Citizens, Inc. — Q1 2015 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2015, compared with Q1 2014; balance-sheet figures are compared with December 31, 2014. Citizens is an insurance holding company focused primarily on life insurance, including policies sold to U.S. customers and residents of Latin America and the Pacific Rim. It reports Life Insurance, Home Service Insurance, and Other Non-Insurance Enterprises segments. Amounts below are in U.S. dollars.
Financial performance and position
- Revenue: $55.9 million, up 5.3% from $53.0 million. Premiums were $44.6 million, up 3.6%; net investment income was $11.1 million, up 11.7%.
- Profit: Pretax income fell to $0.35 million from $1.69 million; net income was $0.43 million versus $1.20 million. Diluted Class A EPS was $0.01 versus $0.02. Net margin was approximately 0.8%, compared with 2.3%.
- Benefits and expenses: Total benefits and expenses rose to $55.5 million from $51.3 million. Claims and surrenders increased 17.9%, to $19.4 million; other general expenses increased to $7.6 million from $6.5 million.
- Segments: Life Insurance reported a pretax loss of $0.22 million, versus $0.30 million income. Home Service pretax income declined to $0.72 million from $1.52 million. Other Non-Insurance Enterprises reported a $0.15 million loss.
- Cash flow and liquidity: Operating cash flow was $17.0 million, down from $20.5 million. Investing activities used $26.8 million; financing activities provided $0.6 million. Cash and equivalents were $41.4 million at quarter-end, down from $50.7 million at year-end.
- Balance sheet and investments: Total assets were $1.44 billion; total liabilities were $1.18 billion and stockholders’ equity was $262.1 million. Policy liabilities were $1.08 billion. Investments totaled $1.10 billion, including $965.2 million in fixed maturities. No material debt balance is presented in the filing.
- Margins and portfolio: Pretax margin was approximately 0.6%, versus 3.2% in Q1 2014. The annualized yield on average invested assets was 4.26%, versus 4.22%. Fixed maturities were approximately 97% investment grade; net unrealized gains on fixed maturities were $53.0 million.
Material changes versus Q1 2014
- Premium and investment-income growth did not offset higher claims and expenses. Management attributed the claims increase to higher death claims in both insurance segments and increased life-segment surrenders; it said mortality experience remained within expected levels.
- Life-segment premiums benefited from international new and renewal business. Home Service premium growth partly reflected three months of MGLIC results, versus one month in Q1 2014 following its March 2014 acquisition.
- General expenses included about $0.5 million of tax-compliance-related consulting costs. MGLIC also contributed a full quarter of expenses, compared with one month in the prior-year quarter.
- Other comprehensive income was $3.3 million, compared with $9.2 million, largely reflecting lower unrealized gains on available-for-sale securities.
Outlook, risks, and unusual items
- Management provided no quantified earnings or revenue guidance. It said available liquidity and expected future cash flows should meet funding needs; operating cash flows have historically funded insurance operations, and the company did not liquidate investments in Q1.
- Tax qualification matter: A substantial portion of policies were identified as not qualifying for favorable federal tax treatment under IRC Sections 7702 and 7702A. The company recorded an $11.4 million after-tax reserve at December 31, 2014, the low end of its estimated $11.4 million–$40.0 million after-tax range. Domestic products are intended to be remediated; certain products sold to non-U.S. residents will not be remediated. Further liabilities may exceed the reserve or range. Additional 2015 system and consulting costs were estimated at $0.5 million–$0.8 million, but could not be reliably estimated.
- The company identified potential deficiencies in its Bank Secrecy Act program and is addressing them; it could not estimate any resulting loss. State-authorized unclaimed-property audits are underway. Potential Louisiana exposure could be substantial, but no amount could be estimated.
- Management reported disclosure controls were effective, while continuing remediation of a material weakness in the actuarial function identified at year-end 2014.
- Key risks include interest-rate and credit exposure, foreign-market concentration and regulation, policyholder surrenders and claims-reserve estimates, litigation and regulatory matters, and the unresolved tax and compliance issues. No other-than-temporary investment impairments were recognized in Q1.
Most important facts for investors to verify
- Progress, costs, and final exposure from the IRC 7702/7702A policy issue, including whether the reserve or stated range changes.
- Results and potential liabilities from the Louisiana, Arkansas, and Texas unclaimed-property audits, and remediation of BSA program deficiencies.
- Whether higher death claims and life-policy surrenders persist, and the resulting effects on earnings, reserves, and cash flows.
- Investment portfolio credit quality, interest-rate sensitivity, municipal concentration, and the effect of callable bonds on future yields.
- Completion and effectiveness of remediation for the actuarial-function material weakness.