,848
Gross re-estimated liability
One year later. . . . . . . . . . . 16,100 17,486 21,372
Reinsurance recoverable - latest. . . 2,834 2,835 4,755
------ ------ ------
Net re-estimated liability- latest. . 13,266 14,651 16,617
Gross re-estimated liability
Two years later . . . . . . . . . . 15,417 18,136
Reinsurance recoverable . . . . . . . 2,268 3,994
------ ------
Net re-estimated liability. . . . . . 13,149 14,142
Gross re-estimated liability
Three years later . . . . . . . . . 15,612
Reinsurance recoverable . . . . . . . 2,827
------
Net re-estimated liability. . . . . . 12,785
Cumulative redundancy (deficiency)
on gross liability. . . . . . . . . . 996 1,256 (382)
__________
(1) Reinsurance recoverables exclude $49, $55, $1 and $3 of paid recoverables
as of December 31, 1995, 1994, 1993 and 1992, respectively.
9
SEASONALITY OF BUSINESS
In the geographic region where Citizens Mutual and Citizens Fund operate, most
weather-related claims, primarily those resulting from tornadoes and severe
hailstorms, historically occur during the period from May to September. Most
weather-related claims in ICO's geographic region historically occur during the
period from March to June. Accordingly, greater losses have been incurred from
claims in the second and third quarters of the year than during the rest of the
year. Therefore, the Company expects to experience poorer results of operations
during these quarters.
INVESTMENTS
An important element of the financial results of the Company is the return on
invested assets. The investment portfolios of Citizens Fund and ICO are managed
by a professional investment management firm and are under the direction of the
Company's Board of Directors. The Company's investment policy is to maximize
current yield while maintaining safety of capital together with adequate
liquidity for insurance operations.
The investment portfolios consist primarily of fixed maturity tax-exempt and
taxable bonds, including United States Government and governmental agency
securities and corporate, state and municipal bonds. The entire investment
portfolios are classified as "available-for-sale," and therefore, these
investments are reported at estimated market value, with unrealized gains and
losses, net of deferred taxes, recorded in shareholders' equity. In 1995, the
investment portfolios were positively affected by an decrease in interest rates.
The Company experienced an after-tax increase of approximately $2.1 million from
December 31, 1994 to December 31, 1995 in the market value of its investments in
fixed maturities and equity securities.
The following table sets forth the combined investment results of Citizens
Fund's and ICO's investment portfolios for the years ended December 31, 1995,
1994 and 1993. Because of the inability to predict future investment yield, the
following information should not be considered indicative of future investment
results for the Company.
1995 1994 1993
----------- ----------- -----------
Average invested assets(1) . . . . $36,718,784 $34,765,854 $33,074,125
Investment income(2) . . . . . . . 2,452,264 2,194,372 1,952,529
Average annualized yield . . . . . 6.7% 6.3% 5.9%
Net realized gains (losses)(3) . . 76,880 (7,422) 606,031
Change in unrealized
appreciation (depreciation)
of fixed maturities/
available-for-sale(3) . . . . . . 3,150,505 (3,238,042) 210,388
Change in unrealized appreciation
of equity securities(3) . . . . . 99,616 4,788 21,569
__________
(1) Average of the aggregate invested amounts at market at the beginning and
end of the year.
(2) After deduction of investment expenses, but before applicable income taxes.
(3) Before applicable income taxes.
10
The following table sets forth the composition of the investment portfolios of
Citizens Fund and ICO, based on estimated market values, as of the dates
indicated.
December 31,
------------------------------------------------
1995 1994
---------------------- -----------------------
Amount Percent Amount Percent
----------- --------- ----------- ----------
Fixed maturities:
U.S. Treasury securities and
obligations of U.S.
Government corporations
and agencies . . . . . . . . . $ 6,748,373 17.2% $ 7,833,186 22.9%
Obligations of states and
public subdivisions. . . . . . 7,131,048 18.2 8,348,303 24.4
Corporate securities . . . . . . 11,477,976 29.2 8,140,208 23.9
Mortgage-backed securities . . . 11,664,667 29.7 7,529,212 22.0
----------- ----- ----------- -----
Total fixed maturities(1). . . . . 37,022,064 94.3 31,850,909 93.2
Equity securities(2) . . . . . . . 791,385 2.0 689,088 2.0
Short-term investments(3). . . . . 1,462,448 3.7 1,621,674 4.8
----------- ----- ----------- -----
Total investments. . . . . . . . . $39,275,897 100.0% $34,161,671 100.0%
----------- ----- ----------- -----
----------- ----- ----------- -----
__________
(1) Total cost adjusted for amortization of discount or premium of fixed
maturities was $36,174,613 and $34,153,963 on December 31, 1995 and 1994,
respectively.
(2) Equity securities are valued at market. Total cost of equity securities was
$649,278 and $646,597 on December 31, 1995 and 1994, respectively.
(3) Short-term investments are valued at amortized cost, which approximates
market.
COMPETITION
The property and casualty insurance industry is highly competitive. Price
competition has been particularly intense during recent years and is expected to
continue for the foreseeable future. Citizens Mutual, Citizens Fund and ICO
compete with numerous insurance companies, many of which are substantially
larger and have considerably greater financial resources. In addition, Citizens
Mutual, Citizens Fund and ICO operate through independent agents which represent
more than one company and therefore face competition within each agency.
RATING
As a result of the proposed Meridian Acquisition, A. M. Best & Company,
Inc., publisher of Best's Insurance Reports, Property-Casualty ("Best's"),
has placed its rating of Citizens Mutual, Citizens Fund and ICO
under review with positive implications. Best's rating of Citizens Mutual,
Citizens Fund and ICO is currently "B++ (Very Good)". As is customary for
pooled insurance companies, Citizens Mutual, Citizens Fund and ICO are rated
as a group. Best's ratings are based in part on an analysis of the financial
condition, operations and strategic plans of insurance companies. These
ratings are not designed for investors and do not constitute recommendations
to buy, sell or hold any security.
INVESTIGATION AND SETTLEMENT OF CLAIMS
In the ordinary course of business, Citizens Mutual, Citizens Fund and ICO are
regularly engaged in the defense of claims arising out of the conduct of their
insurance business. Claims under insurance policies written by Citizens Mutual,
Citizens Fund and ICO are investigated and settled either by claims adjusters
employed by Citizens Mutual, by their independent agents who have the authority
to settle small claims or by independent adjusters. Citizens Mutual, Citizens
Fund and ICO currently utilize 14 full-time claims adjusters
11
employed by Citizens Mutual. If a claim or loss cannot be settled and results in
litigation, Citizens Mutual, Citizens Fund and ICO retain outside counsel to
represent them.
In 1995, Citizens Mutual, Citizens Fund and ICO entered into an agreement with a
single adjusting company, Adjusting Unlimited ("AU"), covering claims inspection
and loss control services. The Company's strategy is to reduce non-legal
expenses and severity. AU has the ability to provide claim adjustment services
more efficiently through the use of highly automated equipment and by
strategically placing their employees in territories serviced by Citizens
Mutual, Citizens Fund and ICO.
GOVERNMENT REGULATION
Citizens Fund and Citizens Mutual hold licenses to write property and casualty
insurance in Minnesota, Wisconsin, Iowa, North Dakota and South Dakota. ICO and
Citizens Fund each hold a license to write property and casualty insurance in
Ohio. Citizens Mutual also holds licenses to reinsure property and casualty
insurance in Ohio and to write property and casualty insurance in Missouri.
Citizens Mutual, Citizens Fund and ICO are regulated by Minnesota, Ohio and the
other states in which they are licensed. The purpose of such regulation is to
protect policyholders rather than shareholders. The insurance laws of the
various states establish regulatory agencies with broad administrative powers,
including the power to grant or revoke licenses to transact business and to
regulate trade practices, investments, premium rates, the form and content of
financial statements and insurance policies, accounting practices and the
maintenance of specified reserves and surplus.
Pursuant to Ohio insurance laws, ICO must maintain minimum statutory surplus of
$5,000,000 in order to write commercial property and casualty insurance lines.
As of December 31, 1995, ICO's statutory surplus was $5,287,053.
Citizens Mutual and the Company have agreed that, without prior approval of
Minnesota state regulatory authorities, neither of the two companies will engage
in any transaction which would result in Citizens Mutual and the directors,
officers and employees of, and employee benefit or stock ownership plans
sponsored by, Citizens Mutual, the Company, and Citizens Fund owning less than
35.0% of the issued and outstanding voting stock of the Company. In addition,
the Minnesota insurance statutes require that Citizens Mutual have "voting
control" of the Company. Voting control is presumed to exist if Citizens Mutual
owns at least 10% of the voting securities of the Company.
Under Minnesota and Ohio laws, dividends which may be paid by Citizens Fund and
ICO to the Company are restricted. The information contained under Note 14 of
Notes to Consolidated Financial Statements is incorporated herein by reference.
In addition to regulatory supervision of Citizens Mutual, Citizens Fund and ICO,
the Company is subject to statutes governing insurance holding company systems.
Typically, such statutes require the Company to periodically file information
with the state insurance commissioner, including information concerning its
capital structure, ownership, financial condition and general business
operations and material intercompany transactions not in the ordinary course of
business. In addition, these laws require administrative approval of a change in
control of insurance companies.
The regulatory authorities of the states in which Citizens Mutual and Citizens
Fund operate require them to deposit securities with the Minnesota Department of
Commerce for the benefit of policyholders. ICO is required to deposit securities
with the Ohio Insurance Department. Amounts deposited may only be
12
used for the purpose of paying claims. At December 31, 1995, the securities on
deposit by Citizens Fund with the Minnesota Department of Commerce had a market
value of $705,671. At December 31, 1995, the securities on deposit by ICO with
the Ohio Insurance Department had a market value of $259,140.
Under insolvency or guaranty laws in all states in which Citizens Mutual,
Citizens Fund and ICO operate, insurers doing business in those states can be
assessed up to prescribed limits for policyholder losses of insolvent insurance
companies. Assessments are based on prior years' experience or prior years'
direct premiums written. In addition, other state laws require Citizens Mutual,
Citizens Fund and ICO to participate in various mandatory pools or underwriting
associations in certain states in which they operate. During 1995, 1994 and
1993, Citizens Fund's and ICO's portion of total paid assessments was
approximately $402,000, $287,000 and $290,000, respectively.
In 1994, Citizens Fund and ICO 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 US Court of Appeals for the Eighth Circuit upheld a lower court ruling
that found the legislation to be unconstitutional. Citizens Fund and ICO
recorded such refunds as premiums earned in 1995 which were recognized in net
income accordingly.
In December 1993, the National Association of Insurance Commissioners approved a
model risk-based capital formula for property and casualty insurers to be
effective with the 1994 statutory annual statement. Citizens Mutual, Citizens
Fund and ICO have adequate surplus to meet these requirements.
EMPLOYEES AND MANAGEMENT SERVICES
The Company, Citizens Fund and ICO have no employees, and Citizens Mutual
provides the services of its employees to the Company, Citizens Fund and ICO
under a management services agreement (the "Management Services Agreement").
Under the Management Services Agreement, Citizens Fund and ICO pay 75% of all
salaries and related expenses of Citizens Mutual's employees. In addition, the
Company pays Citizens Mutual for services that are performed specifically for
the Company.
Pursuant to the Management Services Agreement, the employees will be
transferred to the Company when Citizens Mutual owns shares of Common Stock
and Preferred Stock that constitute less than 50% of the voting power of all
outstanding voting securities of the Company. After the transfer of such
employees, Citizens Mutual would pay 25% of all employee related expenses of
the Company.
Citizens Fund and ICO also pay 75% of the total expenses relating to data
processing equipment and other employee support facilities. Prior to October 20,
1989, Citizens Fund paid 70% of such expenses. If the Pooling Agreement is
amended, the Management Services Agreement provides that the percentage of
expenses paid by Citizens Fund and ICO will change to equal the new percentages
of the pool allocated to Citizens Fund and ICO. The Management Services
Agreement expires on December 31, 1996 and is subject to automatic renewal on an
annual basis.
13
ITEM 2. PROPERTIES
The principal office of the Company in Red Wing, Minnesota, consists of
approximately 30,000 square feet and is leased by Citizens Mutual under a lease
expiring on December 31, 2002. Citizens Mutual may terminate the lease upon
prior written notice of one year. Citizens Mutual also has the option to extend
the lease for two periods of five years. Under the terms of the Management
Services Agreement, Citizens Mutual and the Company have the right to occupy the
premises jointly. Citizens Mutual also leases an additional office in Red Wing,
Minnesota, consisting of approximately 3,300 square feet under a lease expiring
on June 30, 1998. The lease is automatically extended for an additional 60
months. Although, Citizens Mutual may terminate the lease upon written notice
prior to April 1, 1998. ICO leases an office in Mansfield, Ohio, which consists
of approximately 2,700 square feet under a lease which expires on January 3,
1997. ICO is subleasing the Mansfield, Ohio office space.
The annual rent on offices is currently $314,412 plus the amount of real estate
taxes, utility, insurance and common area maintenance expenses. Citizens Fund
and ICO pay 75% of the rent and all other expenses under the leases. If the
Pooling Agreement is amended, the Management Services Agreement provides that
this percentage will change to equal the new percentage of the pool allocated to
Citizens Fund and ICO.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Common Stock ($.01 par value) of the Company trades on The Nasdaq Small-Cap
Market under the symbol "CSGI".
The following table sets forth the high and low bid quotations as reported by
Nasdaq for each quarterly period during 1995 and 1994.
1995 High Low
--------------- ----- -----
First Quarter $3.63 $3.13
Second Quarter 4.50 3.50
Third Quarter 4.50 4.25
Fourth Quarter 5.00 4.38
1994 High Low
--------------- ----- -----
First Quarter $3.25 $3.25
Second Quarter 4.13 3.25
Third Quarter 3.75 3.38
Fourth Quarter 3.50 3.25
14
HOLDERS
There were 115 holders of record of Common Stock as of March 19, 1996. The
Company believes there were more than 1,000 beneficial owners of its Common
Stock as of March 19, 1996.
DIVIDENDS
The Company does not intend to pay cash dividends to holders of its Common Stock
for the foreseeable future. As a result of changes in state insurance statutes
and covenants contained in its bank loan agreement, the Company has not paid any
cash dividends with respect to its Common Stock since 1992. As a holding
company, the Company's source of cash is dividends from its subsidiaries and
payments under a capital access fee agreement with Citizens Mutual, Citizens
Fund and ICO. See Part III, Item 13, "Certain Relationships and Related
Transactions." These subsidiaries are subject to state laws and regulations
which restrict their ability to pay dividends. See Note 14 of Notes to
Consolidated Financial Statements in Part II, Item 8, "Financial Statements and
Supplementary Data."
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Company as of December 31, 1990 through 1995
and for the years then ended are derived from the consolidated financial
statements of Citizens Security Group Inc. and subsidiaries, which financial
statements have been audited by KPMG Peat Marwick LLP, independent auditors. The
consolidated financial statements for 1995, 1994 and 1993 and KPMG Peat Marwick
LLP's report thereon are included in Part II, Item 8, "Financial Statements and
Supplementary Data."
1995 1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------------
(in thousands, except per common share data)
STATEMENT OF OPERATIONS DATA:
Premiums earned. . . . . . . . . . . . . $30,635 $27,349 $24,489 $24,288 $24,048 $21,359
Investment income, less related
expenses . . . . . . . . . . . . . . . 2,452 2,194 1,953 2,002 2,093 1,932
Realized gains (losses) on investments . 77 (7) 606 39 998 60
Total revenues . . . . . . . . . . . 33,729 30,046 27,443 26,697 27,458 23,608
Losses and loss adjustment
expenses incurred. . . . . . . . . . . 21,347 18,569 16,424 16,575 18,947 15,231
Income (loss) before cumulative
effect of accounting change. . . . 1,441 1,382 1,464 801 (114) 77
Cumulative effect of accounting
change - income tax. . . . . . . . . . - - 38 - - -
Net income (loss). . . . . . . . . . 1,441 1,382 1,502 801 (114) 77
Earnings (loss) per common share*. . . . .64 .57 .52 .31 (.04) .03
BALANCE SHEET DATA:
Total investments. . . . . . . . . . . . $39,276 $34,162 $35,370 $30,054 $34,859 $27,219
Insurance premiums receivable. . . . . . 8,323 7,238 5,992 5,220 5,053 4,772
Total assets . . . . . . . . . . . . 61,291 54,650 52,613 46,997 47,338 38,729
Reserves for losses and loss
adjustment expenses. . . . . . . . . . 24,013 20,990 19,392 16,608 12,847 9,918
Unearned premiums. . . . . . . . . . . . 16,632 15,673 13,150 11,978 11,494 10,648
Bank loan payable. . . . . . . . . . . . 999 1,519 2,569 3,429 4,286 5,143
Total liabilities. . . . . . . . . . 44,324 41,101 38,080 34,777 36,154 27,427
Shareholders' equity . . . . . . . . 16,967 13,549 14,532 12,220 11,185 11,302
Shareholders' equity per
common share*. . . . . . . . . . . . . 7.58 5.52 4.99 4.20 4.36 4.41
Dividends declared and
paid per common share. . . . . . . . . - - - .04 .08 .08
- -------------------
* All per common share information for 1995 and 1994 reflects the March 1994
stock exchange transaction and the deduction of preferred stock dividends.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The consolidated financial statements and the related notes included in Part II,
Item 8, "Financial Statements and Supplementary Data" should be read in
conjunction with the following discussion as they contain important information
for evaluation of the Company's financial condition and operating results.
