Citizens, Inc. — FY 2017 Form 10-K Summary
Business context and reporting period. Citizens, Inc. is an insurance holding company reporting for the fiscal year ended December 31, 2017. It sells life and endowment insurance, with about 73% of direct premiums from international markets, principally Latin America and the Pacific Rim; its Home Service business primarily serves Louisiana, Mississippi and Arkansas. The filing also presents unaudited fourth-quarter results.
Financial performance and position
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Total revenue | $252.6 million | $245.4 million |
| Insurance premiums | $197.7 million | $197.9 million |
| Net investment income | $53.1 million | $48.6 million |
| Income (loss) before tax | $(3.0) million | $5.5 million |
| Net income (loss) | $(38.1) million | $2.0 million |
| Class A diluted EPS | $(0.77) | $0.04 |
| Operating cash flow | $93.0 million | $102.3 million |
| Total assets | $1.644 billion | $1.584 billion |
| Stockholders’ equity | $223.5 million | $249.1 million |
- Revenue rose 2.9%, led by a 9.4% increase in net investment income as average invested assets grew. The average portfolio yield edged up to 4.31% from 4.28%.
- The pretax margin was approximately negative 1.2% and the net margin approximately negative 15.1%, calculated from reported revenue and earnings. The net loss primarily reflects $35.1 million of income tax expense, including the Tax Cuts and Jobs Act deferred-tax remeasurement, and a $4.6 million Home Service goodwill impairment.
- Fourth-quarter revenue was $67.9 million and net loss was $44.2 million, including $35.7 million of tax-remeasurement expense and the goodwill impairment.
- Cash and cash equivalents were $46.1 million; investments totaled $1.306 billion. The company reported $93.0 million of operating cash flow and $85.0 million of net cash used in investing activities. It reported no liquidity issues in 2017.
- Policy liabilities were $1.301 billion, including $1.134 billion of life insurance reserves. The filing does not present a separate conventional debt balance or debt metric.
Material changes versus the prior comparable period
- Net income shifted from $2.0 million profit to a $38.1 million loss. Before tax, results moved from $5.5 million income to a $3.0 million loss.
- Other general expenses increased 39.1% to $46.4 million, reflecting higher audit, legal and consulting costs, executive compensation and the goodwill impairment. Claims and surrenders rose 1.9%; surrender expense increased 10.4%.
- Life segment pretax income was essentially unchanged at $5.4 million. Home Service moved from $2.3 million pretax income to a $5.6 million pretax loss, including the goodwill impairment and increased allocated expenses.
- International first-year life premiums fell 18.8%; total insurance premiums were nearly flat. The company attributed weaker new sales in part to repriced products and Venezuela’s economic and social turmoil.
- Equity fell 10.3%, despite a $12.5 million increase in other comprehensive income, largely reflecting the reported net loss.
Outlook, risks, contingencies and unusual items
- Tax compliance exposure: Certain life policies did not qualify under IRC Sections 7702 and certain annuities under Section 72(s). The company recorded a $12.3 million after-tax best-estimate reserve; its estimated range is $5.9 million to $48.2 million after tax, and actual costs could exceed that range. It expected additional 2018 costs of $1.0 million to $2.0 million but said these could not be estimated reliably. IRS closing-agreement offers were pending or planned for additional business lines.
- Regulatory and international exposure: The company’s foreign sales model may be challenged under local insurance laws; it is exploring alternatives, including withdrawal from some markets. Bermuda’s regulator licensed CICA Life Ltd. in February 2018, and the company expected to transition international operations to that entity during 2018.
- Liquidity and investment risks: Older endowment policies representing a substantial portion of in-force business will mature over coming years; policyholder choices between lump-sum payouts and deposits are uncertain. Low rates, callable securities and reinvestment needs may pressure investment spreads and liquidity. About 97.2% of fixed maturities were investment grade; fixed maturities were approximately 55% callable.
- Controls and reporting: Management and the auditor concluded internal control over financial reporting was ineffective at year-end due to material weaknesses, including deficiencies in IT controls, spreadsheet/report validation, and oversight of third-party data and estimates. Remediation was ongoing. The auditor gave an unqualified opinion on the financial statements but an adverse opinion on internal controls.
- Legal matters: A securities class action seeks unspecified damages and a motion to dismiss was pending. The SEC was investigating disclosure and internal-control matters related to the tax-compliance issue; the company reported no fraud allegations and could not predict the outcome. A Louisiana unclaimed-property audit could potentially be significant, but the amount was not estimable.
- Strategy and outlook: Management cited ongoing reviews of products, profitability, international restructuring, technology modernization and investment strategy. It provided no quantified earnings or revenue guidance. The company discontinued most new domestic life sales beginning in 2017 and does not expect to pay cash dividends in the foreseeable future.
Important facts for investors to verify
- Progress and final cost of the IRC 7702/72(s) remediation, IRS closing agreements, and potential effects on policyholder behavior.
- Whether material weaknesses are remediated and whether controls operate effectively; track the actuarial-system conversion and any further reporting corrections.
- Execution, cost and regulatory consequences of moving international business to Bermuda, including exposure to foreign-law enforcement and Venezuela.
- Home Service profitability after the goodwill write-off, and trends in surrenders, new sales, claims and operating expenses.
- Policyholder election behavior as endowments mature, alongside investment portfolio credit quality, interest-rate sensitivity and reinvestment yields.
- Outcomes of the securities lawsuit, SEC investigation and unclaimed-property review, including any change to recorded reserves or contingencies.