Citizens, Inc. — Q2 2018 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. The unaudited consolidated statements cover Citizens, Inc. and its subsidiaries. Citizens is an insurance holding company with Life Insurance and Home Service Insurance segments, including substantial international life business.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $59.8 million | $60.9 million | $117.3 million | $120.4 million |
| Net income (loss) | $(2.6) million | $0.6 million | $(2.5) million | $2.6 million |
| Class A EPS | $(0.05) | $0.01 | $(0.05) | $0.05 |
| Operating cash flow | Not reported quarterly | $42.0 million | $43.4 million |
Six-month pretax loss was $1.5 million versus pretax income of $3.0 million a year earlier. Q2 pretax loss was $4.1 million versus income of $2.1 million. Six-month federal income tax expense was $1.0 million; Q2 recorded a $1.6 million tax benefit. No separate operating-margin measure is provided.
- Premiums declined 3.4% in Q2 and 3.2% for the first half, primarily from lower first-year and renewal Life premiums.
- Net investment income rose 5.6% in Q2 and 6.9% for the first half. The annualized portfolio yield was 4.33% for the first half, compared with 4.24% in 2017.
- Six-month realized investment results were a net loss of $0.8 million, versus a $1.1 million net gain in 2017, which included a gain on sale of an office building. The 2018 period included a $0.225 million impairment on one bond issuer.
- Total assets were $1.653 billion at June 30, 2018, compared with $1.644 billion at year-end 2017. Stockholders’ equity was $197.4 million, down from $223.5 million; accumulated other comprehensive income fell to $6.7 million from $26.3 million, mainly reflecting unrealized investment losses.
- Cash and cash equivalents were $63.3 million, up from $46.1 million at year-end. Six-month investing cash outflow was $24.9 million, and financing cash inflow was $0.1 million.
- Investments totaled $1.291 billion, including $1.191 billion in fixed maturities. Policy liabilities were $1.337 billion, including $1.164 billion of life insurance future policy reserves. The filing does not report conventional funded debt or a debt balance.
Material changes versus prior period
- Results shifted from prior-year profits to losses. Higher claims and surrender costs, general expenses, and weaker realized investment results contributed; lower premiums were partly offset by higher investment income and lower commissions.
- Q2 other general expenses rose to $14.5 million from $9.4 million. Management cited audit-related costs, executive salaries, and changes in estimates and costs related to tax-compliance matters.
- Life Insurance reported a Q2 pretax loss of $1.3 million versus income of $1.9 million; Home Service reported a Q2 loss of $1.0 million versus income of $0.6 million. For the first half, Life pretax income rose to $4.6 million from $3.6 million, while Home Service moved to a $2.8 million loss from income of $0.9 million.
- Available-for-sale fixed-maturity net unrealized gains declined to $8.5 million from $38.6 million at year-end. The 10-year U.S. Treasury yield rose to 2.85% from 2.40% over the first half.
Outlook, risks, contingencies, and notable items
- No numerical earnings or revenue guidance is provided. The company stated it planned to re-enter the domestic life market in 2019 and continued evaluating products, markets, technology, investment strategy, and possible international restructuring or market exits.
- Effective July 1, 2018, all international policies issued by CICA were novated to the newly established Bermuda entity, CICA Life Ltd. Management said the transition was disrupting international sales; its pace and longer-term effect remained uncertain. The company also discontinued accepting applications from Brazilian residents or citizens in April 2018.
- International business represented approximately 71% of direct premiums in 2018. Management cited foreign regulatory and political conditions, currency access, and declining sales in some markets, including Venezuela, as risks.
- The estimated liability for potential IRS liabilities and remediation costs related to noncompliant life policies and annuity contracts was $7.1 million, within an estimated range of $4.5 million to $44.0 million. The company said actual costs could exceed the reserve or range and anticipated additional 2018 costs; discussions and proposed IRS closing agreements were pending.
- Liquidity was described by management as adequate, with available-for-sale securities representing 75.6% of investments and available for conversion to cash. Risks include lump-sum elections on maturing endowment policies, possible elevated surrenders, and reinvestment of maturing or callable bonds at lower yields.
- All insurance subsidiaries were above statutory risk-based capital minimums at June 30, 2018. The filing says the holding company may fund subsidiaries if needed to maintain required capital.
- Disclosure controls were not effective because material weaknesses in internal control over financial reporting remained unremediated. Management planned remediation and expected testing to begin in Q3 2018.
- An SEC investigation concerning internal controls and disclosure practices remained ongoing; the company reported no fraud allegations and could not predict timing or outcome. A related securities class action was dismissed with prejudice, and management understood the appeal period had expired.
- The company reported no off-balance-sheet arrangements and no material change in contractual obligations. It also reported no other-than-temporary investment impairments in Q2; a $0.225 million bond impairment was recorded in the first half.
Important facts for investors to verify
- Progress and final financial impact of the IRS tax-compliance matters, including any closing agreements and policyholder effects.
- Sales, renewals, surrenders, and premium collections following the Brazil withdrawal and transfer of international policies to CICA Life Ltd.; confirm Bermuda regulatory and reporting implications.
- Remediation and testing of the disclosed material weaknesses, and any developments in the SEC investigation.
- Liquidity and statutory capital under alternative policyholder maturity and surrender scenarios, along with the effect of bond reinvestment yields on investment spreads.
- Whether declining Home Service performance, higher expenses, and investment valuation changes persist in subsequent periods.