Citizens, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. Citizens is an insurance holding company focused on life insurance, with international sales primarily to residents of Latin America and the Pacific Rim, U.S. domestic life insurance, and home-service final-expense and limited property insurance. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and condition
| Metric | FY 2011 | FY 2010 | Change / context |
|---|---|---|---|
| Total revenue | $195.0 | $191.2 | Up 2.0% |
| Insurance premiums | $161.4 | $152.1 | Up 6.1% |
| Net investment income | $31.0 | $30.1 | Up 2.9%; portfolio yield fell to 4.03% from 4.32% |
| Net realized investment gains | $0.8 | $8.0 | Lower primarily because gains from sales of previously impaired securities declined |
| Income before tax | $11.2 | $19.6 | Down 43.1%; pretax margin about 5.7%, versus 10.3% |
| Net income | $8.4 | $15.5 | Down 46.0%; net margin about 4.3%, versus 8.1% |
| Class A diluted EPS | $0.17 | $0.32 | Down from $0.32 |
| Operating cash flow | $64.3 | $60.5 | Up; investing cash outflow was $85.1 |
| Total assets | $1,091.3 | $986.5 | Up 10.6% |
| Total liabilities / equity | $835.6 / $255.7 | $758.9 / $227.6 | Equity increased 12.3%; liabilities are principally policy obligations |
Cash and cash equivalents were $33.3 million at year-end, down from $49.7 million. Cash, cash equivalents and investments totaled $872.5 million, including $741.8 million in fixed maturities. Management reported no liquidity issues in 2011 or 2010 and expected available liquidity and future cash flows to meet needs. The filing does not report conventional borrowings as a material funding source or provide a debt balance.
Insurance in force increased to $5.24 billion from $5.12 billion. Statutory risk-based capital ratios were above minimum requirements for all insurance subsidiaries: CICA 628%, CNLIC 4,066%, SPFIC 408%, and SPLIC 1,298%.
Fourth-quarter 2011 revenue was $52.7 million, versus $55.7 million in fourth-quarter 2010; net income was $1.1 million versus $9.1 million. Fourth-quarter 2011 Class A basic EPS was $0.01 and diluted EPS was $0.02. The filing’s quarterly table does not explain the year-over-year fourth-quarter earnings decline.
Material changes and management commentary
- Premium growth was driven mainly by life insurance, including higher renewal premiums and improved new-business production. International endowment products represented about 69% of new first-year life premiums, up from 56% in 2010.
- Life Insurance pretax income fell to $5.8 million from $13.9 million; Home Service pretax income declined to $5.7 million from $6.7 million. Other Non-Insurance Enterprises reported a $0.3 million pretax loss.
- Despite higher average invested assets, falling reinvestment yields pressured investment returns. The company said it expected the low-rate environment to persist and noted that lower projected long-term investment returns increased current-year policy reserves by about $0.8 million and reduced DAC by about $1.4 million.
- Claims and surrenders declined 1.6% to $60.1 million, including favorable claims development and an approximately $0.8 million release of incurred-but-not-reported liability. Future policy benefit reserves increased by $58.3 million, partly reflecting growth in endowment business.
- Net realized gains fell to $0.8 million and included $0.6 million of impairment on an Arkansas investment property and $0.07 million on an American Airlines bond after its bankruptcy filing. Fixed-maturity gross unrealized losses declined to $3.0 million from $13.7 million.
- Management cited possible acquisition opportunities amid industry consolidation but provided no quantified earnings, revenue, or capital guidance. A new international endowment product had limited sales to date; management anticipated it could be well received.
- The 2011 acquisition of reserve liabilities under assumption-reinsurance agreements added about $4.5 million of reserves and $4.6 million of cash; the filing deemed the transactions immaterial. Integrity Capital entities were merged into CICA effective April 1, 2011.
Risks, contingencies, and unusual items
- Interest rates and investments: Low rates, callable securities and reinvestment at lower yields may pressure spreads and earnings. A modeled 100-basis-point rate increase would reduce the fair value of fixed maturities by approximately $36 million. About 36.6% of invested assets were in U.S. government-sponsored corporations and agencies; Fannie Mae and Freddie Mac remained in conservatorship.
- Geographic and regulatory concentration: A substantial share of business comes from foreign residents, particularly in Latin America and the Pacific Rim. Foreign regulatory action, political or economic disruption, currency controls, or restrictions on the Stock Investment Plan could impair sales and plan participation. The company states that it has not obtained foreign-jurisdiction legal advice on these matters.
- Reserving and acquisition-cost estimates: Mortality, persistency, lapse, investment-return and expense assumptions affect policy reserves, DAC and acquired customer-relationship assets. Adverse experience could require higher reserves, accelerated amortization or impairment.
- Litigation: The Road Home Litigation involving SPFIC remains pending; the State has not specified the claims at issue, and the company cannot estimate possible loss. The Texas Andrade matter is proceeding, if at all, on an individual rather than class basis; no individual cases had been pursued since 2009. Loss estimates for both matters were unavailable. Other Katrina/Rita-related individual suits were described as immaterial.
- Other risks: Reinsurer failure or higher reinsurance costs, competition and distribution-channel retention, regulatory changes, legacy information systems, tax-asset recoverability, and reliance on senior management were highlighted. The Class B shareholder controls election of a board majority; no cash dividends on common stock were expected in the foreseeable future.
- Accounting change: The company adopted ASU 2010-26 on January 1, 2012 and estimated a retrospective reduction in DAC of $10 million to $13 million, with an estimated $0.5 million to $1.0 million increase in pretax earnings. These are estimates, not 2011 results.
Key investor verification points
- Reconcile the sharp decline in 2011 earnings with lower realized gains, reserve and DAC assumption changes, and the quarter-by-quarter results; specifically investigate the unusually high fourth-quarter 2010 comparison.
- Review the durability of premium growth and persistency, especially by foreign country and product, and the increasing contribution of endowment policies to reserve growth.
- Assess exposure to sustained low rates, callable bond reinvestment, government-sponsored entities, municipal holdings and the portfolio’s interest-rate sensitivity.
- Track statutory capital, permitted subsidiary distributions, liquidity, and the effect of the estimated 2012 DAC accounting adjustment.
- Monitor developments and potential exposure in the Road Home and Andrade litigation, as well as foreign regulatory scrutiny of policy sales and the Stock Investment Plan.