Business context and reporting period
Citizens, Inc. is an insurance holding company reporting for the fiscal year ended December 31, 2013. Its principal businesses are U.S.-dollar life and endowment insurance sold to foreign residents, domestic life insurance, and final-expense and limited property insurance in the southern U.S. The filing is an audited Form 10-K; financial figures below are in U.S. dollars.
Financial performance and position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $213.6 million | $202.8 million | +5.4% |
| Insurance premiums | $176.2 million | $169.9 million | +3.7% |
| Net investment income | $36.6 million | $31.7 million | +15.4% |
| Income before tax | $6.9 million | $6.0 million | +14.8% |
| Net income | $4.8 million | $4.5 million | +5.8% |
| Class A diluted EPS | $0.10 | $0.09 | Up $0.01 |
| Assets | $1.216 billion | $1.175 billion | +$41.3 million |
| Stockholders’ equity | $245.8 million | $263.1 million | −$17.3 million |
| Operating cash flow | $81.4 million | $69.3 million | +$12.1 million |
Net income margin was approximately 2.2% of revenue. Investment yield increased to 4.11% from 3.81%. Net cash used in investing activities was $84.9 million; year-end cash and equivalents were $54.6 million. The balance sheet reports no conventional borrowings; policy liabilities were $954.7 million, including $834.3 million of life reserves. Total contractual obligations were $906.7 million, principally projected policy benefits and claims.
Fixed maturities totaled $833.0 million, or 83.9% of cash, cash equivalents and investments. Approximately 96.3% of fixed maturities were investment grade. Year-end net unrealized gains on total fixed maturities were $5.1 million, versus $51.5 million in 2012; the decline contributed to comprehensive loss of $17.3 million and lower equity. Operating cash flows were positive, and management reported no liquidity issues in 2013 or 2012. All insurance subsidiaries exceeded minimum risk-based capital requirements; reported ratios ranged from 421% to 2,363%.
Material changes versus comparable periods
- Premium growth came mainly from life insurance, with life-segment premiums increasing to $132.5 million from $126.0 million. International endowment products represented approximately 73% of new sales.
- Reserve expense rose 11.3% to $74.2 million, reflecting low-rate assumptions and growth in endowment business, which builds reserves faster than traditional whole life.
- Claims and surrenders eased slightly to $64.4 million from $64.7 million; the prior-year comparison included higher property claims from Hurricane Isaac.
- Life Insurance pretax income improved to $2.1 million from $0.5 million; Home Service pretax income declined to $6.0 million from $6.4 million. Other Non-Insurance Enterprises reported a $1.2 million pretax loss.
- Life insurance in force fell to $4.616 billion from $4.976 billion, despite direct written in-force insurance rising to $4.732 billion. The filing attributes the net decline largely to lower assumed reinsurance.
- For the fourth quarter, revenue was $56.9 million and net income was $0.8 million, compared with $54.1 million and a $0.3 million net loss in fourth-quarter 2012.
Outlook, risks, contingencies and unusual items
The filing gives no quantified earnings or revenue guidance. Management expects low interest rates to remain a pressure on insurer margins, while noting investment yields had begun to rise. It describes continued international product sales, potential demand for cash-accumulation products, and possible domestic acquisition opportunities as business drivers. Magnolia Guaranty Life Insurance Company was acquired by Security Plan Life on March 7, 2014, for $5.2 million; it had $8.6 million of admitted assets at year-end 2013.
- Geographic concentration: Venezuela represented 22.3% of 2013 international direct premiums (the risk discussion cites 22.6%). Management warned that unrest, inflation, currency controls or regulatory changes could affect collections and sales. Colombia represented 19.5% of international direct premiums; new laws effective in 2013 could impede consultants, though no noticeable adverse effect had yet been reported.
- Investment and interest-rate exposure: A hypothetical 100-basis-point rise in rates would reduce the fair value of fixed maturities by approximately $58.3 million. Gross unrealized losses on available-for-sale securities were $13.1 million; no OTTI was recorded in 2013. Callable securities and reinvestment at lower yields remain risks.
- Legal and regulatory matters: Three states authorized unclaimed-property audits; potential payments, penalties and interest could be substantial, but the company could not estimate an amount. A long-running Texas securities-related case may proceed only as individual claims; likelihood and potential losses are undetermined. The Louisiana Road Home litigation was settled in 2013 for approximately $183,000, with no material financial-statement impact.
- Stock Investment Plan: The company disclosed potential rescission, damages or enforcement exposure related to prior Plan share sales. A new registration statement became effective January 14, 2013; the filing describes possible claims for sales before that date.
- Other items: 2013 included a $0.4 million realized loss on sales of equity mutual funds and approximately $0.5 million in write-offs of prior-period policy records. No warrants remained outstanding. The company reported no off-balance-sheet arrangements.
- Governance and distributions: Class B shares held by the founder’s trust elect a majority of directors. The company has never paid cash dividends on common stock and does not expect to do so in the foreseeable future.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also reported effective disclosure controls and internal controls.
Important facts for investors to verify
- Reconcile the disclosed Venezuela premium concentration figures (22.3% in the country table versus 22.6% in the risk discussion) and monitor collections and consultant activity in Venezuela and Colombia.
- Assess reserve adequacy and DAC recoverability under persistently low yields, rising surrenders, and the expanding endowment mix.
- Review the duration, call exposure, credit quality and unrealized losses of the fixed-maturity portfolio, including the impact of rate changes on equity and capital.
- Track the unclaimed-property audits and the status and potential exposure of the Texas litigation and Stock Investment Plan disclosures.
- Evaluate the Magnolia acquisition’s integration, contribution to Home Service results, and effect on capital and liquidity.
- Monitor direct versus assumed reinsurance and the reported decline in net insurance in force, alongside subsidiary RBC ratios and dividend restrictions.