UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20172023
Commission File Number: 000-16509or
COMMISSION FILE NUMBER: 000-16509
CITIZENS, INC.
(Exact Namename of Registrantregistrant as Specifiedspecified in Its Charter)its charter)
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| Colorado | | 84-0755371 |
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Colorado | | 84-0755371 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.employer identification no.) |
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2900 Esperanza Crossing, Austin, TX | | 78758 |
(Address of principal executive offices) | | (Zip Code) |
(512) 837-710011815 Alterra Pkwy, Suite 1500, Austin, TX 78758
( (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code)code(512) 837-7100
Securities registered pursuant to Section 12(b) of the Act:
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| Securities registered pursuant to Section 12(b) of the Act |
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| Class A Common Stock | CIA | New York Stock Exchange |
(Title of Each Class)each class) | (Trading symbol(s)) | (Name of Each Exchangeeach exchange on Which Registered)which registered) |
Securities registered pursuant to Section 12(g) of the Act:
Act
None
(Title of class)
Indicatebycheckmark if theregistrantisawell-known seasoned issuer, as defined in Rule 405 of the Securities Act. o☐ Yes ý☒ No
Indicatebycheckmark if theregistrant isnotrequiredtofile reports pursuant to Section 13 orSection15(d)of the Act.o ☐ Yes ý☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý☒ Yes o☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý☒ Yes o☐ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K). ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.Act:
Large accelerated filer oAccelerated filer ýNon-accelerated filer oSmaller reporting company oEmerging growth company o | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | ☐ | | Accelerated filer | ☒ | | Non-accelerated filer | ☐ | | Smaller reporting company | ☒ | | Emerging growth company | ☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o☐ Yes ý☒ No
As of June 30, 2017,2023, the aggregate market value of the Class A common stock held by non-affiliates of the registrant was approximately $340,350,072.$115,859,350.
NumberAs of March 6, 2024, the Registrant had 49,572,398 shares of Class A common stock outstanding as of March 5, 2018.outstanding.
Class A: 49,080,114
Class B: 1,001,714
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report incorporates by reference certain portions of the definitive proxy materials to be delivered to stockholders in connection with the 20182024 Annual Meeting of Shareholders.
Shareholders (the "2024 Proxy Statement"). The 2024 Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
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TABLE OF CONTENTS
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| PART I | | |
| Item 1. | | |
PART IItem 1A. | | Page |
Item 1.1B. | | |
Item 1A.1C. | | |
Item 1B.2. | | |
Item 2.3. | | |
Item 3.4. | | |
Item 4. | | |
| PART II | | |
| Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
PART IIIItem 9C. | | |
| PART III | | |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
| PART IV | | |
| Item 15. | | |
| Item 16. | | |
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FORWARD-LOOKING STATEMENTS
Certain statements contained in thisThis Annual Report on Form 10-K are not statements of historical fact and constitute(“Form 10-K”) contains forward-looking statements, within the meaning of the federal securities laws, including, without limitation,Private Securities Litigation Reform Act of 1995. All statements specifically identified as forward-looking statements withincontained in this document. Many of these statements contain risk factors as well. In addition, certain statements in future filings by the Company with the Securities and Exchange Commission, in press releases, and in oral and written statements made by us or with the approval of the Company, which are notForm 10-K other than statements of historical fact, constituteincluding statements regarding our future results of operations and financial position, our business strategy and plans, our expected capital needs, and our objectives for future operations, are forward-looking statements. Examples ofForward-looking statements may be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. We have based these forward-looking statements include, but are not limited to: (i)largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure,operations, business strategy, short-term and other financial items, (ii) statements of our planslong-term business operations and objectives, by our management or Board of Directors, including those relating to products or services, (iii) statements of future economic performance and (iv) statements of assumptions underlying such statements. Words such as "believes," "anticipates," "assumes," "estimates," "plans," "projects," "could," "expects," "intends," "targeted," "may," "will" and similar expressions are intended to identifyfinancial needs. These forward-looking statements, but are not the exclusive means of identifying such statements.
Forward-looking statements are subject to
known and unknowna number of risks, uncertainties and
otherassumptions, including those described in Part I, Item 1A, Risk Factors in this Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors thaton our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contemplated bycontained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Factors that could cause the Company's future results to differ materially from expected results include, but are not limited to:
Changes in the application, interpretation or enforcement of foreign insurance laws that impact our business, which derives the majority of its revenues from residents of foreign countries;
Potential changes in amounts reserved for in connection with the noncompliance of a portion of our insurance policies with Sections 7702 under the Internal Revenue Code, the failure of certain annuity contracts to qualify under Section 72(s) of the Internal Revenue Code and the anticipated timing of finalization of our proposed closing agreements with the IRS to address these matters;
The anticipated transition of our international business to a new Bermuda-based entity, the adoption of our international business to regulatory oversight by the Bermuda Monetary Authority and potential shifts in policyholder behavior arising from these changes;
Changes in foreign and U.S. general economic, market, and political conditions, including the performance of financial markets and interest rates;
Changes in consumer behavior or regulatory oversight, which may affect the Company's ability to sell its products and retain business;
The timely development of and acceptance of new products of the Company and perceived overall value of these products and services by existing and potential customers;
Fluctuations in experience regarding current mortality, morbidity, persistency and interest rates relative to expected amounts used in pricing the Company's products;
The performance of our investment portfolio, which may be adversely affected by changes in interest rates, adverse developments and ratings of issuers whose debt securities we may hold, and other adverse macroeconomic events;
Results of litigation we may be involved in;
Changes in assumptions related to deferred acquisition costs and the value of any businesses we may acquire;
Regulatory, accounting or tax changes that may affect the cost of, or the demand for, the Company's products or services;
Our concentration of business from persons residing in Latin America and the Pacific Rim;
Changes in tax laws;
Effects of acquisitions and restructuring, including possible difficulties in integrating and realizing the projected results of acquisitions;
Changes in statutory or U.S. Generally Accepted Accounting Principles ("U.S. GAAP"), policies or practices;
Changes in leadership among our board and senior management team.
Our success at managing risks involved in the foregoing; and
The risk factors discussed in "Part 1.-Item 1A- Risk Factors" of this report.
Such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakesWe assume no obligation to revise or update any forward-looking statementstatements for any reason, except as required by law. You should be aware that factors not referred to reflect events or circumstances afterabove could affect the date on which such statement is made.accuracy of our forward-looking statements and use caution and common sense when considering our forward-looking statements.
ACCESS TO INFORMATION
The U.S. Securities and Exchange Commission ("SEC") maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. We also make available, free of charge, through our Internet website (http://www.citizensinc.com), our Annual ReportReports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 Reports filed by officers and directors, news
releases, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the Securities and Exchange Commission.SEC. We are not including any of the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K.
December 31, 2023 | 10-K 1
2
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
PART I
Item 1.1. BUSINESS
OverviewOVERVIEW
Citizens, Inc. (“Citizens”("Citizens" or the "Company") is an insurance holding company incorporated in Colorado serving the life insurance needs of individuals in the United States since 1969 and internationally since 1975. Through our domestic insurance subsidiaries, we are licensed to provide insurance benefits to residents in 39 U.S. states and through our international subsidiaries, we provide insurance benefits to residents in over 75 different countries. We pursue a strategy of offering traditional insurance products in niche markets where we believe we are able to achieve competitive advantages. We had approximately $1.6$1.7 billion of assets and approximately $4.9 billion of direct insurance in force at December 31, 2017 and approximately $4.5 billion of insurance2023.
We operate in force. Our core insurance operations include:two business segments:
•Life Insurance - Internationally, we sell U.S. dollar-denominated ordinary whole life insurance, endowment and endowmentcritical illness policies predominantly sold to foreignnon-U.S. residents, located principally in Latin America and the Pacific Rim,Rim. Domestically, we sell whole life insurance, life insurance with living benefits, critical illness, credit life and disability products throughout the U.S.
•Home Service Insurance - We sell final expense life insurance policies to middle- and lower-income households, as well as whole life products with higher allowable face values, in Louisiana, Mississippi and Arkansas.
Our Principal Brands
LIFE INSURANCE SEGMENT
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| Internationally, we conduct our Life Insurance segment business through CICA Life, A.I., a Puerto Rico company ("CICA International"). |
| Domestically, we conduct our Life Insurance segment business through CICA Life Insurance Company of America ("CICA Domestic"). |
HOME SERVICE INSURANCE SEGMENT
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| We conduct our Home Service Insurance segment through Security Plan Life Insurance Company ("SPLIC") and Magnolia Guaranty Life Insurance Company ("Magnolia"). |
As an insurance provider, we collect premiums on an ongoing basis from our policyholders and invest the majority of the premiums to pay future benefits, including claims, surrenders and policyholder dividends. Accordingly, the Company derives its revenues principally from: (1) life insurance premiums earned for insurance coverages provided to insureds in our two operating segments; and (2) net investment income. In addition to paying and reserving for insurance benefits that we pay to our policyholders, our expenses consist primarily of the costs of selling our insurance products (e.g., commissions, underwriting, marketing expenses), operating expenses and income taxes.
Because collection of premiums is the primary source of our revenues, our overall financial performance depends primarily upon the development and distribution of our products. A key to product development is the pricing of our insurance products and the accuracy of our pricing assumptions. We seek to price our insurance policies such that insurance premiums and future net investment income earned on premiums received will cover the ultimate cost of paying claims on our policies, our expenses and will also yield a profit margin. Pricing adequacy depends on a number of factors, including the ability to project future losses based on historical loss experience adjusted for
December 31, 2023 | 10-K 2
known trends, proper evaluation of underwriting risks, the Company’s response to competitors, commission payments for selling our products, expectations about interest rates and regulatory or legal developments, and expense levels.
