Citizens, Inc. — Q2 2023 Form 10-Q
Business context and period. Citizens is an insurer operating through Life Insurance and Home Service Insurance segments, serving customers in the U.S. and internationally. This unaudited report covers the quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods unless stated otherwise. Amounts below are in millions unless noted.
Financial highlights
- Revenue: Q2 revenue was $58.5 million, up from $53.7 million; first-half revenue was $114.4 million, versus $109.1 million. Net investment income increased 8% in Q2 and 9% for the first half, to $17.2 million and $34.3 million, respectively.
- Profit: Q2 net income was $6.1 million ($0.12 per Class A share), compared with $2.5 million ($0.05 per share). First-half net income was $11.0 million ($0.22 per share), versus $8.9 million ($0.18 per share). Improvement was driven mainly by higher investment income and investment-related gains rather than losses in 2022.
- Benefits and expenses: Q2 claims and surrenders rose to $32.8 million from $27.1 million; first-half amounts rose to $63.1 million from $55.5 million. Higher surrenders and matured endowment benefits were key drivers. General expenses also increased, partly due to strategic growth initiatives, the international business relocation, and employee benefit costs.
- Cash flow and liquidity: First-half operating cash flow was $12.2 million, down from $22.3 million; investing cash outflow was $11.9 million. Cash and cash equivalents were $20.9 million at June 30, compared with $23.0 million at year-end 2022. Management said operating cash flows and invested assets are expected to meet near- and long-term needs.
- Balance sheet and debt: Total assets were $1.624 billion and stockholders’ equity was $146.8 million at June 30. The company reported no debt and had not drawn on its $20 million revolving credit facility. Investments totaled $1.374 billion; fixed maturities were $1.206 billion, or 86.5% of cash and invested assets.
- Investment marks: Fixed-maturity securities had $178.6 million of pretax net unrealized losses at June 30, improving from $201.7 million at December 31, 2022. Management attributed the losses primarily to interest rates and credit spreads, reported no fixed-maturity credit valuation losses, and stated that 99% of the portfolio’s fair value was investment grade.
Material changes versus the prior period
- Life Insurance pretax income increased to $7.5 million in Q2 and $13.8 million for the first half, from $3.3 million and $9.2 million. Home Service pretax income declined to $0.6 million and $2.0 million, from $2.0 million and $4.1 million.
- Life insurance premiums fell 4% in Q2 and 3% in the first half, primarily as renewal premiums declined amid surrenders and maturing endowments. First-year premiums increased; total ordinary life insurance issued rose 22% in the first half to $328.6 million.
- First-half accumulated other comprehensive income improved by $8.7 million, while Q2 other comprehensive loss was $12.9 million. These amounts reflect, among other items, changes in fixed-maturity values and the discount rate used for policy liabilities.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management expects matured endowment benefits to remain elevated over the next few years and is monitoring policyholder surrender and maturity elections.
- The company exited property insurance operations effective June 30, 2023. Property premiums were negative $0.1 million in Q2 because the company recognized a remaining reinsurance amount due for 2023; it remains obligated to pay most remaining catastrophe reinsurance premiums through year-end. The exit was described as immaterial to consolidated operations, with no material exit charges.
- Management cited risks from rising rates and inflation, including unrealized investment losses, potential policy surrenders, and pressure on lower- and middle-income customers. Higher claims or lump-sum endowment payouts could also affect liquidity. Approximately 18% of endowments in force, representing about 6% of in-force business, are expected to mature over the next five years.
- Citizens expects to contribute capital to CICA PR as its new business grows and to maintain the required premium-to-surplus ratio. CICA International was above its regulatory target capital threshold; a keep-well agreement could require up to $10 million of support. The company also had $33.0 million of commitments to fund limited partnerships.
- The $20 million revolving facility matures May 5, 2024; it was undrawn and the company reported covenant compliance at quarter-end. The company repurchased 325,424 Class A shares in Q2 for approximately $0.7 million; $4.58 million remained under the authorization.
- CNLIC merged into CICA on July 1, 2023. Management reported effective disclosure controls and no material changes to internal control over financial reporting during Q2. No material legal or risk-factor developments were reported.
Important facts for investors to verify
- Whether surrenders and matured endowment payments continue to rise, and how policyholder elections affect cash needs.
- Whether investment income gains persist and how interest-rate changes affect portfolio fair values, policy liabilities, and reported comprehensive income.
- The impact of the property-insurance exit and remaining reinsurance payments on subsequent-period premiums and cash flow.
- The timing and amount of potential capital support for CICA PR or CICA International, alongside the limited-partnership funding commitments.
- Whether management’s liquidity assessment remains supported by operating cash generation, subsidiary capital requirements, and the facility’s May 2024 maturity.