Citizens, Inc. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are primarily with FY 2019. Citizens is an insurance holding company operating Life Insurance and Home Service Insurance businesses. International policies are a substantial part of its business: foreign residents generated about 71% of total direct premiums.
Financial performance and position
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Total revenue | $238.9 million | $250.5 million |
| Premiums | $175.3 million | $184.3 million |
| Net investment income | $60.2 million | $59.5 million |
| Income (loss) before tax | $(12.3) million | $5.7 million |
| Net income (loss) | $(11.0) million | $(1.4) million |
| Operating cash flow | $48.8 million | $72.2 million |
| Total assets | $1.84 billion | $1.74 billion |
| Cash and cash equivalents | $34.1 million | $46.2 million |
| Debt | None reported | None reported |
Consolidated investment yield declined to 4.24% from 4.36%. Fixed maturities were $1.49 billion, or 89.8% of cash and invested assets; 98.5% were investment grade. Stockholders’ equity was $300.9 million, including $128.3 million of accumulated unrealized gains on fixed maturities. The company reported a net loss, so a conventional profit margin is not meaningful.
By segment, Life Insurance pretax income fell to $9.9 million from $11.8 million. Home Service Insurance shifted to a $3.5 million pretax loss from $1.2 million income. Other Non-Insurance Enterprises reported an $18.7 million loss, including change-in-control-related costs.
Material changes versus FY 2019
- Revenue declined 4.7%, primarily as premiums fell 4.9%, reflecting lower first-year and renewal Life Insurance premiums. Net investment income rose 1.1%, but investment yield fell 12 basis points.
- Claims and surrender benefits increased 13.4% to $121.1 million. Life Insurance surrender and matured-endowment benefits rose; Home Service death claims increased amid the pandemic, and Louisiana hurricanes raised property claims.
- General expenses increased 10.8%. The net loss included approximately $10.0 million of change-in-control and executive-related expenses, including $8.8 million of CEO severance and $1.2 million for accelerated restricted-stock vesting.
- Operating cash flow decreased from $72.2 million to $48.8 million. Cash declined, while total assets and investment holdings increased. The company reported no debt.
- Class B ownership transferred to the Harold E. Riley Foundation in July 2020, triggering a control dispute, leadership changes and litigation. Subsequent to year-end, the dispute was settled and the company agreed to buy all Class B shares for $9.1 million, subject to regulatory approval; the purchase price was placed in escrow in March 2021.
Outlook, risks and unusual items
- Outlook: Management provided no quantified earnings or revenue guidance. Priorities include launching Life Insurance products in the U.S. Hispanic market, transforming the Home Service product and sales offering, and continued technology and virtual-sales improvements. Management reported stronger Life Insurance first-year premiums in Q4 2020: 75% above Q3 2020 and 15% above Q4 2019.
- COVID-19 and catastrophes: The pandemic disrupted sales and premium collection, affected investment markets, and increased Home Service death claims. Three Louisiana hurricanes caused $1.2 million of net claims; claims above stated catastrophe reinsurance limits remain the insurer’s responsibility.
- Regulatory capital: CICA Ltd. fell $8.9 million below Bermuda’s Target Capital Level in March 2020, but the shortfall was rectified by April. At year-end it was above the threshold. Following a regulatory review, Bermuda’s regulator required a parent-subsidiary “Keepwell Agreement” by September 30, 2021, potentially requiring capital support. Domestic subsidiaries were above minimum RBC levels.
- Tax contingency: The IRS is reviewing withholding and reporting returns for international policies. The company had paid $8.0 million through the filing, but the payment did not resolve the matter. The disclosed probability-weighted estimated liability range was $7.3 million to $52.5 million after tax; actual exposure could exceed the estimate.
- Foreign-market exposure: The company warns that its foreign insurance sales may face licensing, product-approval, enforcement, currency-transfer and political risks. It has not qualified to do business or obtained policy approvals in foreign jurisdictions outside Bermuda.
- Other financial risks: Low rates may compress spreads and reduce reinvestment income; policy surrenders and endowment maturities could strain liquidity. The company had $68.6 million of private-equity investment commitments, including $30.0 million due within one year. It also disclosed litigation, legacy-system and cybersecurity risks.
- Accounting and audit: The company expects the forthcoming long-duration insurance accounting standard to have a material financial-statement impact. Deloitte issued unqualified opinions on the financial statements and internal controls. Goodwill of $12.6 million had an 8% fair-value cushion over carrying value.
Key facts for investors to verify
- Whether premium production and persistency recover, particularly in international markets and the planned U.S. Hispanic launch.
- The final IRS determination and whether recorded reserves adequately cover the tax and related policyholder obligations.
- Completion of regulatory approvals for the $9.1 million Class B share repurchase and the resulting governance transition.
- Terms and potential funding obligations under the required Bermuda Keepwell Agreement.
- Claims, surrender and endowment-maturity trends, as well as catastrophe reinsurance recoveries and limits.
- Investment portfolio credit quality, yield, liquidity, private-equity commitments and sensitivity to interest-rate changes.