Citizens, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. Citizens is an insurance holding company focused on life, endowment, final-expense and limited property insurance. Its international life business principally serves Latin America and the Pacific Rim; its Home Service business is concentrated in Louisiana, Mississippi and Arkansas.
Financial results and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $244.0 million | $252.6 million |
| Insurance premiums | $187.9 million | $197.7 million |
| Net investment income | $54.2 million | $53.1 million |
| Income (loss) before tax | $2.0 million | $(3.0) million |
| Federal income tax expense | $13.1 million | $35.1 million |
| Net income (loss) | $(11.1) million | $(38.1) million |
| Operating cash flow | $84.6 million | $93.0 million |
| Total assets | $1,615.6 million | $1,644.5 million |
| Stockholders’ equity | $187.7 million | $223.5 million |
- Revenue declined about 3.4%; premiums fell 5.0%, mainly reflecting weaker Life segment first-year and renewal premiums. Net investment income rose about 2.0%, while portfolio yield declined to 4.17% from 4.31%.
- Pre-tax margin was approximately 0.8%; net margin was approximately negative 4.5%. Net loss narrowed substantially from 2017, when tax reform remeasurement and a Home Service goodwill impairment materially affected results.
- Claims and surrenders increased 9.9% to $91.1 million, including higher surrender benefits and matured endowments. Future policy benefit reserve expense fell to $47.9 million from $76.0 million, partly due to actuarial-system estimate changes.
- Cash and cash equivalents were $45.5 million; cash, cash equivalents and investments totaled $1.388 billion. Operating cash flow remained positive but decreased from $93.0 million. Investing activities used $85.1 million.
- Fixed maturities were $1.231 billion; 98.1% were investment grade. Net unrealized gains on fixed maturities fell to $7.3 million from $46.0 million, principally as interest rates rose. Total stockholders’ equity declined 16.0%, and book value per share fell to $3.75 from $4.46.
- The filing does not provide a clear conventional corporate-debt balance. Major obligations are insurance policy liabilities, reported at $1.350 billion.
Fourth-quarter context
2018 fourth-quarter revenue was $65.6 million and net loss was $1.4 million (loss per Class A share: $0.03). In fourth-quarter 2017, revenue was $67.9 million and net loss was $44.2 million, primarily reflecting the $35.7 million tax-reform remeasurement and goodwill impairment.
Material changes, outlook and risks
- Effective July 1, 2018, Citizens novated all international CICA policies to its Bermuda subsidiary, CICA Life Ltd. The transaction generated $18.4 million of Subpart F federal tax expense; Bermuda regulation and policyholder reaction add uncertainty.
- The company recorded a $10.0 million after-tax best-estimate liability for tax and product-compliance matters; its disclosed probability-weighted range is $6.0 million to $52.5 million after tax. The IRS has not responded to certain submitted closing-agreement offers. The SEC closed its related investigation in August 2018 without recommending enforcement action.
- Citizens stopped accepting new applications from Brazilian residents in April 2018 and ceased new domestic Life segment sales in 2017. Management continues its strategic review, including possible market withdrawals, technology modernization and investment-portfolio changes. It expects to introduce enhanced international products in 2019 but gives no quantified earnings or revenue guidance.
- New actuarial software reduced reserves by $10.2 million and DAC by $4.3 million before tax; management says the conversion remains in progress and may identify further differences. Citizens also implemented a new Oracle ERP system.
- Management and the auditor concluded internal control over financial reporting was ineffective at year-end because of a material weakness in controls for significant and unusual transactions, identified in accounting for the Bermuda novation. Third-quarter 2018 results were restated to reduce tax expense by $7.6 million. Previously reported 2017 control weaknesses were considered remediated. The auditor issued an unqualified opinion on the financial statements but an adverse opinion on internal controls.
- Key exposures include foreign insurance-law enforcement and political/economic instability, concentrated international markets, persistently low investment yields, callable securities, rising policy surrenders and endowment maturities, tax uncertainty, reinsurance availability, and execution of the Bermuda transition and systems upgrades. About 46% of insurance in force comprises endowment products that will mature over coming years, creating uncertain liquidity demands.
- All insurance subsidiaries were above required minimum risk-based capital levels at year-end. Citizens has never paid cash dividends and does not expect to do so in the foreseeable future.
Investor verification priorities
- Track the tax-compliance reserve, IRS discussions, policy remediation costs and whether actual exposure remains within or exceeds the disclosed range.
- Monitor Life segment premium trends, new-policy counts, market withdrawals, Brazil run-off and policyholder response to the Bermuda novation.
- Assess reserve and DAC estimates as the actuarial-system conversion continues, including remediation of the material weakness and the reliability of future reporting.
- Review surrender and maturity experience against liquidity resources, and the effect of reinvestment yields, calls and unrealized investment losses on earnings and capital.
- Confirm regulatory capital and dividend restrictions at U.S. subsidiaries and CICA Life Ltd., and review the effect of the forthcoming long-duration insurance accounting standard.