Citizens, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; unaudited. Citizens is an insurance holding company focused on life insurance, with home-service life and limited property insurance operations. It reported approximately $1.0 billion of assets and $5.3 billion of insurance in force.
Key financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $49.6 million | $48.3 million | $96.5 million | $93.4 million |
| Net income | $0.4 million | $3.0 million | $1.9 million | $4.6 million |
| Net income margin | 0.8% | 6.2% | 2.0% | 5.0% |
| Operating cash flow | Not separately provided | Not separately provided | $30.2 million | $28.0 million |
- Premiums rose 4.3% in Q2 and 4.6% for the six-month period, mainly from life-insurance renewal premiums. Net investment income increased 1.5% and 2.6%, respectively.
- Pre-tax income fell to $0.3 million in Q2 from $4.4 million; for six months it declined to $2.4 million from $6.9 million. Insurance benefits and expenses increased to $49.3 million in Q2 and $94.1 million for six months.
- Claims and surrenders rose 8.1% in Q2 and 3.6% for six months. Growth in policy benefit reserves was a larger driver: $16.8 million in Q2 and $30.9 million for six months, up from $13.0 million and $25.3 million.
- Cash and cash equivalents were $68.9 million at June 30, versus $33.3 million at year-end 2011. Total investments were $843.0 million; total assets were $1.129 billion; total liabilities were $874.0 million; stockholders’ equity was $255.4 million. Liabilities were principally insurance policy obligations. The filing does not show conventional borrowing debt.
- Insurance policy liabilities were $838.9 million. The available-for-sale fixed-maturity portfolio had $37.5 million of unrealized gains; accumulated other comprehensive income was $24.6 million.
- Net cash provided by investing activities was $4.0 million, versus $20.7 million used in the prior-year period. The company said cash accumulated partly due to timing while awaiting investment in suitable long-term securities.
Changes, outlook, and notable matters
- Life Insurance reported pre-tax losses of $1.0 million for Q2 and $0.9 million for six months, compared with profits of $1.6 million and $2.2 million a year earlier. Home Service remained profitable, but its pre-tax income decreased to $1.8 million in Q2 and $4.2 million for six months.
- Management attributed reserve growth to stronger-than-assumed persistency, low interest rates increasing reserves on newer policies, and increased sales of endowment products, which require higher initial reserves. The consolidated portfolio yield was 3.77%, down from 3.92% at December 31, 2011.
- No numeric earnings or revenue guidance was provided. Management said available liquidity and expected cash flows should meet funding needs; insurance subsidiaries exceeded statutory risk-based capital minimums at December 31, 2011.
- Accounting changes: retrospective adoption of revised deferred acquisition cost rules reduced December 31, 2011 DAC by $11.8 million and equity by $7.6 million; comparative 2011 results were adjusted. Separate prior-period actuarial and reserve-model adjustments affected 2012 interim results: DAC adjustments reduced earnings, while reserve adjustments increased earnings. Management said these items were material to the interim periods but not expected to be material to full-year 2012 or earlier years.
- Contingencies include the Texas insurance/securities lawsuit and Louisiana Road Home litigation related to Katrina claims. The company could not estimate possible losses or ranges for either matter; it intends to defend them. Additional Katrina/Rita cases were described as immaterial.
- Key risks include low interest rates, investment credit and market-value changes, mortality and persistency experience, policyholder behavior, litigation, regulation and taxes, and concentration of international business in Latin America and the Pacific Rim. No other-than-temporary investment impairments were recorded in the period.
Important facts for investors to verify
- Whether reserve increases and elevated benefits continue to pressure Life Insurance profitability, and how persistency and endowment-product mix develop.
- Whether investment income can offset continued portfolio-yield pressure, and the credit quality and concentration of municipal and corporate holdings.
- The impact of the DAC and reserve-model adjustments on reported earnings and comparability, including the related actuarial assumptions.
- Developments in the Louisiana and Texas litigation, for which potential losses were not estimable.
- Liquidity and statutory capital at the insurance-subsidiary level; the RBC ratios shown in this filing are as of December 31, 2011, not June 30, 2012.