Citizens, Inc. — Q2 2019 Form 10-Q Summary
Business context and reporting period
Citizens, Inc. is an insurance holding company serving U.S. and international markets, principally through life insurance and home-service insurance. Its international policies are concentrated in Latin America and the Pacific Rim. This unaudited filing covers the quarter and six months ended June 30, 2019, compared with the corresponding 2018 periods; balance-sheet comparisons are to December 31, 2018. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $56.9 million | $59.8 million | $119.3 million | $117.3 million |
| Pre-tax loss | $3.3 million | $4.1 million | $1.3 million | $1.5 million |
| Federal income tax expense (benefit) | $1.2 million | $(1.6) million | $7.1 million | $1.0 million |
| Net loss | $4.6 million | $2.6 million | $8.4 million | $2.5 million |
| Class A loss per share | $(0.09) | $(0.05) | $(0.17) | $(0.05) |
- Revenue and margins: Q2 insurance premiums were $43.8 million, down 5.0%; six-month premiums were $86.3 million, down 4.3%. Net investment income rose 10.9% in Q2 to $15.3 million and 5.5% for the first half to $29.1 million. The company reported losses before tax in both periods; it does not present a consolidated operating-margin measure in the filing.
- Drivers of earnings: Claims and surrenders increased 31.1% in Q2 and 19.8% for the first half, mainly from life-policy surrenders and matured endowments. Future-policy-reserve expense fell 42.8% in Q2 and 30.1% for the half. General expenses fell 17.4% in Q2 but rose 24.4% for the half, in part because 2018 included a $5.4 million reduction in the estimated tax-compliance liability. The first-half tax expense included $1.6 million related to CICA Ltd. Subpart F income and effects of uncertain tax positions.
- Cash flow: First-half operating cash flow was $31.4 million, versus $42.0 million in 2018. Investing activities used $41.4 million, versus $24.9 million; financing activities used $1.0 million. Cash and cash equivalents ended June at $34.6 million, down from $45.5 million at year-end and $63.3 million at June 2018.
- Balance sheet and liquidity: Total assets were $1.702 billion; total liabilities were $1.466 billion, including $1.372 billion of policy liabilities; stockholders’ equity was $236.4 million. Investments totaled $1.444 billion, including $1.341 billion of available-for-sale fixed maturities. The filing reports no conventional debt balance. Management reported no liquidity issues during the half and said available sources and expected cash flows should meet needs, while noting potential liquidity pressure from unusually high policyholder withdrawals or endowment maturities.
- Investment and capital metrics: The annualized yield on average consolidated invested assets was 4.30% for the first half, versus 4.33% a year earlier. Fixed maturities were 90.7% of cash, cash equivalents and investments; 26.3% of the fixed-maturity portfolio was rated BBB and 1.5% BB or lower. Net unrealized gains on fixed maturities were $67.3 million, compared with $7.3 million at year-end, primarily reflecting lower market interest rates. U.S. insurance subsidiaries exceeded minimum RBC requirements and CICA Ltd. exceeded Bermuda solvency requirements.
Material changes versus prior comparable periods
- Q2 total revenue declined 5.0%, while first-half revenue increased 1.7%, supported by higher investment income and first-quarter realized gains.
- Net loss widened in Q2 and for the first half. The first-half result included $7.1 million of tax expense, compared with $1.0 million in 2018, despite a smaller pre-tax loss.
- First-half realized investment results were a $3.1 million net gain, including a $5.5 million gain on sale of the former Austin headquarters and a $3.1 million impairment of the Citizens Academy property. Q2 recorded a $2.9 million net realized loss, principally from the Academy impairment.
- New policy counts fell 23.4% in Life Insurance and 10.5% in Home Service Insurance for the first half. Management cited the Brazil sales exit and termination of certain Latin American consultant agreements; average face amounts issued increased.
- Accumulated other comprehensive income rose to $61.2 million from $5.4 million at year-end, largely reflecting unrealized fixed-maturity gains. This lifted reported equity, but is distinct from net income.
Outlook, commentary, risks and unusual items
- No quantitative earnings, revenue or other financial guidance is provided. Management’s stated 2019 priorities are operational excellence, growth in existing markets and development of new capabilities. It described continued challenges finding comparable investment yields in a low-rate environment.
- The company recorded a $10.0 million after-tax estimated liability for policy tax-compliance and remediation matters. Its probability-weighted estimated range is $6.0 million to $52.5 million after tax; actual exposure could exceed the range. The IRS accepted closing agreements in June; specified payments totaling $127,897 were made July 12, 2019, and corrective policy steps were expected by September 5, 2019. Management also estimated $0.6–$0.9 million in additional analysis costs, which it said could not yet be reliably estimated as a liability.
- International business faces foreign-law, currency-access, political and regulatory risks. Management highlighted deteriorating conditions in Venezuela and noted that endowment maturities and surrender activity may affect cash needs. Reinvestment of called or maturing securities at lower yields could also pressure investment spreads and profitability.
- Interest-rate exposure is material because fixed maturities dominate the investment portfolio; securities are also subject to call risk. Management said the portfolio’s fair-value movements were within its interest-rate sensitivity analysis. No derivative, subprime or collateralized debt obligation exposure was reported.
- A material weakness in internal control over financial reporting, concerning controls for significant and unusual transactions, remained unremediated at June 30. Management expected remediation by December 31, 2019; disclosure controls were therefore concluded not effective at a reasonable-assurance level.
- The company is pursuing litigation against a former executive, related entities and former consultants alleging unfair competition and trade-secret misappropriation. A preliminary-injunction hearing was scheduled for August 12, 2019; the outcome was uncertain. The filing reported no other material pending legal proceedings.
- New long-duration insurance-contract accounting guidance is expected by management to have a material impact; the FASB had tentatively agreed to defer its effective date by one year, to 2022 if finalized. The company was evaluating the impact of the expected-credit-loss standard, which it said could also be material.
Important facts for investors to verify
- Updates to the IRS-related liability, the ultimate remediation costs and completion of required corrective steps.
- Whether the internal-control material weakness was remediated by the stated year-end target and whether later filings identify any reporting effects.
- Premium and policy-count trends by segment and country, particularly Venezuela and other international markets, and the effect of the Brazil exit.
- Actual surrender and endowment payout experience, policyholder elections, and resulting liquidity needs.
- Investment portfolio credit quality, call and reinvestment activity, yields, unrealized gains or losses, and any impairment developments.
- Progress and outcome of the preliminary-injunction hearing and related litigation.