Citizens, Inc. — Form 10-Q Summary
Business context and reporting period
Citizens, Inc. is an insurance holding company focused on life insurance, including U.S.-dollar-denominated policies sold to international customers, and home-service final-expense insurance in Louisiana, Mississippi and Arkansas. This unaudited filing covers the quarter and nine months ended September 30, 2019; comparative 2018 results were restated for an income-tax accounting error. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $61.5 million | $61.2 million | $180.7 million | $178.4 million |
| Income (loss) before tax | $2.1 million | $5.6 million | $0.8 million | $4.0 million |
| Federal income tax expense | $0.1 million | $12.7 million | $7.1 million | $13.7 million |
| Net income (loss) | $2.0 million | $(7.1) million | $(6.3) million | $(9.6) million |
| Class A EPS | $0.04 | $(0.14) | $(0.13) | $(0.19) |
Q3 pretax margin was about 3.5%, compared with 9.1% in the prior-year quarter; net margin was about 3.3%, versus negative 11.6%. For the nine-month periods, pretax margin was about 0.5% versus 2.3%, and net margin was negative 3.5% versus negative 5.4%.
- Premiums fell 3.0% in Q3 to $46.0 million and 3.9% year to date to $132.3 million, mainly from lower Life Insurance renewal premiums. Q3 Life Insurance first-year premiums rose 31.0% year over year.
- Net investment income increased 10.7% in Q3 to $15.0 million and 7.2% year to date to $44.2 million. The annualized portfolio yield for the first nine months was 4.34%, compared with 4.29%.
- Claims and surrenders rose 14.7% in Q3 and 17.9% year to date, principally reflecting higher surrender benefits and matured endowments; management said experience was within expected levels.
- At September 30, total assets were $1.738 billion, total liabilities $1.477 billion and stockholders’ equity $261.3 million. Cash and cash equivalents were $47.1 million. Available-for-sale fixed maturities had a $1.370 billion fair value and $91.4 million of net unrealized gains.
- Operating cash flow was $50.9 million for the nine months, down from $65.2 million. Investing activities used $48.1 million; cash increased $1.7 million from year-end to $47.1 million. The filing describes no liquidity issues. It does not report conventional borrowings; policy liabilities totaled $1.379 billion.
Changes versus the prior comparable period
Revenue was nearly flat in Q3 as higher investment income largely offset lower premiums. Q3 pretax income declined, while net results turned positive primarily because tax expense was far lower than in the restated 2018 quarter. Year-to-date net loss narrowed, but pretax income declined. Investment gains included a $5.5 million first-quarter gain on sale of the former headquarters and a $3.1 million second-quarter impairment of the Citizens Academy property. Unrealized investment gains increased equity substantially compared with December 31, 2018.
Segment pretax income in Q3 was $2.3 million for Life Insurance and $0.9 million for Home Service Insurance; Other Non-Insurance Enterprises recorded a $1.1 million loss. Year to date, segment pretax income was $6.8 million and $0.3 million, respectively, while Other Non-Insurance Enterprises lost $6.3 million.
Outlook, risks and unusual items
- No formal financial guidance or quantified earnings outlook is provided. Management describes priorities as operational excellence, growth in existing markets, and development of new capabilities. It reported improving international new-business production since Q1 while noting lower renewals and fewer policies issued overall.
- The company recorded a $9.9 million after-tax estimated liability for policy tax-compliance matters. The disclosed probability-weighted after-tax range is $6.0 million to $52.5 million; actual costs could exceed the estimate and even the range. The IRS accepted closing agreements in June 2019, related payments were made in July, and required corrective steps were completed by the September deadline.
- Interest-rate and reinvestment risk are significant: fixed maturities represented most invested assets, and lower market yields could pressure investment spreads. Policyholder lump-sum choices on maturing endowment contracts—about 41% of insurance in force—could create liquidity needs. International business is exposed to foreign political, economic, regulatory and currency-access risks, including deteriorating conditions in Venezuela.
- Disclosure controls were deemed ineffective at September 30 because a material weakness in controls over significant and unusual transactions remained unremediated. Management expected remediation by December 31, 2019.
- A trade-secret and unfair-competition lawsuit involving former personnel and other parties was ongoing; the company appealed denial of a preliminary injunction. The ultimate outcome was not predictable.
- The 2018 comparative results were restated for an immaterial error involving tax effects of the 2018 international-policy novation. An actuarial valuation-system conversion also affected reserve and acquisition-cost accounting in the periods presented. The company expects the long-duration insurance accounting standard effective in 2022 to have a material impact.
Important facts for investors to verify
- Subsequent updates to the $9.9 million tax-compliance estimate, the $6.0–$52.5 million range, and any IRS settlement developments.
- Progress in remediating the material weakness and whether controls are subsequently judged effective.
- Renewal premiums, new-business production, policy persistency, surrenders and endowment maturity elections.
- Portfolio credit quality, unrealized gains, reinvestment yields and liquidity under higher-than-expected policyholder withdrawals.
- Developments in the pending litigation and the impact of foreign-market conditions and regulation on international premiums and collections.