In addition to insurance premiums, the investment return, or yield, on invested assets is an important element of the Company’s earnings since life insurance products are priced with the assumption that premiums received can be invested for a period of time before benefits are paid. Pursuant to regulatory guidelines, most of the Company’s invested assets are held in available-for-sale ("AFS") fixed maturity securities, primarily in asset classes of corporate bonds, municipal bonds, and government obligation bonds. The interest rate environment has a significant impact on the determination of insurance contract liabilities, our investment rates and yields, and our asset/liability management. The profitability of our "spread-based" product features depends largely on the Company’s ability to earn higher returns on invested assets than the interest we credit to policyholders.
The primary investment objective for the Company is to maximize economic value, consistent with acceptable risk parameters, including the management of credit risk and interest rate sensitivity of invested assets, while generating sufficient after-tax income to meet policyholder and corporate obligations. The Company maintains a prudent investment strategy that may vary based on a variety of factors including business needs, regulatory requirements and tax considerations.
IN 2021, WE BECAME A NON-CONTROLLED COMPANY
Throughout most of our history, the Company was led and controlled by our founder Harold E. Riley and his family members. Mr. Riley passed away in 2017 and in 2020, a change-in-control of our Company occurred when the shares held by the Harold E. Riley Trust were transferred to the Harold E. Riley Foundation (the “Foundation”). In February 2021, the Company entered into an agreement with the Foundation to purchase all of the outstanding shares of Class B common stock for a purchase price of $9.1 million (the “B Share Transaction”). After the completion of the B Share Transaction and the appointment of a new Chief Executive Officer, we believe the Company was positioned to offer stability to our management team, employees and independent sales force and was able to move forward with new business and strategic initiatives, as described below.
STRATEGIC INITIATIVES
Historically, our insurance companies have only issued a few products and had limited distribution channels. Since the change-in-control described above, our growth strategy shifted to focusing on first year sales growth through introduction of new products and new distribution channels, retaining renewal premiums through policy retention efforts, focused execution, and financial and expense discipline. We believe these factors will lead to growth and profitability.
We believe that our roadmap execution process is key to achieving our strategic goals as it helps us focus on three specific sales levers in each market - products, promotions and processes. Specifically, we implemented a five-quarter roadmap that lays out the following:
•Products. We have a robust product development process that focuses on our customer needs by developing new products tailored to our specific markets, working with partners to develop products tailored to their markets, and enhancing existing products. New products help our sales force, as they can sell additional products to existing customers and offer a broader portfolio of products to entice prospective customers. A broader product portfolio also helps attract new distributors. Our management team meets on a monthly basis to ensure we are bringing the right products to market at the right time.
•Promotions. We are focused on implementing sales promotions and campaigns in order to align our sales consultant compensation opportunities with our premium revenue goals and our growth and retention initiatives.
•Processes. We are implementing process improvements and new technologies in order to get products to our customers faster and improve the experience for both our policyholders and our agents. We also implemented new processes and technologies to help our employees work more effectively and efficiently.
December 31, 2023 | 10-K 3
Status of New and Enhanced Products; Trends in Market Demand
As mentioned above, offering new and enhanced products are key to achieving our strategic goals. In 2023 we:
•Introduced 3 new products in both English and Spanish under our CICA Domestic brand, leading to first year premium revenue growth of 13% in our Life Insurance segment.
•Obtained an A.M. Best rating for the first time ever in July 2023.
◦CICA Domestic is rated as a B++ with a "Very Strong" balance sheet. We believe this will help us expand our distribution networks and the appeal of our products to consumers.
•Completed the move of our international business from Bermuda to Puerto Rico, which we believe will drive greater demand for our international products.
As we seek to optimize value for the Company's shareholders, customers and distributors, we believe our efforts to develop and enhance our products, incentivize our sales force and make process and technology improvements will continue to put the Company on a stronger financial footing and drive sustainable growth.
LIFE INSURANCE SEGMENT
Until December 31, 2022, our Life Insurance segment primarily operated through CICA Life Ltd. ("CICA Bermuda"), a Bermuda company. Upon surveying the market demands and needs of our policyholders, in 2022 we formed a new subsidiary in Puerto Rico, CICA Life, A.I. ("CICA International"). CICA International received a license in September 2022 to issue business as a Puerto Rico international insurer for the Company’s international portion of its Life Insurance segment. Beginning January 1, 2023, all new international policies are issued by CICA International (CICA Life, A.I.) and on August 31, 2023, CICA Bermuda transferred all of its insurance in force business to CICA International and we voluntarily surrendered our insurance license in Bermuda. Because CICA International provides our non-U.S. policyholders the ability to purchase policies in a U.S. territory and in a jurisdiction where the primary language spoken is Spanish, which is the primary language of the majority of our international policyholders, we believe this change will drive sales and improve policy retention, leading to revenue growth.
INTERNATIONAL LIFE INSURANCE
Sales and Distribution
We focus our international sales to residents in Latin America and the Pacific Rim. As of December 31, 2023, we had insurance policies in force in over 75 foreign countries and receive the majority of our premiums from Colombia, Taiwan, Venezuela, Ecuador and Argentina. International direct premiums comprised approximately 97% of total direct premiums in the Life Insurance segment and 70% of our total consolidated direct premiums in 2023.
December 31, 2023 | 10-K 4
We believe positive attributes of our international insurance business typically include:
•larger face amount policies issued compared to our U.S. operations, which results in low underwriting and administrative costs per dollar of coverage;
•high persistency and low mortality charges due to our customer demographics; and
•premiums paid annually at the beginning of each policy year rather than monthly or quarterly, which reduces our administrative expenses, accelerates cash flow and results in lower policy lapse rates than premium payment options with more frequently scheduled payments.
We sell our products internationally through independent marketing consultants;agencies and consultants who specialize in life insurance products. We enter into contracts with the independent marketing agencies pursuant to which they recruit, train and supervise their managers and associates in the sales and service of our products. These agencies receive commissions for products they sell and service, as well as commission overrides on the business that their agents produce and, in return for the override, they guarantee any debt their agents owe to us. Their agents also contract directly with us as independent consultants and receive commission compensation directly from us. This allows us to develop a relationship with their associates so if an agency contract is terminated for any reason, we may seek to continue the existing independent consultant marketing arrangements with the associates of such agency. Our agreements typically provide that the agencies and their agents are independent consultants responsible for their own operational expenses and are the representative of the prospective insured. Our contracts require the independent marketing agencies and consultants to understand and comply with all laws applicable to sales of our products in their country.
Products
CICA International issues primarily ordinary whole life insurance policies to middle income households concentrated in the Midwest, Mountain West and southern United States through independent marketing consultants; and
final expense and limited liability property policies to middle and lower income households in Louisiana, Mississippi and Arkansas through employee and independent agents in our home service distribution channel and funeral homes.
During the last five years, our business, revenues and assets have continued to grow, driven primarily by continued new and renewal sales and increased investment income. From 2013 through 2017, revenues rose 18% from $213.6 million in 2013 to $252.6 million in 2017. During that same period, our assets grew 36%, from $1.2 billion to $1.6 billion. Our net income declined 822%, from net income of $5.3 million in 2013 to a net loss of $38.1 million. 2017 is impacted as a result of the newly enacted Tax Cuts and Jobs Act signed into law on December 22, 2017 (the “New Tax Act”), resulting in re-measurement of deferred tax balances that decreased income in the current year by $35.7 million. In addition, we recorded a goodwill impairment of $4.6 million in 2017 and we recorded higher auditing, consulting and legal costs. See Item 6. "Selected Financial Data" and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Report.
Recent Board of Directors and Officer Changes
On February 1, 2017, the Company announced the appointment of Terry Festervand, as Chief Operating Officer. Ms. Festervand joins Citizens with over 18 years of insurance experience at American International Group, Inc. (“AIG”) in various capacities. During the last five years, she served at AIG Life and Retirement, first as Senior Vice President and Treasurer and later as Senior Vice President, Accounting Operations. Earlier in her career at AIG she was the Director of Global Sarbanes Oxley (“SOX”) Compliance (AIG Corporate, New York) and led the development and implementation of a SOX compliance program throughout AIG’s worldwide operations. Ms. Festervand brings Citizens’ team expertise in coordinating publicly traded company responsibilities with insurance operations, having been an Executive Vice President, Chief Financial Officer at AIG (Advisor Group, Atlanta).
On February 22, 2017, the Company announced the appointment of Gerald W. Shields to fill the open seat on our Board of Directors ("the Board") vacated by former Chairman and Chief Executive Officer Rick D. Riley. Mr. Shields joins the Board with over 37 years of technology experience, including significant life insurance experience as the Senior Vice President and Chief Information Officer of AFLAC, Inc., a leading provider of supplemental insurance. During the last five years, Mr. Shields has served as Director of the IT practice at RE Nolan, a management-consulting firm that caters to the insurance, health care, technology, and banking industries. He also currently serves as the Chief Information Officer of FirstCare Health Plans, a provider of comprehensive health care services to health maintenance organization ("HMO") subscribers that also owns Southwest Life & Health Insurance Company which offers the FirstCare PPO and life insurance products. Mr. Shields brings to the Board expertise in technology, cybersecurity and insurance operating systems, having significant experience directing these areas throughout his career.
On February 27, 2017, the Company announced the appointment of Frank Keating as a director. Governor Keating is a partner at the law firm of Holland & Knight, LLP. Governor Keating has held significant leadership positions in both the public and private sectors. In addition to serving as Governor of Oklahoma, his career included serving as CEO of the American Bankers Association and prior to that President and CEO of the American Council of Life Insurers, the trade association for the life insurance and retirement security industry. He also has served as Assistant Secretary of the Treasury and Associate Attorney General under President Ronald Reagan. He was later General Counsel and Acting Deputy Secretary for the Department of Housing and Urban Development ("HUD") under President George H.W. Bush. During his tenure at the Treasury Department and HUD, he worked
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
on significant issues affecting the banking, insurance and the financial services industries. His law enforcement career included serving as the U.S. Attorney for the Northern District of Oklahoma and as a Federal Bureau of Investigation ("FBI") agent.
