Citizens, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2011; comparisons are with the three and nine months ended September 30, 2010 unless otherwise noted. Financial amounts below are in millions of dollars unless stated otherwise. The unaudited statements consolidate Citizens and its wholly owned subsidiaries.
Business context
Citizens is an insurance holding company focused primarily on life insurance, serving U.S. customers and international policyholders, particularly in Latin America and the Pacific Rim. Its reportable segments are Life Insurance, Home Service Insurance, and Other Non-Insurance Enterprises. At September 30, 2011, the company reported approximately $1.1 billion in assets and $5.2 billion of insurance in force.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $48.5 | $45.5 | $142.3 | $135.4 |
| Insurance premiums | $40.3 | $38.1 | $117.4 | $109.9 |
| Net investment income | $7.7 | $7.3 | $22.9 | $23.9 |
| Income before tax | $3.0 | $3.0 | $10.5 | $9.7 |
| Net income | $2.2 | $1.7 | $7.2 | $6.5 |
| Class A basic and diluted EPS | $0.05 | $0.03 | $0.15 | $0.13 |
Calculated net margin was approximately 4.6% for Q3 2011 versus 3.7% in Q3 2010, and 5.1% for the first nine months versus 4.8%. Q3 revenue grew about 6.8% and nine-month revenue about 5.1%; nine-month net income increased about 12.2%.
- Premium growth was led by Life Insurance. Nine-month life premiums increased to $85.0 million from $78.4 million, while Home Service premiums rose to $32.4 million from $31.6 million.
- Claims and surrenders declined to $14.8 million in Q3 and $44.6 million year to date, from $15.7 million and $46.4 million. Management cited favorable claims experience and releases of incurred-but-not-reported claim reserves.
- Insurance benefits and expenses overall increased to $131.8 million for nine months from $125.7 million. The increase in future policy benefit reserves was a major factor, partly reflecting stronger endowment sales, which build reserves faster.
- Nine-month segment pretax income was $4.9 million in Life Insurance, down from $5.8 million; $5.5 million in Home Service, up from $4.5 million; and $0.2 million in Other Non-Insurance Enterprises, versus a $0.6 million loss.
Financial position, cash flow and capital
- Total assets were $1,074.8 million at September 30, 2011, versus $986.5 million at year-end 2010. Stockholders’ equity rose to $254.5 million from $227.6 million; total liabilities were $820.2 million.
- Cash and cash equivalents were $64.4 million, up from $49.7 million at year-end. Cash, cash equivalents and investments totaled $856.7 million, versus $775.4 million.
- For the first nine months, operating cash flow was $43.6 million versus $39.5 million; investing activities used $32.4 million versus $24.4 million; and financing provided $3.5 million versus $1.6 million. Ending cash increased by $14.7 million to $64.4 million.
- Policy liabilities totaled $784.4 million, principally future life policy benefit reserves of $679.3 million. The filing presents no conventional borrowings balance; insurance obligations are the principal liabilities. The company reported no off-balance-sheet arrangements.
- All insurance subsidiaries exceeded minimum risk-based capital requirements. September 30, 2011 adjusted capital-to-control-level RBC ratios were CICA 973%, CNLIC 2,665%, SPFIC 318%, and SPLIC 1,300%.
Material changes, outlook and risks
- Investment yields: Nine-month net investment income fell 4.1% despite growth in invested assets; annualized yield on average invested assets declined to 4.11% from 4.32%. Management said recent quarterly yield declines appeared to be leveling off, while noting continued sensitivity to interest rates and reinvestment yields.
- Portfolio and valuation: Citizens reinvested $24.0 million of bond calls and prepayments into bond mutual funds. Fixed maturities were 81.2% of investments and cash at quarter-end. Net unrealized gains on fixed maturities were $29.9 million, versus unrealized losses of $3.8 million at year-end 2010, reflecting in part falling interest rates. No other-than-temporary impairments were recognized in the first nine months.
- Credit ratings: Following the U.S. sovereign downgrade by Standard & Poor’s, 253 securities with a carrying value of approximately $301.9 million shifted from AAA to AA. The company also reported that 2.5% of fixed maturities were rated BB or lower, primarily due to issuer downgrades; it said it does not purchase below-investment-grade securities.
- Accounting change: The company planned to adopt revised insurance acquisition-cost guidance on January 1, 2012, retrospectively. It estimated a $10–$13 million reduction in deferred acquisition costs, recorded as an adjustment to beginning retained earnings, and a $0.5–$1.0 million increase in pretax earnings. These were estimates, not reported-period results.
- Transactions: On August 1, SPLIC assumed approximately $4.5 million of reserves from two insurers in rehabilitation and received approximately $4.6 million in cash; management described the transactions as not material. Integrity Capital subsidiaries were merged into CICA effective April 1; management expected reduced duplicative overhead and regulatory reporting expenses.
- Litigation: In the Louisiana Road Home class action, a July 2011 Fifth Circuit ruling requires policy-by-policy review of anti-assignment clauses. The company could not estimate a possible loss or range. In a separate Texas matter involving international policies, the class was not recertified, no individual cases had been pursued, and potential losses were also not estimable.
- Guidance: The filing gives no numerical earnings or revenue guidance. Management stated that available liquidity and projected cash flows were expected to meet funding needs; it had not liquidated investments to fund operations during the first nine months.
- Other risks: Key exposures include interest-rate and call/reinvestment risk, investment credit deterioration, mortality and persistency experience, concentration in Latin America and the Pacific Rim, regulatory requirements, and litigation. The filing reports no updates to the risk factors in the 2010 Form 10-K.
Important facts for investors to verify
- Whether premium growth and improved claims experience continue, particularly given rising policy-reserve costs and the increasing share of endowment sales.
- The effect of lower reinvestment yields, callable bonds, and portfolio credit exposure on future investment income and capital.
- The final impact and accounting treatment of the estimated deferred-acquisition-cost adjustment upon adoption in 2012.
- Developments and potential exposure in the Road Home litigation and the Texas individual-claims matter, where loss estimates are unavailable.
- Statutory capital and liquidity at each insurance subsidiary, especially SPFIC’s 318% RBC ratio, and any restrictions on subsidiary payments to the holding company.