Citizens, Inc. — Q2 2021 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2021. Citizens is an insurance holding company with Life Insurance and Home Service Insurance segments. Its interim financial statements are unaudited.
Financial performance and position
| Metric | Q2 2021 | First half 2021 | Comparable 2020 period |
|---|---|---|---|
| Total revenue | $63.6 million | $119.0 million | $58.3 million / $114.1 million |
| Income (loss) before tax | $5.6 million | $2.9 million | $0.4 million / $(1.8) million |
| Net income (loss) | $5.0 million | $1.4 million | $(1.0) million / $(4.6) million |
| Class A diluted EPS | $0.10 | $0.03 | $(0.02) / $(0.09) |
| Operating cash flow | Not provided for the quarter | $9.0 million | $28.6 million for first half 2020 |
- First-half revenue increased 4.4% year over year, while premiums declined 1.2%; realized investment gains rose to $5.2 million from $0.1 million. Q2 realized gains were $4.9 million, including approximately $4.5 million from fair-value increases in limited partnerships.
- First-half total benefits and expenses were $116.2 million, broadly level with $115.9 million a year earlier. Claims and surrenders rose, offset in part by a smaller increase in future policy reserves.
- At June 30, total assets were $1.814 billion, total liabilities $1.545 billion, and stockholders’ equity $269.1 million. Cash and cash equivalents were $30.1 million; total cash, cash equivalents and invested assets were $1.630 billion. The filing reports no debt outstanding.
- Fixed maturities were $1.468 billion, or 90.1% of cash and invested assets; the portfolio’s weighted-average credit rating was A. Annualized portfolio yield was 4.22%, down from 4.29% at June 30, 2020.
- First-half other comprehensive loss was $24.4 million, principally reflecting unrealized investment losses. This contrasts with $34.6 million of other comprehensive income in first-half 2020.
- First-half cash flow from investing activities was $(4.2) million and from financing activities $(8.8) million. Financing outflow principally included the $9.1 million purchase of the company’s Class B shares.
Material changes and management commentary
- First-half new insurance issued increased 39.8% to $208.7 million; policies issued rose to 15,671 from 10,545. Management cited sales campaigns, distribution improvements and a weak COVID-affected comparison period.
- Life Insurance pretax income rose to $7.0 million for the first half from $4.2 million. Home Service Insurance’s pretax loss narrowed to $0.2 million from $2.2 million. Other Non-Insurance Enterprises’ loss was $3.9 million versus $3.8 million.
- Life Insurance renewal premiums declined 6.4% in the first half, reflecting a shrinking in-force block and surrenders outpacing new business. Total first-half premiums nevertheless increased 7.5% in Home Service Insurance.
- Management reported higher Life Insurance death claims, including COVID-19-related claims, and increased surrender benefits. It attributed surrender trends to the aging policy block, economic conditions and reduced surrender charges; it said the level remained within expectations.
- A conversion of a small policy block to new actuarial software increased Q2 and first-half pretax income by $0.7 million. Management said the impact included a $0.8 million reduction in the increase in reserves, partly offset by $0.1 million higher deferred acquisition cost amortization.
Liquidity, outlook and risks
- Management expects cash needs for the next 12 months to be met from insurance operations and invested assets. Operating cash flow for the first half fell to $9.0 million from $28.6 million, which management attributed in part to surrenders, lower international renewal premiums and higher acquisition costs on new business.
- A $20 million senior secured revolving credit facility was established in May 2021, maturing May 5, 2024. It was undrawn at June 30; the company reported no covenant violations.
- At the Bermuda regulator’s request, Citizens agreed to contribute up to $10 million to CICA Ltd. if needed to maintain capital at 120% of its enhanced capital requirement. CICA Ltd. was above that threshold at period end; all insurance subsidiaries exceeded minimum capital requirements.
- COVID-19 impacts remain uncertain. Management identified potential risks from reduced sales and distribution, increased policy lapses or surrenders, and elevated claims; it noted the Delta variant could affect future operations.
- CICA Ltd. had commitments to fund investments of up to $64.1 million. The company reported no credit valuation losses on fixed-maturity securities during the periods presented, but market interest-rate changes affect portfolio fair values.
- A trade-secret and related litigation matter remained pending; trial was expected in Q1 2022 after a pandemic-related delay. The filing reported no other material change to previously disclosed risk factors.
- The company stated that the IRS withholding-tax matter concerning certain international policies was closed. A July 30, 2021 sale of its Austin-area training facility for $3.8 million resulted in a $1.0 million gain.
- No specific earnings or revenue guidance was provided. The company said results for the remainder of 2021 could not be predicted given COVID-19 uncertainty.
Important facts for investors to verify
- How much of reported earnings growth is repeatable: first-half results included significant fair-value-related investment gains and a $0.7 million actuarial-system benefit.
- Whether international renewal premiums and policy persistency stabilize, given the declining in-force block and increased surrenders.
- Future mortality and COVID-19-related claim experience, as well as the continuation of elevated surrender activity.
- Investment portfolio sensitivity to interest rates, credit spreads and limited-partnership valuations; also review municipal-bond exposures, including Texas and California concentrations.
- Capital and liquidity implications of the $64.1 million investment commitments, the potential CICA Ltd. capital support, and restrictions on distributions from regulated subsidiaries.
- Developments in the pending litigation and the company’s ability to sustain growth from its newer domestic sales initiatives.