On May 15, 2017, the Company announced it added a new C-level officer role to its executive team by creating a Chief Accounting Officer position at the Company and hiring Jeff Conklin, for the role. Mr. Conklin was most recently Vice President of Special Projects at American International Group, Inc. (“AIG”), Life & Retirement, Houston, and prior to that Director and then Vice President of Financial Reporting at AIG. His career at AIG spanned 13 years. Mr. Conklin joins Citizens with over 25 years of life insurance and financial reporting experience, having worked at Zurich Life and Jackson National Life prior to joining AIG. In addition to financial reporting, Mr. Conklin brings Citizens expertise in budgeting, financial analysis and implementing strategic accounting initiatives.
On June 9, 2017, the Company announced the addition of Christopher (“Chris”) W. Claus and J.D. (“Chip”) Davis, Jr. to its Board of Directors.
Mr. Claus, had a 20 year career as an executive at USAA of San Antonio, Texas. From 2013 - 2014, Mr. Claus served as Executive Vice President of USAA’s Enterprise Advice Group. Prior to that, Mr. Claus served as President of USAA’s Financial Advice and Solutions Group from 2007 to 2013. From 2001 to 2006, Mr. Claus served as President of USAA’s Insurance Management Company. Mr. Claus serves on Citizens’ Executive Committee. He also concurrently serves as Lead Director and on the Audit Committee of TrueCar (NASDAQ:TRUE), a digital automotive marketplace.
Mr. Davis, had a 40-year insurance career with National Farm Life Insurance Company (“NFLIC”) of Ft. Worth, Texas. During his career, Mr. Davis served as President, CEO and Chairman of NFLIC’s board of directors. Mr. Davis serves on Citizens’ Compensation Committee and Executive Committee.
On June 19, 2017, the Company hired Greg Broer as Vice President and Chief Actuary. Mr. Broer joins us from AIG, where he served in multiple roles over 23 years. Greg is a Fellow of the Society of Actuaries, Member of the American Academy of Actuaries, Certified Public Accountant, and Chartered Financial Analyst.
On July 16, 2017, the Company hired Robert Mauldin as Chief Marketing Officer. Mr. Mauldin is responsible for managing all aspects of marketing, distribution, customer analytics and innovation. Prior to joining Citizens, Mr. Mauldin served over 20 years in marketing with Bank of America, most recently as Senior Vice President of Product Management for the insurance division, where his work was focused on innovation and business transformation. In other roles, Mr. Mauldin served as Operations Leader for USI Inc.’s life insurance division and management roles with the American Bankers Association and American International Group.
On September 12, 2017, the Company announced the appointment of David S. Jorgensen as General Manager for International Operations of our subsidiary, CICA Life, Ltd. (Bermuda). Mr. Jorgensen has more than 30 years of experience in the life insurance industry, particularly in oversight of international insurance operations in his most recent role as Chief Financial Officer and Treasurer of Citizens. Prior to joining the Company, Mr. Jorgensen was SVP and Controller of AIG’s Life and Retirement Division, which included the additional role of Chief Financial Officer of AIG Life of Bermuda from 2014 to 2015, where he gained experience in Bermuda Solvency Capital Requirements (“BSCR”), corporate governance, risk assessment and risk management under the BSCR. In his new role, he will be responsible for leading CICA Life, Ltd. operations, expanding the Company’s international footprint globally and implementing strategic changes to the Company’s current international business model.
Mr. Jorgensen was succeeded at the Chief Financial Officer ("CFO") position by Kay E. Osbourn, who serves as Citizens’ Executive Vice President, Chief Financial Officer and Chief Investment Officer. Ms. Osbourn was most recently the Company’s President. Since joining the Company in 2008, Ms. Osbourn has served in a number of management roles including Vice President, Internal Audit, Treasurer, Chief Financial Officer, President and Interim Chief Executive Officer. Ms. Osbourn has extensive experience in the insurance industry and with the Company.
Geoffrey M. Kolander, Citizens’ current Chief Executive Officer, succeeded Ms. Osbourn as President and now serves in both the role of President and Chief Executive Officer ("CEO") of Citizens, Inc.
On October 23, 2017, the Company hired Darin Moore as Interim Chief Information Officer ("CIO"). Mr. Moore comes to Citizens with 30 years of technology experience, including life insurance experience at Chubb Life America, Union Central Life, and AFLAC, Inc. During the last six years, he has served in interim leadership positions at various health insurance companies including interim CIO for Anthem’s Government Programs Division, supporting all of Anthem’s Medicaid, Medicare, and Federal Employee
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Program business. Mr. Moore also served as Vice President of Consulting for Clearwater Compliance, a company focused on HIPAA compliance and cybersecurity. Mr. Moore brings Citizens’ expertise in technology, high volume call center operations, claims payment operations, cybersecurity, project leadership, and software implementation, having extensive experience directing these areas throughout his career.
On January 22, 2018, the Company announced its intention to pursue Board diversity. It further announced that Steve Shelton, age 62, independent director and member of the Nominating and Corporate Governance Committee, notified the Company of his intention not to stand for re-election as a director at the completion of his current one-year term, which will expire at the Company’s 2018 Annual Meeting of Shareholders. Mr. Shelton will continue to serve on the Company’s Board of Directors and the Nominating and Corporate Governance Committee until that time.
On February 12, 2018, the Company hired Jim Eliasberg as Vice President, Chief Legal Officer and Corporate Secretary. After graduating from the University of Chicago Law School in 1984, Jim has practiced in the business, transactional and corporate areas, dividing his career between private and in-house practice. Jim has extensive general counsel experience, having served in that role with Taco Cabana, WSNet and, most recently, with Golfsmith.
Strategic Initiatives
In 2015, we began a process to evaluate the expansion of our international footprint and initiated a strategic analysis of our current international business model. As a result of these strategic initiatives, on May 22, 2017, we incorporated CICA Life Ltd. in Bermuda, as a direct and wholly-owned subsidiary of the Company. On February 23, 2018, CICA Life Ltd. received its Class E, long term insurance license from the Bermuda Monetary Authority (“BMA”) and we capitalized the entity. Bermuda was chosen for its strong regulatory environment and suitability with the Company's priorities to protect our customers. We expect to operate our international business from this entity beginning in 2018 related to current and new business.
The Company's Board of Directors and new executive management team are continuing their assessment of the Company's domestic and international business models and business strategies with the assistance and support of external consultants and advisors. Specifically, our evaluation of the Company's international business model is ongoing under the leadership of our new Chief Marketing Officer and CEO. We are focused on (1) newendowment products and our profitability in both the domestic and international markets of our Life Segment as well as our Homes Service Segment; (2) a potential restructuring of our international business and operations; (3) a strategic modernization and upgrade from our legacy technology systems and IT operations with a focus on digitization, our future business needs and cyber risk; (4) effectively operating our international life insurance business offshore in Bermuda through CICA Life, Ltd. (Bermuda); and (5) investment portfolio strategy assessment.
A prolonged low interest rate period has required us to reduce the benefits and dividends included under many policies offered internationally. In many cases, our policies provided significantly higher guarantees and dividends than the financial markets might otherwise offer. As such, the Company reduced discretionary dividends on existing international policies in 2016. In 2017, the Company created new repriced products sold internationally to better reflect the prolonged low interest rate environment that we face.
The Company reviews its investment strategies routinely to monitor the rate of return. By combining more conservative interest rate features in our insurance policies with a more diversified investment strategy to improve returns on our investment portfolio, we intend to grow bottom line returns to shareholders. There is risk that these changes will result in lower demand for new policies, or that the financial markets will make our investment strategy more difficult. Despite the risks, the Company believes that such strategies are in the best interest of our shareholders.
The following pages describe the operations of our two business segments: Life Insurance and Home Service Insurance. CICA Life Insurance Company of America ("CICA"), Citizens National Life Insurance Company ("CNLIC"), constitute the Life segment and Security Plan Life Insurance Company ("SPLIC"), Security Plan Fire Insurance Company ("SPFIC"), Magnolia Guaranty Life Insurance Company ("MGLIC"), comprise the Home Service segment. Revenues derived from any single customer did not exceed 10% of consolidated revenues in any of the last three years. For more information about the financial performance of our business segments, see “Note 8 - Segment and Other Operating Information” of the notes to consolidated financial statements.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Life Insurance
Our Life Insurance segment has historically marketed and issued ordinary whole life insurance in the United States and in U.S. dollar-denominated amounts to foreignnon-U.S. residents. These contractsThe whole life insurance products are designed to provide a fixed amount of insurance coverage over the life of the insured and can utilizeinclude rider benefits to provide additional increasing or decreasing coverage and annuity benefits to enhance accumulations. Additionally,Our endowment contracts are issued by the Company, which are principally accumulation contracts that incorporate an element of life insurance protection. For the majority of our business, we retain the first $100,000 of risk on any one life, reinsuring the remainder of the risk. We operate this segment through our subsidiaries: CICA Life Insurance Company of America ("CICA") and Citizens National Life Insurance Company ("CNLIC").
International Sales
We focus our sales of U.S. dollar-denominated ordinary whole life insurance and endowment policies to residents in Latin America and the Pacific Rim. As of December 31, 2017, we had insurance policies in force in more than 30 countries, including Colombia, Venezuela, Taiwan, Ecuador and Brazil as our top producing countries. Venezuela one of our top markets, has experienced significant economic and social turmoil recently that has negatively impacted our business in that region. New sales premiums decreased 48.6% from 2016 to 2017. However, renewals by existing policyholders in Venezuela were impacted less significantly with renewal premiums only declining 2.7% from 2016 to 2017. The country's ongoing economic struggles alsoThese products have resulted in considerable population migration. The migrating population includes many current and prospective customers in our target market demographic profile and we do not anticipate these trends improving in the near term.
