CIA

Business Context and Reporting Period

Citizens, Inc. is an insurance holding company specializing in ordinary whole life insurance for niche markets. The company operates through three primary segments: Life Insurance (international and domestic), Home Service Insurance (final expense and property in Louisiana and Arkansas), and Other Non-insurance Enterprises. This filing covers the fiscal year ended December 31, 2008.

Key Financial Metrics

Segment Performance (2008):

• Life Insurance: Revenue of $105.5 million; Pre-tax income of $0.7 million.
• Home Service Insurance: Revenue of $42.2 million; Pre-tax loss of $(9.0) million.
• Other Non-insurance: Pre-tax loss of $(4.4) million.

Material Changes vs. Prior Period

• Net Loss: The company reported a net loss of $15.7 million in 2008, a reversal from a net income of $16.6 million in 2007. This represents a 194.9% decrease in earnings.
• Investment Impairments: The primary driver of the loss was a $23.5 million other-than-temporary impairment (OTTI) charge on equity mutual funds due to the global financial crisis. Additionally, two debt securities were permanently impaired for $0.3 million.
• Warrant Liability: A loss of $2.7 million was recorded due to the increase in the fair value of warrants associated with Series A preferred stock.
• Catastrophic Losses: The Home Service segment incurred property losses of $0.5 million from Hurricane Gustav and $0.3 million from Hurricane Ike, along with $0.5 million in reinstatement premiums.
• Revenue Decline: Total revenues decreased 13.5% to $146.7 million, largely due to the investment write-downs offsetting a 3.3% increase in premium income.

Guidance, Outlook, Risks, and Unusual Items

• Market Conditions: Management expects continued downward pressure on equity positions in 2009 due to the severe global recession and market volatility. Persistency of insurance policies may decrease as economic conditions deteriorate.
• Acquisitions: The company acquired Ozark National Life Insurance Company (ONLIC) in Q4 2008 for $8.0 million to expand its Home Service segment into Arkansas. In Q1 2009, it acquired Integrity Capital Corporation for $8.4 million.
• Capital Adequacy: Two subsidiaries, SPFIC and ONLIC, had total adjusted capital below minimum Risk-Based Capital (RBC) standards. The company plans to contribute $1.0 million to each to remediate this, pending regulatory approval.
• Legal Proceedings: The company is a defendant in a class action lawsuit regarding securities laws violations related to international policies (Daccach v. Citizens). The class was decertified in 2007, but plaintiffs are seeking recertification. Additionally, SPFIC is involved in "Road Home Litigation" regarding Hurricane Katrina/Rita claims.
• Preferred Stock: The company must redeem Series A preferred stock by July 12, 2009. Redemption may be made in cash or Class A common stock depending on market conditions.

Investor Verification Checklist

• Investment Portfolio Quality: Verify the composition of the remaining equity portfolio and the likelihood of further OTTI charges in 2009.
• Reinsurance Solvency: Confirm the financial strength of reinsurers, as the company retains only the first $100,000 of risk on most policies and relies on ceded reinsurance for the remainder.
• Legal Exposure: Monitor the status of the Daccach class action recertification and the Road Home Litigation, as adverse outcomes could be material.
• Regulatory Capital: Track the approval and execution of the capital contributions to SPFIC and ONLIC to ensure compliance with RBC requirements.
• Preferred Stock Redemption: Assess the company's liquidity and ability to fund the mandatory redemption of Series A preferred stock in July 2009, particularly if cash redemption is triggered by stock price conditions.