Citizens, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are against December 31, 2019. Citizens is an insurance holding company operating Life Insurance and Home Service Insurance segments. Unless otherwise noted, amounts below are in millions of dollars.
Financial results and position
- Revenue: $55.7, down 10.7% from $62.4 a year earlier. Premiums were $41.3, down 2.7%; net investment income rose 10.0% to $15.2. Realized investment results shifted to a $1.3 loss from a $6.0 gain, which included a $5.5 gain on the sale of the former headquarters in Q1 2019.
- Profitability: Pretax loss was $2.2 versus pretax income of $2.0. Net loss improved to $3.6 from $3.8; Class A loss per share was $0.07 versus $0.08. Federal income tax expense was $1.3, despite the pretax loss.
- Benefits and expenses: Total benefits and expenses decreased 4.0% to $58.0. Claims and surrenders rose 14.8% to $26.4, while other general expenses fell 18.8% to $11.5.
- Investment yield: Annualized yield on average invested assets was 4.31%, versus 4.08% in Q1 2019 and 4.36% in Q4 2019.
- Comprehensive loss and equity: Net unrealized losses on fixed-maturity securities, net of tax, were $40.1 for the quarter. Total comprehensive loss was $43.7. Stockholders’ equity declined 17% from $259.8 at year-end to $215.7 at March 31.
- Cash flow and liquidity: Operating cash flow was $14.1, down from $17.9. Investing cash outflow was $26.2; cash and cash equivalents ended the quarter at $34.9, down from $46.2. Management reported no liquidity issues in the quarter and expected operating cash flows to meet cash needs for the next 12 months.
- Assets and liabilities: Total assets were $1,713.3 and total liabilities $1,497.6. Fixed maturities were $1,356.2, or 90.5% of cash and invested assets. Policy liabilities totaled $1,407.9. The filing’s presented balance sheet does not show a separate borrowings or debt balance.
Material changes and business trends
- Life Insurance first-year premiums increased 19.4%, but lower renewal premiums—attributed to prior product repricing and producer terminations—contributed to a 3.5% decline in segment premiums. Life segment pretax income fell to $2.1 from $4.6.
- Home Service premiums were slightly lower; temporary office closures and reduced in-person interactions affected March production and collections. The segment’s pretax loss widened to $2.1 from $0.3, including $1.7 of realized investment losses.
- Claims and surrender costs increased, particularly surrender benefits and matured endowments in Life Insurance. Management said death-claim experience remained within expected levels.
- COVID-19 market disruption drove substantial investment valuation losses. At March 31, fixed maturities had $40.1 of gross unrealized losses; the company recorded no fixed-maturity credit valuation losses for the quarter and said it did not intend, and was not more likely than not required, to sell these securities before recovery.
Outlook, risks, and unusual items
- The filing provides no numerical earnings or revenue guidance. Management said COVID-19’s full impact was difficult to quantify and continued monitoring effects on sales, premium collections, claims, surrenders, investment values, liquidity, and operations.
- Bermuda capital: CICA Ltd.’s statutory economic capital and surplus was $8.9 below the Bermuda target capital level at March 31. It notified the regulator and planned to submit a remediation report. The company estimated the shortfall had been rectified by April 30, but said further pandemic impacts could require a capital injection or parental guarantee. Domestic insurance subsidiaries were above required minimum risk-based capital levels.
- Tax compliance contingency: The company estimated a $10.0 after-tax liability for potential IRS withholding and reporting issues involving certain policies, with a probability-weighted estimated range of $7.4 to $52.5 after tax. Actual costs could exceed the estimate and even the range’s upper end.
- Control transfer and potential severance: Regulators were considering transfer of the controlling Class B shares from the founder’s trust to a charitable foundation. If the CEO is terminated without cause or resigns within the specified 18-month period after regulatory approval, the potential cash severance is $8.8, plus accelerated vesting of outstanding restricted stock units.
- Other exposures: The company disclosed a $37.0 unfunded commitment to a private equity fund investing in senior secured debt. It also noted risks from low reinvestment yields, policyholder withdrawals or lump-sum endowment maturities, credit downgrades, and COVID-related premium relief or claims.
- The company adopted the expected-credit-loss standard effective January 1, 2020, recording a $0.4 increase in accumulated deficit related to agent debit-balance collectability. A long-duration insurance accounting standard expected to be effective in 2022 is anticipated to have a material impact; the company was evaluating the effect.
Important facts for investors to verify
- Progress and final resolution of the IRS matter, including the adequacy of the $10.0 accrual and any required policy remediation.
- CICA Ltd.’s regulatory capital position after April 30, 2020, and whether a capital contribution or parental guarantee becomes necessary.
- Subsequent investment portfolio performance, credit-rating changes, and whether market losses result in credit allowances or realized losses.
- COVID-19’s continuing impact on new business, renewal premiums, collections, claims, surrenders, endowment elections, and liquidity.
- Regulatory approval and completion of the Class B share transfer, and any resulting governance or CEO-severance consequences.