Citizens, Inc. — Q1 2018 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2018, compared with Q1 2017; balance-sheet figures are compared with December 31, 2017. Citizens is an insurance holding company focused on life insurance, including policies sold to foreign residents, and home-service insurance. It reported approximately $1.6 billion of assets and $4.4 billion of insurance in force.
Key financial results
| Metric | Q1 2018 | Q1 2017 or prior date |
|---|---|---|
| Total revenue | $57.4 million | $59.6 million |
| Insurance premiums | $44.0 million | $45.4 million |
| Net investment income | $13.8 million | $12.7 million |
| Realized investment gains (losses), net | $(0.6) million | $1.3 million |
| Income before tax | $2.6 million | $0.9 million |
| Federal income tax expense (benefit) | $2.5 million | $(1.1) million |
| Net income | $37,000 | $2.1 million |
| Operating cash flow | $22.0 million | $21.6 million |
Margins. Calculated from reported figures, pretax margin was approximately 4.5% versus 1.6%; net margin was approximately 0.1% versus 3.4%. The effective tax rate was 98.6% in Q1 2018, compared with (118.0)% in Q1 2017, reflecting tax-compliance estimates and uncertain-tax-position items.
Financial position and liquidity. At March 31, total assets were $1.645 billion, total liabilities $1.436 billion, and stockholders’ equity $209.4 million, versus $223.5 million of equity at year-end. Policy liabilities were $1.318 billion. Cash and cash equivalents were $41.2 million, down from $46.1 million. Investing cash outflow was $27.1 million and financing cash inflow was $0.3 million, leaving cash down $4.8 million for the quarter. The filing reports no off-balance-sheet arrangements and no material change in contractual obligations; it does not identify conventional corporate debt as a key liability. Management said available liquidity and future cash flows should meet needs, while noting potential exposure to policyholder withdrawals and maturities.
Investments totaled $1.310 billion; fixed maturities were $1.212 billion, or 89.7% of cash, cash equivalents and investments. The annualized portfolio yield was 4.31%, versus 4.22% a year earlier. Net unrealized gains on fixed maturities fell to $25.9 million from $46.0 million at year-end, primarily amid higher interest rates; accumulated other comprehensive income was $16.4 million, down from $26.3 million.
Material changes and operating performance
- Premiums declined 3.0%, mainly from lower first-year and renewal premiums in Life. Direct international life premiums declined to $31.2 million from $32.5 million; applications from Venezuela weakened. Life insurance issued fell to $58.8 million from $73.0 million.
- Net investment income rose 8.1%, attributed primarily to growth in invested assets. The 2017 comparison included a $1.1 million gain on sale of an office building; Q1 2018 instead included investment losses, including a $225,000 impairment on one bond issuer and $302,000 of fair-value losses on equity securities still held.
- Income before tax improved to $2.6 million from $0.9 million. Life segment pretax income rose to $5.9 million from $1.7 million, helped by a $7.2 million reduction in the estimated IRC compliance liability. Home Service shifted to a pretax loss of $1.8 million from income of $0.3 million, with lower revenue and higher general expenses.
- Total benefits and expenses declined to $54.9 million from $58.6 million. Claims and surrenders fell 2.6%; general expenses fell 35.9%, chiefly due to the liability estimate reduction. These expense comparisons therefore include a significant estimate-related benefit.
Outlook, risks and unusual items
- Management was continuing its review of domestic and international strategy, products, technology, operations and investment portfolio. The company planned to re-enter the domestic life market in 2019. Its Bermuda subsidiary received a long-term insurance license in February 2018; the company expected to operate international business through it beginning in 2018.
- In April 2018, Citizens announced it would stop accepting life insurance applications from Brazilian residents or citizens. Management did not anticipate a material impact, citing less than 6% of premiums and less than 1% of in-force policies associated with Brazilian residents or citizens as of year-end 2017. Further strategic changes remained possible.
- IRC compliance contingency: the company estimated a $5.1 million after-tax liability for policies not qualifying under IRC Sections 7702 and 72(s), down from $12.3 million at year-end. Its estimated range was $4.2 million to $45.5 million after tax; actual costs could exceed the reserve or stated range. The IRS had not responded to the 2017 closing-agreement submission for certain domestic policies. Citizens expected to submit additional offers in 2018 and anticipated further related costs.
- Other legal and regulatory matters: a putative securities class action seeking unspecified damages remained pending, with a motion to dismiss outstanding. The company also disclosed an SEC investigation focused on internal controls and disclosure controls; it reported no fraud allegations and could not predict timing or outcome. A Louisiana unclaimed-property audit could result in substantial payments, but the company could not reasonably estimate any amount.
- Controls: management concluded disclosure controls were ineffective because material weaknesses in internal control over financial reporting remained unremediated. Remediation work was ongoing; the filing reported no material control changes during the quarter.
- Principal business risks include foreign political, economic, currency and insurance-regulatory conditions; concentration in Latin America and the Pacific Rim; interest-rate, credit and reinvestment risk; policyholder surrenders and endowment maturities; and uncertainty in actuarial reserves, tax estimates and litigation outcomes. Venezuela’s deteriorating conditions were already associated with declining premiums.
Important facts for investors to verify
- Progress and final resolution of the IRC 7702/72(s) matters, including IRS closing agreements, remediation costs and the adequacy of the $5.1 million reserve.
- Whether material weaknesses are remediated and whether subsequent filings report effective disclosure and financial-reporting controls.
- Developments in the securities lawsuit, SEC investigation and Louisiana unclaimed-property audit.
- Execution and financial effects of the Bermuda transition, the 2019 domestic-market re-entry plan and the Brazil application cutoff.
- Premium trends in international markets, especially Venezuela, and policyholder behavior as older endowment contracts mature.
- Investment portfolio performance, unrealized losses, credit quality and reinvestment yields as securities mature or are called.