Citizens, Inc. — 2019 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2019; the filing also provides unaudited fourth-quarter results. Citizens is an insurance holding company focused on international U.S.-dollar life and endowment policies, U.S. home-service final-expense insurance, and limited property coverage. It reported approximately $1.7 billion of assets and $4.2 billion of net life insurance in force.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $250.5 million | $244.0 million |
| Insurance premiums | $184.3 million | $187.9 million |
| Net investment income | $59.5 million | $54.2 million |
| Net realized investment gains | $5.2 million | $0.1 million |
| Income before federal income tax | $5.7 million | $2.0 million |
| Net loss | $1.4 million | $11.1 million |
| Operating cash flow | $72.2 million | $84.6 million |
| Total assets | $1.745 billion | $1.616 billion |
| Total liabilities | $1.485 billion | $1.428 billion |
| Stockholders’ equity | $259.8 million | $187.7 million |
| Book value per share | $5.17 | $3.75 |
Consolidated investment portfolio yield was 4.36%, compared with 4.17%. Fixed maturities were $1.378 billion, or 90.2% of cash, cash equivalents and investments; 98.8% were investment grade. No conventional debt balance is clearly identified in the supplied filing text; liabilities are predominantly insurance and policyholder obligations. The filing does not provide a single consolidated operating-margin measure.
Fourth-quarter 2019 revenue was $69.8 million and net income was $5.0 million, or $0.10 per Class A share, versus a $1.4 million net loss and a $0.03 per-share loss in fourth-quarter 2018.
Material changes versus the prior comparable period
- Revenue increased 2.7%, principally as higher investment income and realized gains offset lower premiums. Premiums declined 1.9%, mainly from lower Life Insurance renewal premiums.
- Net investment income rose 9.8%; average portfolio yield increased 19 basis points. Claims and surrenders rose 17.3%, including higher surrenders and matured endowments.
- Net loss narrowed from $11.1 million to $1.4 million. The 2019 loss included $7.1 million of federal tax expense despite pretax income of $5.7 million.
- Equity increased 38.4%, largely because after-tax unrealized gains on available-for-sale securities increased $71.8 million as market interest rates declined. This was primarily an other-comprehensive-income valuation change, not operating earnings.
- Operating cash flow fell to $72.2 million from $84.6 million, attributed primarily to lower premium revenue and higher policyholder benefits.
- Life Insurance pretax income was $11.8 million, slightly below $12.1 million. Home Service Insurance improved to $1.2 million pretax income from a $2.5 million loss.
Outlook, commentary, risks and unusual items
- Management reported repricing international products in 2019 in response to low interest rates and expected to expand distribution and issue enhanced products in 2020. No quantified earnings or revenue guidance was provided.
- The company continues a customer-focused strategic realignment and is evaluating modernization of its legacy policy-administration technology. The actuarial-system conversion reduced reserves by about $2.3 million and deferred acquisition costs by about $1.4 million before tax in 2019.
- A significant tax-compliance contingency remains: the company recorded an estimated $10.0 million net-of-tax liability; its probability-weighted estimated range is $7.4 million to $52.5 million. IRS review, acceptance of corrected returns, negotiations and remediation remain uncertain; actual costs could exceed the stated range. Separate IRS closing-agreement payments and corrective steps for certain domestic policies were completed in 2019.
- International sales are a major exposure: foreign markets represented approximately 71% of total direct premiums. The company disclosed uncertainty over the application and enforcement of foreign insurance laws and is exploring alternatives to its current model in some jurisdictions. Political and currency instability, sanctions, and market exits could impair sales and collections.
- Low interest rates, callable securities and reinvestment at lower yields may pressure investment income and spreads. About 51% of fixed maturities were callable, including 17% callable within a year. Endowment maturities also present liquidity uncertainty: approximately 10% of endowments in force were expected to mature over the next five years.
- COVID-19 was identified as a potential risk to Pacific Rim sales and operations; the filing stated its impact was uncertain. The company reported no liquidity issues in 2019 or 2018 and said available liquidity and expected cash flows were anticipated to meet needs. Insurance subsidiaries exceeded applicable minimum capital requirements.
- The company recorded a $5.5 million gain on sale of its former Austin headquarters and a $3.1 million impairment on its Citizens Academy facility held for sale. A lawsuit alleging unfair competition and trade-secret misappropriation was in discovery, with trial expected in fourth-quarter 2020; the company’s appeal of the denial of a preliminary injunction remained pending.
- The founder’s Class B share transfer to a charitable foundation remained subject to estate proceedings and regulatory approvals; timing and potential governance effects were uncertain. The company paid no cash dividends and did not expect to do so in the foreseeable future.
- Management and the auditor reported effective internal control over financial reporting at year-end 2019. A material weakness identified in 2018 concerning significant and unusual transactions was addressed through new controls. Deloitte issued an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Progress and final costs of the IRS tax matter, including whether exposure could exceed the recorded reserve or disclosed range.
- Developments in foreign-market regulatory compliance, sales restrictions and premium collection, particularly in major markets such as Colombia, Venezuela and Taiwan.
- Persistency, surrenders and endowment maturity elections, and their effect on claims, cash needs and profitability.
- Portfolio credit quality, callable-bond reinvestment yields, unrealized gains and sensitivity to interest-rate changes.
- Execution and cost of the technology modernization and strategic initiatives, and sustained new-business production in both insurance segments.
- Cash generation, statutory capital and dividend restrictions at insurance subsidiaries, plus developments in the litigation and Class B control transfer.