Business context and reporting period
Citizens, Inc. is an insurance holding company focused primarily on life insurance, including U.S.-dollar policies sold to customers in Latin America and the Pacific Rim, and home-service insurance in the southern United States. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods.
Financial results and position
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $58.1 | $57.2 | $174.1 | $166.8 |
| Pre-tax income (loss) | $(0.1) | $3.3 | $(0.6) | $6.5 |
| Net income (loss) | $0.1 | $2.3 | $(1.4) | $4.7 |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $62.7 | $66.9 |
Premiums rose 4.2% in both comparison periods: to $48.9 million for Q3 and $141.9 million year to date. Net investment income increased 9.1% in Q3 to $11.3 million and 10.6% year to date to $33.6 million. The annualized yield on average invested assets was 4.24% for the first nine months, versus 4.22% in 2014.
Calculated net margin was approximately 0.2% for Q3 2015 versus 4.1% in Q3 2014, and negative 0.8% for the first nine months versus 2.8% in 2014. Nine-month earnings included $2.4 million of investment impairment losses and costs associated with tax-compliance issues. The company reported a Q3 income-tax benefit of $0.2 million and nine-month tax expense of $0.8 million despite the pre-tax loss; it attributed the unusual effective tax rate in part to non-deductible annuity-related charges.
At September 30, total assets were $1.475 billion, total liabilities $1.225 billion, and stockholders’ equity $249.7 million. Policy liabilities were $1.118 billion. Cash and cash equivalents were $42.8 million, down from $50.7 million at year-end 2014. Nine-month investing cash outflow was $72.7 million and financing cash inflow was $2.1 million. The company said operating cash flows were sufficient for current needs and expected available liquidity and future cash flows to meet funding needs.
Investments totaled $1.118 billion, including $983.7 million of fixed maturities; fixed maturities were 88.0% of investments. The portfolio was predominantly investment grade, with 96.9% of fixed maturities rated investment grade. No conventional debt balance is separately presented; annuity investment-contract liabilities were $45.7 million. All insurance subsidiaries were above minimum risk-based capital requirements at quarter-end.
Material changes versus the prior comparable period
- Revenue growth did not translate into profit: year-to-date results shifted from $4.7 million net income to a $1.4 million net loss.
- Claims and surrenders increased 15.3% year to date to $58.2 million, including higher death claims and life-segment surrenders. Management said mortality experience remained within expected levels; increased surrender activity was mainly in older policies after surrender charges expired.
- Other general expenses rose to $25.0 million from $20.0 million year to date, reflecting tax-compliance charges, consulting expenses, and additional audit costs.
- Net realized investment losses were $2.5 million year to date, including $2.4 million of other-than-temporary impairments on two bond mutual funds; no such impairments were recorded in the 2014 comparison period.
- Other comprehensive income was a loss of $7.2 million for the first nine months, versus income of $16.3 million in 2014. Accumulated unrealized gains on securities fell to $18.6 million from $25.9 million at year-end 2014.
Outlook, risks, contingencies, and unusual items
The filing provides no quantitative earnings or revenue guidance. Management stated that liquidity sources and future cash flows were expected to be adequate. It noted that the portfolio’s yield had remained relatively stable as portfolio mix partly offset low-rate reinvestment pressure.
- Insurance tax qualification: Some life products did not qualify for intended favorable treatment under IRC Sections 7702 and 7702A, and certain annuity contracts did not qualify under Section 72(s). The company recorded $11.4 million after tax at December 31, 2014 and a further $2.5 million pre-tax annuity-related charge in 2015. Management’s estimated total exposure range was $13.9 million to $46.6 million after tax; it recorded the low end because no specific amount within the range was considered more likely. Actual costs could exceed the reserve or the range. The company said it would not remediate certain foreign endowment and endowment-like products, but intended to remediate domestic products.
- Additional compliance exposure: The company was enhancing its Bank Secrecy Act/anti-money-laundering controls after an internal review identified deficiencies; it could not estimate potential losses or assure that any impact would not be material. Louisiana, Arkansas, and Texas authorities were conducting unclaimed-property audits. Potential Louisiana exposure could be substantial, but the amount was not estimable.
- Market and operating risks: Key risks include interest-rate and credit changes affecting the investment portfolio, callable bonds and reinvestment yields, claims and surrender experience, foreign political/regulatory conditions and premium collections, and policyholder response to the tax-compliance matter.
- Controls and leadership: Management considered disclosure controls effective at quarter-end. Remediation of a material weakness in the actuarial function identified at year-end 2014 was ongoing. In October 2015, the CEO assumed leadership of the international business; effective November 6, 2015, Kay E. Osbourn resumed the CFO and Treasurer duties pending a successor.
Most important facts for investors to verify
- Updated scope, remediation costs, policyholder response, and ultimate liability for the IRC 7702/7702A and 72(s) issues, including whether exposure may exceed the recorded low-end estimate.
- Results and potential financial impact of the Louisiana, Arkansas, and Texas unclaimed-property audits, and progress in addressing BSA deficiencies.
- Whether elevated claims, surrenders, and acquisition-cost amortization persist, and their effect on earnings and policy reserves.
- Investment portfolio credit quality, impairment developments, interest-rate sensitivity, and changes in unrealized gains or losses.
- Progress in remediating the actuarial-control material weakness and any effects on statutory capital or subsidiary dividend capacity.