Citizens, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited consolidated results; monetary amounts below are in millions unless noted. Citizens is an insurance holding company focused on life insurance and home service insurance. It reported approximately $4.6 billion of direct insurance in force.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $59.8 | $61.5 | $173.9 | $180.7 |
| Net income (loss) | $(7.9) | $2.0 | $(12.5) | $(6.3) |
| Basic/diluted EPS, Class A | $(0.16) | $0.04 | $(0.25) | $(0.13) |
| Income (loss) before tax as % of revenue | (13.7%) | 3.5% | (5.7%) | 0.5% |
Revenue and earnings: Q3 premiums were $44.1 million, down 4.1%; nine-month premiums were $126.9 million, down 4.0%. Net investment income was essentially flat at $15.0 million in Q3 and rose to $45.1 million for nine months from $44.2 million. Q3 general expenses increased to $19.4 million from $11.5 million, principally reflecting change-in-control expenses. Claims and surrenders increased 14.6% in Q3 and 10.6% year to date.
Cash flow and liquidity: Operating cash flow was $34.0 million for the first nine months, versus $50.9 million in 2019. Investing activities used $39.2 million; financing activities provided $1.3 million. Cash and equivalents were $42.3 million at September 30, down from $46.2 million at year-end 2019. Management said it expected cash needs over the next 12 months to be met from insurance operations and invested assets and reported no liquidity issues during the nine-month period.
Balance sheet and investments: Total assets were $1.844 billion and stockholders’ equity was $296.8 million, compared with $1.745 billion and $259.8 million at December 31, 2019. Fixed-maturity securities available-for-sale were $1.445 billion, with $136.5 million of net unrealized gains. Policy liabilities totaled $1.433 billion, including $1.239 billion of life reserves. The filing does not report conventional borrowings; it reports $12.3 million of operating lease liabilities and $60.6 million carrying value for annuity investment-contract liabilities. All regulated insurance subsidiaries exceeded applicable minimum capital requirements.
Changes, outlook, and risks
- Drivers of the year-over-year loss: Q3 results included $8.8 million funded to a Rabbi Trust for former CEO Geoffrey Kolander’s separation payment, $1.2 million for accelerated vesting of his restricted stock units, and change-in-control-related legal expenses. Nine-month results also reflected lower premiums, higher claims and surrenders, and fewer realized investment gains than in 2019, partly offset by lower reserve increases and income-tax expense.
- Business and segment trends: Life Insurance pretax income was $5.5 million in Q3 and $9.7 million for nine months; Home Service Insurance recorded pretax losses of $1.0 million and $3.2 million, respectively. Other non-insurance enterprises recorded losses of $12.7 million in Q3, mainly related to the change in control. Management reported Q3 Life segment premiums 39% above Q2, but first-year Life premiums remained below Q3 2019. The company plans to begin selling Life Insurance products in the U.S. Hispanic market in 2021; this is a plan, not quantified earnings guidance.
- COVID-19 and catastrophe exposure: Management cited disrupted sales and collections, increased Home Service death claims, and uncertainty around future claims, surrenders, investment values, and liquidity. Hurricane Laura increased property claims; the reinsurance contract provides up to $11 million per event after a $0.5 million retention. Subsequent Hurricanes Delta and Zeta were being assessed, and additional catastrophe losses could exceed available reinsurance or require added capital.
- Tax contingency: For tax withholding and reporting issues involving certain policies sold to non-U.S. persons, the company reported a probability-weighted estimated liability range of $7.3 million to $52.5 million after tax. It had paid $8.0 million to the IRS, but stated that payment did not close the matter and the IRS could revise the liability. Actual costs could exceed the estimate.
- Governance and litigation: Following the July 2020 change in control, the former CEO resigned and the vice chairman became interim CEO. Litigation between the company/board and the controlling Riley Foundation concerned board appointments and governance. A court stipulation constrained certain significant actions pending further proceedings. The filing also describes ongoing trade-secret litigation with former executives and others.
- Capital commitments and accounting: The company had commitments to fund up to $95 million for private equity and other investments, and an $8.8 million separation payment due in February 2021. Adoption of the credit-loss standard reduced opening accumulated equity by $0.4 million. A new long-duration insurance accounting standard, then expected to take effect in 2023 if the proposed deferral were finalized, was expected to have a material financial-statement impact.
Investor verification priorities
- Track the IRS review and whether the tax contingency reserve is adequate relative to the disclosed $7.3–$52.5 million range.
- Separate recurring operating costs from change-in-control and CEO separation expenses; verify the timing and amount of remaining payments.
- Monitor Life premium trends, new-business production, persistency, and the planned 2021 U.S. Hispanic-market launch.
- Assess COVID-19 mortality, policy surrenders and collections, and catastrophe claims against reinsurance limits, including any later hurricane developments.
- Follow the Foundation governance litigation, interim CEO succession, and the $95 million investment commitments for possible effects on strategy, liquidity, and capital.