Management believes that the Company's owned and leased office space is adequate for its current needs.
Net income in 1997 increased $10.1 million to $94.2 million, compared to $84.1 million in 1996. Excluding net realized gains of $18.7 million and claims office restructuring charges of $1.4 million, both net of taxes, net income increased $1.8 million to $76.9 million in 1997. The increase in net income is primarily attributable to an increase in investment income and realized gains of $12.9 million and $13.8 million, respectively, partially offset by a decrease in underwriting profit of $11.9 million. The increases in investment income and realized gains were primarily the result of the company's portfolio shift from equity securities to higher yielding debt securities, begun in 1996 and substantially completed in the first quarter of 1997. The decrease in underwriting profit primarily reflects an increase in claims activity in the commercial multiple peril and homeowners lines and an increase in catastrophes. Catastrophe losses were $17.8 million in 1997 compared to $15.3 million in 1996. The increases in catastrophes and claims activity were partially offset by favorable claims experience on current and prior accident years in the personal automobile and workers' compensation lines. Federal income tax expense increased $3.2 million to $24.6 million, while the effective tax rate increased from 20.3% in 1996 to 20.7% in 1997.
Net premiums earned increased $19.8 million, or 2.4%, to $855.3 million during 1997, representing increases of $28.7 million, or 5.2% in the personal segment, partially offset by decreases of $8.9 million, or 3.2%, in the commercial segment. This overall growth is due to increases in net premiums earned of $16.8 million, or 27.1%, to $78.9 million in Ohio and Indiana resulting from expansion in these states. Rate increases contributed to net premium growth in all major lines except the workers' compensation line where rate reductions and competitive conditions continue in Michigan. Continued growth in policies in force in the commercial multiple peril, homeowners, and commercial automobile lines of 16.6%, 2.8%, and 2.7%, respectively, were offset by a 0.6% decrease in personal automobile policies in force.
Net income in 1996 increased $9.2 million to $84.1 million, compared to $74.9 million in 1995. Excluding net realized gains of $9.7 million and severance charges of $0.7 million, both net of taxes, net income increased $2.6 million to $75.1 million in 1996. The increase in net income is primarily attributable to an increase in investment income and realized gains of $10.1 million and $11.2 million, respectively, partially offset by a decrease in underwriting profit of $12.7 million. The increase in investment income and realized gains was primarily the result of the Company's portfolio shift, in 1996, from equity securities to higher yielding debt securities. The decrease in underwriting profit primarily reflects an increase in catastrophes and an increase in claims activity in the commercial multiple peril and homeowners lines. Catastrophe losses were $15.3 million in 1996 compared to $8.0 million in 1995. The increases in catastrophes and claims activity were partially offset by favorable claims experience on current and prior accident years in the personal automobile line. Federal income tax expense decreased $0.3 million to $21.4 million, while the effective tax rate decreased from 22.5% in 1995 to 20.3% in 1996.
Personal segment premiums represented 68.2%, 66.4% and 65.6% of total net premiums earned in 1997, 1996 and 1995, respectively.
Personal segment net premiums earned increased $18.4 million, or 3.4%, to $554.6 million in 1996. This growth is attributable to rate increases in the personal automobile and homeowners lines. The growth is partially offset by a 3.0% decrease in policies in force in the personal automobile line, attributable to the aforementioned competitive factors in Michigan.
Commercial segment premiums represented 31.8%, 33.6% and 34.4% of total net premiums earned in 1997, 1996 and 1995, respectively.
Commercial segment net premiums earned decreased $8.9 million, or 3.2%, to $272.0 million in 1997. This decrease primarily reflects rate reductions in the workers' compensation line. Rates in the workers' compensation line were decreased 8.5%, 7.0%, 6.4% and 8.7% effective May 1, 1995, December 1, 1995, June 1, 1996 and March 1, 1997, respectively. This decrease is partially offset by an increase in policies in force in the commercial multiple peril and commercial automobile lines of 16.6% and 2.7%, respectively. Management believes competitive conditions in Michigan in the workers' compensation line may impact future growth in net premiums earned.
