Citizens, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise.
Business context
Citizens is an insurer operating through Life Insurance and Home Service Insurance segments, selling life, endowment, final-expense, accident and health, and property products in the U.S. and internationally. Its principal revenue sources are premiums and investment income.
Financial performance and condition
- Revenue: Q2 revenue was $53.7, down from $63.6 a year earlier; first-half revenue was $109.1, down from $119.0. Premiums were nearly flat year over year: $42.2 in Q2 and $81.6 for six months. Net investment income rose to $15.9 in Q2 and $31.4 for six months.
- Profit: Net loss was $3.5 in Q2 versus net income of $5.0 in Q2 2021; first-half net loss was $4.9 versus net income of $1.4. Class A EPS was a loss of $0.07 for Q2 and $0.10 for six months, versus earnings of $0.10 and $0.03, respectively.
- Investment results and comprehensive income: Investment-related losses were $5.0 in Q2 and $5.6 for six months, compared with gains of $4.9 and $5.2 in the prior-year periods. Six-month other comprehensive loss was $240.4, principally reflecting unrealized fixed-maturity losses; total comprehensive loss was $245.3.
- Benefits and expenses: Total benefits and expenses were $57.4 in Q2 and $113.7 for six months, down from $58.0 and $116.2. Lower claims and surrenders and lower general expenses were partly offset by higher additions to future policy reserves.
- Cash flow: First-half operating cash flow was $22.3, versus $9.0 in 2021. Investing activities used $27.9; financing provided $0.7. Cash and equivalents fell to $22.4 from $27.3 at year-end 2021.
- Assets, equity and debt: Total assets were $1,618.9 at June 30, down from $1,854.5 at year-end; stockholders’ equity fell to $76.2 from $320.6. The company reported no debt and had not drawn on its $20 million revolving credit facility.
- Investments and liquidity: Investments totaled $1,394.3; fixed-maturity securities were $1,237.0. Cash and invested assets totaled $1,416.7. The company reported $4.7 billion of direct insurance in force. Fixed-maturity securities were 97.6% investment grade by fair value.
Material changes versus prior periods
- Rising interest rates materially reduced fixed-maturity fair values: the portfolio had a pre-tax net unrealized loss of $125.4 at June 30, 2022, versus a net unrealized gain of $126.9 at December 31, 2021. This drove a large decline in reported equity through accumulated other comprehensive income.
- Investment-related losses, primarily changes in fair value of limited partnerships and equity securities, were the principal reason the company swung to a net loss despite higher net investment income and lower total expenses.
- Insurance issued increased 28.7% to $268.5 for the first half, with growth in both segments and contributions from new products. Premium revenue nevertheless declined slightly, as lower first-year premiums offset renewal-premium growth.
- Claims and surrenders declined, including lower death claims following elevated 2021 experience that included COVID-19-related deaths. The company also reported lower surrenders, which it attributed in part to retention efforts.
Outlook, risks and unusual items
- Management gave no specific earnings or revenue guidance. It expects operating cash flow and invested assets to meet cash needs and expects fixed-maturity values to recover as securities approach maturity, while noting market and policyholder behavior uncertainties.
- Management warned that inflation and rising rates could increase policy lapses and surrenders or reduce sales, particularly among lower- and middle-income Home Service customers. COVID-19 effects remain uncertain; potential risks include mortality, distribution disruption, surrenders and investment volatility.
- Liquidity risks include unexpectedly high surrenders, mortality, and lump-sum elections when endowment policies mature. About 39% of insurance in force was endowment business; approximately 14% of endowments in force were expected to mature within five years.
- Citizens had up to $50.6 million in commitments to fund limited partnership and other investments. Its keep-well agreement may require up to $10 million of capital for CICA International if needed; no contribution was currently required. All insurance subsidiaries exceeded minimum regulatory capital requirements, and CICA International was above its target capital level.
- The company recorded a $3.3 million valuation allowance against certain capital deferred tax assets through OCI. It plans to adopt the long-duration insurance accounting standard on January 1, 2023; management said the impact was still under evaluation and could materially affect accumulated OCI and future earnings patterns.
- An $8 million share-repurchase program was authorized in May; 392,083 Class A shares were repurchased during Q2 for approximately $1.3 million, leaving $6.7 million authorized. Separately, the company issued 16,118 shares to Venezuelan shareholders at $0.01 per share to address identity fraud involving prior share sales.
- A trade-secret lawsuit trial was delayed to October 2022. The filing reported no other material legal developments or significant subsequent events.
Most important facts for investors to verify
- How interest rates and market valuations affect fixed-maturity unrealized losses, equity, and investment-related earnings.
- Whether premium growth, new-product sales, and policy retention can offset pressure on first-year premiums and potential inflation-related lapses.
- Future mortality, surrender, and endowment maturity behavior and the resulting liquidity needs.
- The eventual financial impact of the 2023 long-duration insurance accounting adoption and the recoverability of deferred tax assets.
- Funding requirements for investment commitments, regulatory capital support, and the status and potential cost of the trade-secret litigation.