RESULTS OF OPERATIONS
INDUSTRY OVERVIEW
Property and casualty insurance policies are priced before costs are known as
premiums are determined before losses are reported. The profitability of
insurers is affected by many factors, including the severity and frequency of
claims, natural disasters, interest rates, crime rates, general business
conditions, regulatory measures, and court decisions that define and expand the
extent of coverage and amount of compensation due for injuries or losses.
The property and casualty insurance industry experienced record catastrophe
losses in recent years as a result of hurricanes, floods, earthquakes and other
natural disasters. While the Company was not adversely affected by these
catastrophic losses, they will have a lasting effect on how the insurance
industry evaluates exposures.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Direct premiums written increased 7.9 percent in 1995 over the comparable amount
in 1994 primarily because of growth in commercial lines of business. The growth
is also attributable to an increase in policies written with agents that the
Company has designated as "Partner" agencies. As anticipated, this growth was
somewhat offset by the effect of the Company's decision not to write new
business with certain agencies that do not fit within the Company's long-term
marketing strategies.
Net premiums earned increased 12.0 percent in 1995 over 1994. In the first
quarter of 1995, net premiums earned 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 approximately 32 percent
in 1995 compared to association revenues during 1994, the workers'
compensation market in Minnesota and Wisconsin is intensely competitive. The
Company's current strategy is to maintain rate adequacy in order not to
jeopardize underwriting results.
Net investment income increased 11.8 percent in 1995 over 1994, primarily as a
result of an increase in invested assets. Realized gains on investments were
$76,880 in 1995 compared to a realized loss of $7,422 in 1994. The Company
continued to shorten the duration of the investment portfolios in order to
decrease exposure to interest rate volatility.
The Company's loss ratio was 62.0 percent in 1995 compared to 59.3 percent in
1994. The Company experienced a 12.7 percent decrease in the number of claims in
1995 compared to 1994; however, this decrease was offset by an increase in
severe claims during 1995. The Company experienced an increase in the severity
of claims mainly 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 due to major accidents. The increase in severity was partially offset by
favorable development of prior years' workers' compensation losses in 1995.
16
The Company continued to decrease loss adjustment expenses in 1995. The
Company's loss adjustment expense ratio (loss adjustment expenses to premiums
earned) was 7.7 percent in 1995 compared to 8.6 percent 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.
The Company's expense ratio (total operating expenses to premiums earned) in
1995 was approximately the same as the expense ratio reported in 1994.
In evaluating its financial performance, the Company focuses on after-tax
operating results before consideration of realized investment gains or losses.
Management believes operating results are a better indicator of the Company's
financial performance because it eliminates the variability associated with such
gains or losses. After-tax operating income, excluding realized gains and
losses, was $1,389,643 in 1995 compared to $1,386,961 in 1994. This resulted in
operating earnings per common share of $.61 in 1995 (after deduction of
Preferred Stock dividends) compared to $.57 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.
Net income was $1,440,523, or $.64 per common share, in 1995 compared to net
income of $1,381,538, or $.57 per common share, in 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Direct premiums written increased 13.5 percent in 1994 over the comparable
amount in 1993. The growth was primarily attributable to an increase in the
number of policies written for personal automobile, commercial multi-peril,
workers' compensation and related commercial lines in Iowa, Minnesota and
Wisconsin.
Net premiums written in 1994 rose 16.3 percent over the comparable amount in
1993 mainly as the result of the increase in direct premiums written. The
Company's net premiums written also increased by $592,398 due to a refund of
excess ceded premiums from the MWCRA. Net written premiums and unearned
premiums as of December 31, 1994 were increased by this amount. Net premiums
earned in 1994 increased 11.7 percent over 1993.
Net investment income was $2,194,372 for 1994 compared to $1,952,529 for 1993.
This increase over 1993 results was primarily from an increase in invested
assets. The Company experienced realized losses on investments of $7,422 in 1994
compared to realized gains of $606,031 in 1993. During the first quarter of
1993, the Company took advantage of favorable conditions in the bond market and
repositioned a portion of its investment portfolio to reduce its exposure to
fixed maturities being called before maturity.
The Company's loss ratio was 59.3 percent in 1994 compared to 54.5 percent in
1993. The Company experienced a 13.5 percent increase in the number of claims
for the year ended December 31, 1994 compared to the same period in 1993. In
addition, the Company experienced an increase in the severity of claims during
1994. The majority of the increase in claim frequency and severity occurred in
the homeowners line of business as a result of a catastrophe hailstorm which
occurred on August 18 and 19, 1994, in three separate locations in Iowa,
Minnesota and North Dakota. The increase in claim frequency and severity was
partially offset by favorable development primarily in commercial multi-peril,
commercial automobile liability and homeowners lines of business related to
claims incurred prior to 1994.
17
The Company aggressively decreased loss adjustment processing costs in 1994. The
Company's loss adjustment expense ratio was 8.6 percent in 1994 compared to 12.5
percent in 1993. The majority of this decrease occurred as a result of adding
in-house staff to handle certain adjusting functions previously handled by
outside vendors. The Company also realized a decrease of approximately $169,000
in loss adjustment expenses during 1994 as a result of a reclassification of
expenses into insurance operating expenses based on a recent study of the
allocation of expenses between loss adjustment and underwriting.
As a result of the expense reallocation, the Company's expense ratio for 1994
increased nearly one percentage point as compared to the expense ratio for 1993.
After-tax operating income, excluding realized gains and losses, increased 30
percent to $1,386,961 in 1994 from $1,062,887 in 1993. This increase
resulted in operating earnings per common share of $.57 in 1994 (after
effect of the March 1994 stock exchange of Common Stock for Preferred Stock
by Citizens Mutual and the deduction of Preferred Stock dividends) compared
to $.37 in 1993.
Net income was $1,381,538, or $.57 per common share, in 1994 compared to net
income of $1,501,918, or $.52 per common share, in 1993.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
The primary sources of liquidity for the Company's subsidiaries are funds
generated from insurance premiums and net investment income. The principal
outflows of cash are payments of claims, taxes and operating expenses. The
amount of cash provided from operating activities was $2,557,371 in 1995 and
$3,826,575 in 1994. The Company's subsidiaries generate sufficient cash to meet
their operating requirements.
In December 1993, the National Association of Insurance Commissioners approved a
model risk-based capital formula for property and casualty insurers to be
effective with the 1994 statutory annual statement. The Company's subsidiaries
have adequate surplus to meet these requirements.
INVESTING ACTIVITIES
In addition to the cash provided from operations, the Company maintains
liquidity in its subsidiaries' investment portfolios. At December 31, 1995,
Citizens Fund and ICO had total investments, at market value, of $39,275,897
compared to $34,161,671 at December 31, 1994.
In 1995, the Company's subsidiaries' investment portfolios were effected by a
change in economic conditions which led to a decrease in interest rates. The
Company experienced an after-tax increase of approximately $2.1 million from
December 31, 1994 to December 31, 1995 in the market value of its investments in
fixed maturities and equity securities. The entire investment portfolio is
classified as "available-for-sale," and, therefore, these investments are
reported at estimated market value, with unrealized gains and losses, net of
deferred taxes, recorded in shareholders' equity. Citizens Fund's and ICO's
investment portfolios consist almost entirely of fixed maturity bonds, of which
97% are rated "A" or higher by investment rating agencies. The Company does not
own real estate, junk bonds or high-risk derivative products.
The Company's subsidiaries' investment portfolios are managed by an investment
advisor under the direction of the Company's Board of Directors.
18
At December 31, 1995, the Company, Citizens Fund and ICO held cash and short-
term investments of $2,753,621. Management believes these funds provide adequate
liquidity for the payment of claims and other short-term cash needs.
FINANCING ACTIVITIES
On November 3, 1989, the Company obtained a $6,000,000, seven-year bank loan to
fund the purchase of ICO. On November 9, 1995, the bank loan was assigned by the
lender to Goodhue County National Bank of Red Wing, Minnesota ("GCNB"). The
principal balance of the bank loan remaining to be paid as of December 31, 1995
was $999,000. The current interest rate is 8.75 percent, but the rate is
variable and is tied to the prime rate. Under the bank loan agreement, the
Company agreed to certain restrictive covenants. See Note 9 of Notes to
Consolidated Financial Statements included in Part II, Item 8, "Financial
Statements and Supplementary Data."
On March 31, 1994, Citizens Mutual exchanged 1,250,000 shares of Common Stock
for 1,250,000 shares of Preferred Stock issued by the Company. Annual cumulative
dividends totaling $347,813 ($.27825 per share) are payable with respect to the
Preferred Stock.
As a holding company, the Company depends on cash dividends from its
subsidiaries and fees payable under a capital access fee agreement to make
principal and interest payments due under the loan agreement and provide funds
for preferred stock dividends and other expenses. Citizens Fund and ICO are
restricted under state insurance laws as to the amount of dividends that may be
paid without the approval of such regulatory authorities. See Note 14 of Notes
to Consolidated Financial Statements included in Part II, Item 8, "Financial
Statements and Supplementary Data."
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
Citizens Security Group Inc. and Subsidiaries
December 31,
--------------------------
1995 1994
- -----------------------------------------------------------------------------------------------
ASSETS:
Investments:
Fixed maturities, at market (amortized cost of $36,174,613 and
$34,153,963, respectively) . . . . . . . . . . . . . . . . . $37,022,064 $31,850,909
Equity securities, at market (cost of $649,278 and $646,597,
respectively). . . . . . . . . . . . . . . . . . . . . . . . . 791,385 689,088
Short-term investments . . . . . . . . . . . . . . . . . . . . . 1,462,448 1,621,674
- -----------------------------------------------------------------------------------------------
Total investments. . . . . . . . . . . . . . . . . . . . . . . 39,275,897 34,161,671
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,291,173 1,099,677
Receivables:
Insurance premiums receivable. . . . . . . . . . . . . . . . . 8,322,717 7,238,448
Reinsurance recoverable. . . . . . . . . . . . . . . . . . . . 5,214,073 3,874,223
- -----------------------------------------------------------------------------------------------
Total receivables. . . . . . . . . . . . . . . . . . . . . . 13,536,790 11,112,671
Deferred policy acquisition costs. . . . . . . . . . . . . . . . 2,427,418 2,298,703
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . 2,395,744 2,299,649
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . 745,000 1,684,000
Equipment, at cost less accumulated depreciation . . . . . . . . 594,525 840,625
Accrued investment income. . . . . . . . . . . . . . . . . . . . 573,303 494,943
Excess of cost over net assets acquired. . . . . . . . . . . . . 309,297 451,517
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 141,896 206,259
- -----------------------------------------------------------------------------------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $61,291,043 $54,649,715
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Reserves for losses and loss adjustment expenses . . . . . . . $24,012,866 $20,989,736
Unearned premiums. . . . . . . . . . . . . . . . . . . . . . . 16,632,332 15,672,948
Bank loan payable. . . . . . . . . . . . . . . . . . . . . . . 999,000 1,518,920
Unearned compensation. . . . . . . . . . . . . . . . . . . . . 329,999 509,999
Due to Citizens Mutual . . . . . . . . . . . . . . . . . . . . 76,616 215,850
Current income tax payable . . . . . . . . . . . . . . . . . . 90,423 118,229
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . 2,182,897 2,074,955
- -----------------------------------------------------------------------------------------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . 44,324,133 41,100,637
- -----------------------------------------------------------------------------------------------
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. . . . . 16,616 16,616
Additional paid-in capital . . . . . . . . . . . . . . . . . . 5,097,360 5,097,360
Unearned compensation. . . . . . . . . . . . . . . . . . . . . (329,999) (509,999)
Unrealized appreciation (depreciation) of investments in fixed
maturities and equity securities, net of related taxes . . . 652,558 (1,492,563)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . 7,155,375 6,062,664
- -----------------------------------------------------------------------------------------------
Total shareholders' equity . . . . . . . . . . . . . . . . . 16,966,910 13,549,078
Commitments and contingencies (notes 8 and 10) . . . . . . . . . - -
- -----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity . . . . . . . . . $61,291,043 $54,649,715
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
CONSOLIDATED STATEMENTS OF INCOME
Citizens Security Group Inc. and Subsidiaries
Year ended December 31,
-----------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------
REVENUES:
Premiums earned. . . . . . . . . . . . . . . . . . . $30,635,266 $27,349,069 $24,488,918
Investment income, less related expenses . . . . . . 2,452,264 2,194,372 1,952,529
Realized gains (losses) on investments . . . . . . . 76,880 (7,422) 606,031
Other income . . . . . . . . . . . . . . . . . . . . 564,594 510,329 395,059
- ----------------------------------------------------------------------------------------------------
Total revenues . . . . . . . . . . . . . . . . . . 33,729,004 30,046,348 27,442,537
- ----------------------------------------------------------------------------------------------------
LOSSES AND EXPENSES:
Losses and loss adjustment expenses incurred . . . . 21,346,784 18,569,082 16,424,267
Policy acquisition costs . . . . . . . . . . . . . . 5,461,203 5,216,627 4,845,920
Interest expense . . . . . . . . . . . . . . . . . . 163,656 276,791 243,563
Other operating expenses . . . . . . . . . . . . . . 4,815,027 4,230,278 3,809,869
- ----------------------------------------------------------------------------------------------------
Total losses and expenses. . . . . . . . . . . . . 31,786,670 28,292,778 25,323,619
- ----------------------------------------------------------------------------------------------------
Income before income taxes . . . . . . . . . . . . 1,942,334 1,753,570 2,118,918
Income tax expense . . . . . . . . . . . . . . . . . . 501,811 372,032 655,000
- ----------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change. . . . . . . . . . . . . . . . 1,440,523 1,381,538 1,463,918
Cumulative effect of accounting change - income tax. . - - 38,000
- ----------------------------------------------------------------------------------------------------
Net Income . . . . . . . . . . . . . . . . . . . . $ 1,440,523 $ 1,381,538 $ 1,501,918
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Weighted average common shares and
common equivalent shares outstanding . . . . . . . . 1,699,550 1,973,010 2,915,171
- ----------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE:
Income before cumulative effect of accounting change $ .64 $ .57 $ .51
Cumulative effect of accounting change - income tax. - - .01
- ----------------------------------------------------------------------------------------------------
Net income per common share. . . . . . . . . . . . $.64 $.57 $.52
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Citizens Security Group Inc. and Subsidiaries
Year ended December 31,
-----------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------
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 29,116
Common stock exchanged . . . . . . . . . . . . . . . - (12,500) -
- ----------------------------------------------------------------------------------------------------
Common stock, end of period. . . . . . . . . . . . 16,616 16,616 29,116
- ----------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL, beginning of period. . . . 5,097,360 9,609,674 9,609,674
Common stock exchanged . . . . . . . . . . . . . . . - (4,512,314) -
- ----------------------------------------------------------------------------------------------------
Additional paid-in capital, end of period. . . . . 5,097,360 5,097,360 9,609,674
- ----------------------------------------------------------------------------------------------------
UNEARNED COMPENSATION, beginning of period . . . . . . (509,999) (689,998) (870,004)
Employee Stock Ownership Plan principal payments. . . 180,000 179,999 180,006
- ----------------------------------------------------------------------------------------------------
Unearned compensation, end of period . . . . . . . (329,999) (509,999) (689,998)
- ----------------------------------------------------------------------------------------------------
UNREALIZED APPRECIATION (DEPRECIATION), beginning
of period. . . . . . . . . . . . . . . . . . . . . (1,492,563) 641,691 11,134
Change due to adoption of SFAS No.115. . . . . . . - - 616,988
Change in unrealized appreciation (depreciation),
net of taxes . . . . . . . . . . . . . . . . . . 2,145,121 (2,134,254) 13,569
- ----------------------------------------------------------------------------------------------------
Unrealized appreciation (depreciation),
end of period. . . . . . . . . . . . . . . . . . 652,558 (1,492,563) 641,691
- ----------------------------------------------------------------------------------------------------
RETAINED EARNINGS, beginning of period . . . . . . . . 6,062,664 4,941,985 3,440,067
Net income . . . . . . . . . . . . . . . . . . . . . 1,440,523 1,381,538 1,501,918
Series A preferred stock dividend. . . . . . . . . . (347,812) (260,859) -
- ----------------------------------------------------------------------------------------------------
Retained earnings, end of period . . . . . . . . . 7,155,375 6,062,664 4,941,985
- ----------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . $16,966,910 $13,549,078 $14,532,468
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
CONSOLIDATED STATEMENTS OF CASH FLOWS
Citizens Security Group Inc. and Subsidiaries
Year ended December 31,
-----------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . $ 1,440,523 $ 1,381,538 $ 1,501,918
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in:
Insurance premiums receivable. . . . . . . . . . (1,084,269) (1,246,434) (772,184)
Reinsurance recoverable. . . . . . . . . . . . . (1,339,850) (69,140) (1,255,149)
Due from/to Citizens Mutual. . . . . . . . . . . (139,234) 215,850 604,670
Prepaid reinsurance premiums . . . . . . . . . . (96,095) (160,186) (113,304)
Deferred policy acquisition costs. . . . . . . . (128,715) (215,765) (143,350)
Deferred income taxes. . . . . . . . . . . . . . (166,000) (221,000) (103,000)
Reserves for losses and loss adjustment expense. 3,023,130 1,597,610 2,784,409
Unearned premiums. . . . . . . . . . . . . . . . 959,384 2,523,367 1,171,125
Income tax payable . . . . . . . . . . . . . . . (27,806) (85,678) 57,509
Other liabilities. . . . . . . . . . . . . . . . 107,942 (897) 134,690
Depreciation and amortization. . . . . . . . . . . 121,548 233,823 314,423
Realized losses (gains). . . . . . . . . . . . . . (76,880) 7,422 (606,031)
Other, net . . . . . . . . . . . . . . . . . . . . (36,307) (133,935) (130,410)
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities. . . . 2,557,371 3,826,575 3,445,316
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from fixed maturities called or matured . 2,611,887 2,407,203 8,400,551
Proceeds from fixed maturities sold. . . . . . . . 7,725,730 7,074,596 24,663,805
Proceeds from equity securities sold . . . . . . . 9,500 5,550 -
Cost of fixed maturities acquired. . . . . . . . . (12,040,383) (11,753,978) (36,490,431)
Cost of equity securities acquired . . . . . . . . (10,605) - (272,000)
Cost of equipment disposed (acquired). . . . . . . 46,502 92,012 (446,714)
Change in due from investment broker . . . . . . . - - 195,196
- ----------------------------------------------------------------------------------------------------
Net cash used in investing activities. . . . . . (1,657,369) (2,174,617) (3,949,593)
- ----------------------------------------------------------------------------------------------------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Cost of issuance of Series A preferred stock . . . - (149,814) -
Repayment of bank loan . . . . . . . . . . . . . . (519,920) (1,050,000) (859,651)
Series A preferred stock dividends . . . . . . . . (347,812) (260,859) -
Other. . . . . . . . . . . . . . . . . . . . . . . - (28,211) (4,497)
- ----------------------------------------------------------------------------------------------------
Net cash used in financing activities. . . . . . (867,732) (1,488,884) (864,148)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and short-term
investments. . . . . . . . . . . . . . . . . . . . . 32,270 163,074 (1,368,425)
Cash and short-term investments at beginning of period 2,721,351 2,558,277 3,926,702
- ----------------------------------------------------------------------------------------------------
Cash and short-term investments at end of period . . . $2,753,621 $2,721,351 $2,558,277
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
(1) BASIS OF PRESENTATION
Citizens Security Group Inc. (the "Company") was incorporated on September 12,
1986 and is currently 54.5 percent owned by Citizens Security Mutual Insurance
Company ("Citizens Mutual"). Citizens Fund Insurance Company ("Citizens Fund"),
a wholly-owned subsidiary of the Company, was incorporated on September 15,
1986. Insurance Company of Ohio ("ICO"), a wholly-owned subsidiary of the
Company, was acquired by the Company effective as of October 20, 1989. As used
herein, "Subsidiaries" refers to Citizens Fund and ICO. The consolidated
financial statements include the accounts of the Company and Subsidiaries. All
significant intercompany balances have been eliminated in consolidation.
