CITIZENS, INC. quarterly report, Q1 FY2022

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Citizens, Inc. — Q1 2022 Form 10-Q Summary

Period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. The interim financial statements are unaudited. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless otherwise noted.

Business context and reporting period

Citizens is an insurance holding company operating through Life Insurance and Home Service Insurance segments. Products include international endowment and whole-life policies, domestic life and credit insurance, and final-expense and property insurance. The filing reports two operating segments and separate corporate-support operations.

Financial results and position

  • Revenue: $55.4 million, essentially flat versus $55.5 million in Q1 2021. Premiums were $39.4 million, up 0.9%; net investment income was $15.5 million, up 1.6%. Investment-related results shifted to a $0.6 million loss from a $0.3 million gain.
  • Profit: Net loss was $1.3 million, or $0.03 per Class A share, versus a $3.6 million loss, or $0.07 per share. Pretax loss improved to $1.0 million from $2.7 million. Approximate net margin improved to negative 2.4% from negative 6.4%.
  • Benefits and expenses: Total benefits and expenses declined to $56.3 million from $58.2 million. Claims and surrenders fell to $28.4 million from $30.6 million; reserve increases rose to $6.6 million from $5.2 million. General expenses declined to $11.0 million from $11.4 million.
  • Cash flow: Operating activities provided $12.1 million, versus $1.8 million in Q1 2021. Investing activities used $19.8 million and financing activities provided $1.7 million. Cash and equivalents ended the quarter at $21.3 million, down from $27.3 million at year-end.
  • Assets and equity: Total assets were $1.733 billion, down from $1.855 billion; stockholders’ equity was $196.9 million, down from $320.6 million. The principal reported equity pressure was the shift in accumulated other comprehensive income from a $117.5 million gain to a $6.7 million loss, reflecting fixed-maturity securities’ fair-value changes.
  • Investments and interest rates: Total investments were $1.513 billion. Fixed-maturity securities were $1.355 billion, with $46.9 million of gross unrealized losses and $41.0 million of gross unrealized gains. Management attributed the portfolio decline and unrealized losses primarily to interest-rate and market movements; no fixed-maturity credit valuation losses were recorded. The weighted-average fixed-maturity portfolio rating was A.
  • Debt and liquidity: The company reported no debt and had not drawn on its $20 million revolving credit facility, which matures May 5, 2024. Management said operating cash flows and invested assets were expected to meet cash needs. Insurance subsidiaries were above minimum regulatory capital requirements; CICA International was above its 120% Target Capital Level.
  • Insurance measures: Direct insurance in force was $4.6 billion. Insurance issued increased 2.5% to $97.3 million, as Home Service growth more than offset lower Life Insurance production.

Material changes versus Q1 2021 or year-end 2021

  • Net loss narrowed by $2.2 million, mainly reflecting lower death claims and corporate/general expenses, partly offset by investment losses and higher reserve increases.
  • Death claim benefits decreased 21.5% and surrender benefits decreased 4.3%. Management attributed lower death claims in part to elevated COVID-19-related claims in the prior-year quarter and described retention efforts as helping reduce surrenders.
  • Life Insurance pretax results improved to $1.0 million income from a $0.1 million loss. Home Service Insurance loss widened to $1.2 million from $0.8 million, reflecting investment losses and higher general expenses.
  • Life Insurance first-year premiums declined 19.8%; renewal premiums increased 2.4% across the company. Home Service premiums increased 3.9%, supported by renewal collections.
  • Fixed-maturity fair value declined from $1.471 billion at year-end to $1.355 billion at quarter-end. The 10-year U.S. Treasury yield rose from 1.52% to 2.32% over that period; net unrealized fixed-maturity results moved from a $126.9 million gain to a $5.8 million loss.

Outlook, risks, contingencies and unusual items

  • The filing provides no numerical earnings or revenue guidance. Management expects available operating cash flow and capital resources to meet funding needs, while monitoring policyholder behavior and claims.
  • Management said the impact of COVID-19 remains uncertain. Potential effects include higher mortality claims, disruption to premium collection and distribution, increased lapses or surrenders, and investment-market volatility.
  • Interest-rate changes affect the fair value of the company’s substantial fixed-maturity portfolio. Management stated that the unrealized losses were non-credit-related, it did not intend to sell the securities, and it was not more likely than not that it would be required to sell before recovery; the company will continue monitoring for potential credit impairment.
  • Endowment contracts represented 40% of insurance in force; approximately 13% of endowments in force were expected to mature over the next five years. Large lump-sum elections could create liquidity pressure, while leaving funds on deposit could affect profitability if guaranteed rates exceed investment yields.
  • CICA International had $36.8 million of unfunded limited-partnership and other investment commitments. The company also has a keep-well agreement requiring up to $10 million of capital support if needed to maintain CICA International’s required capital level; no contribution was then required.
  • The $20 million credit facility is secured by substantially all company assets, subject to exceptions, and includes customary covenants. The company reported no borrowings and no covenant violations at March 31, 2022.
  • The company plans to adopt the long-duration insurance accounting standard (ASU 2018-12) on January 1, 2023, using a January 1, 2021 transition date. The impact was not yet estimable; management said adoption could materially affect accumulated other comprehensive income and future earnings patterns.
  • Legal and regulatory proceedings were referenced to the 2021 Form 10-K, with no material developments reported this quarter. Management reported no significant subsequent events and no material changes to previously disclosed risk factors.

Important facts for investors to verify

  1. Whether the improvement in claims and surrenders persists, particularly as COVID-19 effects and endowment maturities evolve.
  2. Whether Life Insurance sales recover following lower first-year premiums, distributor disruption in Venezuela, and the March 2022 launch of a new whole-life product.
  3. How rising rates, credit conditions, and unrealized fixed-maturity losses affect investment income, statutory capital, and future earnings.
  4. Whether Home Service Insurance can improve profitability after its quarterly loss widened, and whether reported growth in insurance issued converts into renewal premiums and earnings.
  5. The eventual transition impact of ASU 2018-12 and the status of limited-partnership funding commitments and insurance-subsidiary capital requirements.