Citizens, Inc. — 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015; comparisons are primarily with 2014. Citizens is an insurance holding company focused on life, endowment, final-expense and limited property coverage. Approximately 72% of 2015 direct premiums came from international business, principally Latin America and the Pacific Rim.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $236.3 million | $230.2 million |
| Insurance premiums | $194.5 million | $188.5 million |
| Net investment income | $45.8 million | $41.1 million |
| Net realized investment losses | $5.5 million | $0.02 million |
| Loss before income taxes | $2.6 million | $2.8 million |
| Net loss | $3.6 million | $6.5 million |
| Operating cash flow | $87.2 million | $97.9 million |
| Total assets | $1.484 billion | $1.418 billion |
| Total liabilities | $1.242 billion | $1.159 billion |
| Stockholders’ equity | $242.5 million | $258.4 million |
| Net life insurance in force | $4.478 billion | $4.663 billion |
Revenue increased about 2.6%, while the net loss narrowed. The filing attributes the 2015 loss largely to investment impairments, tax-compliance-related costs and consulting expenses. The average investment yield rose to 4.38% from 4.21%. No conventional borrowings are listed in the consolidated balance sheet; liabilities are primarily insurance and policyholder obligations. A company-wide profit margin is not clearly stated.
Operating cash flow remained positive but declined year over year. Cash and cash equivalents were $82.8 million at year-end, and cash, cash equivalents and investments totaled $1.171 billion. Management reported no liquidity issues in 2015 and expected available liquidity and future cash flows to meet needs. All insurance subsidiaries exceeded minimum risk-based capital requirements.
Quarterly data show a fourth-quarter 2015 net loss of $2.2 million on revenue of $62.2 million, versus a fourth-quarter 2014 net loss of $11.2 million on revenue of $63.5 million.
Material changes versus 2014
- Premiums rose 3.2%; renewal premiums increased, while first-year life premiums declined 2.7%. Management noted the decline occurred in the final quarter amid a marketing leadership transition.
- Claims and surrenders increased 15.5% to $78.9 million, driven mainly by higher international life-policy surrenders. Management expects surrender activity to rise as older policies age.
- Other-than-temporary investment impairments totaled $5.4 million, compared with $0.4 million in 2014. The 2015 charges related to bond mutual funds and bond issuers, including utility and energy issuers.
- Equity fell by $15.8 million, reflecting the net loss and a decline in unrealized gains on available-for-sale securities.
- Life Insurance reported a $5.4 million pretax loss; Home Service reported $4.4 million pretax income. The 2014 MGLIC acquisition is included in 2015 results but was included for only part of 2014.
Outlook, risks and unusual items
- Strategy: Management was reviewing products and profitability, possible restructuring of international operations, technology modernization, cybersecurity and executive structure. It provided no quantitative earnings or revenue guidance.
- Low interest rates: Persistently low rates and callable investments can pressure investment spreads and returns. Citizens reduced discretionary policy dividends and is revisiting international product design and investment strategy; these changes could reduce demand.
- IRC tax-compliance exposure: The company estimated a $14.6 million after-tax reserve for life and annuity policy issues under IRC Sections 7702 and 72(s), against an estimated probable-loss range of $9.0 million to $45.5 million after tax. Actual amounts could exceed the range. Additional 2016 remediation, consulting and systems costs were also possible and not reliably estimable.
- Foreign-market and regulatory exposure: Citizens sells to foreign residents without foreign-country offices or local policy approvals. Its ongoing review identified a risk that some jurisdictions may require local authorization or policy approval, potentially disrupting sales. Political instability, currency controls and access to U.S. dollars are additional risks.
- Other contingencies: Louisiana, Arkansas and Texas authorities authorized unclaimed-property audits. The company said any Louisiana exposure could be substantial but could not estimate the amount. It was also enhancing its Bank Secrecy Act compliance program after identifying deficiencies.
- Financial reporting controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end due to a material weakness in management review of complex tax documentation. The auditor issued an adverse opinion on internal control, while giving an unqualified opinion on the financial statements. Remediation had begun.
- Concentration and portfolio risks: International premiums are concentrated in a limited number of countries; fixed maturities represented most investments. Interest-rate, credit, surrender, claims-reserve and reinsurance risks could affect earnings, capital or liquidity.
Most important facts for investors to verify
- How the IRC 7702/72(s) reserve develops, what amounts are ultimately payable, and whether additional remediation costs or policyholder surrenders arise.
- Progress in remediating the tax-related internal-control material weakness and whether controls are independently shown to be effective.
- Outcome and potential financial exposure of the Louisiana, Arkansas and Texas unclaimed-property audits, and the BSA compliance enhancements.
- Whether international sales, collections and persistency withstand regulatory, political and currency-related disruption, particularly in major markets.
- Trends in investment yield, impairments, policy surrenders, equity and statutory capital, including the effects of the portfolio’s municipal-bond concentration.
- Whether strategic changes and leadership transitions improve Life Insurance profitability without materially weakening new sales.