The Subsidiaries and Citizens Mutual provide personal and commercial insurance
products throughout the states of Iowa, Minnesota, Missouri, North Dakota, Ohio,
South Dakota, and Wisconsin.
The Subsidiaries and Citizens Mutual are parties to a reinsurance pooling
agreement. Under the pooling agreement, all premiums, losses, loss adjustment
expenses and underwriting expenses of the three companies are combined and
prorated between the parties based on their participation in the pool. Since
October 20, 1989, the Subsidiaries have been 75 percent participants in the pool
and Citizens Mutual has been a 25 percent participant.
Citizens Fund and Citizens Mutual losses incurred prior to October 20, 1989 (but
not prior to December 24, 1986) are pooled 70 percent to Citizens Fund and 30
percent to Citizens Mutual. Losses incurred prior to December 24, 1986 are
incurred solely by Citizens Mutual.
Pursuant to a loss and loss adjustment expense agreement between Prudential-LMI
Commercial Insurance Company ("Prudential-LMI") and ICO, ICO losses incurred
prior to October 20, 1989 are incurred solely by Prudential-LMI regardless of
when such losses are reported or paid.
Under the terms of a management services agreement, Citizens Mutual provides the
Company and Subsidiaries with facilities, employees and substantially all
services required to conduct its business. In return, the Subsidiaries pay 75
percent of the related expenses of Citizens Mutual, which consist primarily of
salaries, employee benefits, rent and depreciation of equipment. In addition,
the Company pays Citizens Mutual for services that are performed specifically
for the Company.
The Company entered into a capital access fee agreement on March 31, 1994 under
which the Subsidiaries and Citizens Mutual pay a fee to the Company in
consideration of its ability to raise capital for the combined insurance
operations of the Subsidiaries and Citizens Mutual. The fee is paid monthly in
an amount equal to one percent of the aggregate direct written premiums of the
Subsidiaries and Citizens Mutual. Of the total monthly fee, 75 percent of the
fee is paid by the Subsidiaries and 25 percent by Citizens Mutual. Citizens
Mutual's obligation to pay its portion of the fee will terminate on the earlier
of (i) the date on which the Company's currently outstanding bank loan (or any
indebtedness incurred to refinance such loan) is repaid in full or (ii) the
closing date of the Company's next public offering of securities.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
On February 8, 1996, Meridian Insurance Group, Inc., ("Meridian") and the
Company announced that they entered into a letter of intent providing for
Meridian's acquisition of the Company for approximately $29 million in cash.
Common shareholders of the Company would receive approximately $12.50 per common
share, and the preferred shareholder, Citizens Mutual, would receive
approximately $4.4 million for the Company's preferred stock. In conjunction
with the transaction, Meridian would also assume control of Citizens Mutual and
the Subsidiaries and Citizens Mutual would enter into arrangements with the
Meridian Insurance Group companies relating to the pooling of insurance.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
The Company implemented Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities" as of
December 31, 1993. The Company classified 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.
PREMIUMS
Premiums are recognized as revenue on a pro rata basis over the terms of the
respective policies. Unearned premiums are calculated on the daily pro rata
basis.
DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs such as commissions, premium taxes and certain other
underwriting expenses, which vary with and are primarily related to the
production of business, are deferred and amortized over the effective period of
the related insurance policies. If deferred policy acquisition expenses were to
exceed the sum of unearned premiums and related anticipated investment income
less losses and loss adjustment expenses, the excess costs would be expensed
immediately.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company provides reserves for losses based upon aggregate case basis
estimates for losses reported and estimates of unreported losses, less
reductions for estimated amounts recoverable for salvage and subrogation. The
estimated amounts recoverable for salvage and subrogation were $685,000 and
$695,000 at December 31, 1995 and 1994, respectively. The Company provides
reserves for loss adjustment expenses by estimating expenses to be incurred in
settlement of the claims. Estimated losses and loss adjustment expenses
recoverable from reinsurers are reflected as assets.
The reserves for losses and loss adjustment expenses are considered adequate to
cover the ultimate net cost of losses and loss adjustment expenses. Since the
reserves are necessarily based on estimates, the ultimate liability may be more
or less than such reserves. Any adjustments made to reserves are reflected in
the operating results of the year during which the adjustments are made.
BANK LOAN PAYABLE
The carrying amount reported in the Consolidated Balance Sheets for the bank
loan payable approximates its fair value.
EQUIPMENT
Equipment is stated at cost less accumulated depreciation. Depreciation is
computed on a straight-line basis over the estimated useful lives of the related
assets.
INCOME TAXES
Deferred Federal income taxes are provided to recognize temporary differences
between income determined for financial reporting purposes and income determined
for Federal income tax purposes and changes during the year in cumulative
temporary differences between the tax basis and book basis and liabilities.
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 $347,812 and $260,859 in 1995 and 1994, respectively.
EXCESS OF COST OVER NET ASSETS ACQUIRED
The excess of cost over net assets acquired of $1,184,550, less accumulated
amortization of $875,253 and $733,033 as of December 31, 1995 and 1994,
respectively, represents the unamortized excess of cost over underlying net
tangible assets of ICO at the date of acquisition. The original amount is being
amortized on a straight-line basis over an average life of approximately nine
years. The Company monitors the value of goodwill and would reduce the carrying
value against expenses if it was determined that goodwill had been impaired.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
reported financial statement balances as well as the disclosure of contingent
assets and liabilities. Actual results could differ from those estimates.
Similar to most companies with property and casualty insurance operations, the
Company's gross and net reserves for losses and loss adjustment expenses and
deferred acquisition costs, although supported by actuarial projections and
other data, are ultimately based on management's reasoned expectations of future
events. It is reasonably possible that the expectations associated with these
accounts could change in the near term (i.e., within one year) and that the
effect of such changes could be material to the consolidated financial
statements.
RECLASSIFICATIONS
The Company reclassified some figures in prior years' financial statements to
conform with the 1995 presentation.
(3) INVESTMENTS
The following schedule summarizes information related to equity securities as of
December 31:
1995 1994
- -------------------------------------------------------------------------------------------------
Market value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $791,385 $689,088
Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 649,278 646,597
- -------------------------------------------------------------------------------------------------
Unrealized appreciation . . . . . . . . . . . . . . . . . . . . . . 142,107 42,491
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 48,000 15,000
- -------------------------------------------------------------------------------------------------
Net unrealized appreciation . . . . . . . . . . . . . . . . . . . . $ 94,107 $ 27,491
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Unrealized appreciation (depreciation) consists of the following:
Gross unrealized appreciation . . . . . . . . . . . . . . . . . . . $154,682 $ 81,541
Gross unrealized depreciation . . . . . . . . . . . . . . . . . . . (12,575) (39,050)
- -------------------------------------------------------------------------------------------------
Unrealized appreciation . . . . . . . . . . . . . . . . . . . . . $142,107 $ 42,491
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
The amortized cost, gross unrealized appreciation, gross unrealized depreciation
and estimated market value of investments in fixed maturities available for sale
as of December 31, 1995 and 1994 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Appreciation Depreciation Value
- ---------------------------------------------------------------------------------------------------------
1995:
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies . . . . . . . . . . . . . . $ 6,656,527 $101,170 $(9,324) $ 6,748,373
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . 6,848,211 282,837 - 7,131,048
Corporate securities . . . . . . . . . . . . 11,189,336 308,480 (19,840) 11,477,976
Mortgage-backed securities . . . . . . . . . 11,480,539 206,816 (22,688) 11,664,667
- ---------------------------------------------------------------------------------------------------------
Totals . . . . . . . . . . . . . . . . . $36,174,613 $899,303 $(51,852) $37,022,064
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Appreciation Depreciation Value
- ---------------------------------------------------------------------------------------------------------
1994:
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies . . . . . . . . . . . . . . $ 8,697,141 $ - $ (863,955) $ 7,833,186
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . 8,738,709 79,990 (470,396) 8,348,303
Corporate securities . . . . . . . . . . . . 8,711,771 14,507 (586,070) 8,140,208
Mortgage-backed securities . . . . . . . . . 8,006,342 9,181 (486,311) 7,529,212
- ----------------------------------------------------------------------------------------------------------
Totals . . . . . . . . . . . . . . . . . $34,153,963 $103,678 $(2,406,732) $31,850,909
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
The amortized cost and estimated market value of fixed maturities at
December 31, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
1995
--------------------------
Estimated
Amortized Market
Cost Value
- ----------------------------------------------------------------------------------------------------------
Due in one year or less. . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,359,787 $ 3,368,737
Due after one year through five years. . . . . . . . . . . . . . . . . . . 9,265,077 9,545,067
Due after five years through ten years . . . . . . . . . . . . . . . . . . 6,607,280 6,756,660
Due after ten years. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,461,930 5,686,933
- ----------------------------------------------------------------------------------------------------------
24,694,074 25,357,397
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . 11,480,539 11,664,667
- ----------------------------------------------------------------------------------------------------------
$36,174,613 $37,022,064
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Realized and unrealized gains (losses) from investments are summarized as
follows:
Year ended December 31,
--------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
Realized gains (losses) on investments:
Fixed maturities:
Gross realized gains . . . . . . . . . . . . . . . . . . $128,338 $ 124,334 $635,860
Gross realized losses. . . . . . . . . . . . . . . . . . (53,033) (137,306) (29,829)
- ---------------------------------------------------------------------------------------------------------
Total fixed maturities . . . . . . . . . . . . . . . . 75,305 (12,972) 606,031
- ---------------------------------------------------------------------------------------------------------
Equities:
Gross realized gains . . . . . . . . . . . . . . . . . . 1,575 5,550 -
- ---------------------------------------------------------------------------------------------------------
Total realized gains (losses) on investments . . . . . $76,880 $(7,422) $606,031
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
Year ended December 31,
----------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
Changes in unrealized appreciation (depreciation):
Equity securities. . . . . . . . . . . . . . . . . . . . . $ 99,616 $ 4,788 $ 21,569
Fixed maturities . . . . . . . . . . . . . . . . . . . . . 3,150,505 (3,238,042) 210,388
- ---------------------------------------------------------------------------------------------------------
Total change in unrealized appreciation
(depreciation) . . . . . . . . . . . . . . . . . . . . $3,250,121 $(3,233,254) $231,957
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Investment income is summarized as follows:
Year ended December 31,
----------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
Interest on fixed maturities . . . . . . . . . . . . . . . . $2,409,795 $2,167,506 $1,911,863
Dividends on equity securities . . . . . . . . . . . . . . . 33,097 32,815 32,710
Interest on short-term investments . . . . . . . . . . . . . 141,505 125,793 52,338
Other interest . . . . . . . . . . . . . . . . . . . . . . . 66,894 50,383 73,253
- ---------------------------------------------------------------------------------------------------------
2,651,291 2,376,497 2,070,164
Investment expenses. . . . . . . . . . . . . . . . . . . . . 199,027 182,125 117,635
- ---------------------------------------------------------------------------------------------------------
Investment income, less related expenses . . . . . . . . . . $2,452,264 $2,194,372 $1,952,529
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
At December 31, 1995 and 1994, there were no investments, other than investments
in U.S. Government or U.S. Government Agency securities, which exceeded 10
percent of shareholders' equity.
At December 31, 1995 and 1994, bonds carried at $705,671 and $602,064
respectively, were pledged to the Commerce Department of the State of Minnesota.
At December 31, 1995 and 1994, bonds carried at $259,140 and $237,577,
respectively, were pledged to the Insurance Department of the State of Ohio.
