Citizens, Inc. — Q3 2014 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2014, compared with the same 2013 periods. Citizens is an insurance holding company focused on life insurance, including international policies, U.S. life insurance, and home-service insurance. It completed the acquisition of Magnolia Guaranty Life Insurance Company (MGLIC) in March 2014; MGLIC’s results are included in the home-service segment.
Financial performance
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $57.2 | $53.6 | $166.8 | $156.8 |
| Net premiums | $46.9 | $43.7 | $136.3 | $128.5 |
| Net investment income | $10.4 | $9.6 | $30.4 | $27.2 |
| Income before tax | $3.3 | $2.6 | $6.5 | $5.5 |
| Net income | $2.3 | $1.8 | $4.7 | $4.0 |
| Class A diluted EPS | $0.04 | $0.03 | $0.09 | $0.08 |
- Revenue grew 6.7% in Q3 and 6.4% for the first nine months; premiums increased 7.3% and 6.0%, respectively. Management attributed premium growth mainly to first-year and renewal life business, plus MGLIC.
- Net income increased approximately 27% in Q3 and 17% year to date. Calculated net margins were about 4.1% versus 3.4% in Q3 and 2.8% versus 2.5% for nine months.
- For nine months, pretax income by segment was $2.3 million for Life Insurance, $4.9 million for Home Service Insurance, and a $0.7 million loss for Other Non-Insurance Enterprises.
- Claims and surrenders rose 4.6% year to date, while the increase in policy reserves reflected growth in endowment products, which require higher initial reserves. Commission expense also increased; other general expenses declined slightly.
Financial position, cash flow, and liquidity
- At September 30, 2014, total assets were $1.318 billion, up from $1.216 billion at year-end 2013. Total liabilities were $1.052 billion and stockholders’ equity was $266.8 million, versus $245.8 million at year-end.
- Cash and cash equivalents were $57.0 million, compared with $54.6 million at year-end. Total cash, cash equivalents, and investments were $1.086 billion; fixed maturities were $911.9 million.
- Policy liabilities totaled $1.023 billion, including $894.9 million of life insurance future policy benefit reserves. The filing does not present a conventional corporate debt balance; annuity investment-contract liabilities were $42.1 million carrying value.
- Nine-month operating cash flow was $66.9 million, versus $54.3 million in 2013. Investing activities used $66.1 million, versus $69.9 million; financing activities provided $1.6 million. Cash increased $2.4 million during the period.
- Management said operating cash flows and available liquidity were expected to meet needs and reported that the company did not liquidate investments to fund insurance operations during the first nine months. Available-for-sale marketable debt securities represented 66.2% of investments, as stated in the liquidity discussion.
- The annualized yield on average invested assets increased to 4.22% from 4.10% for the comparable nine-month period. Fixed-maturity net unrealized gains were $40.2 million, up from $5.1 million at December 31, 2013, primarily reflecting lower interest rates.
Material changes, outlook, and risks
- MGLIC was acquired for approximately $5.2 million in cash. Its reported contribution through September 30 was $1.7 million of revenue and $0.2 million of net income. Initial purchase accounting remained provisional pending completion of data validation and conversion work.
- Management provided no specific earnings or revenue guidance. It said reinvestment yields were rising modestly and anticipated available liquidity and future cash flows would be adequate. Interim results are not necessarily indicative of full-year or future results.
- Investment risks include interest-rate sensitivity, callable bonds, credit exposure and potential impairment. The company recorded $0.3 million of other-than-temporary impairments in 2014; it also reported $2.8 million of gross unrealized losses on available-for-sale securities.
- Approximately 97.4% of fixed maturities were investment grade, while the portfolio included exposure to municipal securities, utilities, and U.S. government-sponsored enterprises. Management reported no direct sovereign European debt exposure and no derivatives, subprime, or collateralized debt obligation exposure.
- Unclaimed-property audits authorized by Louisiana, Arkansas, and Texas could result in payments, escheatment, penalties, or interest. The company said potential Louisiana exposure could be substantial for SPLIC, but it could not estimate the amount; it believed Arkansas and Texas exposure would not be material.
- Other key risks include reliance on international markets and independent distribution, foreign political/regulatory and currency-transfer risks, policy surrenders and reserve assumptions, reinsurance availability, and litigation. The filing also describes potential claims related to a technical error in an older stock-plan registration statement; a replacement registration statement became effective in January 2013.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes in contractual obligations or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether MGLIC’s policy-data conversion and provisional acquisition accounting were finalized, and whether integration delivers expected benefits.
- Developments and any estimable exposure from the Louisiana unclaimed-property audit, as well as the Arkansas and Texas audits.
- Trends in international premium collections, policy persistency and surrenders, especially given the company’s foreign-market concentration.
- Investment portfolio credit quality, interest-rate/call risk, realized losses, and changes in unrealized gains or losses.
- Insurance-subsidiary statutory capital and dividend capacity. The filing reports year-end 2013 risk-based-capital ratios, but does not provide updated September 2014 ratios.