Citizens, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated U.S. GAAP results. Citizens is an insurance holding company with Life Insurance and Home Service Insurance segments. Unless stated otherwise, amounts below are in millions of dollars.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $58.3 | $56.9 | $114.1 | $119.3 |
| Insurance premiums | $41.5 | $43.8 | $82.8 | $86.3 |
| Net investment income | $14.9 | $15.3 | $30.1 | $29.1 |
| Benefits and expenses | $57.9 | $60.2 | $115.9 | $120.6 |
| Income (loss) before tax | $0.4 | $(3.3) | $(1.8) | $(1.3) |
| Net income (loss) | $(1.0) | $(4.6) | $(4.6) | $(8.4) |
| Class A loss per share | $(0.02) | $(0.09) | $(0.09) | $(0.17) |
- Cash flow: First-half operating cash flow was $28.6 million, versus $31.4 million in 2019. Investing cash outflow was $22.8 million, versus $41.4 million; financing cash inflow was $0.4 million, versus $1.0 million outflow. Cash and cash equivalents ended June at $52.4 million, up from $46.2 million at year-end 2019.
- Balance sheet and liquidity: Total assets were $1.813 billion and stockholders’ equity was $289.8 million at June 30, compared with $1.745 billion and $259.8 million, respectively, at December 31, 2019. The filing does not present a conventional corporate-debt balance; liabilities are principally insurance policy liabilities. It reports $12.5 million of lease liabilities.
- Investments and capital: Fixed-maturity securities were $1.417 billion, or 89.2% of cash and invested assets. Net unrealized fixed-maturity gains were $121.7 million, versus $84.1 million at year-end. The company recorded no fixed-maturity credit valuation losses in the first half. Domestic insurance subsidiaries exceeded required capital levels at June 30.
- Margins: The filing does not provide a clear reported operating-margin measure.
Changes versus the prior comparable periods
- Q2 revenue rose 2.6%, but first-half revenue fell 4.4%. First-half premiums declined 4.0%; Q2 premiums declined 5.3%, primarily reflecting reduced Life segment sales and lower renewal premiums.
- First-year Life premiums fell 40.6% in Q2, which management attributed largely to COVID-19 disruption to sales processes. New policy counts for the first half declined 11.2% in Life and 20.9% in Home Service.
- Q2 claims and surrenders increased 2.7% year over year; first-half claims and surrenders rose 8.3%. Management cited higher Home Service death claims associated in part with COVID-19 and increased matured endowments. General expenses declined 6.8% in Q2 and 13.3% in the first half.
- Net losses narrowed in both comparison periods, supported by lower expenses and, in Q2, a $1.4 million realized investment gain versus a $2.9 million realized loss in Q2 2019. First-half net investment income increased, although Q2 investment income declined 2.6% year over year.
Outlook, risks and unusual items
- Management gave no numerical earnings or revenue guidance. It said COVID-19 could adversely affect near-term sales, premiums, claims, policy benefits, investments and regulatory capital; the duration and full financial impact were uncertain.
- Low interest rates and reinvestment of called or maturing bonds may pressure investment yields and profitability. The portfolio is heavily weighted to fixed maturities; credit downgrades, market volatility, liquidity needs and policyholder withdrawals are cited risks. The company reported no liquidity issues in the first half and expected to meet cash needs for the next 12 months from insurance operations and investments.
- Tax contingency: Citizens recorded an estimated $10.0 million after-tax liability for insurance-product tax compliance matters. Its probability-weighted estimated range was $7.4 million to $52.5 million after tax; management cautioned actual exposure could exceed the reserve and even the range. IRS review and settlement remained uncertain.
- Regulatory capital: CICA Ltd.’s capital was $8.9 million below the Bermuda target capital level at March 31, 2020 amid pandemic-related market and rate movements. It was above the threshold at June 30; the company said no capital or management action was required.
- Subsequent leadership and control changes: On July 29, 2020, the Harold E. Riley Foundation acquired control through ownership of all Class B shares. CEO Geoffrey Kolander announced his resignation, effective no later than August 10; Gerald W. Shields was appointed interim CEO. Kolander is entitled to $8.8 million in cash severance, with the expense expected in Q3, and agreed to consulting work through year-end.
- From August 2020, Home Service agents were converted from employees to independent agents. Management identified potential distribution, execution and worker-classification risks. The filing also cites pandemic-related risks to premium collection, claims, investments, operations and cybersecurity.
- Citizens adopted the expected-credit-loss standard in January 2020, recording a $0.4 million increase in accumulated deficit related to agent debit-balance collectability. The forthcoming long-duration insurance accounting standard is expected to have a material impact; its effective date was potentially deferred to 2023, subject to finalization.
Important facts for investors to verify
- Progress and final cost of the IRS tax matter, including whether exposure exceeds the $10.0 million reserve or stated range.
- Subsequent results for Life sales, Home Service claims and collections, and the effects of COVID-19 and the independent-agent conversion.
- Investment portfolio credit quality, realized or unrealized losses, reinvestment yields, and any liquidity or regulatory-capital changes.
- Implementation of the Foundation’s control, CEO transition, and the $8.8 million severance and related consulting costs.
- Any later updates to the estimated impact and effective date of long-duration insurance accounting changes.