(4) EQUIPMENT
Equipment is summarized as follows:
December 31
--------------------------
1995 1994
- ---------------------------------------------------------------------------------------------------------
Furniture and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . $ 505,038 $ 416,498
Data processing equipment. . . . . . . . . . . . . . . . . . . . . . . . . 1,916,403 2,051,445
Automobiles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,697 65,697
- ---------------------------------------------------------------------------------------------------------
Equipment, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,487,138 2,533,640
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . (1,892,613) (1,693,015)
- ---------------------------------------------------------------------------------------------------------
Equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 594,525 $ 840,625
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
(5) FEDERAL INCOME TAXES
The Company implemented SFAS No. 109, "Accounting for Income Taxes," in the
first quarter of 1993. The cumulative effect of this change was a one-time
increase to earnings of $38,000 or $.01 per share.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
SFAS No. 109 changed the way the Company calculates tax expense shown in the
financial statements. Under prior rules, the primary objective was to match the
tax expense with pretax operating income on the Consolidated Statements of
Income. Under SFAS No. 109, the primary objective 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:
Year ended December 31,
---------------------------
1995 1994
- ----------------------------------------------------------------------------------------------------------
Statements of Income:
Expenses related to income . . . . . . . . . . . . . . . . . . . . . . . $ 501,811 $ 372,032
Shareholders' Equity:
Income tax attributable to change in unrealized appreciation
(depreciation) of investments. . . . . . . . . . . . . . . . . . . . . 1,105,000 (1,099,000)
- ----------------------------------------------------------------------------------------------------------
$1,606,811 $ (726,968)
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
The components of income tax expense related to income before cumulative effect
of accounting change are as follows:
Year ended December 31,
-----------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
Federal current. . . . . . . . . . . . . . . . . . . . . . . $644,811 $602,032 $638,000
Federal deferred . . . . . . . . . . . . . . . . . . . . . . (166,000) (221,000) (103,000)
State. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,000 (9,000) 120,000
- ----------------------------------------------------------------------------------------------------------
Income tax expense. . . . . . . . . . . . . . . . . . . . . $501,811 $372,032 $655,000
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
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:
Year ended December 31,
-----------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
Tax expense calculated at the Federal rate . . . . . . . . . $ 660,394 $ 596,214 $ 720,432
Reduction attributable to nontaxable investment income
(municipal bond interest and domestic dividends) . . . . . (118,530) (197,039) (148,479)
State tax expense. . . . . . . . . . . . . . . . . . . . . . 15,180 (5,940) 79,200
Prior years' tax adjustment. . . . . . . . . . . . . . . . . (70,000) - -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,767 (21,203) 3,847
- ----------------------------------------------------------------------------------------------------------
Income tax expense . . . . . . . . . . . . . . . . . . . . $ 501,811 $ 372,032 $ 655,000
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
The tax effects of temporary differences giving rise to significant portions of
the deferred tax assets and deferred tax liabilities are presented as follows:
December 31,
-------------------------
1995 1994
- ---------------------------------------------------------------------------------------------------------
Deferred tax assets:
Loss reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,108,125 $1,009,292
Unearned premium reserves. . . . . . . . . . . . . . . . . . . . . . . . 968,087 909,384
Unrealized depreciation of investments . . . . . . . . . . . . . . . . . - 768,591
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,788 14,733
- ---------------------------------------------------------------------------------------------------------
Total gross deferred tax asset . . . . . . . . . . . . . . . . . . . . 2,087,000 2,702,000
- ---------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . $ 825,322 $ 781,559
Unrealized appreciation of investments . . . . . . . . . . . . . . . . . 336,450 -
Excess of cost over net assets acquired. . . . . . . . . . . . . . . . . 101,464 145,383
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,279 38,084
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,485 52,974
- ---------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities . . . . . . . . . . . . . . . . . 1,342,000 1,018,000
- ---------------------------------------------------------------------------------------------------------
Net deferred income tax asset. . . . . . . . . . . . . . . . . . . . . $ 745,000 $1,684,000
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
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, future taxable income and tax planning strategies
related to its investment portfolios.
Income tax payments in 1995, 1994 and 1993 were $695,617, $678,710 and $700,491,
respectively.
(6) STOCK OPTION PLANS
On April 18, 1995, the Company amended the 1986 Stock Option Plan (a) to extend
the term of such plan from September 16, 1996 to September 16, 2006, (b) to
increase the number of shares of the Company's Common Stock authorized for
issuance from 225,000 to 375,000 and (c) to satisfy the requirements of Section
162(m) of the Internal Revenue Code of 1986. The Company has reserved a maximum
of 375,000 and 225,000 shares of common stock for issuance under the 1986 Stock
Option Plan as of December 31, 1995 and December 31, 1994, respectively. At
December 31, 1995 and 1994, options to purchase 285,000 and 196,500 shares,
respectively, had been granted at exercise prices ranging from $3.13 to $4.00.
No options have been exercised under this plan.
In 1991, the Company adopted a non-employee director stock option plan. The
Company has reserved a maximum of 50,000 shares of common stock for issuance
under such plan. As of December 31, 1995 and 1994, options to purchase 50,000
and 40,000 shares, respectively, had been granted at exercise prices ranging
from $3.13 to $4.00. No options have been exercised under this plan.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
(7) POST RETIREMENT BENEFITS
In October 1992, Citizens Mutual established an Employee Stock Ownership Plan
("ESOP"). The ESOP borrowed $1,200,000 from Citizens Mutual. The loan will be
repaid in monthly principal payments of $20,000. The current interest rate is
9.5 percent, but the rate is variable and is tied to the prime rate. On October
30, 1992, the ESOP purchased 349,090 shares of the Company's authorized but
previously unissued shares of Common Stock for approximately $1,200,000. The
stock held by the ESOP is released for allocation to the participants' accounts
over the term of the loan as the Company and Citizens Mutual make contributions.
The Company has reflected the principal portion of the loan it expects to repay
as an unearned compensation liability and a corresponding reduction in
shareholders' equity. These amounts will be reduced as the ESOP loan is repaid.
The amount of the annual contribution is discretionary, except that it must be
sufficient to enable the ESOP to meet its current obligations. The Company's
portion of contribution expense related to the ESOP amounted to $221,988,
$229,699 and $235,131 in 1995, 1994 and 1993, respectively, of which $41,988,
$49,700 and $55,125, respectively, was payment of interest.
Citizens Mutual had a defined benefit pension plan covering substantially all of
its employees which was curtailed on June 20, 1992. The Company recognized a
gain of $3,266 on the final settlement which occurred in early 1993.
(8) COMMITMENTS AND CONTINGENCIES
Citizens Mutual leases the home office, a branch office, automobiles and
equipment under various agreements. Under the terms of the management services
agreement, Citizens Mutual and the Company have the right to occupy the offices
jointly, and the Company pays 75 percent of the rent and all other expenses
under the leases. The Company's portion of rental expense for these leases was
$316,729, $275,894 and $295,232 in 1995, 1994 and 1993, respectively. The
Company's portion of future rentals under these leases are $328,320, $106,685,
$37,852, $22,679 and $2,870 in the years 1996, 1997, 1998, 1999 and 2000,
respectively. Lease payments include amounts paid to an affiliated company for
the rental of computer software and equipment. The Company's annual portion of
this lease is $81,795 in 1996 and 1997, $26,625 in 1998, $21,610 in 1999 and
$1,801 in 2000. The future rentals do not include insurance and real estate
taxes which are also payable by the Company. The home and branch office rentals
also do not include utilities and maintenance expenses.
The Company is subject to claims and lawsuits that arise in the ordinary course
of business. In the opinion of management, the ultimate resolution of such
litigation will not have a material adverse effect on the Company's financial
position.
The Company has not established a liability for environmental-related losses
because it does not offer a pollution liability policy. The Company's commercial
liability policies contain standard Insurance Services Office pollution
exclusions and no claims have been reported to date.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
(9) BANK LOAN PAYABLE
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 December 31, 1995,
was $999,000. The current interest rate is 8.75 percent, but the rate is
variable and is tied to the prime rate. On March 31, 1994, the Company and First
Bank National Association amended the bank loan to change the debt repayment
schedule and revise certain covenants. The Company is now required to make
quarterly principal payments of $100,000 until October 1996 when the remaining
principal amount of $699,000 is due. Principal may be prepaid. Principal
payments of $519,920 were made in 1995. Interest payments in 1995, 1994 and 1993
totaled $121,669, $202,928 and $243,563, respectively.
The loan is secured by a pledge of the stock of the Subsidiaries. Additionally,
the Company agreed to certain restrictive covenants which limit the amount of
subsequent indebtedness, dividends payable to shareholders, capital expenditures
and business acquisitions. The covenants also restrict any changes to the
pooling agreement.
These restrictive covenants further require that the Subsidiaries maintain
specified levels of capital and policyholders' surplus and that net written
premiums to policyholders' surplus and combined trade ratios not exceed
specified levels. The Company is currently in compliance with all requirements
of the loan agreement.
(10) REINSURANCE
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.
During 1993, the Company implemented SFAS No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts." This statement
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. Adoption of SFAS No. 113 had no impact on net income or
shareholders' equity.
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 prepaid reinsurance premiums was with Mutual
Reinsurance Bureau. All business written with that company is automatically
assumed on an equal and joint basis by its six owner/assuming companies and the
six
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
companies are rated from "A" to "A++" by A.M. Best Company. As of December
31, 1995, approximately 54 percent of the total reinsurance recoverable was
with Swiss Reinsurance America Corporation, formerly known as the 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.
In 1994, the Company received refunds of $592,388 of excess ceded reinsurance
premiums from the Minnesota Workers' Compensation Reinsurance Association
("WCRA"). 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 reflected in the following
table.
Year ended December 31,
-----------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
Premiums written:
Direct . . . . . . . . . . . . . . . . . . . . . . . . . . $37,803,342 $35,038,696 $30,870,254
Ceded. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,304,787 5,326,445 5,323,515
- ---------------------------------------------------------------------------------------------------------
Net premiums written . . . . . . . . . . . . . . . . . . $31,498,555 $29,712,251 $25,546,739
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Premiums earned:
Direct . . . . . . . . . . . . . . . . . . . . . . . . . . $36,251,560 $33,107,727 $29,699,129
Ceded. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,616,294 5,758,658 5,210,211
- ---------------------------------------------------------------------------------------------------------
Net premiums earned. . . . . . . . . . . . . . . . . . . $30,635,266 $27,349,069 $24,488,918
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Insurance losses and loss adjustment expenses:
Direct . . . . . . . . . . . . . . . . . . . . . . . . . . $26,464,085 $22,745,832 $20,688,952
Ceded. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,117,301 4,176,750 4,264,685
- ---------------------------------------------------------------------------------------------------------
Net insurance losses and loss adjustment
expense. . . . . . . . . . . . . . . . . . . . . . . . $21,346,784 $18,569,082 $16,424,267
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
(11) LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table contains information concerning the reserves of Citizens
Fund and ICO for losses and Loss Adjustment Expenses ("LAE").
Year ended December 31,
-----------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
Reserves for losses and LAE at beginning year. . . . . . . . $20,989,736 $19,392,126 $16,607,717
Less reinsurance recoverables on unpaid losses
at beginning of year . . . . . . . . . . . . . . . . . . . 3,818,909 3,804,095 2,546,375
- ---------------------------------------------------------------------------------------------------------
Net reserves for losses and LAE at
beginning of year. . . . . . . . . . . . . . . . . . . 17,170,827 15,588,031 14,061,342
- ---------------------------------------------------------------------------------------------------------
Provision for losses and LAE for claims
occurring in the current year. . . . . . . . . . . . . . . 21,900,996 19,506,310 17,219,223
Change in estimated losses and LAE for
claims occurring in prior years. . . . . . . . . . . . . . (554,212) (937,228) (794,956)
- ---------------------------------------------------------------------------------------------------------
Total losses and LAE incurred. . . . . . . . . . . . . . 21,346,784 18,569,082 16,424,267
- ---------------------------------------------------------------------------------------------------------
Payments on losses and LAE for claims
occurring during:
Current year . . . . . . . . . . . . . . . . . . . . . . 12,393,198 10,788,251 8,778,219
Prior years. . . . . . . . . . . . . . . . . . . . . . . 7,276,725 6,198,035 6,119,359
- ---------------------------------------------------------------------------------------------------------
Total payments . . . . . . . . . . . . . . . . . . . . 19,669,923 16,986,286 14,897,578
- ---------------------------------------------------------------------------------------------------------
Net reserves for losses and LAE at end of year . . . . . . . 18,847,688 17,170,827 15,588,031
Plus reinsurance recoverables on unpaid losses at
end of year. . . . . . . . . . . . . . . . . . . . . . . 5,165,178 3,818,909 3,804,095
- ---------------------------------------------------------------------------------------------------------
Reserves for losses and LAE at end of year . . . . . . . $24,012,866 $20,989,736 $19,392,126
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
In 1995, the majority of the decrease in estimated losses and LAE for claims
occurring in prior years is the result of favorable development primarily in the
workers' compensation line.
(12) STATUTORY ACCOUNTING PRACTICES
The Subsidiaries are required to file statutory financial statements with state
regulatory authorities. The Subsidiaries follow prescribed statutory accounting
policies in all material respects. The accounting practices used to prepare
statutory financial statements differ from generally accepted accounting
principles ("GAAP").
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
A reconciliation of net income and shareholders' equity, as determined in
accordance with GAAP on a consolidated basis, to statutory amounts reported to
regulatory authorities by the Subsidiaries on an unconsolidated basis, is as
follows:
Year ended December 31,
-------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
Net Income:
Subsidiaries combined on a statutory basis . . . . . . . . . $ 1,208,733 $ 961,570 $1,739,851
Change in deferred policy acquisition costs. . . . . . . . . 128,715 215,766 143,350
Amortization of excess of cost over
net assets acquired. . . . . . . . . . . . . . . . . . . . (129,173) (129,173) (129,173)
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 166,000 221,000 103,000
Prior years' tax adjustments . . . . . . . . . . . . . . . . 47,019 111,504 (87,536)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (2,743) 55,597 49,493
- ----------------------------------------------------------------------------------------------------------
Subsidiaries' net income on a GAAP basis . . . . . . . . . . $1,418,551 $1,436,264 $1,818,985
Parent only net income (loss) on a GAAP basis. . . . . . . . 21,972 (54,726) (317,067)
- ----------------------------------------------------------------------------------------------------------
Consolidated net income on a GAAP basis. . . . . . . . . . . $1,440,523 $1,381,538 $1,501,918
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Subsidiaries combined on a statutory basis . . . . . . . . . $13,338,574 $13,222,505 $13,733,154
Deferred policy acquisition costs. . . . . . . . . . . . . . 2,427,418 2,298,703 2,082,938
Unrealized appreciation (depreciation) on
fixed maturities . . . . . . . . . . . . . . . . . . . . . 847,451 (2,303,054) 934,830
Excess of cost over net assets acquired. . . . . . . . . . . 298,424 427,597 556,770
Non-admitted assets. . . . . . . . . . . . . . . . . . . . . 224,544 197,487 230,451
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 745,000 1,684,000 364,000
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . 82,543 37,752 (181,675)
- ----------------------------------------------------------------------------------------------------------
Subsidiaries' shareholders' equity on a
GAAP basis . . . . . . . . . . . . . . . . . . . . . . . . $17,963,954 $15,564,990 $17,720,468
Parent only and eliminations on a GAAP basis . . . . . . . . (997,044) (2,015,912) (3,188,000)
- ----------------------------------------------------------------------------------------------------------
Consolidated shareholders' equity on a
GAAP basis . . . . . . . . . . . . . . . . . . . . . . . . $16,966,910 $13,549,078 $14,532,468
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
In December 1993, the National Association of Insurance Commissioners approved a
model risk-based capital formula for property and casualty insurers to be
effective with the 1994 statutory annual statement. The Subsidiaries have
adequate surplus to meet these requirements.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Security Group Inc. and Subsidiaries
December 31, 1995, 1994 and 1993
(13) STOCK EXCHANGE
On March 31, 1994, the Company's affiliate, Citizens Mutual, exchanged 1,250,000
shares of common stock for 1,250,000 shares of 7.95% Series A Preferred Stock
("Preferred Stock"). The Preferred Stock, which has an annual cumulative
dividend of $.27825 per share and a liquidation preference of $3.50 per share,
ranks senior to the Company's common stock as to payment of dividends and also
as to the distribution of assets should there be a liquidation or dissolution of
the Company. The Preferred Stock has one vote per share voting together with the
Company's common stock on all matters submitted to a shareholders' vote. The
Preferred Stock is not convertible by Citizens Mutual and is not subject to
redemption at the option of the Company or the holder thereof.
The Preferred Stock was recorded at the liquidation preference of $3.50 per
share which approximated the market of the common stock retired at the time of
the exchange. Common stock and additional paid-in capital were decreased
$4,524,814 for the common stock retired (including $149,814 of transaction
costs).
(14) DIVIDEND RESTRICTIONS
As a holding company, the Company depends on dividends from the Subsidiaries to
make principal and interest payments with respect to its bank loan and to meet
its other expenses. As members of an insurance holding company system, the
Subsidiaries are restricted by law as to the amount of dividends they may pay to
the Company without the approval of state regulatory authorities.
Generally, restrictions on Citizens Fund limit the amount of dividends paid
during a twelve month period to an amount which does not exceed the greater of
(i) 10 percent of Citizens Fund's statutory surplus at the end of the prior year
or (ii) the statutory net income, not including realized gains, of Citizens Fund
for the prior year. In addition, ordinary dividends may only be paid from the
earned surplus of Citizens Fund, also known as unassigned funds, determined in
accordance with the accounting procedures and practices used in the preparation
of its statutory annual statement, minus 25 percent of earned surplus
attributable to unrealized capital gains. As of December 31, 1995, Citizens
Fund's unassigned surplus was $305,020. Citizens Fund's ordinary dividends are
restricted to a maximum of $832,883 for 1996. Citizens Fund paid dividends of
$789,000 in 1995.