Commercial segment net premiums earned decreased $0.7 million, or 0.2%, to $280.9 million in 1996. This decrease primarily reflects the aforementioned rate reductions and a 1.4% decrease in policies in force in the workers' compensation line due to continuing competition in this line in Michigan. This decrease is partially offset by an increase in policies in force in the commercial multiple peril and commercial automobile lines of 13.2% and 3.7%, respectively.
The commercial segment underwriting loss in 1997 was $2.4 million compared to a $2.0 million profit in 1996. The decline in underwriting profit is primarily attributable to lower net premiums earned in the workers' compensation line, an increase in current year severity and frequency in the commercial multiple peril line, less favorable development of prior year reserves in the commercial automobile line, and an increase in catastrophe losses of $1.6 million. These decreases were offset by a $13.9 million increase in favorable development of prior year claims in the workers' compensation line. Policy acquisition expenses increased $1.2 million, or 2.3%, primarily as a result of higher commission rates, offset by a decrease in net premiums earned. Other underwriting expenses decreased $2.4 million, or 8.9%, to $24.6 million due to reductions in employee related expenses.
The provision for federal income taxes was $24.6 million, $21.4 million, and 21.7 million in 1997, 1996, and 1995, respectively. These provisions resulted in consolidated effective federal tax rates of 20.7%, 20.3%, and 22.5% in 1997, 1996, and 1995, respectively. The increase in the effective tax rate in 1997 from 1996 resulted from higher capital gains partially offset by higher tax-exempt interest. The decrease in the effective tax rate in 1996 from 1995 resulted from higher tax-exempt interest, partially offset by higher pre-tax income.
The table below provides a reconciliation of the beginning and ending reserve for unpaid losses and LAE for the years ended December 31:
Due to the nature of business written by the Company, the exposure to environmental liabilities is relatively small. Losses and LAE reserves related to environmental damage and toxic tort liability, included in the total reserve for losses and LAE were $19.0 million and $20.6 million at the end of 1997 and 1996, respectively, both net of reinsurance of $7.0 and $3.5 million, respectively. The Company does not specifically underwrite policies that include this coverage, but as case law expands policy provisions and insurers' liability beyond the intended coverage, the Company has been required to defend such claims. Due to their unusual nature and absence of historical claims data, reserves for these claims are not determined using historical experience to project future losses. The Company estimated its ultimate liability for these claims based upon currently known facts, reasonable assumptions where the facts are not known, current law and methodologies currently available. Although these claims are not material, their existence gives rise to uncertainty and is discussed because of the possibility, however remote, that they may become material. The environmental liability could be revised in the near term if the estimates used in determining the liability are revised. Management believes that,
Under the 1997 casualty reinsurance program, the reinsurers are responsible for 100% of the amount of each loss in excess of $0.5 million per occurrence up to $30.5 million for general liability and workers' compensation. Additionally, this reinsurance covers workers' compensation losses in excess of $30.5 million to $60.5 million per occurrence. Amounts in excess of $60.5 million are retained 100% by the Company. Under the Company's 1997 catastrophe reinsurance program, the Company retains 5% of losses in excess of $10.0 million, up to $25.0 million. For losses in excess of $25.0 million and up to $180.0 million, the Company retains 10% of the loss. Amounts in excess of $180.0 million are retained 100% by the Company. In 1996, the Company had additional catastrophe coverage which reinsured 90% of $5.0 million for aggregated catastrophe losses in excess of $5.0 million which individually exceed $1.0 million. In 1997 and 1996, the Company recovered $1.2 million and $4.6 million on its catastrophe coverage, respectively. In 1995, the Company did not exceed the minimum catastrophe levels.
As a condition to the ability to conduct personal automobile business in the state of Michigan, the Company is required under Michigan law to participate in a pooling arrangement with the Michigan Catastrophic Claims Association (MCCA). The Company is indemnified by the MCCA for personal protection insurance losses in excess of $0.25 million.
The Company cedes a portion of its private passenger automobile premiums to the MCCA. Ceded premiums earned to MCCA in 1997, 1996 and 1995 were $9.8 million, $50.5 million and $66.8 million, respectively. The decrease in ceded premiums earned to MCCA reflects a reduction in premiums charged per policyholder by MCCA. Losses and LAE ceded to MCCA in 1997, 1996 and 1995 were ($0.8) million, ($52.9) million and $62.9 million, respectively. In 1997 and 1996, the MCCA's favorable development on prior year reserves exceeded the losses and LAE incurred during the current year.