In 2017, international direct premiums comprised approximately 95% of total direct premiums in the life segment and 73% of our total direct premiums, and exceeded 10% of our premiums for each of the last three years. We have participated in the foreign marketplace since 1975. We believe positive attributes of our international insurance business include:
larger face amount policies typically issued when compared to our U.S. operations, which results in lower administrative costs per unit of coverage;
premiums typically paid annually rather than monthly or quarterly, which limits our administrative expenses, accelerates cash flow and results in lower policy lapse rates than premiums with more frequently scheduled payments; and
persistency experience and mortalitypremium rates that are comparable to our U.S. policies.
We have implemented several policiescompetitive with most foreign local companies and procedures to limit the risks of asset and premium loss relating to our international business. Approvals for policy issuance are made in our Austin, Texas office and policies are issued and delivered to the independent consultants, who deliver the policies to the insureds. We have no offices, employees or assets outside of the United States other than the initial capital contribution of CICA Life Ltd. in Bermuda. Insurance policy applications and premium payments are submitted by the independent consultants or customers to us, and we review the applications in our home offices in Austin, Texas. Premiums are paid in U.S. dollars by check, wire or credit card. The policies we issue contain limitations on benefits for certain causes of death, such as homicide in certain high risk international countries. We have also developed disciplined underwriting criteria, which include medical reviews of applicants as well as background and reference checks. In addition, we have a claims policy that requires investigation of substantially all death claims. Furthermore, we perform background reviews and reference checks of prospective independent marketing firms and consultants.
Our independent marketing firms and consultants specialize in marketing life insurance products and generally have several years of insurance marketing experience. We maintain contracts with the independent marketing firms pursuant to which they provide recruitment, training and supervision of their managers and associates in the service and placement of our products. However, all associates of these firms also contract directly with us as independent contractors and receive their compensation directly from us. Accordingly, should an arrangement between any independent marketing firm and us be terminated for any reason, we expect that we would seek to continue the existing marketing arrangements with the associates of these firms. Our agreements with independent marketing firms and consultants typically provide that they are independent contractors responsible for their own operational expenses and are the representative of the prospective insured. In addition, the marketing firms guarantee any debts of their associates to us. The marketing firms receive commissions on all new and renewal policies serviced or placed by them or their associates. All of these contracts provide that the independent marketing firms and consultants are aware of and responsible for compliance with local laws.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
International Products
We offer several ordinary whole life insurance and endowment products designed to meet the needs of our non-U.S. policyowners. These policies have been structured to provide:provide the policyowners with:
•U.S. dollar-denominated cash values that accumulate, tobeginning in the first policy year, throughout a policyholder during his or herpolicyholder’s lifetime;
premium rates that are competitive with or better than most foreign local companies;
a hedge against local currency inflation;
•protection against devaluation of foreign currency;the policyowners' local currency and local hyper-inflation;
•capital investment in a more secure economic environment (i.e., the United States)U.S.); and
•lifetime income guarantees for an insured or for surviving beneficiaries.
Our international products have both living and death benefit features. Every policy containsMost policies contain guaranteed cash values and isare participating (i.e., providesprovide for cash dividends as apportioned by theCICA International's board of directors). Once a policyowner pays the annual premium and the policy is issued, the owner becomes entitled to policy cash dividends as well asand may elect to receive annual premium benefits, if the annual premium benefit was elected. According to the policy language, thebenefits. The policyowner has several options with regardregards to the policy dividends and annual premium benefits. Any annual policybenefits, which include, among other things, electing to receive cash, dividend may, atcrediting such amounts towards the option of the policyowner and provided the value of a dividend is not encumbered by a policy loan, be applied under one of the following options: (1) paid in cash to the policy owner; (2) credited toward payment of premiums on the policy; (3) leftpolicy, leaving such amounts on deposit with the Company to accumulate at a defined interest rate; (4) applied to increase the amount of insurance benefit by purchase of paid-up additions to the policy;rate or (5) be assignedassigning them to a third party. Ifthird-party. Under the policy is encumbered by a loan, only option 3 will apply to secure the outstanding loan. Similarly, all annual premium benefits credited to the policy may at the option of the policyowner, and provided the policy is not encumbered by a policy loan, be applied under one of the following options: (1) paid in cash to the policy owner; (2) credited toward payment of premiums on the policy; (3) left with the Company to accumulate at an annually company declared interest rate; or (4) be assigned"assigned to a third party. Likewise, if the policy is encumbered by a loan, only option (3) will apply to secure the outstanding loan. Under the “assigned to a third party”third-party" provision, the Company has historically allowed policyowners, only after receiving a copy of the Citizens, Inc. Stock Investment Plan (the “CISIP”"SIP") prospectus and acknowledging their understanding of the risks of investing in CitizensCitizens' Class A common stock, the right to assign policy values outside of the policy to the CISIP,SIP, which is administered in the United States by Computershare Trust Company, N.A., our third-party plan administrator and an affiliate of Computershare, Inc., our transfer agent. The CISIPSIP is a direct stock purchase plan available to our policyowners, our shareholders, our employees ourand directors, independent consultants, and other potential investors through the Computershare website. The Company has registered the shares of Class A common stock issuable to participants under the CISIPSIP on a registration statement under the Securities Act of 1933, as amended, (the "Securities Act") that is on file with the Securities and Exchange Commission.SEC. Computershare administers the CISIPSIP in accordance with the terms and conditions of the CISIP,SIP, which is available on the Computershare website and as part of the Company’s registration statement on file with the Securities and Exchange Commission.SEC.
International
December 31, 2023 | 10-K 5
Competition
The life insurance business is highly competitive. WeInternationally, we compete with a large number of stock and mutual life insurance companies, internationally and domestically, as well as with financial institutions that offer insurance products. There are more than 800 life insurance companies in the United States, some of which also provide insurance to foreign residents.
We face competition primarily from other insurance companies that operate in the same markets and manner as we do. Additionally, some of our competitors are local companies formed and operated in the country in which the insureds reside, froman insured resides, and others are companies that operate in the same manner as we do and from companies that are foreign to the countries in which policiestheir products are sold, but issue insurance policies denominated in the local currency of those countries or issue products approved by regulators of those countries. A substantial numberSome of these companies may be deemed to have a competitive advantage over us due to their significantly greater financial resources, histories of successful operations and brand recognition, local licensing, partnering with local insurance companies and larger marketing forces.
BecauseWe believe that we have a competitive advantage over some of our competitors because premiums on our international policies are paid in U.S. dollars, cash value is accumulated in U.S. dollars, and we pay claims and benefits in U.S. dollars, we provide a product that is different from the products offered by foreign-domiciled companies.dollars. We believe this provides security and stability to our international policiesinsureds, who are usually acquired bygenerally individuals in the upper middlemiddle- to upper-middle class in their respective countries and those with significant net worth and earnings that placeearnings. Therefore, our products protect them in the upper income brackets of their respective countries. The policies sold by our foreign competitors are generally offered broadly and are priced using the mortality of the entire population of the geographic region. Our mortality charges are typically lower due to our customer demographics, which provides a competitive advantage. Additionally, the assets backing the reserves for our foreign competitors' policies must be substantially invested in their respective countries and, therefore, are exposed tofrom the inflationary risks and social or economic crises that have been more common in thesemany of our top-producing foreign countries.
DOMESTIC LIFE INSURANCE
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Prior to July 1, 2023, our domestic life insurance business operated through CICA Domestic Sales
and Citizens National Life Insurance Company ("CNLIC"). CNLIC merged into CICA Domestic on July 1, 2023 in order to streamline and focus our domestic life insurance business in one entity. In 2017,2023, domestic direct life insurance premiums comprised approximately 5%3% of total direct premiums in the lifeLife Insurance segment and 3%2% of our consolidated total direct premiums. The majority of our domestic inforcein force business results from renewal premiums from blocks of business of insurance companies we have acquired over the past 19 years. In late 2022, we began our "white label" program to expand our distribution, we began expanding CICA Domestic's state licenses, developing new final expense and living benefit products, and filing these new products in multiple states.
HOME SERVICE INSURANCE SEGMENT
We discontinued new sales ofoperate our non-home service domestic products beginning January 1, 2017. These sales represented approximately 1% of total new business in 2016 for the life segment and is considered immaterial to our business. Under the direction of our new CMO, we are reviewing our domestic strategy.
Domestic Life Insurance Products
Our domestic life insurance products have historically focused primarily on living needs and provided benefits focused toward accumulating financial benefits for the policyowner. The features of our domestic life insurance products include:
cash accumulation/living benefits;
tax-deferred interest earnings;
guaranteed lifetime income options;
monthly income for surviving family members;
accidental death benefit coverage options; and
an option to waive premium payments in the event of disability.
Our life insurance products have historically been designed to address the insured's concern about outliving his or her monthly income, while at the same time providing death benefits. The primary purpose of our product portfolio is to help the insured create capital for needs such as retirement income, children's higher education funds, business opportunities, emergencies and health care needs.
Domestic Home Service Insurance
Our domestic Home Service
Insurance segment
operates through
our subsidiaries Security Plan Life Insurance Company ("SPLIC"),SPLIC and Magnolia
Guaranty Life Insurance Company ("MGLIC") and
prior to June 30, 2023, Security Plan Fire Insurance Company ("SPFIC")
, and focuses on the. SPLIC issues final expense life insurance
needs of the middle and
lower income markets,critical illness products to middle- and lower-income individuals, primarily
in Louisiana, Mississippi and Arkansas. Our policies are sold and serviced through a home service
marketing distribution
system of approximately 307 employee-agents who work on a route system andmodel based in Louisiana. Policies issued by Magnolia are primarily burial policies which are serviced through
over 350 funeral homes,
and independent agents to sell policies, collect premiums and service policyholders. Towho are also typically the beneficiaries of the policies. SPFIC is a
lesser extent, our Home Service segment sells limited liability
named perilcasualty company that prior to June 30, 2023, sold small face value property
insurance policies covering dwelling and
contents.contents, primarily in Louisiana. We ceased operations on June 30, 2023 as explained in more detail in Part II, Item 7, Managements' Discussion and Analysis, Overview section. In 2017,2023, our Home Service Insurance segment comprised 24%, or $47.8 million27% of our total consolidated direct premiums.
