Citizens, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended March 31, 2012; financial statements are unaudited. Citizens is an insurance holding company focused primarily on life insurance, with home-service life and limited property insurance operations. Its life business serves U.S. customers and policyholders in Latin America and the Pacific Rim. The company reported approximately $1.1 billion of assets and $5.3 billion of insurance in force.
Financial results and position
Unless otherwise noted, amounts are in millions of dollars. Comparisons are with the three months ended March 31, 2011; prior-year figures are adjusted for the accounting change described below.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Total revenue | $46.9 | $45.1 |
| Insurance premiums | $39.1 | $37.2 |
| Net investment income | $7.6 | $7.3 |
| Benefits and expenses | $44.8 | $42.6 |
| Income before tax | $2.1 | $2.5 |
| Net income | $1.5 | $1.6 |
| Class A basic and diluted EPS | $0.03 | $0.03 |
| Operating cash flow | $15.2 | $14.3 |
- Revenue increased 4.1%; premiums rose 5.0%, led by life insurance. Net income fell 6.8% as benefits and expenses grew faster than revenue. Net margin was approximately 3.2%, versus 3.6% in the prior-year quarter.
- Net investment income rose 3.8%, although the annualized yield on average invested assets declined to 3.76% from 3.94%. Average invested assets increased and helped offset lower yields.
- Cash and cash equivalents were $61.1 million at March 31, up from $33.3 million at year-end. Q1 cash increased $27.8 million. Investing activities provided $11.9 million, mainly reflecting investment maturities and cash awaiting reinvestment; financing activities provided $0.7 million.
- Total assets were $1,106.0 million, liabilities $854.8 million, and stockholders’ equity $251.2 million at March 31, 2012. Policy liabilities totaled $819.9 million. The filing does not provide a conventional corporate-debt balance as a separate line item.
- Available-for-sale fixed maturities had $31.1 million of net unrealized gains; total fixed-maturity net unrealized gains were $34.5 million. The company recognized no other-than-temporary investment impairments in either comparative quarter.
Material changes and segment performance
- Life Insurance pretax income decreased to $0.1 million from $0.6 million. Renewal premiums grew, but first-year premiums declined; higher reserve increases, claims, and dividends weighed on results. New life policies issued were lower in face amount and count than in Q1 2011.
- Home Service Insurance pretax income increased to $2.4 million from $1.8 million, supported by lower claims and modest premium growth. The $0.5 million release of incurred-but-not-reported claims liability reduced current-quarter claims expense.
- Other Non-Insurance Enterprises recorded a pretax loss of $0.4 million, compared with income of $0.05 million a year earlier. The segment is generally immaterial apart from warrant fair-value movements.
- Effective January 1, 2012, the company retrospectively adopted revised deferred acquisition cost accounting. The change reduced December 31, 2011 stockholders’ equity by $7.6 million, deferred acquisition costs by $11.8 million, and deferred taxes by $4.1 million. Adjusted Q1 2011 net income was $1.6 million; as previously reported it was $1.8 million.
- Cash flows from operations were supported in part by growth in future policy benefit reserves. The balance-sheet increase in life policy reserves and the reported expense for reserve increases reflect policy growth and product mix, including endowment policies that build reserves more quickly.
Outlook, risks, contingencies, and unusual items
- No specific earnings or revenue guidance was provided. Management said available liquidity and projected cash flows were expected to meet funding needs; it reported no investment liquidations to fund operations during the quarter.
- Management cited low interest rates and declining portfolio yields as pressure on investment income. Interest-rate risk is the primary market risk; investment values are also exposed to credit deterioration, calls and prepayments. Fixed maturities were 82.1% of cash, cash equivalents and investments, and 2.9% were rated BB or lower/other. The company reported no direct sovereign European debt exposure and no subprime or collateralized-debt-obligation exposure.
- Business risks include mortality, morbidity, persistency, interest rates, investment performance, consumer demand, regulation and taxes, and geographic concentration in Latin America and the Pacific Rim. The company said existing risk factors were unchanged from its 2011 Form 10-K.
- Two principal legal matters remain unresolved: individual claims following dismissal of class certification in the Texas litigation, and the Road Home Litigation in Louisiana, where class allegations were dismissed. The company could not estimate a possible loss or range for either matter; the State’s deadline to identify claims against SPFIC was May 31, 2012.
- Unusual items include the $0.5 million home-service claims-liability release and a $0.157 million reserve decrease from system corrections discovered during validation work. Warrants outstanding had a $0.415 million fair-value liability and were due to expire during 2012.
- Insurance subsidiaries exceeded risk-based capital minimums at December 31, 2011; reported ratios ranged from 408% to 4,066% of control-level RBC. These are year-end, not March 31, figures. Management stated disclosure controls were effective and reported no material internal-control changes during the quarter.
Important facts for investors to verify
- Whether premium growth can persist as first-year life production has weakened and renewal business represents a larger share of premiums.
- How the declining investment yield affects future investment income and the value, credit quality, and liquidity of the fixed-maturity portfolio.
- Whether claims experience remains favorable after the $0.5 million home-service liability release, and whether reserve assumptions remain adequate.
- Developments in the Road Home Litigation and Texas individual claims, including any change in the currently unestimable potential losses.
- The continuing effects of the deferred acquisition cost accounting change and the system corrections on reported reserves, acquisition costs, and comparability.