At December 31, 1997 and 1996, the Company had reinsurance recoverable from the MCCA on paid and unpaid losses of $280.2 million and $292.0 million, respectively. Because MCCA is supported by assessments permitted by statute and all amounts billed by the Company to MCCA have been paid when due, the Company believes that it has no significant exposure to uncollectible reinsurance balances.
At December 31, 1997, $1,311.7 million, or 86.2%, of debt securities held by the Company were rated by the National Association of Insurance Commissioners ("NAIC") as investment grade (1 or 2 by the NAIC). The remaining $210.7 million were rated non-investment grade. At December 31, 1996, $1,233.5 million, or 88.2%, of the debt securities were rated investment grade. At December 31, 1997, 66.1% of debt securities were tax-exempt investments, compared to 69.9% at December 31, 1996. The Company may make modest extensions in portfolio incremental credit risk and adjustments to its taxable and tax- exempt positions in the future to seek to maximize after tax income.
At December 31, 1997, $182.7 million, or 10.6%, of the investment portfolio was invested in equity securities compared to $192.3 million, or 12.0%, at December 31, 1996. Dividend income from equity securities was $4.3 million, or 4.0%, of total investment income in 1997, compared to $4.2 million, or 4.5%, and $4.5 million, or 5.3%, in 1996 and 1995, respectively.
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of business operations. As a holding company, Citizens' primary source of cash for payment of dividends to its shareholders is dividends from its insurance subsidiaries, which are subject to limitations imposed by state regulators. Such limitations require that dividends be paid only out of statutory earned surplus (unassigned funds) and impose a restriction on the payment of "extraordinary" dividends without prior approval of the state authorities. The maximum dividend that may be paid to Citizens Corporation at January 1, 1998, without prior approval from the Michigan Commissioner of Insurance, is $86.9 million.
Net cash provided by operating activities for the Company was $48.6 million, $73.5 million and $120.0 million in 1997, 1996, and 1995, respectively. The decrease in cash provided by operating activities in all periods is attributable primarily to the increase in payments for losses and LAE of $58.3 million to $663.3 million in 1997 and $59.5 million to $605.0 million in 1996 compared to $545.5 million in 1995.
The Company will utilize both internal and external resources to reprogram, or replace, and test the software for Year 2000 modifications. The Company plans to complete the mission critical elements of the Year 2000 project by December 31, 1998. The cost of the Year 2000 project will be expensed as incurred over the next two years, and is being funded through a reallocation of resources from discretionary projects. Therefore, the Year 2000 project is not expected to result in significant incremental technology costs or to have material effect on the results of operations. Through December 31, 1997, the Company has incurred and expensed approximately $6.3 million related to the assessment of, and preliminary efforts in connection with, the project and the development of a remediation plan. The total remaining cost of the Year 2000 project is estimated at $16.1 million.
The costs of the project and the date on which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties.
The Company wishes to caution readers that the following important factors, among others, in some cases have affected and in the future could affect, the Company's actual results and could cause the Company's actual results for 1998 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. When used in the MD&A discussion, the words "believes," "anticipated," "expects" and similar expressions are intended to identify forward-looking statements. See "Important Factors Regarding Forward-Looking Statements" filed herewith as Exhibit 99.1 and incorporated herein by reference.
Factors that may cause actual results to differ materially from those contemplated or projected, forecasted, estimated or budgeted in such forward looking statements include among others, the following possibilities: (i) adverse catastrophe experience and severe weather; (ii) adverse loss development for events the Company insured in prior years; (iii) heightened competition, including the intensification of price competition, the entry of new competitors, and the introduction of new products by new and existing competitors; (iv) adverse state and federal legislation, including decreases in rates, limitations on premium levels, increases in minimum capital and reserve requirements, benefit mandates, limitations on the ability to manage care and utilization, and tax treatment of insurance products; (v) changes in interest rates causing a reduction of investment income or in the market value of interest rate sensitive investments; (vi) failure to obtain new customers, retain existing customers or reductions in policies in force by existing customers; (vii) higher service, administrative, or general expense due to the need for additional advertising, marketing, administrative or management information systems expenditures; (viii) loss or retirement of key executives; (ix) increases in medical costs, including increases in utilization, costs of medical services, pharmaceuticals, durable medical equipment and other covered items; (x) termination of provider contracts or renegotiation at less cost- effective rates or terms of payment; (xi) changes in the Company's liquidity due to changes in asset and liability matching; (xii) restrictions on insurance underwriting, based on certain criteria; (xiii) adverse changes in the ratings obtained by independent rating agencies such as Moody's, Standard and Poors and A.M. Best; and (xiv) uncertainty related to the Year 2000 Issue.