Home Service Products and Competition
Our home service insuranceHome Service Insurance products consist primarily of small face amount ordinary whole life and pre-need policies, which are designed to fund final expenses for the insured primarily consisting of(e.g., funeral and burial costs.costs). The average life insurance policy face amount issued in 2023 was approximately $6,800 in 2017.$12,900 per policy. Due to the lower risk associated with small face amount polices, the underwriting performed on these applications is limited. OurAs part of the Home Service Insurance segment transformation mentioned above, in 2021 we introduced a new product, Security Plan Plus, which has a higher allowed face amount. In December 2021, we also introduced a critical illness product, which pays the insured a lump sum following the diagnosis of an illness covered under the plan. To a much lesser extent, our Home Service Insurance segment sold property coverages are limited to $30,000insurance policies covering dwellings and content until it ceased operations on June 30, 2023. We provided $30,000 maximum coverage on any one dwelling and contents policy, while content-only coverage and dwelling-only coverage iswere both limited to $20,000. $20,000.
We face competition in Louisiana, Mississippi and Arkansas from other companies specializing in home service distribution offinal expense insurance. We seek to compete based upon our emphasis onby delivering exceptional personal service to our customers.customers, enhancing our
December 31, 2023 | 10-K 6
management team and upgrading our agent field force. We intend to continue premium growth within this segment viaby focusing on direct salesindependent agent-to-consumer sales.
REINSURANCE
We follow the industry practice of reinsuring a portion of our insurance risks with unaffiliated reinsurers. In a reinsurance transaction, a reinsurer agrees to indemnify another insurer for part or all of its liability under a policy or policies it has issued for an agreed upon premium. We participate in reinsurance activities in order to minimize exposure to significant risks, limit losses, and acquisitions.provide additional capacity for future growth. We enter into various agreements with reinsurers that cover individual risks, group risks or defined blocks of business, primarily on a coinsurance and yearly renewable term basis.
For the majority of our life insurance business, we generally retain the first $100,000 of risk on any one life and reinsure the remainder of the risk. Therefore, under the terms of the reinsurance agreements, the reinsurers agree to reimburse us for the ceded amount (i.e., the death benefit amount less our retained risk) in the event a claim is paid. Cessions under reinsurance agreements do not discharge our obligations as the primary insurer. In the event reinsurers do not meet their obligations under the terms of the reinsurance agreements, reinsurance recoverable balances could become uncollectible.
Our amounts recoverable from reinsurers represent receivables from and/or reserves ceded to reinsurers. The amount recoverable from reinsurers was $4.0 million as of December 31, 2023.
We focus on obtaining reinsurance from a diverse group of well-established reinsurers. All of our reinsurers are rated A- (Excellent) or higher by A.M. Best. We regularly evaluate the financial condition of our reinsurers and monitor concentration risk with our reinsurers.
OTHER NON-INSURANCE ENTERPRISES
Other Non-Insurance Operations
Other Non-insurance OperationsEnterprises includes the results of our parent company, Citizens, Inc. and our non-insurance subsidiary, Computing Technology, Inc., which provides data processing servicesprimarily provide the Company's corporate-support and information technology functions to the Company, and Insurance Investors, Inc., which provided aviation transportation to the Company until the company-owned airplane was sold during 2017. This operating unit includes the resultsinsurance operations.
OPERATIONS AND TECHNOLOGY
Most of Citizens, Inc., the parent Company.
Operations and Technology
Our administrativeour operations principally serve our life insurance segment and are conducted primarilybased at our executive officescorporate headquarters in Austin, Texas through approximately 136 administrative, operating and underwriting personnel. OurTexas. We also conduct operations for our Home Service operations are conducted to a large degreeInsurance segment from our district offices in Louisiana, Arkansas and Mississippi, as well as our service center in
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Donaldsonville, Louisiana. AtFor the international portion of our executive offices, we also performLife Insurance segment, operations including underwriting, policy design, marketing oversight, underwriting,issuance, claims processing, accounting and reporting actuarial, customer service, claims processing, administrativerelated to certain international policies were conducted in Bermuda until December 31, 2023 and investing activities.are now conducted in Puerto Rico.
We have a proprietary single, integrated information technology system for our entire Company, which is a centrally-controlled, mainframe-based administrative system. Functions of our policy administrative system ("PAS") that we use for all of our insurance companies. Our PAS performs various functions to effectively handle our insurance operations. These functions include policy set up,set-up, administration, billing and collections, commission calculation, valuation, automated data edits, storage backup, image management and other related functions. Each company and block of business we acquire is ultimatelyhave acquired has been converted onto our administrative system.PAS. The Company is actively engaged in continued modernization of technology to invest and expand into new opportunities. This system has been in place for more than 30 yearsmodernization allows us to bring new products to market rapidly and has been updated on an ongoing basisautomate insurance interactions to enhance user experience. This investment is foundational to the Company's growth strategy as technology has evolved.we pursue new product innovation and provides:
We are currently reviewing technology options•our customers and agents with portals to transition from be able to access account information 24/7;
•our legacy administration system to an upgraded, modernized technology platform that willpolicyholder service our needs into the future. On February 1, 2017, we went liveand claims representatives with a modernized claims system. We are also currently converting our actuarial valuation from a third party service provider to an actuarial valuation modeling software system purchased from a vendor.
Enterprise Risk Management
The Company has an enterprise risk management function (“ERM”) that analyzes the Company’s risks on an individual and aggregated basis and is responsible for ensuring that the Company’s risks remain within its risk appetite and tolerances as determined by management with oversight from the Audit Committee. The Company's focus on ERM strengthens its risk management culture and discipline. The mission of ERM is to support the Company in achieving its strategic priorities by:
Providing a comprehensivecustomer account-centric view of the risks facing the Company, including risk concentrationsour policyholders and correlations;beneficiaries, reducing customer inquiry response time and claims processing time; and
Helping management define the Company’s overall capacity and appetite for risk by evaluating the risk return profile of the business relative to the Company’s strategic intent and financial underpinning;•business-to-business solutions.
Assisting management in setting specific risk tolerances and limits that are measurable, actionable, and comply with the Company’s overall risk philosophy;
Communicating and monitoring the Company’s risk exposures relative to set limits and recommending, or implementing as appropriate, mitigating strategies; and
Providing insight to assist in growing the businesses and achieving optimal risk-adjusted returns within established guidelines.
Enterprise Risk Management Structure and Governance
Effective risk oversight is an important priority for the Company’s Board of Directors and senior management team. While it is the job of the CEO and senior management to assess and manage the Company’s risk exposure through ERM, in accordance with NYSE requirements, the Audit Committee of the Board of Directors is charged with discussing guidelines and policies to govern the process by which ERM is handled. The Audit Committee periodically discusses the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures.
The five broad categories of risk exposures assessed and managed by senior management include, but are not limited to:
Strategic risk, including international business risks;
Insurance risk, including those arising out of catastrophes and acts of terrorism;
Financial risk, including market, credit and liquidity risks;
Operational risk, including cybersecurity risk and legal and regulatory compliance risks; and
Any other risk that poses a material threat to the operational and/or strategic viability of the Company.
In addition to the Audit Committee, the Compensation Committee considers the risks and rewards that may be implicated by our executive compensation philosophy and programs, and the Nominating and Corporate Governance Committee oversees the Company’s governance practices, director succession and committee composition and leadership to manage risks associated with corporate governance. Although risk oversight is conducted primarily through committees of the Board, the full Board has retained responsibility for general oversight of risks. The Board satisfies this responsibility through full reports by each committee chair regarding the committees’ considerations and actions, as well as through regular reports directly from officers responsible for oversight of particular risks within the Company.
9December 31, 2023 | 10-K 7
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
REGULATION
Regulation
Our U.S.The insurance operations are subject to a wide variety of lawsindustry is heavily regulated and regulations. State insurance laws establish supervisory agencies with broad regulatory authority to regulate most aspects of our U.S. insurance businesses,both Citizens and our insurance subsidiaries are subject to regulation and supervision by the U.S. states in which they do business, by U.S. federal laws, and for CICA International, by Puerto Rico.
REGULATION OF OUR INTERNATIONAL BUSINESS
Puerto Rico
CICA International, our Puerto Rico domiciled subsidiary, is regulated by the Puerto Rico Office of the Insurance Commissioner (“OIC”) and is licensed pursuant to the Puerto Rico Insurance Code (the "Insurance Code"). Although Puerto Rico is a U.S. territory, it has its own tax code and own insurance code, including a provision under its Insurance Code that allows CICA International to be established as an "international insurer" and thus export insurance to international markets. We may not insure risks of residents of Puerto Rico with this type of license and we do not issue policies to U.S. risks through CICA International.
The Insurance Code does not specifically set forth minimum capital and surplus standards, but rather requires that an insurer submit a business plan for approval to the OIC that includes proposed minimum capital and surplus. CICA International is required to maintain a minimum of $750,000 in capital and maintain a premium to surplus ratio of 7 to 1. The Insurance Code requires us to file annual U.S. GAAP financial statements with the OIC that include schedules providing information regarding premiums written and reinsurance assumed and ceded, as well as an annual actuarial certification.
In addition to compliance with the Insurance Code, CICA International must comply with other laws and regulations of Puerto Rico, most of which apply to our domestic subsidiaries as well, including the U.S. Bank Secrecy Act and other anti-money laundering laws and regulations of the United States.
Other International Regulation
Generally, all foreign countries in which we offer insurance products require a license or other authority to conduct insurance business in that country. Some of these countries also require that local regulatory authorities approve the terms of any insurance product sold to residents of that country. Other than formerly in Bermuda, we have never qualified to do business in any foreign country, and we have never submitted our international insurance policies for approval to any regulatory agency. As described above, we sell our policies to residents of foreign countries through independent marketing agencies and independent consultants located in those countries and we rely on our independent consultants to comply with laws applicable to them in marketing and servicing our insurance products in their respective countries.
