Citizens, Inc. — Q2 2011 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011; financial statements are unaudited and consolidated. Citizens is an insurance holding company focused on life insurance, home service insurance and related non-insurance operations. Unless otherwise stated, amounts below are in millions of dollars.
Financial results and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $48.510 | $46.160 | $93.793 | $89.992 |
| Net income | $3.243 | $3.185 | $5.023 | $4.790 |
| Basic EPS, Class A | $0.07 | $0.07 | $0.10 | $0.10 |
| Diluted EPS, Class A | $0.07 | $0.07 | $0.08 | $0.10 |
| Pre-tax income | $4.740 | $4.362 | $7.473 | $6.734 |
- Q2 revenue increased 5.1% and net income increased 1.8% year over year. For the first half, revenue increased 4.2% and net income increased 4.9%.
- Life premiums rose to $38.2 million in Q2 and $73.8 million in the first half, from $35.1 million and $68.7 million, respectively. Net investment income fell to $7.7 million and $15.2 million, from $8.3 million and $16.6 million.
- Q2 insurance benefits and expenses totaled $43.8 million, versus $41.8 million; first-half expenses were $86.3 million, versus $83.3 million. Increased reserve additions, commissions and policyholder dividends contributed to the rise. Reported net margin was approximately 6.7% for Q2 (6.9% prior year) and 5.4% for the first half (5.3% prior year).
- First-half operating cash flow was $28.0 million, versus $24.0 million. Investing activities used $20.7 million, compared with $7.9 million of inflows in 2010; financing provided $1.3 million. Cash and cash equivalents were $58.4 million at June 30, up from $49.7 million at year-end.
- Total assets were $1.041 billion, total liabilities $800.1 million and stockholders’ equity $240.5 million at June 30. Total investments were $765.1 million. Liabilities are primarily policy obligations; the filing does not provide a clear figure for conventional borrowings.
- Fixed maturities were 84.1% of cash, cash equivalents and investments. Net unrealized gains on fixed maturities were $7.9 million at June 30, compared with net unrealized losses of $3.8 million at December 31, 2010. No other-than-temporary investment impairments were recorded in either first-half period.
- All insurance subsidiaries exceeded the stated risk-based capital minimums; June 30 ratios ranged from 325% at SPFIC to 2,783% at CNLIC.
Changes versus the prior comparable period
- Premium growth was driven mainly by international life business, including renewal persistency and stronger first-year premiums. First-half insurance issued increased in the Life segment to $181.9 million from $156.4 million.
- Life segment pre-tax income declined to $2.9 million for the first half from $3.9 million, as higher premiums were outweighed by increased reserve additions and expenses. Home Service pre-tax income improved to $4.3 million from $3.2 million, and Other Non-Insurance Enterprises reported $0.3 million versus a $0.4 million loss.
- Management attributed lower investment income to call activity on bonds and reinvestment at lower yields. Annualized yield on average invested assets was 4.13%, versus 4.32% in the comparable first-half period.
- Assets increased from $986.5 million at year-end 2010 to $1.041 billion at June 30; equity rose from $227.6 million to $240.5 million. Accumulated other comprehensive income increased alongside the improvement in unrealized investment values.
Outlook, risks and unusual items
- No quantitative earnings or revenue guidance was provided. Management expects call activity and lower reinvestment yields to weigh on investment income in the near term unless interest rates rise, despite higher invested assets. Management expects available liquidity and future cash flows to meet funding needs.
- Principal risks include interest-rate and investment-market movements, issuer credit deterioration, mortality and persistency experience, policyholder withdrawals, regulatory changes, litigation, and the company’s concentration in customers residing in Latin America and the Pacific Rim. Fixed maturities are a substantial portion of invested assets; approximately 51% of their fair value was in U.S. Treasury and government-sponsored enterprise securities.
- The July 20, 2011 Fifth Circuit ruling in the Louisiana Road Home litigation revived uncertainty for SPFIC: anti-assignment clauses must be assessed policy by policy. The company said the State was expected to pursue the case and the potential impact was uncertain. Other proceedings include an individual-plaintiff Texas insurance/securities matter; the former class was not recertified.
- Warrant fair-value decreases contributed $0.8 million to Q2 revenue and $1.2 million to first-half revenue; these are valuation gains rather than core insurance revenue. At June 30, the warrant liability was $0.4 million. On July 12, 2011, warrant exercises followed, including $1.8 million cash proceeds and a cashless exercise resulting in 1,989 Class A shares.
- Reserve and acquisition-cost estimates were adjusted in Q1: reserve reductions of $0.2 million for certain SPLIC policies and $0.1 million from refined estimates, alongside a $0.3 million decrease in deferred acquisition costs; the reported net-income impact was $50,237. Integrity Capital entities merged into CICA effective April 1, 2011; management anticipated reduced duplicate overhead and regulatory costs.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. The company stated that it had no off-balance-sheet arrangements and no material changes in contractual obligations from its 2010 Form 10-K.
Important facts for investors to verify
- Whether premium growth and segment profitability continue, particularly in international Life and Home Service operations.
- Investment portfolio yield, bond calls, interest-rate sensitivity, credit downgrades and the effect of unrealized valuation changes on equity.
- Reserve adequacy and assumptions for endowment products, claims, persistency and deferred acquisition costs.
- The financial and legal exposure from the Road Home case and remaining Texas litigation.
- Post-quarter warrant exercise details and resulting share dilution; also confirm the effect of the Integrity Capital merger on expenses.
- Insurance-subsidiary statutory capital and liquidity, including any restrictions on payments to the holding company.