Restrictions on ICO limit the amount of dividends paid during a twelve month
period to an amount which does not exceed the greater of (i) 10 percent of ICO's
statutory surplus at the end of the prior year or (ii) the net income of ICO for
the prior year. In addition, ordinary dividends may only be paid from earned
surplus, which equals ICO's unassigned funds as set forth in its most recent
statutory annual statement, including net unrealized capital gains and losses.
As of December 31, 1995, ICO's unassigned surplus was $69,053. ICO's ordinary
dividends are restricted to a maximum $528,705 for 1996. ICO paid dividends of
$375,706 in 1995.
37
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Citizens Security Group Inc.:
We have audited the consolidated balance sheets of Citizens Security Group Inc.
and subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of income, changes in equity and cash flows for each of the years in
the three-year period ended December 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Citizens Security
Group Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in Notes 2 and 5 to the consolidated financial statements, the
Company in 1993 adopted the provisions of the Financial Accounting Standards
Board's Statements of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," and No. 109, "Accounting for
Income Taxes."
/s/ KPMG PEAT MARWICK LLP
-------------------------
Minneapolis, Minnesota
March 15, 1996
38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
Name Age Position
- ---- --- --------
Spencer A. Broughton ........ 67 Chairman of the Board, Chief Executive
Officer and Director
Scott S. Broughton .......... 41 President, Chief Operating Officer,
Chief Financial Officer and Director
David A. Cairns.............. 49 Director
William C. Ferril ........... 64 Director
S. B. Foot, III.............. 49 Director
William J. Haaland........... 34 Vice President, Marketing
R. Scott Jones .............. 51 Director
Terry A. Lynner ............. 42 Director
Jerald K. Olson ............. 36 Vice President, People Services
Mary B. Plein ............... 35 Vice President, Financial Services
and Treasurer
Kirk D. Simmons.............. 35 Vice President, Insurance Services
Bruce A. Tollefson........... 47 Vice President, Product Services
Spencer A. Broughton has been Chairman of the Board, Chief Executive Officer and
a director of the Company since its inception in September 1986 and of Citizens
Mutual since 1965. Mr. Broughton was also President of the Company from its
inception in September 1986 to April 1992 and President of Citizens Mutual from
1965 to April 1992. He joined Citizens Mutual as General Manager in 1962. Mr.
Broughton is a director of BancInsure Company, an insurance company formed by
national banks to provide directors' and officers' insurance and blanket bond
coverage to member banks, and a director of the Independent Casualty Companies
of America. Mr. Broughton is also a director and past President of the Insurance
Federation of Minnesota, Minnesota Association of Mutual Insurance Companies and
Minnesota Insurance Information Center. In addition, he is a director of the
Alliance of American Insurers and a past President of the Twin Cities
Underwriters Association.
Scott S. Broughton has been President and Chief Operating Officer of the Company
and Citizens Mutual since April 1992 and Chief Financial Officer of the Company
and Citizens Mutual since December 1994. Mr. Broughton has served as a director
of the Company since April 1992 and a director of Citizens Mutual since April
1990. Mr. Broughton was Senior Vice President of the Company from April 1991 to
April 1992 and Senior Vice President of Citizens Mutual from December 1990 to
April 1992. He was Vice President, Sales of the Company from February 1989 to
April 1991 and Vice President, Sales of Citizens Mutual from February 1989 to
December 1990. From July 1986 to February 1989, Mr. Broughton was employed by
Citizens Mutual as Assistant to the President. Mr. Broughton is on the Board of
Trustees of the Ohio Insurance Institute. He is the son of Spencer A. Broughton.
David A. Cairns was elected to the Board of Directors of the Company in 1994.
Mr. Cairns is a private business consultant. He served as Vice President and
Treasurer of SUPERVALU INC. a food wholesaler, from 1984 to February 1995.
William C. Ferril was elected to the Board of Directors of the Company in
November 1986. Mr. Ferril is a private investor and consultant. He served as
39
President and Chief Executive Officer of Ciatti's Inc., a company that operates
full-service Italian restaurants, from May 1988 to May 1992 and as a director of
Ciatti's Inc. from November 1986 to July 1992.
S. B. Foot, III has served as a director of the Company since its inception in
September 1986. He has been President and Chief Executive Officer of S. B. Foot
Tanning Company since 1981. Mr. Foot has served as a director of Citizens Mutual
since 1983.
William J. Haaland has been Vice President, Marketing (previously known as Sales
and Underwriting) of the Company and Citizens Mutual since January 1994. Mr.
Haaland was named a director of Citizens Mutual in March 1996. From February
1992 until January 1994, Mr. Haaland was the Assistant Vice President, Sales of
Citizens Mutual. He was Sales Manager of Citizens Mutual from January 1991 until
February 1992, and Agency Automation Manager of Citizens Mutual from January
1989 until January 1991. He is the son-in-law of Spencer A. Broughton.
R. Scott Jones has served as a director of the Company since its inception in
September 1986. He has been Chairman of the Board of GCNB since April 1993 and
Chief Executive Officer of GCNB since 1984. He has been Co-Chairman of the
Board, Co-Chief Executive Officer and a director of United Community Bancshares
Inc. ("United Bancshares") since January 1994. Mr. Jones has served as a
director of Citizens Mutual since 1982.
Terry A. Lynner was elected to the Board of Directors of the Company in November
1986. He is a Managing Director of Goldsmith, Agio, Helms & Company, an
investment banking firm, and has been employed by such firm since March 1989.
From March 1985 until such time, he was a Vice President of Piper, Jaffray &
Hopwood Incorporated (now Piper Jaffray Inc.), an investment banking firm.
Mr. Lynner is also a director of the Minnesota Zoo Foundation.
Jerald K. Olson has been Vice President, People Services (previously known as
Human Resources) of the Company and Citizens Mutual since December 1994. Mr.
Olson has been Assistant Secretary of the Company since April 1992 and Secretary
of Citizens Mutual since December 1991. From April 1990 until December 1994, Mr.
Olson was the Human Resources Manager of the Company and Citizens Mutual. Mr.
Olson was a Management Trainee at Citizens Mutual and Citizens Fund from March
1987 through April 1990 and a Management Trainee at ICO from October 1989
through April 1990. He is the son-in-law of Spencer A. Broughton.
Mary B. Plein has been Vice President, Financial Services (previously known as
Accounting) and Treasurer of the Company and Citizens Mutual since April 1995.
Ms. Plein was the Assistant to the President of the Company and Citizens Mutual
from January 1993 to April 1995. Ms. Plein was named an Assistant Vice President
of Citizens Mutual, Citizens Fund and ICO in February 1992. She joined Citizens
Mutual as an accountant in April 1993.
Kirk D. Simmons has been Vice President, Insurance Operations (previously known
as Claims and Information Services) of the Company and Citizens Mutual since
October 1993. Mr. Simmons was a Regional Claims Analyst/Manager of the CNA
Insurance Group("CNA") from January 1992 to October 1993 and a CNA Claims
Supervisor from May 1988 to January 1992.
Bruce A. Tollefson has been Vice President, Product Services (previously known
as Operations) of the Company since April 1991 and Vice President, Product
Services of Citizens Mutual since December 1990. From April 1987 until December
1990, Mr. Tollefson was the Assistant Vice President, Research and Development
of Citizens Mutual. Mr. Tollefson was the Research and Development Manager of
Citizens Mutual from December 1985 through April 1987.
40
MEETINGS OF THE BOARD OF DIRECTORS AND DIRECTOR FEES
The Board of Directors held six meetings in 1995. In 1995, all directors
attended at least 75% of the total number of meetings of the Board of Directors
and committees of the Board on which they served during 1995. Each nonemployee
director receives an annual fee of $4,000 for serving as a director and a fee of
$1,000 plus expenses for each Board meeting attended.
COMMITTEES
The Board of Directors has an Audit Committee that reviews, and makes
recommendations to the Board with respect to, financial and accounting matters,
including the activities of the Company's independent auditors and the Company's
internal accounting controls. Messrs. R. Scott Jones (Chairman), Cairns, Ferril,
Foot and Lynner are the members of the Audit Committee. The Audit Committee
held two meetings in 1995.
The Board of Directors also has a Compensation Committee that reviews, and makes
recommendations to the Board with respect to, executive compensation matters.
Messrs. Ferril (Chairman), Cairns, Foot and R. Scott Jones are the members of
the Compensation Committee. The Compensation Committee held four meetings in
1995.
An Advisory Committee of four persons has been established to approve any
changes in the Pooling Agreement between the Company and Citizens Mutual (see
Part III, Item 13, "Certain Relationships and Related Transactions" below), to
pass upon any other matters involving actual or potential conflicts of interest
between the two companies and to approve the compensation of officers of the
Company and Citizens Mutual. The Advisory Committee consists of two outside
directors from each of the Company and Citizens Mutual, none of whom holds seats
on both Boards. Advisory Committee members must conclude that any intercompany
transactions are fair and equitable to both companies. Decisions of the Advisory
Committee are binding on the Company. Messrs. Ferril and Lynner are the
Company's Advisory Committee members.
The Company's Board of Directors does not have a nominating committee. Each
nonemployee member of a Board committee receives $300 plus expenses for each
committee meeting attended. The Chairman of each Board committee receives $400
plus expenses for each committee meeting attended.
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
The Company has a Nonemployee Director Stock Option Plan ("Director Option
Plan") under which a total of 50,000 shares of Common Stock are reserved for
issuance. Each director of the Company is eligible to participate in the
Director Option Plan unless such director is an employee of Citizens mutual, the
Company or a subsidiary of the Company. Under the Director Option Plan, each
eligible director automatically is granted an option to purchase 2,000 shares of
Common Stock at the time of each Annual Meeting of Shareholders at which such
director is elected for the first time or re-elected to the Board.
All options granted under the Director Option Plan have an exercise price equal
to the fair market value of the Company's Common Stock on the date of grant and
become exercisable six months after the date of grant. The option exercise price
is payable in cash. The options expire five years from the date of grant and are
not transferable (except by will or the laws of descent and distribution).
During the year ended December 31, 1995, Messrs. Cairns, Ferril, Foot, R. Scott
Jones and Lynner each were granted an option under the Director Option Plan to
purchase 2,000 shares of the Company's Common Stock at an exercise price of
$4.00. No options granted under the Director Option Plan have been exercised to
date.
41
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers, and persons who own
more than 10% of the Company's Common Stock, to file with the Securities and
Exchange Commission (the "SEC") initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the
Company. Officers, directors and greater than 10% shareholders are required
by SEC regulation to furnish the Company with copies of all Section 16(a)
reports they file. To the Company's knowledge, based solely on review of
copies of such reports furnished to the Company relating to transactions
during the fiscal year ended December 31, 1995, all Section 16(a) filing
requirements applicable to its directors, officers and greater than 10%
beneficial owners were complied with, except that (a) each of David A.
Cairns, William C. Ferril, S.B. Foot, III, R. Scott Jones and Terry A. Lynner
(who are directors of the Company) were late in filing a Form 5 (annual
statement of changes in beneficial ownership) reporting the grant of a stock
option pursuant to the Company's Nonemployee Stock Option Plan and (b) each
of Spencer A. Broughton, Scott S. Broughton, William J. Haaland, Jerald K.
Olson, Mary B. Plein, Kirk D. Simmons and Bruce A. Tollefson (who are
executive officers of the Company) and Charles W. Bergher, Michael L.
Halvorson and Gloria J. Reeck (former executive officers of the Company) were
late in filing a Form 5 reporting the grant of options under the Company's
Employee Stock Option Plan and certain indirect acquisitions of Common Stock
of the Company through the Company's 401(k) Plan. All of the above
transactions were exempt from Section 16(b) of the Exchange Act pursuant to
Rule 16b-3 or Rule 16a-8 under the Exchange Act and have been reported on
Form 5 reports filed with the SEC prior to the date of filing of this report.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
OVERVIEW
The Compensation Committee of the Board of Directors of the Company (the
"Committee") is responsible for developing and making recommendations to the
Board with respect to the Company's executive compensation policies. In
addition, the Committee makes annual recommendations to the Board concerning the
compensation to be paid to the Chief Executive Officer and each of the other
executive officers of the Company. The Committee is composed entirely of outside
directors of the Company.
EXECUTIVE COMPENSATION PROGRAM
The Company's executive compensation program is intended to reward executives
for successful long-term strategic management and enhancement of shareholder
value. In addition, it is intended to attract and retain highly qualified and
motivated managers, recognize and reward outstanding performance, and foster a
diverse and cohesive management team. The components of the Company's executive
compensation program include (a) base salaries, (b) performance-based bonuses,
(c) stock options, (d) participation in an employee stock ownership plan and (e)
miscellaneous other fringe benefits.
The executive officers of the Company are employees of Citizens Mutual, and all
salaries and cash bonuses of such officers are paid by Citizens Mutual. Pursuant
to the Management Services Agreement, Citizens Mutual provides the services of
its employees (including the Company's officers) to the Company in exchange for
payments equal to 75% of the amount of such employees' cash compensation and
other benefits. In addition, the Company pays Citizens Mutual for services that
are performed specifically for the Company. The salaries and cash bonuses of the
Company's executive officers are approved by the Boards of Directors of both the
Company and Citizens Mutual.
42
The Chief Executive Officer and the Chief Operating Officer proposes to the
Committee base salary amounts for the executive officers. The proposed salaries
are based on factors such as the quality and achievement of the strategic plan
produced for the executive officer's department, development of organizational
and management skills, and industry and civic involvement. In 1995, the Company
revised its internal performance management system. Job descriptions,
compensation levels and performance evaluation processes were reviewed and
revised.
In determining base salaries for executive officers, the Committee takes into
account the Chief Executive Officer's and Chief Operating Officer's
recommendations and considers subjective factors relating to each executive
officer's performance. The Committee reviews the executive officers'
compensation structures and the individual executive officers' proposed salaries
within such structures. Based on this review, the Committee believes the base
salaries for the Company's executive officers are comparable to the average
salary levels of executive officers of other property and casualty insurance
companies of similar size.
Cash bonuses are awarded only if the Company achieves or exceeds certain
corporate performance objectives as determined by the Board at the beginning of
each year based on the Committee's recommendations. Under the 1995 employee
bonus plan for executive officers, the payment of bonuses was conditioned upon
the achievement of a combined trade ratio goal (losses plus loss adjustment
expenses to net earned premiums and underwriting expenses to net written
premiums) for the Company's and Citizens Mutual's combined insurance operations
and of certain Company department goals. No bonuses were awarded to executive
officers because the combined trade ratio goal was not achieved.
The Committee believes that significant stock ownership by executive officers
provides strong incentive to increase shareholder value and aligns the interest
of executive officers and shareholders. Options are granted under the Company's
Employee Option Plan, which is administered by the Committee. Options are
granted to executive management employees based on recommendations made by the
Chief Operating Officer involving subjective criteria. The size of option grants
depend upon an executive officer's responsibility level. To date, the exercise
prices of all stock options granted under the Employee Option Plan have been
equal to the fair market value of the Common Stock on the date of grant.
In October 1992, Citizens Mutual established the Citizens Security Mutual
Employee Stock Ownership Plan (the "ESOP"). The ESOP purchased 349,090 shares of
the Company's authorized but unissued shares of Common Stock on October 30, 1992
for approximately $1,200,000. The ESOP borrowed such amount from Citizens
Mutual. During the five years ending October 30, 1997, as the annual principal
payments of $240,000 are paid by the Company and Citizens Mutual to the ESOP,
the shares held by the ESOP are allocated to eligible employees proportionally
based on their salaries.
The Company also provides miscellaneous fringe benefits. These benefits include
a split-dollar life insurance program for executive officers. Under this plan,
Citizens Mutual matches 100% of the officer's premiums paid for a life insurance
policy up to a maximum of $3,000 per year.
43
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The Chief Executive Officer's base salary is determined in accordance with the
criteria discussed above. The Committee meets to evaluate the Chief Executive
Officer's performance and reports on that evaluation to the other members of
the Board. In determining Spencer A. Broughton's 1995 base salary, the
Committee considered many factors, including the overall quality of
management and leadership exhibited by Mr. Broughton as well as his tenure
with the Company. The following factors were particularly important to the
Committee in determining the amount of his base salary: (a) the achievement
of the combined trade ratio goal, (b) the continued decrease in expenses to
direct written premiums and (c) the substantial increase in productivity as
measured by written premiums per employee. The determination of Mr.
Broughton's base salary also took into account information relating to the
salaries of chief executive officers of other similar sized regional
property and casualty companies.
Mr. Broughton was not awarded a bonus for 1995 in accordance with the Company's
annual bonus plan as described above. Option grants made to Mr. Broughton during
1995 were determined in the manner described above.
TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162(m) of the Internal Revenue Code of 1986, as amended, should not
affect the deductibility of compensation paid to the Company's executive
officers for the foreseeable future. Accordingly, the Committee has not
formulated any policy with respect to qualifying such compensation for
deductibility under Section 162(m). However, the Board of Directors has amended
the Employee Option Plan to comply with Section 162(m) in order that
compensation resulting from stock options granted under the Employee Option Plan
will not be counted toward the $1,000,000 limit on deductible compensation under
Section 162(m).