We have undertaken a comprehensive compliance review of risks associated with the potential application of foreign laws to our sales of insurance policies in foreign countries. The application of foreign laws to our sales of insurance policies in foreign countries varies by country. There is a lack of uniform regulation, lack of clarity in certain regulations and lack of legal precedent in addressing circumstances similar to ours. Our compliance review has confirmed certain risks related to foreign insurance laws associated with our current business model, at least in certain jurisdictions, as described in detail in Item 1A. Risk Factors.
U.S. REGULATION
In the United States, insurance is primarily regulated at the state level. Our primary regulator in the U.S. is the Colorado Division of Insurance, as both Citizens and CICA Domestic are Colorado companies. We are also regulated by the departments of insurance in Louisiana (SPLIC and SPFIC) and Mississippi (Magnolia), as well as each of the 39 states and the District of Columbia in which we conduct insurance business. In supervising and regulating insurance companies, state insurance departments aim to protect policyholders and the public rather than investors, and enjoy broad authority and discretion in applying applicable insurance laws and regulation for that purpose. The extent of each state in which they are licensed.this regulation varies, but most U.S. jurisdictions have laws and regulations based upon the National Association of Insurance Commissioners ("NAIC") model rules governing the financial condition of insurers, including standards of solvency, types and concentration of investments, establishment and maintenance of reserves, credit for reinsurance and requirements of capital adequacy; and the business conduct of insurers,
December 31, 2023 | 10-K 8
including marketing and sales practices and claims handling. In addition, U.S. laws, suchstatutes and regulations require the licensing of insurers and agents, the approval of most types of policy forms and related materials (such as the USA Patriot Act of 2001, the Foreign Corrupt Practices Act (“FCPA”), the Gramm-Leach-Bliley Act of 1999, the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, the Sarbanes-Oxley Act of 2002advertising) and the Dodd-Frank Wall Street Reform and Consumer Protection Act ("the Dodd-Frank Act") and the Tax Cuts and Jobs Act, are examplesapproval of U.S. regulations that affect our business. Werates for certain types of insurance products.
In order for insurance regulators to monitor solvency, insurance companies are subject to comprehensive regulations underrisk-based capital ("RBC") requirements. The RBC requirement is a statutory minimum level of capital that is based on two factors - (1) the USA Patriot Actinsurance company's size, and (2) the Bank Secrecy Act with respect to money laundering, as well as federal regulations regarding privacyinherent riskiness of its financial assets and confidentiality. Our insurance products and thus our businesses also are affected by U.S. federal, state and local tax laws. The Dodd-Frank Act focuses on financial reform and has resulted in changes to the regulation of institutions operating in the financial services industry, including the Company. Its requirements include streamlining the state-based regulation of reinsurance and non-admitted insurance (also known as surplus lines insurance, which is property or casualty insurance written byoperations, i.e. a company that is not licensedmust hold capital in proportion to sell policiesits risk. The RBC requirement thus determines a minimum level of insurance in a given state)capital required for an insurer to support its operations and establishing a new Federal Insurance Office ("FIO") within the U.S. Department of the Treasury with powers over all lines of insurance except health insurance, certain long-term care insurance and crop insurance. The FIO is authorized to, among other things, gather data and information to monitor aspects of the insurance industry, identify issues in the regulation of insurers about insurance matters and preempt state insurance measures under certain circumstances. However, the FIO’s limited monitoring abilities posed minimal risk to the insurance industry and the Dodd-Frank Act has had no significant impact on our business, results of operations, liquidity and capital resources. The rulemaking process going forward may change with the current presidential administration.
write coverage. The purpose of the lawsRBC requirements is to identify weakly capitalized companies, which facilitates regulatory actions to ensure that the policyholders will receive the benefits promised. Regulators have the legal authority to take preventive and regulations that affect our insurance businesscorrective measures depending on the capital deficiency indicated by the RBC result. If a company's ratio of total adjusted statutory capital to control level risk-based capital is primarilyabove 200%, no regulatory intervention is needed. If it falls below 200%, interventions range from submission of action plans to protect our insureds and not our stockholders. Manya regulatory takeover of the laws and regulationsmanagement of the company, which occurs if the ratio is below 70%. We have committed to whichthe Colorado Division of Insurance that we are subject are regularly re-examined, and existingwill keep CICA Domestic's RBC ratio at or future laws and regulations may become more restrictive or otherwise adversely affectabove 350%.
In addition to monitoring our operations. In addition,financial condition, insurance regulatory authorities (including state law enforcement agencies and attorneys general) periodically make inquiries and regularly conduct examinations regarding compliance by us and our subsidiaries with insurance and other laws and regulations regarding the conduct of our insurance businesses. It is our practice to fully and consistently cooperate with such inquiries and examinations and take corrective action when warranted.
OurIn order to sell products in any state, we first have to become licensed in that state. States have various rules for obtaining a license, including capital deposit requirements and seasoning requirements, among others. Once we are licensed in a state, most states require us to file our products for their approval before being able to sell the products. The application and product forms must comply with state insurance subsidiaries are collectively licensedlaws regarding policy requirements. Once an application or product is approved in that state, we must use the approved forms to transact business in 32 states.sell our products. We have insurance subsidiaries domiciledto file our domestic forms in the states of Colorado, Louisiana, Mississippiboth English and Texas. Our U.S. insurance subsidiariesSpanish for separate approvals. We are licensedalso subject to laws related to our advertising and regulated in all U.S. jurisdictions in which they conduct insurance business. The extent of this regulation varies, but most jurisdictionsmay have laws and regulations based upon the National Association of Insurance Commissioners (“NAIC”) model rules governing the financial condition of insurers, including standards of solvency, types and concentration of investments, establishment and maintenance of reserves, credit for reinsurance and requirements of capital adequacy, and the business conduct of insurers, includingto file certain marketing and sales practices and claims handling. In addition, statutes and regulations usually require the licensing of insurers and their agents, the approval of policy forms and related materials and the approval of rates for certain types of insurance products.documents with state regulators as well.
All U.S. jurisdictions in which our U.S. insurance subsidiaries conduct insurance business have enacted legislation that requires each U.S. insurance company inBecause Citizens is a holding company system, except captivethat directly and indirectly owns insurance companies,operating subsidiaries, we are also subject to register with the insurance regulatory authority of its jurisdiction of domicile andregulation in our three domiciliary states that require us to furnish that regulatory authoritythe respective insurance regulators with financial and other information concerning the operations of, and the interrelationships and transactions among, the companies within itsour holding company system that may materially affect the operations, management or financial condition of the insurers within the system. These laws and regulations also regulate transactions between insurance companies and their parents and affiliates. Generally, these laws and regulations require that all transactions within a holding company system between an insurer and its affiliates be fair and reasonable and that the insurer's statutory capital and surplus following any transaction with an affiliate be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. For certain types of agreements and transactions between an insurer and its affiliates, these laws and regulations require prior notification to, and non-disapproval or approval by, the insurance regulatory authority of the insurer's jurisdiction of domicile.
Generally, all foreign countries in which we offer insurance products require a license or other authority to conduct insurance business in that country. Some of these countries These laws also require that local regulatory authorities approvea controlling party obtain the termsapproval of anythe insurance product soldcommissioner of the insurance company's jurisdiction of domicile prior to residentsacquiring or divesting control of that country. We have never qualified to do business in any foreign country and have never submitted our insurance policies issued to residents of foreign countries for approval by any foreign or domestic insurance regulatory agency. We sell our policies to residents of foreign countries using foreign independent marketing firms and independent consultants, and we rely on our independent consultants to comply with laws applicable to them in marketing our insurance products in theirthe insurer.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
respective countries. We have undertaken a comprehensive compliance review of risks associated with the potential application of foreign laws to our sales of insurance policies in foreign countries. The application of foreign laws to our sales of insurance policies in foreign countries varies by country. There is a lack of uniform regulation, lack of clarity in certain regulations and lack of legal precedent in addressing circumstances similar to ours. Our compliance review has confirmed the previously disclosed risks related to foreign insurance laws associated with our current business model, at least in certain jurisdictions, as described in detail in “Item 1A - Risk Factors - Risks Relating to our Business.” We are exploring alternatives to our current business model in one or more jurisdictions, including withdrawing from particular markets. We cannot assure you that any of these laws, regulations, or application of them by foreign regulatory authorities, or any change in our business model, will not have a material adverse effect on our ability to market our products through our independent marketing consultants and, in turn, on our results of operations and financial condition.
The payment of dividends or other distributions to usCitizens by our insurance subsidiaries is also regulated by the insurance laws and regulations of their respective state or countryjurisdiction of domicile. The laws and regulations of some of these jurisdictions also prohibit an insurer from declaring or paying a dividend except out of its earned surplus or require the insurer to obtain regulatory approval before it may do so. In addition, insurance regulators may prohibit the payment of ordinary dividends or other payments by our insurance subsidiaries to us (such as a payment under a tax sharing agreement or for employee or other services) if they determine such payment could be adverse to policyholders or insurance contract holders of the subsidiary.
TheBecause we maintain sensitive data regarding our customers, we are also subject to additional state regulations in states where we do business, such as data security and state privacy laws.
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While primarily regulated at the state level, our domestic business is subject to various federal laws and regulationsregulations. Some of the jurisdictionsprimary federal laws include:
•USA Patriot Act and the Bank Secrecy Act, which require us to institute certain measures to detect and prevent money laundering;
•Foreign Corrupt Practices Act, which makes it unlawful to bribe foreign officials for the purpose of obtaining or retaining business;
•Gramm-Leach-Bliley Act, which requires us to explain our information-sharing practices to our customers and to safeguard sensitive data;
•Securities Act, Securities Exchange Act and Sarbanes-Oxley Act, which establish various requirements for Citizens, as a public company, to comply with, including registration of our Class A common stock, reporting and disclosure requirements, and public company audit and internal control requirements;
Our U.S.-based insurance products and thus our businesses also are affected by U.S. federal, state and local tax laws.
