Citizens, Inc. — Q1 2013 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2013, compared with Q1 2012; balance-sheet figures are compared with December 31, 2012. Citizens is an insurance holding company focused on life insurance, including international policies, and home-service life and property insurance. It reported approximately $5.3 billion of insurance in force.
Financial performance and condition
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior date |
|---|---|---|
| Total revenue | $49.5 million | $46.9 million, Q1 2012 |
| Insurance premiums | $40.9 million | $39.1 million, Q1 2012 |
| Net investment income | $8.4 million | $7.6 million, Q1 2012 |
| Income before tax | $1.1 million | $2.1 million, Q1 2012 |
| Net income | $0.9 million; diluted EPS: Class A $0.02, Class B $0.01 | $1.5 million; diluted EPS: Class A $0.03, Class B $0.02 |
| Operating cash flow | $18.1 million | $15.2 million, Q1 2012 |
| Total assets | $1,187.6 million | $1,174.9 million, Dec. 31, 2012 |
| Cash and cash equivalents | $42.6 million | $56.3 million, Dec. 31, 2012 |
| Stockholders’ equity | $264.0 million | $263.1 million, Dec. 31, 2012 |
Revenue increased 5.6% year over year, led by life premiums and investment income. Net income fell 43.4% as benefits and expenses rose to $48.4 million from $44.8 million. The increase in future policy benefit reserves was $17.0 million versus $14.1 million, reflecting low interest rates and growth in endowment products. Annualized yield on average invested assets was 3.86%, compared with 3.76% in Q1 2012.
Life Insurance segment pretax income was $0.1 million versus $0.1 million; Home Service pretax income fell to $1.2 million from $2.4 million; Other Non-Insurance Enterprises reported a $0.2 million loss versus a $0.4 million loss. Cash declined during the quarter as net investing cash outflow was $32.0 million, primarily reflecting investment purchases. Policy liabilities were $894.9 million, chiefly future policy benefit reserves. The balance sheet reports no borrowings; liabilities are principally insurance and policyholder obligations.
Material changes, outlook, and risks
- Life premiums rose 6.9%, primarily from international renewal business. Home-service premiums declined slightly, with management citing higher lapses. New life insurance issued increased in face amount, while home-service policy count and face amount issued declined.
- Fixed maturities were $815.4 million by carrying value; total cash, cash equivalents and investments were $969.7 million. The portfolio shifted toward municipal and corporate securities and away from government-sponsored enterprise securities. Net unrealized gains on fixed maturities were $51.0 million, down from $51.5 million at year-end. No other-than-temporary investment impairments were recorded.
- Management said available liquidity and expected cash flows should be adequate; it did not provide quantitative earnings guidance. Insurance subsidiaries’ year-end 2012 risk-based capital ratios exceeded minimums: CICA 553%, CNLIC 2,380%, SPFIC 421%, and SPLIC 1,282%.
- Interest-rate, investment-credit, mortality, morbidity, persistency, and policyholder-withdrawal risks may affect results. International business is concentrated in Latin America and the Pacific Rim; the company noted that Colombian legal changes expected in July 2013 could impede marketing or premium collection.
- In April 2013, SPFIC agreed to a confidential settlement of substantially all Road Home litigation claims for approximately $183,000, accrued at March 31 and reported as not material. An unclaimed-property audit may result in payments, penalties, interest, or process changes; the company could not estimate the amount and said costs could be substantial relative to its size. Potential individual claims in a long-running Texas case also remain unquantifiable.
- Contractual obligations were reported as having no material change from the 2012 Form 10-K, and the company reported no off-balance-sheet arrangements. Management stated disclosure controls were effective at quarter-end.
Most important facts for investors to verify
- Whether reserve growth and the resulting pressure on earnings persist, particularly given low interest rates and endowment-product sales.
- Whether Home Service lapses and claims experience improve, and whether international renewal premiums remain strong.
- Investment portfolio credit quality, municipal and utility exposure, interest-rate sensitivity, and reinvestment yields.
- Potential outcomes and costs of the unclaimed-property audit, Texas litigation, and remaining hurricane-related claims.
- Effects of foreign regulatory or political developments, including the anticipated Colombian legal changes, on sales and premium collections.