Management of Citizens Corporation has established and maintains a system of internal control that provides reasonable assurance that assets are safeguarded and that transactions are properly authorized and recorded. The system of internal control provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees with significant roles in the financial reporting process and updated as necessary. Management continually monitors the system of internal control for compliance. Citizens Corporation and its subsidiaries maintain a strong internal audit program that independently assesses the effectiveness of the internal controls and recommends possible improvements thereto. Management recognizes the inherent limitations in all internal control systems and believes that our system of internal control provides an appropriate balance between the costs and benefits desired. Management believes that the Company's system of internal control provides reasonable assurance that errors or irregularities that would be material to the financial statements are prevented or detected in the normal course of business.
The Audit Committee of the Board of Directors, composed solely of outside directors, oversees management's discharge of its financial reporting responsibilities. The committee meets periodically with management, our internal auditors and independent accountants, Price Waterhouse LLP. Both our internal auditors and Price Waterhouse LLP have direct access to the Audit Committee.
Management recognizes its responsibility for fostering a strong ethical climate. This responsibility is reflected in the Company's policies which address, among other things, potential conflicts of interest; compliance with all domestic and foreign laws including those relating to financial disclosure and the confidentiality of proprietary information. Citizens Corporation maintains a systematic program to assess compliance with these policies.
/s/John F. O'Brien /s/Edward J. Parry, III - ------------------------------------- ------------------------------------- JOHN F. O'BRIEN EDWARD J. PARRY, III President and Chief Executive Officer Vice President, Chief Financial Accounting Officer Officer, Treasurer and Principal
The consolidated financial statements include the accounts of Citizens Corporation, a Delaware corporation and non-insurance holding company; Citizens Insurance Company of America (Citizens Insurance), a Michigan corporation; Citizens Insurance Company of the Midwest, an Indiana corporation; and Citizens Insurance Company of Ohio, an Ohio corporation; (collectively, Citizens Insurance Operations) and Citizens Management Inc. (collectively, the Company). Approximately 82.5% of the Company is owned by The Hanover Insurance Company (Hanover). Hanover is an indirect wholly-owned subsidiary of Allmerica Financial Corporation (AFC), a Delaware corporation.
In accordance with the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (Statement No. 115), the Company is required to classify its investments into one of three categories: held-to-maturity, available-for-sale or trading. Statement No. 115 also requires that unrealized holding gains and losses for trading securities be included in earnings, while unrealized gains and losses for available-for-sale securities be excluded from earnings and reported as a separate component of shareholders' equity until realized.
Deferred policy acquisition expenses consist of commissions, premium taxes and other costs that vary with and are primarily related to the production of new and renewal business. The deferral is subject to ultimate recoverability and is charged to expense over the period in which the related premiums are earned. Deferred policy acquisition expenses are reviewed for each segment to determine that they do not exceed recoverable amounts, after considering anticipated investment income. If such costs are determined to be unrecoverable, they are expensed at the time of determination.
Earnings per common share are based on the weighted average number of common shares and common share equivalents. The Board of Directors authorized the repurchase of 1.8 million shares or slightly less than five percent of its issued common stock and has purchased a total of 0.8 million shares since the implementation of the repurchase program in 1995. As of December 31, 1997, the Company is holding these shares as treasury stock for the purpose of funding current and future stock option awards and for other purposes.
A reconciliation of the Company's statutory net income and surplus to GAAP net income and shareholders' equity is as follows:
Included in income from other investments was income from limited partnerships of $3.2 million and $4.4 million for the years ended December 31, 1997 and 1996, respectively. The Company had no income from limited partnerships for the year ended December 31, 1995.
There were no debt securities that were non-income producing for the twelve months ended December 31, 1997. The Company had no concentration in an individual issuer that exceeded 10% of shareholders' equity at December 31, 1997.