HUMAN CAPITAL RESOURCES
Composition and Demographics
Our human capital is a critical component to our success. Our employees implement and drive our strategic initiatives and contribute to the success of our products (development, underwriting, pricing adequacy, customer service), promotions and processes. Our employees in our claims department are ultimately tasked with "keeping our promise". Our independent consultants and agents also drive our key goals, as they sell our insurance products and provide local services to our global base of policyholders. We also believe that we derive a great deal of strength from our diverse workforce. Fostering an equitable and inclusive workplace with diverse teams produces more creative solutions, results in more innovative products and services and is crucial to our efforts to attract, develop and retain key talent.
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As of December 31, 2023, we had 232 employees. The pie charts below illustrate the gender, racial, ethnicity, and generational make-up of our total employee workforce as of such date.
Gender Composition
Racial/Ethnic Composition
Generational Composition
We determine race, ethnicity, gender, and generation based on our employees' self-identification or other information compiled to meet requirements of the U.S. government.
None of our employees are subject to a collective bargaining agreement.
We do not utilize captive employee agents to distribute our products and thus contract with over 1,000 actively producing independent consultants internationally and over 2,000 independent agencies and agents domestically to sell and service our insurance products. Our international independent consultants generally reflect the demographics of the areas in which they sell their products.
In order to continue to develop, sell and administer our U.S. insurance subsidiaries are domiciled requireproducts, it is crucial that a controlling party obtainwe continue to attract and retain both experienced employees and independent agents.
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Compensation and Benefits
Our compensation program is designed to attract and retain talented individuals who possess the approvalskills necessary to support our business objectives, assist in the achievement of the insurance commissioner of the insurance company's jurisdiction of domicile prior to acquiring control of the insurerour strategic goals and may delay, deter or prevent a transactioncreate long-term value for our shareholders might consider desirable.
Risk-based capital ("RBC") requirements are imposed on lifestockholders. We provide employees with compensation packages that include base salary and propertyannual performance-based bonus opportunities that include cash, and casualty insurance companies. The NAIC has established minimum capital requirementsfor certain employees, long-term equity awards in the form of RBC. RBC requirements weightrestricted stock units ("RSUs"). We believe that a compensation program with both short-term cash awards and long-term equity awards provides fair and competitive compensation and aligns employee and stockholder interests. In addition to cash and equity compensation, we also offer standard employee benefits such as life and health (medical, dental and vision) insurance, 401(k) and HSA contributions, life insurance, long-term and short-term disability, including paid parental leave, and a generous PTO plan.
Independent agents work for themselves and may sell insurance policies for a variety of insurers and make most of their money through sales commissions and bonuses. We attract and retain our independent agent sales force through the typeuse of our commission structure and agent campaigns and promotions, including annual sales conventions. We believe that our commission structure is attractive and competitive in the markets in which we do business. In our Life Insurance segment, we believe our campaigns and promotions provide an extra incentive to agents that not only promote first year premium growth, but also create improvements within policyholder retention. In our Home Service Insurance segment, we believe our agent campaigns and promotions are critical in attracting and retaining our independent agent sales force. This business contains a large block of existing in force policies. To ensure we maintain this book of business, written bythe agent campaigns and promotions provide an insuranceextra incentive to not only grow the business but to collect on the existing policies. We believe that creating agent campaigns and promotions with additional incentives provides long-term value for our shareholders.
Wellness
We are committed to the health and safety of our work force and compliance with applicable regulatory and legal requirements. In response to the COVID-19 pandemic, in 2021, we implemented operating changes that we determined were in the best interest of the health of our employees, including offering a hybrid work environment where our employees can work part- or full-time from home, depending on their position and circumstances. We have continued with the hybrid work environment as it offers employees flexibility and helps attract and retain talent. We also have implemented training programs to assist our independent agents with online sales efforts in order to minimize face-to-face interactions with potential customers and our policyholders when necessary.
Item 1A. RISK FACTORS
As a smaller reporting company, the quality of its assets, and various other aspects of an insurance company's businesswe are not required to develop a minimum level of capital called "authorized control level risk-based capital" and compares this level to adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level risk-based capital fall below 200%, a series of actions would bedisclose information required by the affected company, including submitting a capital plan to the Department of Insurance in the insurance company's state of domicile.
this Item 1A. RISK FACTORS
Investing However, we have elected to provide the following discussion of risks as we feel it is important to provide adequate information to our investors regarding the risks of investing in our Company involves certain risks.Set forth below are certain risks with respect to our Company. Readers should carefully reviewsecurities. If any of these risks together withdevelop into actual events, our business, financial condition, results of operations or cash flows could be materially and adversely affected, and, as a result, the trading price of our Class A common stock could decline. These risk factors may also be important to understanding other information containedstatements in this report.Form 10-K. The risksfollowing information should be read in conjunction with Part II. Item 7. Management’s Discussion and uncertainties we have describedAnalysis of Financial Condition and Results of Operations and the consolidated financial statements and accompanying notes in Part II. Item 8. Financial Statements and Supplementary Data of this report are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently deem not material, may also adversely affect our business. Anyreport.
Because of the risks discussed in this report or that are presently unknown or not material, if they were to actually occur, could result in a significant adverse impact on our business,following factors, as well as other factors affecting the Company’s financial condition and operating results, prospectspast financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or financial condition. Referencestrends in the risk factors belowfuture periods.
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INTERNATIONAL BUSINESS RISKS
A SUBSTANTIAL PORTION OF OUR REVENUE IS GENERATED FROM INSURANCE PRODUCTS SOLD OUTSIDE OF THE UNITED STATES. WHILE OUR PRODUCTS ARE PRICED AND PAID FOR IN U.S. DOLLARS, OUR FOREIGN BUSINESS MAY SUBJECT US TO SEVERAL RISKS.
Our sales to "we," "us," "our," "Citizens" and like terms relate to Citizens, Inc. and its subsidiaries on a U.S. GAAP consolidated financial statement basis, unless specifically identified otherwise. We operate our subsidiaries as separate and distinct entities with respect to corporate formalities.
Risks Relating to Our Business
The majority of our sales derive from residents of foreign countries expose us to unknown risks related to foreign regulation, foreign currency restrictions, and is subject to risks associated with political instability, currency control laws and foreign insurance laws.instability. A significant loss of sales in these foreign markets couldwould have a material adverse effect on our results of operations and financial condition.
TheInternational Regulatory Risks.A substantial majority of our direct insurance premiums, approximately 73% in 2017,70% at December 31, 2023, are from policyholders in foreign countries, primarily those in Latin America and the Pacific Rim. These salesAs described in Part I, Item 1, Business, these policies are made throughissued by our Puerto Rico subsidiary, CICA International, which is licensed as an international insurer in Puerto Rico. Our products are sold by independent consultants who are located in these foreign countries. Many of these countries have a history of political instability, including regime changes, political uprisings, currency fluctuations and anti-democratic or anti-U.S. policies. There is a risk that political instability in these countries could have a material adverse effect on the ability of people living in these countries to purchase our insurance policies or our ability to sell our policies in those countries through our independent consultants or otherwise. Our Company’s future sales and financial results depend upon avoiding significant regulatory restraints on receiving insurance policy applications and premiums from, and issuing insurance policies to, residents outside of the United States.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Currency control laws or other currency exchange restrictions in foreign countries could materially adversely affect our revenues by imposing restrictions on asset transfers outside of a country where our insureds reside. Difficulties in transferring funds from or converting currencies to U.S. dollars in certain countries could prevent our insureds in those countries from purchasing or paying premiums on our policies. There can be no assurance that such restrictions will not be imposed and that our revenues, results of operations and financial condition will not be materially adversely affected if they do occur.
We also face risks associated withwhich the application of foreign laws to our sales of policies to residents in foreign countries.are sold. Generally, allthe foreign countries in which we offer insurance products require either us and/or our independent consultants to obtain a license or other authorityregister to conduct insurance business in that country. Some of these countries also require that local regulatory authorities approve the terms and rates of any insurance product sold to residents of that country. WeSome of these countries have never sought to qualifylaws that state that their residents may not purchase life insurance from us or a consultant may not sell life insurance on our behalf unless we become qualified to do business in any foreignthat country or unless our policies receive prior approval from their insurance regulators. Others have a "consumption abroad" model where their residents may purchase unregistered products only if they are outside of their country when the purchase is made. Other than Puerto Rico and formerly Bermuda, we have never submitted the insurance policies that we issueregistered to residents of foreigndo business in these countries for approval by any foreign or domestic insurance regulatory agency. Traditionally, we have sought to address risks associated with the potential application of foreign laws tohave our sales of insurance policies in our foreign marketsinternational products approved by among other things, not locating any of our offices or assets in foreign countries, selling policies only through independent consultants rather than our own employees, requiring that all applications for insurance be submitted to and accepted only in our offices in the U.S., and requiring that policy premiums be paid to us only in U.S. Dollars. We rely on our independent consultants to comply with laws applicable to them in marketing our insurance products in their respective countries.a governmental authority.
