Citizens, Inc. — 2012 Third-Quarter Form 10-Q
Business context and period: Citizens is an insurance holding company focused primarily on life insurance, with domestic and international operations, a home-service insurance business, and smaller non-insurance activities. This unaudited report covers the three and nine months ended September 30, 2012; balance-sheet comparisons are with December 31, 2011. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $52.2 | $48.3 | $148.7 | $141.7 |
| Insurance premiums | $43.0 | $40.3 | $123.6 | $117.4 |
| Net investment income | $8.1 | $7.5 | $23.3 | $22.3 |
| Income before tax | $4.0 | $2.8 | $6.5 | $9.7 |
| Net income | $2.9 | $2.1 | $4.8 | $6.7 |
| Class A diluted EPS | $0.06 | $0.04 | $0.10 | $0.13 |
| Comprehensive income | $7.9 | $12.0 | $15.2 | $24.5 |
- Q3 revenue rose about 8% and net income rose about 42% year over year. For the nine-month period, revenue rose about 5%, while net income declined about 28%. Net income as a share of revenue was approximately 5.6% in Q3 2012 versus 4.2% a year earlier, and 3.2% for the first nine months versus 4.7%.
- Q3 and nine-month premiums increased 6.6% and 5.3%, respectively, primarily from life insurance renewals. Nine-month life segment pretax income fell to $1.5 million from $3.9 million; Home Service pretax income increased to $5.8 million from $5.6 million.
- Insurance benefits and expenses were $48.1 million in Q3 and $142.2 million year to date. Nine-month reserve increases were $47.8 million, versus $39.7 million in 2011, reflecting low interest rates and growth in endowment products.
- Cash from operating activities was $47.6 million for the first nine months, compared with $43.6 million in 2011. Investing activities used $43.6 million, financing provided $2.6 million, and cash increased $6.6 million to $39.8 million.
- At September 30, total assets were $1.152 billion, total liabilities $887.7 million, and stockholders’ equity $264.0 million. Policy liabilities were $857.2 million, including $743.8 million of life reserves. The filing does not identify conventional interest-bearing debt as a material balance-sheet item.
- Total investments were $897.3 million; cash, cash equivalents and investments together were $937.1 million. Available-for-sale fixed maturities had fair value of $594.6 million; held-to-maturity fixed maturities were carried at $203.2 million, with disclosed fair value of $209.6 million. Unrealized gains on available-for-sale securities contributed to accumulated other comprehensive income of $29.5 million.
- Annualized yield on average invested assets was 3.74% for the nine-month period, down from 3.99% in the comparable 2011 period. The investment portfolio shifted away from U.S. government-sponsored enterprise securities toward municipal and corporate bonds.
Material changes, outlook and risks
- Q3 claims and surrenders increased 5.6%; the company attributed higher property claims in Home Service to Hurricane Isaac. Gross Isaac losses were about $751,000, with $251,000 recoverable from reinsurance. Death claims were also higher year to date, partly because 2011 included a $0.7 million release of incurred-but-not-reported claims liability.
- Management cited low interest rates as a pressure on investment yields and a driver of higher reserve development for newer policies. Endowment products, which require higher initial reserves, represented approximately 80% of international first-year premium through September 2012, compared with 75% a year earlier.
- Management said available liquidity and future cash flows were expected to meet funding needs; it reported no investment liquidations to fund operations during the first nine months. The company had no off-balance-sheet arrangements and reported no material change in contractual obligations.
- No quantified earnings or revenue guidance was provided. Management noted opportunities to expand international business and increase Mississippi sales, while identifying interest rates, investment performance, policyholder behavior, mortality and morbidity, foreign-market concentration, regulation, taxes and litigation as risks.
- Unusual or comparability items: 2011 figures were retrospectively adjusted for an accounting change that reduced December 2011 deferred acquisition costs by $11.8 million and equity by $7.6 million. 2012 year-to-date results also included prior-period actuarial adjustments: $0.5 million net of tax reducing DAC and increasing amortization, and $0.3 million net of tax reducing reserves. A $0.4 million commission expense reduction reflected amounts no longer considered payable. A $0.6 million gain came from sale of a previously impaired equity mutual fund.
- Legal contingencies include the Texas individual-plaintiff insurance/securities matter and Louisiana Road Home litigation related to Hurricane Katrina; management could not estimate possible losses. Three state agencies notified the company of planned unclaimed-property audits; potential payments, penalties, interest and related costs could not be estimated and could be substantial for the company’s size.
Important facts for investors to verify
- Whether premium growth can offset reserve growth, claim costs and lower reinvestment yields, particularly in the life segment.
- The credit quality and valuation of the investment portfolio after the shift toward municipal and corporate securities; no other-than-temporary impairments were recorded in the periods presented.
- Developments and potential exposure from the Texas and Louisiana litigation and the newly announced unclaimed-property audits.
- The effects of the prior-period DAC and reserve adjustments and the retrospective accounting change when comparing results with earlier filings.
- Statutory capital adequacy: the filing’s latest RBC ratios are as of December 31, 2011, ranging from 408% to 4,066% across the insurance subsidiaries; current-period ratios are not provided.