Citizens, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited, with comparison to Q1 2013 unless otherwise noted. Citizens is an insurance holding company focused primarily on life insurance, including international life products and U.S. home-service insurance.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $53.0 million | $49.5 million | +7.0% |
| Insurance premiums | $43.0 million | $40.9 million | +5.1% |
| Net investment income | $9.9 million | $8.4 million | +18.1% |
| Income before tax | $1.7 million | $1.1 million | +52.7% |
| Net income | $1.2 million | $0.9 million | +39.8% |
| Operating cash flow | $20.5 million | $18.1 million | +13.5% |
Class A and Class B basic and diluted EPS were $0.02 and $0.01, respectively, unchanged from Q1 2013. Pretax margin was approximately 3.2% versus 2.2%; net margin was approximately 2.3% versus 1.7%. The effective tax rate rose to 29.2% from 22.7%.
Investment yield improved: the annualized yield on average invested assets was 4.22%, compared with 3.86% in Q1 2013. Management attributed the increase to reinvesting maturities, calls, and new premiums in higher-yielding bonds as rates modestly improved.
Financial position and liquidity
- Total assets were $1.260 billion at March 31, 2014, up from $1.216 billion at year-end 2013. Total investments were $977.6 million; cash and cash equivalents were $52.3 million, down from $54.6 million.
- Total liabilities were $1.004 billion, including $979.8 million of policy liabilities. Stockholders’ equity was $256.2 million, up from $245.8 million, primarily alongside higher unrealized investment gains recorded in other comprehensive income.
- Net unrealized gains on fixed maturities were $24.8 million, versus $5.1 million at year-end. Comprehensive income was $10.4 million, including $9.2 million of other comprehensive income.
- Operating cash flow was $20.5 million; investing activities used $22.7 million, including $4.8 million of net cash used in the MGLIC acquisition. Financing activities used $0.1 million. Cash declined by $2.3 million during the quarter.
- The filing presents no conventional corporate borrowings or funded debt balance. Annuity investment-contract liabilities were carried at $39.7 million; estimated fair value was $43.1 million.
- Management said available liquidity and expected future cash flows should meet funding needs. It reported no investment liquidation to fund operations during Q1. Insurance subsidiaries exceeded statutory risk-based capital minimums at December 31, 2013; the latest disclosed ratios ranged from 421% to 2,363% of control-level RBC.
Material changes and operating drivers
- Premium growth was driven mainly by first-year and renewal life business. Life-segment premiums rose to $31.8 million from $30.1 million; home-service premiums rose to $11.2 million from $10.8 million.
- Claims and surrenders increased 11.2% to $16.5 million, with surrender benefits up to $5.8 million from $4.6 million. Management cited higher life-segment surrenders, while noting experience was within expectations.
- Future policy-benefit reserve increases rose to $17.7 million from $17.0 million. Management linked reserve growth to sales of endowment products, which require higher initial reserves than whole-life products.
- Pre-tax income improved in all reported segments: Life Insurance earned $0.3 million versus $0.1 million; Home Service Insurance earned $1.5 million versus $1.2 million; Other Non-Insurance Enterprises lost $0.1 million versus $0.2 million.
- Citizens completed its acquisition of Magnolia Guaranty Life Insurance Company (MGLIC) on March 7 for approximately $5.2 million cash. MGLIC’s results are included in the home-service segment. The company said actuarial estimates and acquired intangibles were still being finalized, so reported acquisition amounts could change.
Outlook, risks, and unusual items
- No specific earnings, revenue, or EPS guidance was provided. Management stated that it expects liquidity sources and future cash flows to be adequate for funding needs.
- Key exposures include interest-rate and investment-market changes, issuer credit deterioration, mortality and morbidity experience, persistency and surrender activity, international market and political conditions, regulation and taxes, and acquisition integration. Business is concentrated in Latin America and the Pacific Rim, and the portfolio has substantial municipal-bond exposure, including holdings in Texas and Louisiana.
- The company reported no other-than-temporary investment impairments in either comparison period. It had $10.3 million of gross unrealized losses on fixed maturities at quarter-end; management said it did not intend, and did not expect to be required, to sell the affected securities before recovery.
- An external unclaimed-property audit, authorized by Louisiana, Arkansas, and Texas authorities, is underway, alongside an internal review. The company said potential payments, escheatment, penalties, and interest cannot currently be estimated and could be substantial relative to its size.
- A long-running Texas lawsuit involving policies sold to non-U.S. residents is no longer proceeding as a class action; individual claims could still be pursued. The company cannot estimate any possible loss. Other disclosed individual lawsuits were described as immaterial.
- Management identified interest-rate risk as the primary market risk. Fixed maturities represented most of the investment portfolio; a significant portion is callable. No derivatives, subprime exposure, or collateralized debt obligation exposure were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether final actuarial and intangible-asset valuations for the MGLIC acquisition materially change reported balances or earnings.
- Developments and potential financial exposure from the multi-state unclaimed-property audits.
- Trends in life-policy surrenders, endowment sales, reserve requirements, and persistency.
- Portfolio credit quality and concentrations, especially municipal exposures, and sensitivity of investment values and income to interest rates and calls.
- Statutory capital and dividend capacity at insurance subsidiaries; the RBC ratios disclosed are as of December 31, 2013, not March 31, 2014.