William C. Ferril, Chairman
David A. Cairns,
S. B. Foot, III and
R. Scott Jones
Members of the Compensation Committee
SUMMARY COMPENSATION TABLE
The executive officers of the Company are employees of Citizens Mutual, and all
salaries and cash bonuses of such officers are paid by Citizens Mutual. Pursuant
to the Management Services Agreement between the Company and Citizens Mutual,
Citizens Mutual provides the services of its employees (including the Company's
executive officers) to the Company in exchange for payments equal to 75% of the
amount of such employees' cash compensation and other benefits. In addition, the
Company pays Citizens Mutual for services that are performed specifically for
the Company.
The following table sets forth the cash and noncash compensation for each of the
last three fiscal years awarded to or earned by the Chief Executive Officer of
the Company and the only other executive officer of the Company whose salary and
bonus earned in 1995 exceeded $100,000.
44
Long-Term
Compensation
---------------------
Annual Awards
Compensation ---------------------
Name and -------------------- Securities Underlying
Principal Position Year Salary($) Bonus($) Options/SARs(#)(1) Compensation($)(2)
- ----------------------------- ---- --------- -------- --------------------- ------------------
Spencer A. Broughton, 1995 $176,000 $ - 13,000 $16,935
Chairman of the Board 1994 176,000 49,385 - 18,282
and Chief Executive Officer 1993 176,677 9,000 12,000 22,142
Scott S. Broughton, President, 1995 125,000 - 13,000 24,735
Chief Operating Officer and 1994 125,000 49,385 - 19,303
Chief Financial Officer 1993 116,619 8,000 15,125 18,695
__________
(1) The Company does not grant stock appreciation rights.
(2) The compensation reported represents (a) contributions (determined at cost)
to the ESOP, (b) contributions to the Savings Plan, (c) premiums paid for
split-dollar life insurance, (d) premiums paid for whole life insurance and
(e) deferred compensation plan benefits. Company contributions during
fiscal 1995 were as follows: ESOP contributions of $9,315 to both to Mr.
Spencer A. Broughton and Mr. Scott S. Broughton; Savings Plan Contributions
of $4,620 to both Mr. Spencer A. Broughton and Mr. Scott S. Broughton;
premium payments on split-dollar life insurance of $3,000 and $2,750 for
Mr. Spencer A. Broughton and Mr. Scott S. Broughton, respectively; $1,050
of premiums paid for term life insurance for Mr. Scott S. Broughton; and
$7,000 of deferred compensation payments to Mr. Scott S. Broughton.
OPTION GRANTS AND VALUE
The following tables summarize option grants during 1995 to the Chief Executive
Officer and the other executive officer named in Summary Compensation table
above, and the value of the options held by such persons at the end of 1995. No
options were exercised by these officers during 1995.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term
- ----------------------------------------------------------------------------- ---------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Expiration
Name Granted (#)(1) Fiscal Year Base Price($/Sh) Date 5% 10%
- -------------------- -------------- ------------ ---------------- ---------- -------- --------
Spencer A. Broughton 13,000 14.7% $3.38 2/1/01 $14,944 $33,904
Scott S. Broughton 13,000 14.7 3.38 2/1/01 14,944 33,904
__________
(1) Each option (a) has a term of six years from the date of grant, (b) becomes
exercisable to the extent of 20% of the shares subject to the option one
year after the date of grant of the option with the balance of the option
becoming exercisable in four cumulative installments of 20% of the shares
subject to the option until five years after the date of grant, after which
the option will be fully exercisable, (c) has an exercise price per share
equal to the fair market value per share of the Common Stock on the date of
grant, (d) is exercisable only by payment of the exercise price to the
Company in cash, and (e) is an "incentive stock option" within the meaning
of Section 422 of the Code.
45
FISCAL YEAR-END OPTION/SAR VALUES
Value of Unexercised
Number of Securities Underlying Unexercised In-the Money
Options/SARs at End of 1995(#) Options/SARs at End of 1995($)
Name Exercisable/Unexercisable Exercisable/Unexercisable(1)
- --------------------- ------------------------------------------- ------------------------------
Spencer A. Broughton 22,400 options/ $45,838/
27,600 options $51,437
Scott S. Broughton 30,775 options/ $63,491/
34,225 options $67,559
__________
(1) Value based on market value of the Company's Common Stock as of December
31, 1995 less the exercise price of the options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
R. Scott Jones, a director of the Company, is the Chairman of the Board of GCNB
and is a director and principal shareholder of United Bancshares, Inc.("UBI"),
GCNB's parent corporation. Mr. R. Scott Jones is also the Co-Chairman of the
Board and Co-Chief Executive Officer of UBI. Mr. R. Scott Jones serves on the
Compensation Committee of the Company's Board of Directors. Mr. Spencer A.
Broughton, Chairman of the Board and Chief Executive Officer of the Company,
serves on the Board of Directors of GCNB and UBI and also serves on the
Audit, Loan/Discount and Personnel Committees of GCNB. Mr. Spencer A.
Broughton also owns less than 1% of the outstanding common stock of UBI.
In December 1993, Citizens Fund purchased 4,000 shares of common stock of UBI
for its investment portfolio. The aggregate purchase price paid for such
shares was $272,000.
Pursuant to a term loan agreement dated as of November 3, 1989, the Company
obtained a $6,000,000 seven-year loan payable through 1996 to fund the purchase
price of ICO, and certain acquisition expenses. On November 9, 1995, the lender
assigned the bank loan, which as of December 31, 1995 had an outstanding
principal balance of $999,000, to GCNB. The current interest rate on the loan is
8.75%, but the rate is variable and is tied to the prime rate.
COMPARATIVE STOCK PERFORMANCE GRAPH
The following table shows a five-year comparison of cumulative total returns for
the Company, the Nasdaq Insurance Stocks and the Nasdaq Stock Market (U.S.
Companies) over the same period (assuming the investment of $100 in each vehicle
on January 1, 1991 and reinvestment of all dividends).
Nasdaq Nasdaq Stock
Insurance Market
Year Company Stocks (U.S. Companies)
-------- ------- --------- ----------------
12/31/95 151.65 272.85 296.30
12/31/94 99.91 192.04 209.69
12/31/93 103.48 204.06 214.51
12/31/92 98.12 190.79 186.87
12/31/91 102.19 140.97 160.56
46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership of
the Company's voting securities as of March 19, 1996 by each person beneficially
owning at least five percent of such securities, by each director of the
Company, by each executive officer named in the Summary Compensation Table above
and by all executive officers and directors as a group.
Amount of
Name and Address of Nature of Percent Percent of Total
Title of Class Beneficial Owners Beneficial Ownership of Class Voting Securities
- ------------------------ -------------------------------------- -------------------- -------- -----------------
Series A Preferred Stock Citizens Security Mutual Insurance Co. 1,250,000 shares 100.0% 42.9%
406 Main Street
Red Wing, MN 55066
Common Stock Citizens Security Employee Stock 340,876 shares(1) 21.2 11.7
Ownership Plan
c/o National City Bank of Minneapolis
75 South Fifth Street
Minneapolis, MN 55402
Citizens Security Mutual Insurance Co. 337,500 shares 20.3 11.6
Citizens Mutual 401(k) Plan 134,389 shares(2) 8.3 4.6
c/o Frontier Trust
3100 13th Avenue South
Fargo, ND 58106
Spencer A. Broughton 120,761 shares(3) 7.5 4.2
406 Main Street
Red Wing, MN 55066
Scott S. Broughton 57,259 shares(4) 3.5 2.0
406 Main Street
Red Wing, MN 55066
Terry A. Lynner 21,260 shares(5) 1.3 *
First Bank Place
601 2nd Ave. S, #4600
Minneapolis, MN 55402
R. Scott Jones 15,100 shares(5) * *
222 Bush Street
Red Wing, MN 55066
William C. Ferril 12,500 shares(5) * *
240 Wakefield Road
Wayzata, MN 55391
S. B. Foot, III 12,500 shares(5) * *
Bench Street
Red Wing, MN 55066
David A. Cairns 8,000 shares(6) * *
18500 Beaverwood Road
Minnetonka, MN 55345
All executive officers and directors
as a group (12 persons) 315,549 shares(7) 19.0 10.8
47
__________
* Less than one percent.
(1) Shares allocated to the accounts of executive officers and reported as
owned by the ESOP are also reported as beneficially owned by such executive
officers. The shares of Common Stock owned by the ESOP are held by National
City Bank of Minneapolis as trustee of the ESOP (the "ESOP Trustee").
Although the ESOP is required to invest primarily in the Common Stock of
the Company, certain investment control is retained by the committee that
administers the ESOP , which is composed of Scott S. Broughton and Gloria
J. Reeck, who are officers of the Company. The shares held by the ESOP that
are allocated to participants are voted by the ESOP Trustee in the manner
directed by the participants, and the unallocated shares are voted by the
ESOP Trustee in the same proportion as the allocated shares.
(2) Shares reported as owned by the Citizens Mutual 401(k) Plan (the "Savings
Plan") that are held in the accounts of executive officers of the Company
are also reported as beneficially owned by such executive officers. The
shares of Common Stock owned by the Savings Plan are held by Frontier Trust
as trustee of the Savings Plan (the "Savings Plan Trustee"). The shares in
the Savings Plan are voted by the Savings Plan Trustee in the manner
directed by the participants.
(3) Includes (a) 82,700 shares held in trust under the Savings Plan, (b) 10,661
shares held in trust under the ESOP and (c) 27,400 shares that may be
purchased under currently exercisable options or options that will be come
exercisable within 60 days after the date of this Form 10-K.
(4) Includes (a) 8,116 shares held in trust under the Savings Plan, (b) 8,693
shares held in trust under the ESOP and (c) 38,150 shares that may be
purchased under currently exercisable options or options that will be come
exercisable within 60 days after the date of this Form 10-K.
(5) Includes 10,000 shares that may be purchased under currently exercisable
options.
(6) Includes 2,000 shares that may be purchased under currently exercisable
options.
(7) Includes (a) 102,802 shares held in trust under the Savings Plan, (b)
38,013 shares held in trust under the ESOP for the benefits of certain
officers of the Company, and (c) 144,700 shares that may be purchased under
currently exercisable options or options that will be come exercisable
within 60 days after the date of this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The operations of the Company are directly interrelated with the operations of
Citizens Mutual. Under the terms of the Pooling Agreement, all premiums, losses,
loss adjustment expenses and underwriting expenses (after deducting all other
reinsurance) are prorated between the Company and Citizens Mutual on the basis
of their participation in the pool. Since October 20, 1989, the Company's and
Citizens Mutual's participation in the pool have been 75% and 25%, respectively.
During the year ended December 31, 1995, the Company assumed approximately
$32,194,349 of gross premiums written from, and ceded approximately $1,869,665
of gross premiums written to Citizens Mutual under the Pooling Agreement.
Under the Management Services Agreement, Citizens Mutual provides the Company
with facilities, employees and all services required to conduct its business on
a cost allocated basis. Under the Management Services Agreement, the Company
pays 75% of all expenses of Citizens Mutual relating to salaries, employee
benefits, facilities and data processing equipment. In addition, the Company
pays Citizens Mutual for services that are performed specifically for the
Company. Pursuant to a second amended Management Services Agreement, the
employees will be transferred to the Company when Citizens Mutual owns shares of
Common Stock and Series A Preferred Stock with less than 50% of the voting power
of all outstanding voting securities of the Company.
Pursuant to a capital access fee agreement, Citizens Mutual, Citizens Fund and
ICO pay a fee to the Company in consideration of the Company's ability to raise
capital for the combined insurance operations of Citizens Mutual, Citizens Fund
and ICO. The fee is paid monthly in an amount equal to 1% of
48
the aggregate direct written premiums of Citizens Mutual, Citizens Fund and ICO.
Of the total monthly fee, 25% of the fee is payable by Citizens Mutual. However,
Citizens Mutual's obligation to pay its portion of the fee would terminate on
the earlier of (i) the date on which the Company's currently outstanding bank
loan (or any indebtedness incurred to refinance such loan) is repaid in full or
(ii) the closing date of the next public offering of securities by the Company.
In March 1994, the Boards of Directors of the Company and Citizens Mutual
approved a transaction in which the Company issued 1,250,000 shares of Series A
Preferred Stock in exchange for 1,250,000 shares of Common Stock of the Company
previously held by Citizens Mutual. Dividends (in an annual amount of $.27825
per share) are paid on the Series A Preferred Stock, when, as and if declared by
the Company's Board of Directors, and such dividends are cumulative and payable
quarterly. The Series A Preferred Stock has a liquidation preference of $3.50
per share, is not convertible by Citizens Mutual and is not subject to
redemption at the option of the Company or Citizens Mutual.
Goldsmith, Agio, Helms & Company ("Goldsmith, Agio"), an investment banking
firm, is providing certain financial advisory services to the Company in
connection with the Meridian Acquisition. The Company anticipates paying
Goldsmith, Agio total fees of approximately $250,000, of which $62,500 has been
paid to date. Terry A. Lynner, a director of the Company, is a Managing Director
of Goldsmith, Agio.
Citizens Fund holds an investment in UBI. See Part III, Item 11, "Executive
Compensation - Compensation Committee Interlocks and Insider Participation."
The Company is the borrower under a bank loan agreement with GCNB. See Part III,
Item 11, "Executive Compensation - Compensation Committee Interlocks and Insider
Participation."
49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
(1) FINANCIAL STATEMENTS
Page
Description Number
----------------------------------------------------------- -------
Independent Auditors' Report............................... 38
Consolidated Balance Sheets as of December 31,
1995 and................................................... 20
Consolidated Statements of Income for the Years ended
December 31, 1995, 1994 and 1993........................... 21
Consolidated Statements of Changes in Equity for the Years
ended December 31, 1995, 1994 and 1993..................... 22
Consolidated Statements of Cash Flows for the Years ended
December 31, 1995, 1994 and 1993........................... 23
Notes to Consolidated Financial Statements................. 24
(2) FINANCIAL STATEMENT SCHEDULES
Schedule Page
Number Description Number
-------- ----------------------------------------- ------
Independent Auditors' Report.................... 56
I. Summary Of Investments - Other Than Investments
In Related Parties............................ 57
II. Condensed Financial Information of Registrant... 58
III. Supplementary Insurance Information............. 64
IV. Reinsurance..................................... 65
VI. Supplemental Information Concerning Property-
Casualty Insurance Operations................. 66
All other schedules not listed have been omitted since the required
information is included in the consolidated financial statements or
the notes thereto, or is not applicable or required.
(3) LISTING OF EXHIBITS
Exhibit
Number Description
------ ---------------------------------------------------------------
(2) (.1) Plan of Stock Exchange between the Company and Citizens
Security Mutual Insurance Company dated as of March 31,
1994(1)
(.2) Acquisition and Affiliation Agreement dated as of
March 20, 1996 by and among the Company, Citizens
Security Mutual Insurance Company, and Meridian Insurance
Group, Inc.