Voluntary Sales and Related Gross Gains and Gross Losses on Available-for- Sale Securities
The Company's federal income tax returns are routinely audited by the IRS, and provisions are made in the financial statements in anticipation of the results of these audits. In management's opinion, adequate tax liabilities have been established for all years. However, the amount of these tax liabilities could be revised in the near term if estimates of the Company's ultimate liability are revised.
The Company is subject to concentration of risk with respect to reinsurance ceded through a pooling arrangement. As a condition to the ability to conduct personal automobile business in the state of Michigan, the Company is required under Michigan law to participate in a pooling arrangement with the Michigan Catastrophic Claims Association (MCCA). The Company is indemnified by the MCCA for personal protection insurance losses in excess of $0.25 million. The Company cedes a significant portion of its private passenger automobile premiums to the MCCA. Ceded premiums earned to MCCA in 1997, 1996, and 1995 were $9.8 million, $50.5 million and $66.8 million, respectively. The decrease in ceded premiums earned to MCCA reflects a reduction in premiums charged per policyholder by MCCA. Losses and LAE ceded to MCCA in 1997, 1996, and 1995 were ($0.8) million, ($52.9) million and $62.9 million, respectively. In 1997 and 1996, the MCCA's favorable development on prior year reserves exceeded the losses and LAE incurred during the year.
As part of an ongoing process, the reserves, net of reinsurance, have been re-estimated for all prior accident years and were decreased by $69.5 million, $58.4 million and $47.0 million in 1997, 1996, and 1995, respectively. The increase in favorable development of $11.1 million in 1997 reflects improved severity in the workers' compensation line where favorable development increased $13.9 million to $35.7 million and in the commercial multiple peril line where favorable development increased $7.0 million to $4.3 million, partially offset by less favorable development in the personal automobile line, where favorable development decreased $10.5 million to $22.5 million in 1997. The increase in favorable development of $11.4 million in 1996 reflects improved severity in the personal automobile line, where favorable development increased $28.6 million to $33.0 million in 1996, partially offset by less favorable development in the workers' compensation line of $10.9 million.
Due to the nature of business written by the Company, the exposure to environmental liabilities is relatively small. Losses and LAE reserves related to environmental damage and toxic tort liability, included in the total reserve for losses and LAE were $19.0 million and $20.6 million at the end of 1997 and 1996, respectively, net of reinsurance of $7.0 million and $3.5 million, respectively. The Company does not specifically underwrite policies that include this coverage, but as case law expands policy provisions and insurers' liability beyond the intended coverage, the Company has been required to defend such claims. Due to their unusual nature and absence of historical claims data, reserves for these claims are not determined using historical experience to project future losses. The Company estimated its ultimate liability for these claims based upon currently known facts, reasonable assumptions where the facts are not known, current law and methodologies currently available. Although these claims are not material, their existence gives rise to uncertainty and is discussed because of the possibility, however remote, that they may become material. The environmental liability could be revised in the near term if the estimates used in determining the liability are revised. Management believes that, notwithstanding the evolution of case law expanding liability in environmental claims, recorded reserves related to these claims are adequate and the Company is not aware of any litigation or pending claims that may result in additional material liabilities in excess of recorded reserves.
Inflation generally increases the cost of losses covered by insurance contracts. The effect of inflation on the Company varies by product. Property and casualty insurance premiums are established before the amount of losses and LAE, and the extent to which inflation may affect such expenses, are known. Consequently, the Company attempts, in establishing rates, to anticipate the potential impact of inflation in the projection of ultimate costs. The impact of inflation has been relatively insignificant in recent years. However, inflation could contribute to increased losses and LAE in the future.
The Company provides retirement benefits to substantially all of its employees, under a defined benefit pension plan (the "Plan"). Benefits under this defined benefit formula were frozen for most employees effective December 31, 1994. In its place, the Company adopted a defined benefit cash balance formula, under which the
Determination of the projected benefit obligation was based on a weighted average discount rate of 7% at December 31, 1997 and 1996. The assumed long- term rate of return on plan assets was 9% for both years. The actuarial present value of the projected benefit obligation was determined using assumed rates of increase in future compensation levels ranging from 5% to 5.5%. Plan assets are invested primarily in various separate accounts and the general account of First Allmerica Financial Life Insurance Company (FAFLIC), an affiliate of the Company. The Plan also holds stock of Allmerica Financial Corporation, the ultimate parent of the Company.
