Citizens, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. Citizens is an insurer focused on life, endowment, final-expense and related products, operating through Life Insurance and Home Service Insurance segments. This unaudited report covers the quarter and nine months ended September 30, 2022; comparisons are with the same 2021 periods unless otherwise noted. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2022 | Nine months 2022 | Comparable 2021 |
|---|---|---|---|
| Total revenue | $56.2 | $165.3 | $61.6 and $180.6 |
| Net investment income | $16.6 | $48.0 | $15.5 and $46.0 |
| Investment-related gains (losses), net | $(5.0) | $(10.6) | $2.1 and $7.3 |
| Total benefits and expenses | $61.0 | $174.7 | $64.3 and $180.5 |
| Net income (loss) | $(5.1) | $(10.0) | $(2.8) and $(1.4) |
| Class A diluted loss per share | $(0.10) | $(0.20) | $(0.06) and $(0.03) |
- Revenue and profitability: Premiums were $43.9 million in Q3 and $125.5 million year to date, up 1.3% and 0.2%, respectively. Higher property premiums, including comparison against Hurricane Ida-related impacts in 2021, offset lower life premiums. Net investment income rose 7.4% in Q3 and 4.3% year to date, reflecting a higher portfolio yield and invested asset base. Investment-related losses were the primary driver of the larger net losses.
- Benefits and expenses: Total benefits and expenses fell 5.2% in Q3 and 3.2% year to date. Lower death claims, including fewer COVID-19-related claims, contributed to the decline; matured endowment benefits rose 98.1% in Q3 and 37.7% year to date. Q3 general expenses increased, partly due to a sales convention and severance costs.
- Cash flow: For the first nine months, operating activities provided $39.8 million, investing activities used $46.1 million, and financing activities provided $0.1 million. Cash and cash equivalents decreased $6.3 million to $21.0 million.
- Balance sheet and liquidity: At September 30, total assets were $1.54 billion, total investments $1.31 billion, policy liabilities $1.52 billion and stockholders’ equity was a deficit of $14.2 million, versus positive equity of $320.6 million at December 31, 2021. The equity decline was largely associated with fixed-income unrealized losses as interest rates rose. The company reported no debt and had not drawn on its $20 million revolving facility, which matures in May 2024.
- Investment portfolio: Fixed-maturity securities had a fair value of $1.16 billion, down from $1.47 billion at year-end 2021; the portfolio was 98.6% investment grade by fair value. Pretax net unrealized losses on available-for-sale securities were $213.7 million, compared with net unrealized gains of $126.9 million at year-end. The company attributed the losses mainly to higher rates and wider spreads, recorded no credit valuation allowance, and said it did not intend or expect to need to sell the securities before recovery.
- Other metrics: Direct insurance in force was $4.7 billion. Insurance issued increased 45.3% year to date to $458.3 million, which management attributed to new products and more policies and higher average face amounts.
Material changes versus prior periods
- Total revenue declined 8.8% in Q3 and 8.5% year to date, largely because investment-related gains in 2021 became losses in 2022. Premiums and net investment income combined increased in both periods.
- Year-to-date net loss widened to $10.0 million from $1.4 million. Life Insurance shifted from pretax income of $8.7 million to a pretax loss of $4.3 million, primarily due to investment-related losses. Home Service Insurance’s pretax loss narrowed to $1.8 million from $4.3 million.
- Rising interest rates drove a substantial decline in fixed-maturity fair values and pushed reported stockholders’ equity into deficit. The ten-year U.S. Treasury yield rose to 3.83% from 1.52% at December 31, 2021.
- Year-to-date operating cash flow increased to $39.8 million from $23.8 million in 2021; cash at period-end was $21.0 million versus $30.1 million a year earlier.
Outlook, risks and notable items
- Management gave no specific earnings or revenue guidance. It said it expects operating cash flow and invested assets to meet liquidity needs and will monitor policyholder behavior.
- Management warned inflation and reduced government relief could pressure Home Service policyholder retention, increasing surrenders or lapses and reducing sales. COVID-19 impacts remain uncertain; possible risks include mortality, distribution disruption, policyholder withdrawals and investment volatility.
- Regulatory capital: CICA International fell below Bermuda’s required long-term business minimum solvency margin following unrealized investment losses. It remained above the 120% Target Capital Level. The company requested a regulatory modification to exclude unrealized gains or losses from the margin calculation; the Bermuda Monetary Authority had not acted on the request. A keep-well agreement could require Citizens to contribute up to $10 million if needed to maintain the target level; no contribution was then required. Domestic insurance subsidiaries exceeded minimum capital requirements.
- Accounting transition: Citizens plans to adopt the long-duration insurance accounting standard (LDTI) on January 1, 2023, using a January 1, 2021 transition date. Its estimated transition impact remained subject to change as implementation and validation continued; the filing describes estimates that had shifted materially with interest-rate changes.
- Commitments and unusual items: CICA International had $42.7 million of unfunded investment commitments, primarily related to limited partnerships. Citizens repurchased 223,575 Class A shares during Q3 under an $8 million authorization, with $5.8 million remaining at quarter-end. A trade-secret lawsuit trial scheduled for October 17, 2022 was continued and had not been rescheduled. No significant subsequent events were reported.
- Management reported disclosure controls were effective as of September 30, 2022 and no material change in internal control over financial reporting during the nine-month period.
Important facts for investors to verify
- Whether the Bermuda regulator approves the requested solvency-margin modification and whether CICA International’s capital position or the potential need for a parent contribution changes.
- How rising rates, credit spreads and investment-market movements affect portfolio values, statutory capital, equity and future investment income.
- Whether surrender, lapse and matured-endowment trends create liquidity pressure or alter renewal premiums, particularly in Home Service Insurance.
- The final LDTI transition adjustments and resulting effects on accumulated other comprehensive income, accumulated deficit and earnings patterns.
- Performance of new products and international distribution, including the effects of Taiwan restrictions and the departure of a major Venezuelan distributor.
- Progress and potential financial impact of the trade-secret litigation, and use of the remaining share-repurchase authorization.