Citizens, Inc. — Q3 2021 Form 10-Q
Business context and period. Citizens is an insurance holding company with Life Insurance and Home Service Insurance segments. This unaudited report covers the quarter and nine months ended September 30, 2021, compared with the same 2020 periods. Its businesses include international life and endowment products, U.S. life insurance, and final-expense and property insurance concentrated in Louisiana, Mississippi, and Arkansas.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $61.6 million | $59.8 million | $180.6 million | $173.9 million |
| Net income (loss) | ($2.8) million | ($7.9) million | ($1.4) million | ($12.5) million |
| Class A diluted EPS | ($0.06) | ($0.16) | ($0.03) | ($0.25) |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $23.8 million | $34.0 million |
- Approximate net margin, calculated as net income (loss) divided by revenue, was negative 4.5% in Q3 2021 versus negative 13.2% in Q3 2020, and negative 0.7% for the first nine months versus negative 7.2% in 2020.
- At September 30, total assets were $1.831 billion, total liabilities $1.566 billion, and stockholders’ equity $265.0 million. Cash and cash equivalents were $30.1 million; total investments were $1.593 billion. Fixed-maturity securities were $1.457 billion, or 89.7% of cash and invested assets.
- The company reported no debt outstanding. A $20 million, three-year secured revolving credit facility was undrawn at quarter-end. Cash declined from $34.1 million at December 31, 2020. Cash flow from operations was positive, while investing activities used $19.4 million and financing activities used $8.4 million in the first nine months.
- Annualized investment yield was 4.24%, compared with 4.26% at September 30, 2020. The 10-year U.S. Treasury yield increase contributed to a decline in net unrealized fixed-maturity gains to $132.4 million from $167.9 million at year-end 2020.
Changes and operating drivers
- Revenue rose $1.8 million in Q3 and $6.7 million year to date. Net losses narrowed substantially, mainly because 2020 included executive severance and change-in-control professional costs; higher realized investment gains also helped. These comparisons are partly affected by prior-year unusual expenses.
- For the nine months, premiums declined 1.4%, while net investment income increased 2.1%. Life Insurance renewal premiums fell to $81.2 million from $85.6 million, reflecting a shrinking in-force block and past product and distribution changes. First-year premiums improved, and total insurance issued increased 28.3% by face amount, although fewer policies were issued overall.
- Q3 pretax results differed by segment: Life Insurance earned $1.7 million, Home Service Insurance lost $4.1 million, and Other Non-Insurance Enterprises lost $0.3 million. The Home Service segment’s Q3 loss included hurricane-related effects.
- Claims and surrenders were $91.7 million for the first nine months, up from $87.2 million. Death claims rose 18.0%, which management attributed in part to COVID-19; surrender benefits were nearly flat year over year. Total benefits and expenses nevertheless declined to $180.5 million from $183.9 million, chiefly due to lower general expenses.
Outlook, risks, and unusual items
- Management gave no quantified earnings or revenue guidance. It said cash from insurance operations and invested assets is expected to meet cash needs for the next 12 months, while noting uncertainty around COVID-19’s effects on sales, lapses, and mortality.
- Hurricane Ida reduced Q3 income by approximately $2.3 million, including about $1.1 million of reinstatement reinsurance premium. Management estimated the company’s net claim exposure at approximately $1.2 million after reinsurance; its catastrophe program provides coverage for up to two events per calendar year per layer.
- CICA Ltd. remained above the Bermuda Target Capital Level. A keep-well agreement requires Citizens to contribute up to $10 million if needed to maintain the specified capital level. Domestic insurance subsidiaries also exceeded minimum regulatory capital requirements.
- CICA Ltd. had $63.0 million of commitments to fund limited-partnership and other investments. The company also disclosed a possible fourth-quarter release of most of an uncertain tax-position accrual after a statute-of-limitations expiration; the resulting increase in the Life Insurance segment’s carrying value could potentially lead to a goodwill impairment. Nine-month tax expense was $1.5 million despite pretax income of only $0.1 million, reflecting unusual tax items, including Subpart F income and uncertain-tax-position effects.
- A trade-secret and unfair-competition lawsuit remained pending, with trial scheduled for February 2022. The filing also identifies increasing natural-catastrophe frequency and severity, reinsurance costs, and limits on the company’s ability to raise property rates as risks.
- Management said implementation of the long-duration insurance accounting standard, expected in 2023, may materially affect stockholders’ equity and the pattern of future earnings; the impact was not yet estimable.
- In a subsequent event disclosed in the filing, the company entered leadership-change agreements with four executives on November 3, 2021, providing specified severance benefits if defined leadership or control events and termination conditions occur.
Key facts for investors to verify
- Whether COVID-related mortality and Hurricane Ida effects persist, and the final net catastrophe claims and reinsurance recovery.
- Whether new sales can offset declining Life Insurance renewal premiums and the aging in-force block.
- The quality and realizability of limited-partnership valuations, commitments, and investment gains, which contributed meaningfully to reported results.
- The resolution and financial effects of the uncertain tax position, potential goodwill impairment, and pending litigation.
- Regulatory capital headroom, the conditions of the keep-well agreement, and liquidity available to the parent given restrictions on subsidiary distributions.