Citizens, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; financial statements are unaudited. Unless noted, amounts are in millions of dollars. Citizens provides life, endowment, final-expense and home-service insurance in the U.S. and international markets. Its reportable segments are Life Insurance and Home Service Insurance.
Financial results and condition
| Metric | Q1 2024 | Q1 2023 / prior date |
|---|---|---|
| Total revenue | $57.7 | $55.9 |
| Premiums | $38.7 | $38.2 |
| Net investment income | $17.5 | $17.1 |
| Pre-tax income | $4.9 | $6.7 |
| Federal income tax expense | $0.4 | $1.8 |
| Net income / Class A EPS | $4.5 / $0.09 | $4.9 / $0.10 |
| Operating cash flow | $6.8 | $7.4 |
| Total assets / stockholders’ equity | $1,665.7 / $195.2 | $1,668.9 / $172.1 at Dec. 31, 2023 |
Benefits and expenses were $52.8 million, up from $49.2 million. Cash and cash equivalents were $23.2 million at quarter-end, down from $27.0 million at year-end. Investing activities used $9.5 million; financing activities used $1.1 million. The company reported no debt and no borrowings on its $20 million revolving facility at March 31. The facility was renewed in May 2024 for three years on substantially similar terms.
Investments totaled $1.40 billion, including $1.23 billion of available-for-sale fixed-maturity securities. Those securities had $169.6 million of gross unrealized losses against amortized cost; 99.0% of their fair value was investment grade. The company recorded no credit valuation losses on fixed maturities in the quarter. Book value per Class A share was reported as $3.94. Total insurance in force was $5.0 billion.
Changes and segment performance
- Revenue rose $1.8 million, led by higher life premiums, net investment income and investment-related gains. Investment-related gains were $1.0 million versus a $0.3 million loss a year earlier.
- Net income fell $0.3 million. Higher claims and matured endowment benefits, commissions and other expenses more than offset revenue growth and a $1.5 million reduction in income tax expense. The effective tax rate was 7.8%, versus 27.4%.
- First-year premiums increased 41% to $5.9 million, while renewal premiums declined to $32.7 million from $34.0 million. Total insurance issued increased 61% to $274.5 million, primarily reflecting domestic Life Insurance growth and new products and distribution channels.
- Life Insurance pre-tax income declined to $5.8 million from $6.4 million despite higher revenue, primarily because claims and acquisition-related costs increased. Home Service pre-tax income declined to $0.6 million from $1.3 million; premiums fell 10%, partly reflecting the cessation of property insurance operations in 2023.
- Claims and surrenders increased to $33.1 million from $30.3 million. Matured endowment benefits rose to $10.8 million from $8.8 million and death claims rose to $6.9 million from $5.4 million; surrenders decreased slightly.
- Other comprehensive income was $18.4 million, versus $21.6 million. Changes in discount rates for future policy benefit liabilities contributed positively, while fixed-maturity unrealized holding losses weighed on OCI. Stockholders’ equity increased to $195.2 million from $172.1 million.
Outlook, risks and unusual items
- No specific financial guidance was provided. Management said it expects operating cash flow and capital resources to be adequate, while monitoring policyholder behavior and liquidity needs.
- Management expects matured endowment benefits to remain elevated over the next few years. About 18% of endowments in force, representing approximately 6% of in-force business, are scheduled to mature within five years; policyholder choices between lump-sum payments and leaving funds on deposit may affect liquidity and profitability.
- Management cited surrender risk from policies reaching the end of surrender-charge periods, higher interest rates and inflation. Higher-than-expected surrenders could increase benefit outflows and reduce renewal premiums. Rapid domestic sales growth and advance commissions may also strain subsidiary liquidity and regulatory capital.
- All domestic insurance subsidiaries exceeded minimum regulatory capital requirements; CICA Domestic was above the 350% RBC threshold in its capital maintenance agreement, so no contribution was required. Citizens may be required to contribute up to $10 million to CICA International under its keep-well agreement if specified capital tests are not met; no contribution was then required.
- The company had a $25.7 million commitment to fund limited-partnership investments. It also disclosed a trade-secret lawsuit verdict requiring approximately $1.3 million in commissions, accrued at year-end 2023. The company intends to contest the verdict. Defendants separately sought approximately $3.9 million in legal fees; the company disputed the claim and had accrued no amount for it.
- Management identified market volatility, interest rates, investment valuation, litigation and regulatory matters among relevant risks. No material changes to the risk factors in the 2023 Form 10-K were reported. Disclosure controls were assessed as effective, with no material changes in internal control reported for the quarter.
Most important facts for investors to verify
- Whether first-year sales growth translates into durable renewal premiums and profitable policy persistency, particularly as commissions and claims rise.
- Future surrender and endowment-maturity patterns, and their effect on cash needs and investment sales.
- Domestic subsidiary regulatory capital and any need for parent-company contributions as advance commissions and sales grow.
- Developments in the lawsuit, including the disputed $1.3 million verdict and the unaccrued $3.9 million legal-fee motion.
- Fixed-maturity portfolio valuation, unrealized losses, credit quality and liquidity, alongside investment returns and limited-partnership commitments.