50
(3) LISTING OF EXHIBITS - CONTINUED
Exhibit
Number Description
------ ---------------------------------------------------------------
(3) (.1) Articles of Incorporation(2)
(.2) Bylaws(3)
(4) (.1) Certificate of Designations, defining the rights of the
holders of Series A Preferred Stock of the Company(1)
(.2) Form of Common Stock certificate(4)
(10) (.1a) Reinsurance Pooling Agreement dated as of September 22,
1986 and restated as of November 10, 1986 among Citizens
Security Mutual Insurance Company, the Company and
Citizens Fund Insurance(4)
(.1b) First Amended Reinsurance Pooling Agreement dated as of
October 20, 1989 among the Company, Citizens Fund
Insurance Company, Citizens Security Mutual Insurance
Company and Insurance Company of Ohio(5)
(.2a) Management Services Agreement dated as of September 22,
1986 and restated as of November 10, 1986 among Citizens
Security Mutual Insurance Company, the Company and
Citizens Fund Insurance Company(4)
(.2b) First Amended Management Services Agreement dated as of
October 20, 1989 among the Company, Citizens Fund
Insurance Company, Citizens Security Mutual Insurance and
Insurance Company of Ohio(5)
(.2c) Second Amended Management Services Agreement among the
Company, Citizens Security Mutual Insurance Company,
Citizens Fund Insurance Company and Insurance Company of
Ohio, dated March 31, 1994(1)
(.3) 1986 Stock Option Plan, as restated April 18, 1995(6)*
(.4) Third Amended Stipulation dated April 9, 1993 among the
Minnesota Department of Commerce, Citizens Security
Mutual Insurance Company and Citizens Fund Insurance
Company(7)
(.5) Lease dated March 1, 1993 between Red Wing Hotel
Corporation and Citizens Security Mutual Insurance
Company(3)
(.6a) Software License and Development Agreement dated as of
August 25, 1988 between the Company and Programming
Resources Company(2)
51
(3) LISTING OF EXHIBITS - CONTINUED
Exhibit
Number Description
-----------------------------------------------------------------------
(.6b) Amendment dated January 3, 1989 to Software License and
Development Agreement dated as of August 25, 1988 between
the Company and Programming Resources Company(5)
(.6c) Addendum dated October 7, 1991 to Software License and
Development Agreement between the Company and Programming
Resources Company(5)
(.6d) Addendum effective as of September 1, 1993 to Software
License and Development Agreement dated as of August 25,
1988 between the Company and Programming Resources
Company(2)
(.7a) Amended and Restated Term Loan Agreement dated as of
December 31, 1992 between the Company and First Bank
National Association(3)
(.7b) First Amendment dated as of March 31, 1993 to Amended and
Restated Term Loan Agreement dated as of December 31,
1992 by and between the Company and First Bank National
Association(7)
(.7c) Waiver Letter dated March 1, 1994 to the Company from
First Bank National Association(2)
(.7d) Second Amendment, dated as of March 31, 1994 to Amended
and Restated Term Loan Agreement, dated as of December
31, 1992 by and between the Company and First Bank
National Association(1)
(.7e) Third Amendment, dated as of August 1, 1994 to Amended
and Restated Term Loan Agreement, dated as of December
31, 1992 by and between the Company and First Bank
National Association(8)
(.7f) Waiver letter dated February 28, 1995 to the Company from
First Bank National Association(5)
(.7g) Waiver letter dated November 9, 1995 to the Company from
Goodhue County National Bank(9)
(.7h) Fourth Amendment, dated as of November 9, 1995 to Amended
and Restated Term Loan Agreement, dated as of December
31, 1992 by and between the Company and Goodhue County
National Bank
(.8) Pledge Agreement dated as of December 31, 1992 between
the Company and First Bank National Association(3)
(.9a) Letter Agreement dated as of November 2, 1989 among the
Company, Insurance Company of Ohio and the Ohio
Department of Insurance(5)
(.9b) Letter dated October 7, 1993 to Insurance Company of Ohio
from the Ohio Department of Insurance(10)
52
(3) LISTING OF EXHIBITS - CONTINUED
Exhibit
Number Description
-----------------------------------------------------------------------
(.10a) 1994 Employee Bonus Plan(2)*
(.10b) 1995 Employee Bonus Plan(6)*
(.11) Nonemployee Director Stock Option Plan(11)*
(.12) Letter Agreement dated January 15, 1992 between Citizens
Fund Insurance Company and the Minnesota Department of
Commerce(12)
(.13a) Lease dated September 16, 1993 between Engwiller
Properties, Inc. and Insurance Company of Ohio(10)
(.13b) Sublease Agreement dated July 5, 1995 between Insurance
Company of Ohio and Tom Witkowski(12)
(.14) Letter dated September 22, 1993 to State of Minnesota
Department of Commerce from Citizens Fund Insurance
Company(2)
(.15) Capital Access Fee Agreement dated March 31, 1994 among
the Company, Citizens Security Mutual Insurance Company,
Citizens Fund Insurance Company and Insurance Company of
Ohio(1)
(.16) Order Approving Restructuring dated March 31, 1994
issued by the Minnesota Department of Commerce(1)
(.17) Letter of Authority dated September 12, 1994 to Scudder,
Stevens & Clark, Inc. from Citizens Fund Insurance
Company(8)
(.18) Letter of Authority dated September 12, 1994 to Scudder,
Stevens & Clark, Inc. from Insurance Company of Ohio(8)
(.19a) Agreement dated December 31, 1994 among Citizens
Security Mutual Insurance Company, Citizens Fund
Insurance Company, Insurance Company of Ohio and
Adjusting Unlimited, Inc.(5)
(.19b) Agreement dated December 31, 1995 between the Company
and Adjusting Unlimited, Inc.
(.20) Lease dated April 21, 1995 between Eagle Building,
L.L.C. and Citizens Security Mutual Insurance Company(6)
(.21) Deferred Compensation Plan Agreement dated August 1,
1995 between Citizens Security Mutual Insurance Company
and Scott Broughton*
(21) Subsidiaries of the Company(5)
(24) Power of Attorney
(27) Financial Data Schedule
53
(3) LISTING OF EXHIBITS - CONTINUED
Exhibit
Number Description
-----------------------------------------------------------------------
(28) (.1) Schedule P from Citizens Fund Insurance Company's 1995
Annual Statement filed with the Minnesota State
Insurance Department
(.2) Schedule P from Insurance Company of Ohio's 1995 Annual
Statement filed with the Ohio Department of Insurance
__________
* Denotes management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the Company's Form 8-K dated March 31,
1994.
(2) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1993.
(3) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1992.
(4) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Registration No. 33-9096) which became effective on December
17, 1986.
(5) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1994.
(6) Incorporated by reference to the Company's Form 10-Q for the quarter
ended March 31, 1995.
(7) Incorporated by reference to the Company's Form 10-Q for the quarter
ended March 31, 1993.
(8) Incorporated by reference to the Company's Form 10-Q for the quarter
ended September 30, 1994.
(9) Incorporated by reference to the Company's Form 10-Q for the quarter
ended September 30, 1995.
(10) Incorporated by reference to the Company's Form 10-Q for the quarter
ended September 30, 1993.
(11) Incorporated by reference to the Company's Form 10-Q for the quarter
ended March 31, 1991.
(12) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1991.
(13) Incorporated by reference to the Company's Form 10-Q for the quarter
ended June 30, 1995.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1995.
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CITIZENS SECURITY GROUP INC.
March 19, 1996 By: /s/ Spencer A. Broughton
------------------------
Spencer A. Broughton
Chairman of the Board,
and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Spencer A. Broughton Chairman of )
the Board, )
Chief Executive )
Officer )
(principal )
executive )
officer) and )
Director )
)
Scott S. Broughton* President, Chief ) By: /s/ SPENCER A. BROUGHTON
Operating Officer, ) ------------------------
Chief Financial ) Spencer A. Broughton
Officer ) Pro Se and Attorney-
(principal ) in-Fact
financial and ) Date: March 19, 1996
accounting )
officer) and )
Director )
)
David A. Cairns* Director )
)
R. Scott Jones* Director )
)
S. B. Foot, III* Director )
)
Terry A. Lynner* Director )
)
William C. Ferril* Director )
__________
* Executed on behalf of the indicated persons by Spencer A. Broughton
pursuant to the Power of Attorney included as Exhibit 24 to this report.
55
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Citizens Security Group Inc.:
Under date of March 15, 1996, we reported on the consolidated balance sheets of
Citizens Security Group Inc. and subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of income, changes in equity and cash
flows for each of the years in the three-year period ended December 31, 1995, as
contained in Part III, Item 8, "Financial Statements and Supplementary Data". In
connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related financial statement schedules as
listed in the accompanying index (see Item 14.(a)(2)). These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statement schedules based on our
audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
As discussed in Notes 2 and 5 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statements of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," and No. 109, "Accounting for Income
Taxes," in 1993.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 15, 1996
56
Citizens Security Group Inc. and Subsidiaries
Schedule I. Summary Of Investments -
Other Than Investments In Related Parties
December 31, 1995
Amount at which
shown in the
Cost(1) Value balance sheet
------------ --------- -------------
Type of investment:
Fixed maturities:
Bonds:
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies . . . . . . . . . . . . . . . . $ 6,656,527 6,748,373 $ 6,748,373
Obligations of states and
political subdivisions . . . . . . . . . . . . 6,848,211 7,131,048 7,131,048
Corporate securities . . . . . . . . . . . . . . 11,189,336 11,477,976 11,477,976
Mortgage-backed securities . . . . . . . . . . . 11,480,539 11,664,667 11,664,667
----------- ----------- -----------
Total fixed maturities . . . . . . . . . . . . . . . 36,174,613 37,022,064 37,022,064
----------- ----------- -----------
Equity securities:
Preferred stocks . . . . . . . . . . . . . . . . . 200,000 231,000 231,000
Common stocks:
Banks, trusts & insurance
companies. . . . . . . . . . . . . . . . . . . 280,450 387,518 387,518
Industrial & miscellaneous . . . . . . . . . . . 168,831 172,867 172,867
----------- ----------- -----------
Total equity securities. . . . . . . . . . . . . . . 649,281 791,385 791,385
----------- ----------- -----------
Short-term investments . . . . . . . . . . . . . . . 1,462,448 1,462,448
----------- -----------
Total investments. . . . . . . . . . . . . . . . . . $38,286,342 $39,275,897
----------- -----------
----------- -----------
__________
(1) Fixed maturities and short-term investments are at amortized cost and
equity securities at original cost.
57
Citizens Security Group Inc. (Parent Only)
Schedule II. Condensed Financial Information of Registrant
Condensed Balance Sheet Information
December 31,
---------------------------
1995 1994
------------ ------------
ASSETS
Investment in subsidiaries . . . . . . . . . . . . . . . . . $17,963,956 $15,564,990
Cash . . . . . . . . . . . . . . . . . . . . . . . . . 257,816 105,214
Receivable from subsidiary . . . . . . . . . . . . . . . . . 139,285 -
Loan origination costs (accumulated amortization
of $142,897 and $107,541, respectively) . . . . . . . . . 31,384 66,740
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 13,303 39,897
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . $18,405,744 $15,776,841
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank loan payable . . . . . . . . . . . . . . . . . . . . $ 999,000 $ 1,518,920
Payable to subsidiary . . . . . . . . . . . . . . . . . . - 108,184
Unearned compensation . . . . . . . . . . . . . . . . . . 329,999 509,999
Other liabilities . . . . . . . . . . . . . . . . . . . . 109,835 90,660
----------- -----------
Total liabilities. . . . . . . . . . . . . . . . . 1,438,834 2,227,763
----------- -----------
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 . . . . . . . . . . . . . . . . . . . . 16,616 16,616
Additional paid-in capital . . . . . . . . . . . . . . . . . 5,097,360 5,097,360
Unearned compensation. . . . . . . . . . . . . . . . . . . . (329,999) (509,999)
Unrealized appreciation of subsidiaries'
investments in equity securities. . . . . . . . . . . . 94,107 27,491
Unrealized appreciation (depreciation)
of subsidiaries' investments in
fixed maturities. . . . . . . . . . . . . . . . . . . . 558,451 (1,502,054)
Retained earnings, including undistributed
income of subsidiaries of $1,379,773 and
$1,125,928 as of December 31, 1995 and
1994, respectively. . . . . . . . . . . . . . . . . . . 7,155,375 6,062,664
----------- -----------
Total shareholders' equity . . . . . . . . . . . . 16,966,910 13,549,078
----------- -----------
Total liabilities and shareholders'
equity. . . . . . . . . . . . . . . . . . . . . $18,405,744 $15,776,841
----------- -----------
----------- -----------
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL INFORMATION.
58
Citizens Security Group Inc. (Parent Only)
Schedule II. Condensed Financial Information of Registrant
Condensed Statement of Income Information
Year ended December 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
Revenues:
Capital access fee income. . . . . . $ 504,045 $ 360,769 $ -
---------- ---------- ----------
Total revenues . . . . . . . . . 504,045 360,769 -
---------- ---------- ----------
Operating expenses:
Salaries . . . . . . . . . . . . . . . 215,525 125,000 110,000
Interest expense. . . . . . . . . . . . 121,669 202,928 243,563
Legal and auditing expenses . . . . . . 38,379 39,139 35,547
Amortization of organization and
loan origination cost . . . . . . . . . 35,357 33,550 24,672
Professional services expenses. . . . . 24,341 24,751 54,187
Other operating expenses. . . . . . . . 35,802 18,127 13,098
---------- ---------- ----------
Total operating expenses . . . . 471,073 443,495 481,067
---------- ---------- ----------
Operating income (loss). . . . . 32,972 (82,726) (481,067)
Income tax expense (benefit) . . . . . . 11,000 (28,000) (164,000)
---------- ---------- ----------
Net income (loss)
- Parent only . . . . . . . . . 21,972 (54,726) (317,067)
Equity in net income of
subsidiaries . . . . . . . . . . . . 1,418,551 1,436,264 1,818,985
---------- ---------- ----------
Consolidated net income. . . . . $1,440,523 $1,381,538 $1,501,918
---------- ---------- ----------
---------- ---------- ----------
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL INFORMATION.
59
Citizens Security Group Inc. (Parent Only)
Schedule II. Condensed Financial Information of Registrant
Condensed Statement of Cash Flows Information
Year ended December 31,
-----------------------------------------
1995 1994 1993
-----------------------------------------
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . $1,440,523 $1,381,538 $1,501,918
Adjustments to reconcile net
income to net cash provided
by operating activities:
Change in receivable from/ (3,840)
payable to subsidiaries. . . . . (247,469) 80,132 (3,840)
Change in other liabilities . . . . 19,175 89,049 (53,139)
Change in equity in
undistributed net (594,085)
income of subsidiaries. . . . . . (253,845) 21,224 (594,085)
Other. . . . . . . . . . . . . . . . . 61,950 15,939 12,076
---------- ---------- ----------
Net cash from operating
activities. . . . . . . . . . . . 1,020,334 1,587,882 862,930
---------- ---------- ----------
Cash flows from investing activities:
Capital contribution to
subsidiary . . . . . . . . . . . . . . - - -
---------- ---------- ----------
Net cash used in investing
activities . . . . . . . . . . . . - - -
---------- ---------- ----------
Cash flows from financing activities:
Cost of issuance of Series A -
preferred stock. . . . . . . . . . . . - (149,814) -
Change in bank loan payable . . . . . . . (519,920) (1,050,000) (859,651)
Common stock dividends. . . . . . . . . . - - -
Series A preferred stock dividends. . . . 347,812 (260,859) -
Other . . . . . . . . . . . . . . . . . - (28,211) (4,497)
---------- ---------- ----------
Net cash from used in
financing activities. . . . . . . . . . . (867,732) (1,488,884) (864,148)
---------- ---------- ----------
Net increase (decrease) in cash. . . . . . . 152,602 98,998 (1,218)
Cash at beginning of year. . . . . . . . . . 105,214 6,216 7,434
---------- ---------- ----------
Cash at end of year. . . . . . . . . . . . . $ 257,816 $ 105,214 $ 6,216
---------- ---------- ----------
---------- ---------- ----------
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL INFORMATION.
60
Citizens Security Group Inc. (Parent Only)
Schedule II. Condensed Financial Information of Registrant
Notes To Condensed Financial Information
December 31, 1995, 1994 and 1993
1. Basis of presentation
The accompanying condensed financial information should be read in conjunction
with the consolidated financial statements and notes as set forth in Part II,
Item 8, "Financial Statements and Supplementary Data."
The Company entered into a capital access fee agreement on March 31, 1994 under
which Citizens Security Mutual Insurance Company ("Citizens Mutual"), Citizens
Fund Insurance Company ("Citizens Fund") and Insurance Company of Ohio ("ICO")
pay a fee to the Company in consideration of its ability to raise capital for
the combined insurance operations of Citizens Mutual, Citizens Fund and ICO. The
fee is paid monthly in an amount equal to one percent of the aggregate direct
written premiums of Citizens Mutual, Citizens Fund and ICO. Citizens Mutual's
obligation to pay its portion of the fee will terminate on the earlier of (i)
the date on which the Company's currently outstanding bank loan (or any
indebtedness incurred to refinance such loan) is repaid in full or (ii) the
closing date of the Company's next public offering of securities.
As of March 20, 1996, Meridian Insurance Group, Inc., ("Meridian") and the
Company executed a definitive acquisition agreement providing for Meridian's
acquisition of the Company for approximately $29 million in cash. Common
shareholders of the Company would receive approximately $12.50 per common share,
and the preferred shareholder, Citizens Mutual, would receive approximately $4.4
million for the Company's preferred stock. In conjunction with the transaction,
Meridian would also assume control of Citizens Mutual and Citizens Fund, ICO and
Citizens Mutual would enter into arrangements with the Meridian Insurance Group
companies relating to the pooling of insurance.
The acquisition is conditioned upon approval by the companies' Board of
Directors, the Company's common and preferred shareholders, Citizen Mutual's
policyholders and insurance regulators in Indiana, Minnesota, and Ohio, where
the insurance companies are domiciled. It is anticipated that the acquisition
will be completed by June 30, 1996.
