Citizens, Inc. 10-Q Summary: Quarter Ended September 30, 2010
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for Citizens, Inc., a Colorado corporation and insurance holding company, for the period ended September 30, 2010. The Company operates primarily through three segments: Life Insurance, Home Service Insurance, and Other Non-Insurance Enterprises. Its core business involves issuing ordinary whole life insurance and endowment policies to foreign residents (primarily Latin America and the Pacific Rim) and domestic middle-income households. As of the reporting date, the Company achieved a milestone of exceeding $1.0 billion in total assets.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2010) | Value (in thousands) |
|---|---|
| Total Revenues | $135,447 |
| Net Income | $6,456 |
| Net Income Applicable to Common Stockholders | $6,456 |
| Basic EPS (Class A) | $0.13 |
| Net Cash Provided by Operating Activities | $39,476 |
| Total Assets | $1,000,399 |
| Total Liabilities | $763,449 |
| Stockholders' Equity | $236,950 |
| Cash and Cash Equivalents | $65,366 |
Material Changes vs. Prior Period
- Revenue: Total revenues increased slightly to $135.4 million for the nine months ended September 30, 2010, compared to $134.9 million in the prior year. Premium income grew across all lines, driven by favorable persistency in the international market.
- Profitability: Net income decreased to $6.5 million from $9.7 million in the same period of 2009. This decline was primarily due to a significant reduction in the non-taxable "decrease in fair value of warrants" revenue ($0.4 million in 2010 vs. $3.1 million in 2009) and an increase in the effective tax rate to 34% from 22%.
- Investment Income: Net investment income increased to $23.9 million from $21.7 million, attributed to a larger asset base. However, the annualized yield on average invested assets declined to 4.66% from 4.82% due to significant call activity on fixed maturities in a low-interest-rate environment.
- Realized Gains: Net realized gains dropped to $0.6 million from $2.8 million in the prior year, reflecting fewer sales of securities and a net realized loss of $0.1 million in the third quarter.
- Reserves: The Company corrected two valuation database discrepancies resulting in a $0.6 million decrease to reserves, partially offset by a $0.5 million increase due to modified reserving assumptions for new policies.
Outlook, Risks, and Contingencies
- Investment Strategy: Management anticipates continued call activity on fixed maturity securities due to low interest rates, which may result in lower yields as proceeds are reinvested. Cash balances increased to $65.4 million and are expected to be reinvested in fixed maturities.
- Legal Proceedings: The Company is a defendant in a long-standing lawsuit (Citizens Insurance Company of America v. Daccach) regarding the sale of life insurance policies to non-U.S. residents. The Texas Supreme Court reversed a class certification in 2007, and the trial court denied recertification in December 2009. Plaintiffs must now proceed individually.
- Regulatory Capital: While all subsidiaries met Risk-Based Capital (RBC) minimums as of September 30, 2010, the subsidiary CNLIC failed to meet minimum capital and surplus requirements in Florida and Mississippi as of June 30, 2010. CNLIC voluntarily suspended sales in these states. A capital contribution of 150,000 shares of Class A stock was made to CNLIC in September 2010.
- Market Risk: The Company is exposed to interest rate risk, with 89% of its portfolio in fixed maturities. A decrease in interest rates has increased the fair value of these assets but reduced reinvestment yields.
Investor Verification Checklist
- Warrant Liability Impact: Verify the volatility of the "decrease in fair value of warrants" line item, which significantly distorts year-over-year earnings comparisons.
- Reinvestment Yield: Monitor the Company's ability to reinvest proceeds from called bonds at yields that maintain profitability, given the current low-interest environment.
- Subsidiary Solvency: Track the status of CNLIC's capital restoration and the potential impact of suspended licenses in Florida and Mississippi on future premium growth.
- Reserve Adequacy: Review the impact of the recent valuation database corrections and assumption changes on future reserve requirements and profitability.
- Legal Exposure: Assess the potential financial impact of the remaining individual plaintiffs in the Daccach litigation.