Citizens, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparative periods are the corresponding 2022 periods. Unaudited consolidated results. Citizens provides life, endowment, final-expense and related insurance through its Life Insurance and Home Service Insurance segments.
Financial results and condition
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $59.4 million | $56.2 million | $173.8 million | $165.3 million |
| Net income | $2.7 million | $3.4 million | $13.7 million | $12.3 million |
| Diluted Class A EPS | $0.05 | $0.06 | $0.27 | $0.24 |
| Operating cash flow | Not reported by quarter | $15.4 million | $39.8 million |
- Revenue and earnings: Q3 revenue rose about 6%, but net income declined; nine-month net income rose about 11%. Approximate net margins were 4.5% for Q3 2023 versus 6.1% in Q3 2022, and 7.9% versus 7.5% for the nine-month periods.
- Investment income: Net investment income increased to $17.4 million in Q3 and $51.7 million for nine months, up from $16.6 million and $48.0 million, respectively. The nine-month annualized yield on average invested assets was 4.53%, compared with 4.30%.
- Benefits and expenses: Claims and surrenders rose to $37.7 million in Q3 and $100.8 million for nine months, primarily reflecting higher surrenders and matured endowments. Total benefits and expenses were $54.7 million and $156.4 million, respectively.
- Cash and liquidity: Cash and equivalents were $16.8 million at September 30, down from $23.0 million at year-end 2022. Nine-month operating cash flow was $15.4 million; investing cash outflow was $18.5 million and financing cash outflow was $3.2 million. Management expects cash needs to be met through insurance operations and invested assets.
- Assets, investments and capital: Total assets were $1.565 billion, versus $1.591 billion at December 31, 2022. Total investments were $1.317 billion; fixed-maturity securities were $1.151 billion, or 86% of cash and invested assets. Stockholders’ equity was $152.7 million, up from $127.8 million.
- Debt: The company reported no debt outstanding. Its $20 million revolving credit facility was undrawn at September 30, 2023 and matures May 5, 2024.
Material changes versus prior periods
- Nine-month results benefited from higher investment income and improved investment-related losses: net losses were $0.5 million, compared with $10.6 million in 2022. Q3 investment-related losses were $0.9 million versus $5.0 million.
- Life Insurance pretax income increased to $20.4 million for nine months from $14.3 million; Home Service Insurance pretax income declined to $1.5 million from $5.0 million. Home Service reported a Q3 pretax loss of $0.4 million.
- Life insurance premiums decreased to $118.0 million for nine months from $120.9 million, as growth in first-year premiums was outweighed by lower renewal premiums. Higher surrenders and maturities contributed to lower renewal premiums.
- Insurance issued increased about 10% to $504.2 million for nine months. First-year life and accident-and-health premiums increased 15%, supported by new products and focused marketing.
- The company ceased property insurance operations on June 30, 2023. The business was immaterial to consolidated assets and revenue; the filing reports no material exit charges.
- International in-force business transferred from CICA International to CICA PR on August 31, 2023. CNLIC merged into CICA on July 1, 2023. The company recorded a $4.3 million reduction in deferred tax liability from the international transfer as a credit to equity, not earnings.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management expects available operating cash flow and capital resources to meet needs, while monitoring policyholder behavior and liquidity.
- Management expects matured endowment benefits to continue increasing over the next few years. Approximately 18% of endowments in force, representing about 6% of in-force business, are scheduled to mature in the next five years. Lump-sum elections could increase liquidity demands.
- Higher interest rates may encourage policy surrenders and have reduced the market value of existing fixed-income assets. Pretax unrealized losses on available-for-sale securities were $238.0 million at September 30, 2023, compared with $201.7 million at year-end 2022. The company said losses were primarily market-related, recorded no credit valuation allowances, and did not expect to be required to sell securities before recovery.
- About 99% of the fixed-maturity portfolio was investment grade. Nonetheless, management highlighted exposure to regional banks and municipal bonds, including concentrations in Texas and California. Interest-rate, credit-market, inflation, surrender, mortality and sales risks remain relevant.
- The company recorded a $6.2 million valuation allowance on capital deferred tax assets through other comprehensive income. Its effective tax rate was 41.9% in Q3 and 21.3% for nine months.
- CICA PR has a 12-month keep-well agreement under which Citizens may need to contribute up to $10 million if specified capital measures are not met; the filing says no contribution was required at September 30. The company also had $30.3 million of committed limited-partnership funding.
- Legal proceedings remain subject to potential costs and adverse outcomes. The trial in the Trade Secret Lawsuit was rescheduled for February 2024. Management reported no material changes to risk factors and stated disclosure controls were effective.
Most important facts for investors to verify
- Whether elevated surrender and matured-endowment payments persist, and how they affect renewal premiums, reserves and liquidity.
- Whether new-product sales and distribution initiatives can offset declines in renewal business.
- Changes in unrealized fixed-income losses, portfolio credit quality, and the company’s ability to avoid selling assets at depressed values.
- Home Service segment performance following the property-insurance exit, and the effect of ongoing strategic and international-transition costs.
- CICA PR capital requirements and any future keep-well contributions, alongside the timing of limited-partnership commitments and revolving-credit-facility maturity.
- The outcome and potential financial implications of the Trade Secret Lawsuit scheduled for February 2024.