Citizens, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014; unaudited. Citizens is an insurance holding company focused primarily on life insurance, including international policies, and home-service final-expense insurance. The filing compares results with 2013.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $56.5 million | $53.6 million | $109.5 million | $103.2 million |
| Income before tax | $1.5 million | $1.8 million | $3.2 million | $2.9 million |
| Net income | $1.2 million | $1.3 million | $2.3 million | $2.2 million |
| Net income per Class A share, diluted | $0.03 | $0.03 | $0.05 | $0.05 |
| Operating cash flow | Not stated separately for the quarter | Not stated separately for the quarter | $43.4 million | $33.0 million |
- Q2 revenue increased about 5.4%, while net income declined about 12.0%; six-month revenue rose about 6.2% and net income about 8.5%. Net margin was approximately 2.0% for Q2 2014 versus 2.4% a year earlier, and 2.1% for the first half versus 2.1%.
- Insurance premiums were $46.3 million in Q2 and $89.3 million for the first half, up 5.7% and 5.4%, respectively. Net investment income was $10.1 million and $20.0 million, up 8.8% and 13.2%.
- Six-month claims and surrenders rose 5.3% to $33.1 million; the increase in future policy benefit reserves rose to $37.7 million from $34.9 million, primarily reflecting growth in endowment products.
Financial position, liquidity and capital
- At June 30, 2014, total assets were $1.298 billion, up from $1.216 billion at year-end 2013. Investments totaled $1.010 billion; cash and cash equivalents were $57.4 million.
- Policy liabilities were $1.001 billion, including $876.2 million of life insurance reserves. Total liabilities were $1.033 billion and stockholders’ equity was $265.4 million, compared with $245.8 million at year-end. Accumulated other comprehensive income increased to $24.0 million from $6.8 million, largely reflecting higher unrealized investment gains.
- No conventional borrowings are listed on the presented balance sheet. Annuity investment-contract liabilities were $40.1 million. Insurance obligations and reserves are the principal liabilities.
- First-half operating cash flow of $43.4 million was partly offset by $40.6 million of investing cash outflow; cash increased $2.8 million to $57.4 million. Management said available liquidity and expected cash flows should meet funding needs and that investments were not liquidated to fund operations.
- At year-end 2013, all insurance subsidiaries exceeded statutory risk-based capital minimums; reported ratios ranged from 421% to 2,363% of authorized control-level RBC. The filing reports no off-balance-sheet arrangements.
Material changes and management commentary
- Citizens completed its acquisition of Magnolia Guaranty Life Insurance Company (MGLIC) on March 7, 2014, for approximately $5.2 million cash. MGLIC contributed to home-service premiums; policy-data conversion was expected to be completed before the third-quarter reporting.
- Management attributed premium growth mainly to first-year and renewal life business, including international renewals, and to MGLIC. The annualized yield on average invested assets for the first half rose to 4.21% from 4.03%; management cited reinvestment at higher yields as interest rates modestly improved.
- Life Insurance pretax income for the first half increased to $1.1 million from $0.8 million, while Home Service pretax income declined to $2.9 million from $3.1 million. Other Non-Insurance Enterprises reported a $0.8 million loss.
- There is no specific financial guidance or quantified full-year outlook in the filing. Management cautioned that interim results are not necessarily indicative of full-year or future results.
Risks, contingencies and unusual items
- International business is exposed to foreign political, regulatory, currency-transfer and economic risks. Venezuela represented 22.8% of direct premiums for the first half; the filing cites civil unrest and inflation there as uncertainties.
- Three state authorities authorized an audit of Citizens and affiliates’ unclaimed-property compliance. Potential beneficiary payments, escheatment, penalties, interest and process changes could not be estimated and could be substantial relative to the company’s size.
- The filing describes a long-running Texas lawsuit involving 17 plaintiffs and alleged securities-law issues concerning policies sold to non-U.S. residents. The company says further individual claims appear unlikely; potential loss cannot be estimated.
- Investment and earnings risks include interest-rate and call risk, credit downgrades or defaults, unrealized-loss realization, and sensitivity of reserves and deferred acquisition-cost amortization to mortality, persistency, surrenders and investment returns. Fixed maturities were 88.4% of investments; 95.9% were investment grade, and no other-than-temporary impairments were recorded in the first half.
- Unrealized gains on fixed maturities increased substantially as market rates declined; these gains affect equity and comprehensive income but are not equivalent to realized earnings. The portfolio includes notable municipal exposure to Texas and Louisiana and special-revenue utility bonds.
- Management reported disclosure controls and procedures were effective at quarter-end, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the improvement in first-half investment income and portfolio yield persists, and how interest-rate changes affect investment spreads and unrealized gains.
- How MGLIC integration, policy-data conversion and acquired-business costs affect subsequent home-service results.
- Developments and any eventual estimated exposure from the unclaimed-property audits and the Texas litigation.
- Trends in international premiums, especially Venezuela, and the concentration of sales among foreign markets.
- Whether reserve growth, claims, surrenders and policy persistency remain consistent with management’s assumptions.