Citizens, Inc. — Q1 2019 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2019, compared with Q1 2018. Citizens is an insurance holding company focused on life insurance, including international policies marketed primarily in Latin America and the Pacific Rim, and home-service insurance in the southern U.S. It reported approximately $1.7 billion of assets and $4.8 billion of insurance in force.
Financial results and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $62.4 million | $57.4 million; up 8.7% |
| Insurance premiums | $42.5 million | $44.0 million; down 3.6% |
| Net investment income | $13.8 million | $13.8 million; up 0.2% |
| Realized investment gains (net) | $6.0 million | $0.6 million net loss |
| Income before tax | $2.0 million | $2.6 million |
| Federal income tax expense | $5.8 million | $2.5 million |
| Net income (loss) | $(3.8) million | $0.04 million |
| Operating cash flow | $17.9 million | $22.0 million |
| Cash and cash equivalents | $34.1 million at March 31 | $45.5 million at December 31, 2018 |
| Total assets / stockholders’ equity | $1,665.6 million / $211.9 million | $1,615.6 million / $187.7 million at December 31, 2018 |
Net margin was approximately -6.1% versus 0.1% in Q1 2018; pretax margin was approximately 3.2% versus 4.5%. The unusually high 289.3% effective tax rate reflected, among other items, annualized tax-rate adjustments, uncertain tax positions and $0.7 million of tax expense from CICA Ltd. Subpart F income. The filing reports no conventional borrowings; policy liabilities were $1,363.4 million, including $55.8 million of annuity investment-contract liabilities. The filing text does not provide a standalone debt figure.
At March 31, fixed-maturity securities were $1,295.5 million, or 90.0% of cash, cash equivalents and investments; cash, cash equivalents and investments totaled $1,440.6 million. Net unrealized gains on fixed maturities were $36.2 million, versus $7.3 million at year-end. Operating cash flow was positive, but cash declined $11.4 million during the quarter after investing and financing cash flows.
Changes versus the prior period
- Revenue growth was more than accounted for by a $5.5 million realized gain on sale of the former Austin headquarters; premiums declined and investment income was essentially flat.
- Premium declines reflected lower first-year and renewal life premiums. Life segment pretax income fell to $4.6 million from $5.9 million; Home Service pretax loss improved to $0.3 million from $1.8 million. Other non-insurance loss widened to $2.3 million from $1.5 million.
- Claims and surrenders increased 8.9%, notably from higher surrender benefits and matured endowments. Total insurance benefits nevertheless declined to $36.5 million from $37.1 million, mainly due to lower reserve increases.
- Other general expenses rose to $14.1 million from $6.5 million. The comparison is affected by a $7.2 million reduction in the prior-year period’s estimated tax-compliance liability, as well as higher 2019 executive compensation.
- Annualized portfolio yield declined to 4.08% from 4.31% a year earlier. Management cited low rates, callable bonds and reinvestment in higher-rated, generally lower-yielding mortgage-backed securities.
Outlook, risks and unusual items
- Tax-compliance contingency: The company recorded an estimated $10.0 million after-tax liability related to life-policy qualification and tax issues. Its probability-weighted estimated range is $6.0 million to $52.5 million after tax; actual exposure could exceed the reserve or stated range. IRS submissions remain unresolved, and the company expects to remediate certain domestic policies and settle potential liabilities related to novated international policies.
- Business and market risks: Management is reviewing international and domestic strategies, including potential market withdrawals, new products, technology modernization, Bermuda operations and investment strategy. Brazil applications were discontinued; Venezuela’s political, economic and infrastructure conditions pose sales and collection risks. No quantified earnings guidance was provided.
- Liquidity and investment risks: Management reported no liquidity issues and expects available sources and future cash flows to meet needs, but older endowment contracts will mature over coming years. Lump-sum elections could require asset sales; reinvestment of maturing or called bonds at lower yields could reduce spreads and profitability. The company reported no bond impairment in Q1 2019.
- Capital and lease matters: U.S. insurance subsidiaries were above RBC minimums and CICA Ltd. exceeded Bermuda solvency requirements. A new Austin office lease is expected to commence after construction in 2020, with average monthly payments of approximately $112,340; $13.5 million of minimum payments for signed but uncommenced leases was excluded from the reported lease-liability maturity table.
- Controls: Disclosure controls were deemed ineffective because an existing material weakness involving accounting for significant and unusual transactions remained unremediated. Management expected remediation by December 31, 2019.
Important facts for investors to verify
- Progress and final cost of the IRS and policy-remediation matters, including whether the $10.0 million reserve remains adequate.
- Underlying earnings and cash generation excluding the one-time headquarters-sale gain, and the drivers of the unusually high tax expense.
- Premium production, policy issuance and persistency in international markets, especially Venezuela, following the Brazil withdrawal and Bermuda novation.
- Endowment maturity and surrender behavior, liquidity needs, and investment yields as callable securities mature or are reinvested.
- Completion and effectiveness of the material-weakness remediation, and implementation of the actuarial valuation system conversion.