Citizens, Inc. — 2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014. This is an annual report; fourth-quarter figures are separately identified where relevant. Citizens is an insurance holding company focused on life insurance, endowment, final-expense and limited property products. Its international life business primarily serves residents of Latin America and the Pacific Rim; domestic and home-service operations serve U.S. markets.
Key financial results and condition
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $230.2 million | $213.6 million |
| Net income (loss) | $(6.5) million | $4.8 million |
| Basic and diluted EPS, Class A | $(0.13) | $0.10 |
| Operating cash flow | $97.9 million | $81.4 million |
| Total assets | $1.418 billion | $1.216 billion |
| Total liabilities | $1.159 billion | $970.5 million |
| Stockholders’ equity | $258.4 million | $245.8 million |
- Revenue rose 7.8%, led by 7.0% growth in insurance premiums and a 12.2% increase in net investment income. Investment income was $41.1 million; portfolio yield increased to 4.21% from 4.11%.
- Pre-tax loss was $2.8 million versus pre-tax income of $6.9 million in 2013. Net margin was approximately (2.8%), versus 2.2% in 2013. Federal income tax expense was $3.7 million despite the pre-tax loss.
- Claims and surrenders rose 6.0% to $68.3 million. Future policy benefit reserve increases rose to $82.8 million from $74.2 million, reflecting endowment growth and lower long-term investment yield assumptions.
- Operating cash flow increased, but included substantial working-capital and tax-related movements, including changes in tax receivables and deferred taxes. Cash and cash equivalents were $50.7 million at year-end; cash, cash equivalents and investments totaled $1.116 billion.
- Fixed maturities were $932.2 million, or 83.6% of cash, cash equivalents and investments; 96.6% were investment grade, and 81.4% were rated A or higher. Total gross unrealized losses on available-for-sale securities were $3.4 million. A 100-basis-point rate increase was estimated to reduce fixed-maturity fair value by about $60.6 million.
- No conventional debt balance is clearly identified in the provided filing text. Reported liabilities are principally policyholder obligations and other operating liabilities. The company reported no liquidity issues in 2014 and said expected liquidity and future cash flows would meet its needs.
- Life Insurance reported a $4.9 million pre-tax loss, compared with $2.1 million income in 2013. Home Service income declined to $2.9 million from $6.0 million. The $5.2 million MGLIC acquisition was completed in March 2014 and contributed to Home Service results.
Material changes and unusual items
- IRC policy qualification issue: In the first quarter of 2015, the company identified that a substantial portion of policies did not qualify for favorable federal tax treatment under IRC Sections 7702 and 7702A. The 2014 results include costs related to the issue. The company disclosed an estimated range of $11.4 million to $40.0 million after tax, with $11.4 million recorded/reserved; actual costs could exceed the range. Management plans to remediate domestic products but said it would not remediate certain foreign endowment and endowment-like products.
- Other general expenses increased to $36.6 million from $26.6 million, primarily due to the tax-compliance matter. The filing also cites an uncertain tax position and a highly unusual effective tax rate of (134.0%).
- Year-end equity increased mainly because of improved unrealized gains on securities; other comprehensive income was $19.1 million, while net income was negative.
- Fourth-quarter 2014 revenue was $63.5 million and net loss was $11.2 million, compared with fourth-quarter 2013 revenue of $56.9 million and net income of $0.8 million.
- The company acquired MGLIC for approximately $5.2 million. It also settled the Andrade lawsuit for $183,000 in March 2015. State audits of unclaimed-property compliance were underway, and potential amounts could not be estimated.
Outlook, risks and controls
- No quantified earnings or revenue guidance is provided. Management expects low interest rates to remain a challenge, potentially pressuring investment spreads, reserves and deferred acquisition costs. It noted that investment yields had risen modestly in 2014.
- Key exposures include foreign political, regulatory and currency-control risks; concentration in international premium sources; interest-rate, credit and callable-security risk; mortality, lapse and surrender experience; reinsurance availability and counterparty performance; and regulatory or tax changes.
- The company disclosed deficiencies in its Bank Secrecy Act program and was enhancing controls. Louisiana, Arkansas and Texas authorities authorized unclaimed-property audits; possible payments, penalties and interest were not estimable.
- Management concluded disclosure controls were effective, but identified a material weakness in internal control over financial reporting related to executive review of the actuarial function and personnel competency. The independent auditor issued an adverse opinion on internal control, while giving an unqualified opinion on the financial statements. Remediation included replacing the chief actuary and adding actuarial resources.
- Insurance subsidiaries exceeded minimum risk-based capital requirements. Management stated that the 2014 statutory reserve assumptions did not indicate a premium deficiency.
Investor verification priorities
- Track the final cost, implementation and policyholder impact of the IRC 7702/7702A remediation, including whether the recorded reserve is adequate and whether policy surrenders increase.
- Review remediation progress and auditor assessments of the actuarial-control material weakness, and monitor the disclosed BSA program deficiencies.
- Follow outcomes of unclaimed-property audits and any resulting liabilities, especially in Louisiana, where the company warned potential exposure could be substantial.
- Assess the sustainability of investment income and portfolio values given rate sensitivity, municipal concentration, credit quality and unrealized gains or losses.
- Monitor segment profitability, claims and surrender trends, reserve development, statutory capital and dividend capacity at insurance subsidiaries.
- Confirm the status and financial consequences of open tax matters, including the uncertain tax position and the large deferred tax asset.