On January 1, 1998, all of the employees of the Company will be transferred to FAFLIC. In addition, the Company's benefit plans will be merged with the existing benefit plans of FAFLIC. Accordingly, the assets and liabilities related to the Company's plans will be transferred to FAFLIC. Beginning in 1998, the Company will be charged actual salaries and benefit costs for services provided to the Company by FAFLIC employees. The transfer of employees and benefit plans to FAFLIC will not have a material impact on the results of operations or financial position of the Company.
The components of net periodic postretirement benefit expense were as follows:
The plans' status and the amounts recognized in the Company's consolidated balance sheets were as follows:
For purposes of measuring the accumulated postretirement benefit obligation at December 31, 1997, health care costs were assumed to decrease to 8.0% in 1998, declining thereafter until the ultimate rate of 5.5% is reached in 2001 and remaining at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1% in each year would increase the medical accumulated postretirement benefit obligation as of December 31, 1997 by $0.6 million, or 8.5%, and the aggregate of the service and interest cost components of annual net periodic postretirement benefit expense by $0.1 million, or 8.6%.
The Company is a party to a consolidated service agreement along with all other affiliates under which FAFLIC and Hanover provide management, space, technology and other services. Charges for these services are based on full cost including all direct and indirect overhead costs and amounted to $20.5 million, $13.3 million and $9.7 million in 1997, 1996, and 1995, respectively.
Also under the consolidated service agreement, Citizens provided technology services to Hanover. Charges for these services amounted to $6.4 million and $0.7 million in 1997 and 1996, respectively. Charges in 1995 were insignificant.
No options expired during 1997, 1996, and 1995. Exercise prices for options outstanding as of December 31, 1997 ranged from $15.25 to $18.875. The weighted average remaining contractual life of these options is 7.8 years. At December 31, 1997, there were 58,000 option shares available for future grant. The fair value of each option is estimated at the date of grant using the Black-Scholes option-pricing model. The weighted average fair values of options granted in 1996 and 1995 were $7.98 and $9.22, respectively. There were no options granted during 1997. Principal assumptions used in applying the Black-Scholes model were as follows:
The Company has certain operating lease agreements for property and equipment. At December 31, 1997, future minimum rental payments under non- cancelable long-term operating leases were $9.9 million, payable as follows: 1998--$2.7 million; 1999--$2.3 million; 2000--$1.7 million; 2001--$1.1 million; 2002--$0.9 million; and $1.2 million thereafter. All leases expire prior to the year 2005. It is expected that, in the normal course of business, leases that expire will be renewed or replaced by leases on other property and equipment; thus, it is anticipated that future minimum lease commitments will not be less than the amounts shown for 1998. Certain equipment and fixture leases are subject to buy out options. Rent expense, excluding related party charges, was $3.3 million, $3.3 million, and $3.3 million in 1997, 1996, and 1995, respectively.
The Company has been named a defendant in various legal proceedings arising in the normal course of business. In the opinion of management, based on the advice of legal counsel, the ultimate resolution of these
proceedings will not have a material effect on the consolidated financial statements. However, liabilities related to these proceedings could be established in the near term if estimates of the ultimate resolution of these proceedings are revised.
Michigan limits the payment of dividends and other distributions to shareholders. Under current law, cash dividends may only be paid from earnings and policyholders' surplus. In addition, a Michigan insurer may not pay an "extraordinary" dividend to its stockholders without the prior approval of the Michigan Commissioner. An extraordinary dividend or distribution is defined as a dividend or distribution of cash or other property whose fair market value, together with that of other dividends and distributions made within the preceding 12 months, exceeds the greater of 10% of policyholders' surplus as of December 31 of the immediately preceding year or the statutory net income less realized gains, for the immediately preceding calendar year. Based upon the 1997 statutory financial statements of Citizens Insurance, the maximum dividend that may be paid to Citizens Corporation at January 1, 1998, without prior approval from the Michigan Commissioner of Insurance, is $86.9 million.
The following is a review of segment results. Investments are available for payments of claims and expenses for all products. Investment income, realized gains and total assets have not been identified to specific segments.