2. Bank loan payable
On November 3, 1989, the Company obtained a $6,000,000, seven-year bank loan
from First Bank National Association, which has subsequently been assigned on
November 9, 1995 to Goodhue County National Bank, Red Wing, Minnesota. The
principal balance of the bank loan remaining to be paid as of December 31, 1995,
was $999,000. The current interest rate is 8.75 percent, but the rate is
variable and is tied to the prime rate. The Company is required to make
quarterly principal payments of $100,000 until October 1996 when the remaining
principal amount of $699,000 is due. Principal may be prepaid. Principal
payments of $519,920 were made in 1995. Interest payments in 1995, 1994 and 1993
totaled $121,669, $202,928, and $243,563, respectively.
The loan is secured by a pledge of the stock of Citizens Fund and ICO.
Additionally, the Company agreed to certain restrictive covenants which limit
the amount of subsequent indebtedness, dividends payable to shareholders,
capital expenditures and business acquisitions. The covenants also restrict any
changes to the pooling agreement.
These restrictive covenants further require that Citizens Fund and ICO maintain
specified levels of capital and policyholders' surplus and that net
61
Citizens Security Group Inc. (Parent Only)
Schedule II. Condensed Financial Information of Registrant
Notes To Condensed Financial Information
December 31, 1995, 1994 and 1993
written premiums to policyholders' surplus and combined trade ratios not exceed
specified levels. The Company is currently in compliance with all requirements
of the loan agreement.
3. Stock exchange
On March 31, 1994, Citizens Mutual exchanged 1,250,000 shares of common stock
for 1,250,000 shares of 7.95% Series A Preferred Stock ("Preferred Stock"). The
Preferred Stock, which has an annual cumulative dividend of $.27825 per share
and a liquidation preference of $3.50 per share, ranks senior to the Company's
common stock as to payment of dividends and also as to the distribution of
assets should there be a liquidation or dissolution of the Company. The
Preferred Stock is not convertible by Citizens Mutual and is not subject to
redemption at the option of the Company or Citizens Mutual.
The Preferred Stock was recorded at the liquidation preference of $3.50 per
share, which approximated the market value of the common stock retired at the
time of the exchange. Common stock and additional paid-in capital were decreased
$4,524,814 for the common stock retired (including $149,814 of transaction
costs).
4. Dividend restrictions
As a holding company, the Company depends on dividends from Citizens Fund and
ICO to make principal and interest payments with respect to its bank loan and to
meet its other expenses. During 1995, 1994 and 1993, the Company received
dividends from Citizens Fund of $789,000, $811,754 and $682,845, respectively.
During 1995, 1994 and 1993, the Company received dividends from ICO of $375,706,
$645,735 and $542,057, respectively. As members of an insurance holding company
system, Citizens Fund and ICO are restricted by law as to the amount of
dividends they may pay to the Company without the approval of state regulatory
authorities.
Generally, restrictions on Citizens Fund limit the amount of dividends paid
during a twelve month period to an amount which does not exceed the greater of
(i) 10 percent of Citizens Fund's statutory surplus at the end of the prior year
or (ii) the statutory net income, not including realized gains, of Citizens Fund
for the prior year. In addition, ordinary dividends may only be paid from the
earned surplus of Citizens Fund, also known as unassigned funds, determined in
accordance with the accounting procedures and practices used in the preparation
of its statutory annual statement, minus 25 percent of earned surplus
attributable to unrealized capital gains. As of December 31, 1995, Citizens
Fund's unassigned surplus was $305,020. Citizens Fund's ordinary dividends are
restricted to a maximum of $832,883 for 1996. Citizens Fund paid dividends of
$789,000 in 1995.
Restrictions on ICO limit the amount of dividends paid during a twelve month
period to an amount which does not exceed the greater of (i) 10 percent of ICO's
statutory surplus at the end of the prior year or (ii) the net income of ICO for
the prior year. In addition, ordinary dividends may only be paid from earned
surplus, which equals ICO's unassigned funds as set forth in its most recent
statutory annual statement, including net unrealized capital gains and losses.
As of December 31, 1995, ICO's unassigned surplus was $69,053. ICO's ordinary
dividends are restricted to a maximum $528,705 for 1996. ICO paid dividends of
$375,706 in 1995.
62
Citizens Security Group Inc. (Parent Only)
Schedule II. Condensed Financial Information of Registrant
Notes To Condensed Financial Information
December 31, 1995, 1994 and 1993
Pursuant to Ohio insurance laws, ICO must maintain statutory surplus of
$5,000,000 in order to write commercial property and casualty insurance lines.
As of December 31, 1995, ICO's statutory surplus was $5,287,053. The
requirements for minimum capital and surplus may restrict ICO's ability to pay
dividends to the Company.
63
Citizens Security Group Inc. and Subsidiaries
Schedule III. Supplementary Insurance Information
At December 31,
------------------------------------------------------
Loss Other
Deferred and loss policy
policy adjustment claims and
acquisition expense Unearned benefits
Segment costs reserves premiums payable
- ------- ----------- ---------- -------- ----------
1995
Property-Liability
Insurance:
Commercial 1,288,959 16,160,791 9,148,444
Personal 1,138,459 7,852,075 7,483,888
Investment
income,
less
related
expenses - - - -
Other - - - -
---------- ---------- ---------- ----------
Total Insurance
Segment $2,427,418 24,012,866 16,632,332 -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
1994
Property-Liability
Insurance:
Commercial $1,218,083 13,601,524 8,890,975 -
Personal 1,080,620 7,388,212 6,781,973 -
Investment
income,
less
related
expenses - - - -
Other - - - - -
---------- ---------- ---------- ----------
Total Insurance
Segment $2,298,703 20,989,736 15,672,948 -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
1993(1)
Property-Liability
Insurance:
Commercial $1,147,004 11,988,698 7,199,859 -
Personal 935,934 7,403,428 5,949,722 -
Investment
income,
less
related
expenses - - - -
Other - - - -
---------- ---------- ---------- ----------
Total Insurance
Segment $2,082,938 19,392,126 13,149,581 -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Year ended December 31,
-------------------------------------------------------------------------------------
Insurance
losses Amortization
Net and loss of policy Other
Premiums investment adjustment acquisition operating Premiums
earned income expenses costs expenses written
-------- ---------- ---------- ------------ --------- --------
1995
Property-Liability
Insurance:
Commercial 17,127,812 11,026,234 2,899,899 2,661,189 17,336,908
Personal 13,507,454 10,320,550 2,561,304 2,350,466 14,161,647
Investment
income,
less
related
expenses - 2,452,264 - - - -
Other - - - - (32,972) -
---------- ---------- ---------- ---------- ---------- ----------
Total Insurance
Segment 30,635,266 2,452,264 21,346,784 5,461,203 4,978,683 31,498,555
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
1994
Property-Liability
Insurance:
Commercial 14,784,091 - 9,391,332 2,764,812 2,344,902 16,346,327
Personal 12,564,978 - 9,177,750 2,451,815 2,079,441 13,365,924
Investment
income,
less
related
expenses - 2,194,372 - - - -
Other - - - - 82,726 -
---------- ---------- ---------- ---------- ---------- ----------
Total Insurance
Segment 27,349,069 2,194,372 18,569,082 5,216,627 4,507,069 29,712,251
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
1993(1)
Property-Liability
Insurance:
Commercial 12,552,511 - 7,442,534 2,668,648 1,860,731 13,533,548
Personal 11,936,407 - 8,981,733 2,177,272 1,711,634 12,013,191
Investment
income,
less
related
expenses - 1,952,529 - - - -
Other - - - - 481,067 -
---------- ---------- ---------- ---------- ---------- ----------
Total Insurance
Segment 24,488,918 1,952,529 16,424,267 4,845,920 4,053,432 25,546,739
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
__________
(1) Balance sheet information not applicable.
64
Citizens Security Group Inc. and Subsidiaries
Schedule IV. Reinsurance
Years ended December 31, 1995, 1994 and 1993
Percentage
Ceded to Assumed of amount
Insurance Gross other from other Net assumed
premiums earned amount(1) companies companies amount to net
--------------- ------------ --------- ---------- ---------- ----------
1995 $36,251,560 5,616,294 - 30,635,266 0.0%
1994 33,107,727 5,758,658 - 27,349,069 0.0
1993 29,699,129 5,210,211 - 24,488,918 0.0
__________
(1) Pursuant to the Pooling Agreement, gross insurance premiums earned includes
75% of Citizens Fund's, ICO's and Citizens Mutual's gross premiums earned.
65
Citizens Security Group Inc. and Subsidiaries
Schedule VI. Supplemental Information Concerning
Property-Casualty Insurance Operations
At December 31,
-------------------------------------------------------------------
Reserves for
Deferred unpaid losses
policy and loss Discount
acquisition adjustment on loss Unearned
costs expenses reserves premiums
----------- ------------- ---------- -----------
1995 $2,427,418 24,012,866 - 16,632,332
1994 2,298,703 20,989,736 - 15,672,948
Year ended December 31,
---------------------------------------------------------------------------------------------------------------------
Losses and loss
adjustment
expenses incurred Amortization Paid
related to of deferred losses
Net --------------------------- policy and loss
Earned investment Current Prior acquisition adjustment Premiums
premiums income year years costs expenses written
------------ ---------- ----------- ----------- ------------ ------------ -----------
1995 $30,635,266 2,452,264 21,900,996 (554,212) 5,461,203 19,669,923 31,498,555
1994 27,349,069 2,194,372 19,506,310 (937,228) 5,216,627 16,986,286 29,712,251
1993 24,488,918 1,952,529 17,219,223 (794,956) 4,845,920 14,897,578 25,546,739
66
EXHIBIT INDEX
Exhibit
Number Description
- ------ ---------------------------------------------------------------------
(2) (.1) Plan of Stock Exchange between the Company and
Citizens Security Mutual Insurance Company dated
as of March 31, 1994(1)
(.2) Acquisition and Affiliation Agreement dated as of
March 20, 1996 by and among the Company, Citizens
Security Mutual Insurance Company and Meridian
Insurance Group, Inc.
(3) (.1) Articles of Incorporation(2)
(.2) Bylaws(3)
(4) (.1) Certificate of Designations, defining the rights
of the holders of Series A Preferred Stock of the
Company(1)
(.2) Form of Common Stock certificate(4)
(10) (.1a) Reinsurance Pooling Agreement dated as of
September 22, 1986 and restated as of November 10,
1986 among Citizens Security Mutual Insurance
Company, the Company and Citizens Fund Insurance(4)
(.1b) First Amended Reinsurance Pooling Agreement dated as of
October 20, 1989 among the Company, Citizens Fund Insurance
Company, Citizens Security Mutual Insurance Company and
Insurance Company of Ohio(5)
(.2a) Management Services Agreement dated as of
September 22, 1986 and restated as of November 10,
1986 among Citizens Security Mutual Insurance
Company, the Company and Citizens Fund Insurance
Company(4)
(.2b) First Amended Management Services Agreement dated as of
October 20, 1989 among the Company, Citizens Fund Insurance
Company, Citizens Security Mutual Insurance and Insurance
Company of Ohio(5)
(.2c) Second Amended Management Services Agreement among
the Company, Citizens Security Mutual Insurance
Company, Citizens Fund Insurance Company and
Insurance Company of Ohio, dated March 31, 1994(1)
(.3) 1986 Stock Option Plan, as restated April 18, 1995(6)*
(.4) Third Amended Stipulation dated April 9, 1993 among the
Minnesota Department of Commerce, Citizens Security Mutual
Insurance Company and Citizens Fund Insurance Company(7)
67
EXHIBIT INDEX - CONTINUED
Exhibit Description
- ------- ----------------------------------------------------------------------
(.5) Lease dated March 1, 1993 between Red Wing Hotel Corporation
and Citizens Security Mutual Insurance Company(3)
(.6a) Software License and Development Agreement dated as of
August 25, 1988 between the Company and Programming
Resources Company(2)
(.6b) Amendment dated January 3, 1989 to Software License and
Development Agreement dated as of August 25, 1988 between
the Company and Programming Resources Company(5)
(.6c) Addendum dated October 7, 1991 to Software License
Development Agreement between the Company and Programming
Resources Company(5)
(.6d) Addendum effective as of September 1, 1993 to Software
License and Development Agreement dated as of August 25,
1988 between the Company and Programming Resources
Company(2)
(.7a) Amended and Restated Term Loan Agreement dated as of
December 31, 1992 between the Company and First Bank
National Association(3)
(.7b) First Amendment dated as of March 31, 1993 to Amended and
Restated Term Loan Agreement dated as of December 31, 1992
by and between the Company and First Bank National
Association(7)
(.7c) Waiver Letter dated March 1, 1994 to the Company from First
Bank National Association(2)
(.7d) Second Amendment, dated as of March 31, 1994 to Amended and
Restated Term Loan Agreement, dated as of December 31, 1992
by and between the Company and First Bank National
Association(1)
(.7e) Third Amendment, dated as of August 1, 1994 to Amended and
Restated Term Loan Agreement, dated as of December 31, 1992
by and between the Company and First Bank National
Association(8)
(.7f) Waiver letter dated February 28, 1995 to the Company from
First Bank National Association(5)
(.7g) Waiver letter dated November 9, 1995 to the Company from
Goodhue County National Bank(9)
(.7h) Fourth Amendment, dated as of November 9, 1995 to Amended
and Restated Term Loan Agreement, dated as of December 31,
1992 by and between the Company and Goodhue County National
Bank
(.8) Pledge Agreement dated as of December 31, 1992 between the
Company and First Bank National Association(3)
68
EXHIBIT INDEX - CONTINUED
Exhibit Description
- ------- ----------------------------------------------------------------------
(.9a) Letter Agreement dated as of November 2, 1989 among the
Company, Insurance Company of Ohio and the Ohio Department
of Insurance(5)
(.9b) Letter dated October 7, 1993 to Insurance Company of Ohio
from the Ohio Department of Insurance(10)
(.10a) 1994 Employee Bonus Plan(2)*
(.10b) 1995 Employee Bonus Plan(6)*
(.11) Non-employee Director Stock Option Plan(11)*
(.12) Letter Agreement dated January 15, 1992 between Citizens
Fund Insurance Company and the Minnesota Department of
Commerce(12)
(.13a) Lease dated September 16, 1993 between Engwiller Properties,
Inc. and Insurance Company of Ohio(10)
(.13b) Sublease Agreement dated July 5, 1995 between Insurance
Company of Ohio and Tom Witkowski(12)
(.14) Letter dated September 22, 1993 to State of Minnesota
Department of Commerce from Citizens Fund Insurance
Company(2)
(.15) Capital Access Fee Agreement dated March 31, 1994 among the
Company, Citizens Security Mutual Insurance Company,
Citizens Fund Insurance Company and Insurance Company of
Ohio(1)
(.16) Order Approving Restructuring dated March 31, 1994 issued by
the Minnesota Department of Commerce(1)
(.17) Letter of Authority dated September 12, 1994 to Scudder,
Stevens & Clark, Inc. from Citizens Fund Insurance
Company(8)
(.18) Letter of Authority dated September 12, 1994 to Scudder,
Stevens & Clark, Inc. from Insurance Company of Ohio(8)
(.19a) Agreement dated December 31, 1994 among Citizens Security
Mutual Insurance Company, Citizens Fund Insurance Company,
Insurance Company of Ohio and Adjusting Unlimited, Inc.(5)
(.19b) Agreement dated December 31, 1996 between the Company and
Adjusting Unlimited, Inc.
(.20) Lease dated April 21, 1995 between Eagle Building, L.L.C.
and Citizens Security Mutual Insurance Company(6)
69
EXHIBIT INDEX - CONTINUED
Exhibit Description
- ------- ----------------------------------------------------------------------
(.21) Deferred Compensation Plan Agreement dated August 1, 1995
between Citizens Security Mutual Insurance Company and Scott
Broughton
(21) Subsidiaries of the Company(5)
(24) Power of Attorney
(27) Financial Data Schedule
(28) (.1) Schedule P from Citizens Fund Insurance Company's
1995 Annual Statement filed with the Minnesota State
Insurance Department
(.2) Schedule P from Insurance Company of Ohio's 1995
Annual Statement filed with the Ohio Department of
Insurance
__________
* Denotes management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the Company's Form 8-K dated March 31, 1994.
(2) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended December 31, 1993.
(3) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended December 31, 1992.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-9096) which became effective on
December 17, 1986.
(5) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended December 31, 1994.
(6) Incorporated by reference to the Company's Form 10-Q for the quarter ended
March 31, 1995.
(7) Incorporated by reference to the Company's Form 10-Q for the quarter ended
March 31, 1993.
(8) Incorporated by reference to the Company's Form 10-Q for the quarter ended
September 30, 1994.
(9) Incorporated by reference to the Company's Form 10-Q for the quarter ended
September 30, 1995.
(10) Incorporated by reference to the Company's Form 10-Q for the quarter ended
September 30, 1993.
(11) Incorporated by reference to the Company's Form 10-Q for the quarter ended
March 31, 1991.
(12) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended December 31, 1991.
(13) Incorporated by reference to the Company's Form 10-Q for the quarter ended
June 30, 1995.
70