CITIZENS, INC. annual report, FY2022

Citizens, Inc. — 2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022. The filing also reports unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing. Citizens is an insurance holding company operating Life Insurance and Home Service Insurance segments, with international life business in more than 70 countries and domestic business in 32 states.

Financial performance and condition

Metric	2022	2021
Total revenue	$232.5 million	$250.5 million
Premium revenue	$173.7 million	$174.7 million
Net investment income	$65.4 million	$61.5 million
Investment-related gains (losses)	$(10.3) million	$11.0 million
Net income (loss)	$(6.6) million	$36.8 million
Class A diluted EPS	$(0.13)	$0.73
Operating cash flow	$56.9 million	$40.5 million

• Net loss margin was approximately 2.9% negative in 2022, compared with net income margin of approximately 14.7% in 2021; the comparison is heavily affected by investment valuation changes and a one-time tax benefit in 2021.
• Fourth-quarter 2022 revenue was $67.3 million and net income was $3.4 million, versus revenue of $69.9 million and net income of $38.1 million in fourth-quarter 2021. The prior-year quarter included most of a $43.8 million uncertain-tax-position release.
• Total assets were $1.57 billion. Cash and cash equivalents were $23.0 million; total investments were $1.34 billion, including $1.18 billion of available-for-sale fixed maturities. Citizens reported no debt at year-end.
• Stockholders’ equity fell to $1.0 million from $320.6 million, principally reflecting a $312.8 million after-tax other comprehensive loss on fixed maturities. The pretax unrealized loss on available-for-sale securities was $201.7 million. Management attributed the decline primarily to rising interest rates, reported no credit valuation allowance on fixed maturities, and said it intended to hold the bonds through recovery or maturity.
• Future policy benefit reserves and policy claims payable totaled $1.41 billion. Direct life insurance in force was $4.80 billion; net life insurance in force after reinsurance was $4.26 billion.
• Operating cash flow improved from 2021. Investing activities used $60.7 million, and cash declined by $4.3 million over the year. The $20 million revolving credit facility was unused at year-end and matures May 2024.

Changes versus 2021

• Revenue declined $18.0 million, mainly because investment-related results swung from $11.0 million of gains to $10.3 million of losses. Net investment income increased 6%, while total premiums declined about 1%.
• Insurance benefits paid or provided decreased 4% to $155.6 million. Death claims and surrender benefits fell, but matured endowment benefits rose to $31.5 million from $20.3 million; management expects maturities to continue increasing over the next several years.
• 2021 net income benefited from a $43.8 million tax benefit following expiration of the limitation period for a prior tax year, while that year also included a $12.6 million goodwill impairment. No goodwill impairment was recorded in 2022.
• Insurance issued increased 64% to $674.7 million, with higher policy counts and average face amounts. Life Insurance first-year premiums grew 4%; Home Service policy issuances rose approximately 20%, although first-year premiums in that segment declined amid inflationary pressure.
• 2022 included $10.3 million of investment-related losses, including $9.7 million from limited partnerships. Management characterizes such fair-value movements as volatile and not representative of core insurance operations.

Outlook, risks, contingencies, and unusual items

• The filing provides no formal earnings or revenue guidance. Management expects operating cash flow and invested assets to meet anticipated funding needs, while monitoring policyholder behavior and liquidity.
• Beginning January 1, 2023, new international policies are issued through the Puerto Rico subsidiary, CICA PR, rather than the Bermuda subsidiary. Management expects the Spanish-language U.S.-territory platform to support sales and retention. It also expects to contribute capital to CICA PR to maintain its required premium-to-surplus ratio.
• Interest-rate movements create opposing risks: higher rates raised reinvestment yields but reduced fixed-income fair values; lower rates could pressure investment spreads and reserve adequacy. Inflation may weaken sales and retention, particularly among lower- and middle-income customers.
• Liquidity risks include elevated surrenders and lump-sum elections as endowment policies mature. Approximately 17% of endowments in force were expected to mature over the next five years; policyholder election behavior is uncertain. Future policy benefit reserves are actuarial estimates subject to mortality, persistency, expense, and investment assumptions.
• International business exposes the company to foreign regulatory, political, currency-transfer, tax, and anti-money-laundering risks. The company says it has not registered or obtained product approval in most foreign markets and relies on independent consultants to comply with local requirements.
• A trade-secret and unfair-competition lawsuit remains a material contingency involving former personnel, distributors, and competitors. The trial was delayed after a defendant died shortly before trial; Citizens settled with one defendant. The filing does not provide a clear estimate of potential financial exposure.
• The company adopted the long-duration insurance accounting standard on January 1, 2023. Its estimates indicate a decrease in accumulated deficit of $50 million to $100 million, primarily from revised reserve assumptions and DAC amortization, with other comprehensive income also affected; actual transition effects may differ.
• Grant Thornton issued unqualified opinions on the 2022 financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at year-end.

Important facts for investors to verify

• Whether earnings and stockholders’ equity recover as unrealized bond losses reverse or mature, and how the 2023 accounting-standard transition changes reported reserves, equity, and earnings.
• Actual surrender and lump-sum maturity activity, particularly as endowment maturities rise, and the resulting effect on cash needs and investment sales.
• Capital contributions, solvency, and dividend capacity across regulated subsidiaries, including CICA PR’s growth and CICA International’s capital requirements.
• Progress in international and Home Service sales, policy retention, and the new distribution initiatives, compared with premium trends and inflation-related pressure.
• Developments and any financial consequences in the trade-secret litigation and foreign-market regulatory compliance matters.
• The company’s very limited year-end GAAP equity, despite reporting no debt, and the sensitivity of that equity to investment valuations and actuarial assumptions.