Citizens, Inc. 10-Q Summary: Period Ended June 30, 2009
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for Citizens, Inc., an insurance holding company incorporated in Colorado. The report covers the quarterly period ended June 30, 2009, and the six-month period then ended. The company operates through three segments: Life Insurance, Home Service Insurance, and Other Non-Insurance Enterprises. As of August 7, 2009, the company had 46,980,411 shares of Class A common stock and 1,001,714 shares of Class B common stock outstanding.
Key Financial Metrics
| Metric (Six Months Ended June 30, 2009) | Value (in thousands) |
|---|---|
| Total Revenues | $90,087 |
| Net Income | $7,093 |
| Net Income Applicable to Common Stockholders | $4,745 |
| Basic EPS (Class A) | $0.10 |
| Net Cash Provided by Operating Activities | $21,971 |
| Total Assets | $890,480 |
| Total Liabilities | $690,558 |
| Stockholders' Equity | $190,064 |
| Cash and Cash Equivalents | $95,090 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 8.3% to $90.1 million for the six months ended June 30, 2009, compared to $83.2 million in 2008. This was driven by a 4.6% increase in life insurance premiums and a significant non-operating gain from the decrease in the fair value of warrants ($3.1 million in 2009 vs. a loss of $0.2 million in 2008).
- Net Income: Net income rose 23.9% to $7.1 million from $5.7 million in the prior year period. However, net income applicable to common stockholders remained relatively flat ($4.7 million vs. $4.7 million) due to accretion of deferred issuance costs on preferred stock.
- Investment Income: Net investment income decreased 4.2% to $14.3 million, attributed to a low interest rate environment and significant call activity in the fixed maturity portfolio, creating a time lag in reinvestment.
- Segment Performance:
- Life Insurance: Income before tax decreased 20.2% to $5.4 million, primarily due to lower investment income and a 15% drop in international new business.
- Home Service Insurance: Income before tax decreased 25.3% to $2.3 million, impacted by higher general expenses and reserve adjustments related to the ONLIC acquisition.
- Other Non-Insurance: Turned a profit of $1.7 million compared to a loss of $1.1 million in 2008, largely due to the warrant fair value adjustment.
Guidance, Outlook, and Risks
Management Commentary: Management anticipates that new insurance policy sales will remain at lower levels due to the global recession. The company is focusing on increasing new business through existing marketers and expanding into new countries. The company completed the acquisition of Integrity Capital Corporation (ICC) in Q1 2009 for approximately $9.0 million in stock.
Outlook: The company expects cash balances to decline as called fixed maturity securities are reinvested into longer-term bonds. Management believes available liquidity sources are adequate to meet future needs.
Risks and Contingencies:
- Legal Proceedings: The company is a defendant in a long-standing class action lawsuit regarding securities laws violations involving non-U.S. residents. The class was decertified in 2007, but plaintiffs are seeking recertification. An adverse judgment could have a material adverse effect.
- Regulatory Capital: Two subsidiaries (SPFIC and ONLIC) fell below the 200% Risk-Based Capital (RBC) threshold at year-end 2008. Capital contributions of $1.0 million each were made in Q1 2009 to address this. ONLIC remains at the "company action level" due to investment declines, and a merger with SPLIC is being pursued to resolve capital issues.
- Investment Risk: The portfolio holds significant fixed maturities exposed to interest rate risk. Approximately 60% of the fixed maturity portfolio is exposed to call risk. The company recorded $111,000 in other-than-temporary impairment (OTTI) charges in Q1 2009 but determined no OTTI existed for securities in unrealized loss positions as of June 30, 2009.
Investor Verification Checklist
- Warrant Liability Impact: Verify the sustainability of the $3.1 million revenue gain from the decrease in fair value of warrants, as this is a non-cash, non-operating item highly sensitive to stock price fluctuations.
- Regulatory Capital Status: Monitor the status of the proposed merger between ONLIC and SPLIC to resolve the RBC deficiency at ONLIC.
- Reinvestment Strategy: Assess the company's ability to reinvest the $95 million cash balance into higher-yielding assets as interest rates potentially rise, given the current low-yield environment.
- Legal Exposure: Track the progress of the Daccach class action lawsuit regarding potential recertification and its potential financial impact.
- International Sales: Confirm trends in international new business, which declined 15% year-over-year, to gauge the impact of the global recession on the core Life Insurance segment.