Citizens, Inc. — Q3 2013 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and nine months ended September 30, 2013, compared with the same 2012 periods. Citizens is an insurance holding company focused on life insurance, home service insurance and related non-insurance operations. It reported approximately $1.2 billion in assets and $5.0 billion of insurance in force.
Financial results and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $53.6m | $52.2m | $156.8m | $148.7m |
| Income before tax | $2.6m | $4.0m | $5.5m | $6.5m |
| Net income | $1.8m | $2.9m | $4.0m | $4.8m |
| Class A diluted EPS | $0.03 | $0.06 | $0.08 | $0.10 |
| Operating cash flow | Not separately reported | Not separately reported | $54.3m | $47.6m |
Premiums increased 1.9% in Q3 and 3.9% year to date, primarily from life insurance growth. Net investment income rose 17.9% in Q3 and 16.8% year to date; the nine-month annualized yield on average invested assets was 4.10%, versus 3.74% in 2012. Calculated net margin was approximately 3.4% for Q3 and 2.5% year to date in 2013, versus 5.6% and 3.2%, respectively, in 2012.
At September 30, total assets were $1,194.1m, total liabilities $946.4m and stockholders’ equity $247.7m. Cash and equivalents were $41.7m, down from $56.3m at year-end 2012; total investments were $932.4m. Policy liabilities, principally future policy benefit reserves, were $928.0m. The filing does not report conventional corporate debt as a material balance-sheet item. Operating cash flow was more than offset by $69.9m of investing outflows, leaving cash down $14.6m year to date.
Changes versus the prior comparable period
- Revenue grew, but net income fell 37% in Q3 and 17% for the first nine months, as benefits and expenses rose faster than revenue.
- Claims and surrenders increased 7.3% in Q3 and 3.7% year to date, driven primarily by surrender benefits. Reserve increases also rose, reflecting growth in endowment products and low-interest-rate assumptions.
- Net unrealized gains on fixed maturities declined to $12.0m from $51.5m at December 31, 2012, as interest rates increased. Nine-month other comprehensive loss was $19.4m after tax; comprehensive loss was $15.4m, compared with comprehensive income of $15.2m in 2012.
- Investment allocation shifted toward municipal securities: states and political subdivisions represented 50.9% of cash, cash equivalents and investments, versus 42.6% at year-end. Fixed maturities totaled $822.7m at carrying value.
- Life Insurance segment pretax income improved to $2.0m for nine months from $1.5m; Home Service pretax income declined to $4.4m from $5.8m. Other Non-Insurance Enterprises reported an $0.9m loss.
Outlook, risks, contingencies and unusual items
- No quantified earnings or revenue guidance was provided. Management said available liquidity and future cash flows are expected to meet needs; interim results are not necessarily indicative of full-year results.
- After quarter-end, Citizens entered a conditional $5.2m purchase agreement for Magnolia Guaranty Life Insurance Company, subject to due diligence. The target reported approximately $8.0m in admitted assets at December 31, 2012; the transaction was not completed as of the filing.
- Louisiana and Arkansas authorized unclaimed-property compliance audits. Potential payments, escheatment, penalties and interest cannot currently be estimated and could be substantial relative to the company’s size.
- New Colombian laws effective July 2013 may impede independent consultants; approximately 20% of nine-month international direct premiums came through Colombian consultants.
- A Texas lawsuit involving policies sold to non-U.S. residents is no longer proceeding as a class action; individual claims have not been pursued since 2009, but potential loss cannot be estimated. The Louisiana Road Home matter was settled for approximately $183,000 without material financial impact.
- Key exposures include interest-rate and investment-credit risk, mortality, persistency and surrender experience, reserve assumptions, litigation and regulatory changes, and concentration in Latin American and Pacific Rim markets. The company reported no OTTI for the periods and no off-balance-sheet arrangements. Insurance subsidiaries exceeded RBC minimums at December 31, 2012; reported ratios ranged from 421% to 2,380%.
Most important facts for investors to verify
- Whether investment income growth and premium gains can offset rising claims, reserve development and expenses, and whether lower earnings persist.
- How higher rates affect unrealized investment losses, portfolio income, asset-liability matching and policyholder surrenders.
- The outcome and potential cost of the unclaimed-property audits, and any developments in the Texas litigation.
- The impact of Colombian legal changes on premium collections and new business, and the final terms and completion prospects of the Magnolia acquisition.
- Current statutory capital and RBC ratios, which the filing provides only as of December 31, 2012.