WeWhile we have undertaken a comprehensive compliance review of risks associated with the potential application of foreign laws to our sales of insurance policies in foreign countries. The application of foreigncountries, the laws to our sales of insurance policies in foreign countries variesvary by country. Therecountry and there is a lack of uniform regulation and lack of clarity in certain regulations and lack of legal precedent addressing circumstances similar to ours. Our compliance review has confirmed the previously disclosedthus we face various risks related to foreign insurance laws associated with our current business model, at least in certainthe application of foreign countries.laws to these sales. There are risks that a foreign government could determine under its existing laws that its residents may not purchase life insurance from us unless we become qualified to do business in that country or unless our policies purchased by its residents receive prior approval from its insurance regulators. There also is a risk that foreign regulators maygovernments where we sell our products will become more aggressive in enforcing any perceived violations of their laws and seek to impose monetary fines or criminal penalties on us or our independent consultants, and/or order us to cease our sales in that jurisdiction. There is no assurance that, if a foreign country were to deem our sales of policies in that country to require that we qualify to do business in that country or submit our policies for approval by that country’s regulatory authorities, we would be able to, or would conclude that it is advisablefinancially reasonable to comply with those requirements. Any determination
We have sought to mitigate the risks described above by, among other things, not locating any of our offices or assets in these foreign countries or jurisdictions, and selling policies only through independent consultants rather than our own employees. We rely on our independent consultants to comply with laws applicable to them in marketing and servicing our insurance products in their respective countries. There is no assurance that these precautionary measures, practices and policies will partially or entirely mitigate the risks associated with the potential application of foreign laws to our sales of insurance policies in our foreign markets. Although the Company believes that these foreign regulators do not have jurisdiction over the Company and that any actions, including fines, may be unenforceable against the Company, any regulatory action could otherwise absorb Company time and resources (including independent consultants) away from its business operations or the Company may choose to pay such fines in order to do business in a foreign countryparticular country. Alternatively, the Company may determine that we or our policy sales are subject to regulation under their laws, or anythe risks associated with a particular market and its regulatory environment outweigh the benefits of conducting further business in that market and discontinue doing business there.
Any actions by a foreign countrygovernment to enforce suchthese laws more aggressively,against us could therefore have a material adverse effect on our ability to sell policies in that country and, in turn, on our results of operations and financial condition. We are exploring alternatives to our current business model in one or more jurisdictions, including withdrawing from particular markets.
Anycause disruption to the marketing and sale of our policies in that country or our withdrawal from doing business in that country, which could have a material adverse effect on our premium revenue, our costs and expenses and on our results of operations and financial condition.
International Currency Risks. While we only sell U.S. dollar denominated products, currency control laws or other currency exchange restrictions in foreign countries could materially adversely affect our revenues by limiting the ability of our policyholders in such countries to residentspay premiums in U.S. dollars or to receive U.S. dollar benefits. Difficulties in transferring funds from or converting currencies to U.S. dollars in certain countries could cause an increase in fees and costs associated with such payments or receipt of benefits and therefore make our products less attractive to such policyholders.
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International Political Risks.Many of the countries in which we operate have a foreign country, resulting from the actionhistory of foreign regulatory authoritiespolitical instability, including regime changes, political uprisings, and anti-democratic or anti-U.S. policies. The ability of people living in these countries to purchase and continue to make premium payments on our insurance policies and our ability to sell our policies in those countries through our independent consultants or otherwise may be adversely affected by political instability. Given the nature of our products, in an economic environment characterized by higher unemployment, lower personal income and reduced consumer spending, new product sales may be adversely affected. During such periods, we may also experience higher claims, longer claims duration, increase in policy lapses and/or increase in surrenders, any of which could have a material adverse effect on our results of operations andor financial condition. In addition, the imposition of U.S. sanctions against foreign countries where our policyholders reside could make it difficult for us to continue to issue new policies and receive premiums from policyholders in those countries.
Our operatingWe face significant competition in our international markets. If we are unable to compete effectively in these markets, our business, results of operations and profitability may be adversely affected.
We experience considerable competition for sales of our policies, primarily from the following sources, many of which have substantially greater financial, marketing and other resources than we have:
•Offshore companies with U.S. dollar-denominated policies. We face direct competition from companies that operate in the same manner as we do in our international markets;
•Foreign companies with locally operated subsidiaries that are registered in those countries and offer both local jurisdiction-regulated products in local currency and offshore U.S. dollar-denominated policies. This arrangement creates competition in that the U.S. dollar-denominated policies are cross-sold with high-need local insurance policies such as health insurance; and
•Locally operated companies with local currency policies. We compete with companies formed and operated in the country in which our foreign insureds reside.
In addition, from time to time, companies enter and exit the markets in which we operate, thereby increasing competition at times when there are new entrants. We may lose business to competitors offering competitive products at lower prices, or for other reasons.
Since we rely on independent consultants for distribution of our products in foreign markets, regulation and licensing requirements imposed upon our Company may impact our ability to attract and retain effective sales representatives, who may choose to distribute products of our competitors.
There can be no assurance that we will be able to compete effectively in any of our markets. If we do not, our business, results of operations and financial condition may be affected if the liabilities actually incurred differ, or if our estimates of those liabilities change, from the amounts we have reserved for in connection with the noncompliance of a portion of our life insurance policies with Section 7702 of the Internal Revenue Code and the failure of certain annuity contracts to qualify under Section 72(s) of the Internal Revenue Code.
We previously announced that we determined that a portion of the life and annuity insurance policies issued by our subsidiary insurance companies failed to qualify for the favorable U.S. federal income tax treatment afforded by Sections 7702 and 72(s) of the Internal Revenue Code ("IRC") of 1986. We may be liable to the IRS for failure to withhold taxes or to tax report on IRS information returns and payee statements. We have undertaken an analysis of our potential liability to the IRS arising from this matter, as well as other expenses we may incur to remediate (i.e., conform to the requirements of the IRS) certain previously issued domestic life insurance and annuity policies and to address any missed reporting and withholding for policies issued to non-U.S. citizens and have established a best estimate reserve of $12.3 million, net of tax as of December 31, 2017 for probable liabilities and expenses. The probability weighted range of financial estimates relative to this issue is $5.9 million to $48.2 million, net of tax. This estimated range includes projected toll charges and fees payable to the IRS, as well as estimated increased payout obligations to current holders of non-compliant domestic life insurance policies expected to result from remediation of those policies. The amount of our liabilities and expenses depends on a number of uncertainties, including the number of prior tax years for which we may be liable to the IRS, the number of domestic life insurance policies we will be required to remediate, the methodology applicable to the calculation of toll charges for non-compliant policies and the amount of time and resources we will require from external advisors who are assisting us with resolving these issues. Given the range of potential outcomes and the
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
significant variables assumed in establishing our estimates, actual amounts incurred may exceed our reserve and also could exceed the high end of our estimated range of liabilities and expenses. To the extent the amount reserved is insufficient to meet the actual amount of our liabilities and expenses, or if our estimates of those liabilities and expenses change in the future, our financial condition and results of operations may be materially adversely affected.
On May 17, 2017, we submitted an offerWe face a greater risk of money laundering activity associated with sales derived from residents of certain foreign countries.
The insurance industry is highly vulnerable to enter into Closing Agreementsmoney laundering. Money laundering in the insurance industry typically involves the exploitation of various products and mechanisms to obscure the origins of illicit funds. One common method is through the purchase of insurance policies, such as life insurance, with the IRS coveringuse of dirty money. Criminals may overpay premiums, surrender policies prematurely, or make fictitious claims to cycle the CICAillicit funds back as legitimate payout. To combat global financial crime, governments and CNLIC domestic lifeinternational authorities implement a range of anti-money laundering and countering of terrorist financing (AML/CFT) regulations that impact the insurance business. The toll charges calculatedsector. Penalties for compliance failures can include heavy fines.
Some of our top international markets, such as Colombia and enumeratedVenezuela, are countries that have been identified by the U.S. Department of the Treasury as jurisdictions of high risk for money laundering. Accordingly, as required by applicable U.S. laws and best business practices, we have developed and implemented an anti-money laundering, anti-terrorist financing and sanctions program that includes policies, procedures, controls, independent testing, reporting and recordkeeping requirements for deterring, preventing and detecting potential money laundering, terrorist financing, fraud and other criminal activity and have an officer of the Company responsible for managing this program. Despite our efforts to prevent money laundering through our companies, there can be no assurance that these enhanced controls will entirely mitigate money laundering risk associated with our insurance products, whether in these foreign countries or in the Closing Agreements totaled $124,000United States.
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INSURANCE RISKS
BECAUSE MOST OF OUR REVENUE DERIVES FROM COLLECTION OF PREMIUMS ON OUR PRODUCTS, OUR OVERALL FINANCIAL PERFORMANCE DEPENDS UPON THE ACCURACY OF OUR PRODUCT PRICING AND ABILITY TO MANAGE PRICING ADEQUACY. DIFFERENCES IN ACTUAL EXPERIENCE, IMPROPER EVALUATION OF UNDERWRITING RISK, MISMANAGEMENT OF CLAIMS, OR OTHER UNFORESEEN EVENTS COULD CAUSE OUR ACTUAL RESULTS TO DIFFER FROM OUR ASSUMPTIONS, WHICH WOULD REDUCE OUR MARGINS AND THUS NEGATIVELY AFFECT OUR PROFITABILITY AND FINANCIAL CONDITION.
Pricing accuracy depends upon our ability to project future losses based on historical loss experience, adjusted for known trends.
In order to price products accurately, the Company must develop and $4,000 for the CICAapply appropriate morbidity and CNLIC domestic life insurance businesses, respectively.
We expectmortality estimates, closely monitor and timely recognize changes in trends, and project both severity and frequency of losses with reasonable accuracy to submit offerscover these risks. Pricing adequacy is necessary to enter into Closing Agreements with the IRS for the SPLICgenerate sufficient premiums to cover our cost of sales, costs of operations (including payment of policy benefits) and MGLIC life insurance business and for the CICA international business and our annuity business in 2018.
The new CICA Life Ltd. (Bermuda) will be subject to extensive government regulation by the Bermuda Monetary Authority (“BMA”), which isearn a new regulatory regime for the Company. Regulation by the BMA,profit. Pricing adequacy is subject to changea number of risks and uncertainties, including, without limitation:
•availability of sufficient reliable data;
•incorrect or incomplete analysis of available data;
•uncertainties inherent in estimates and assumptions;
•selection and application of appropriate rating formulae or other pricing methodologies;
•adoption of successful pricing strategies;
•prediction of policyholder life expectancy and retention;
•unforeseen events that may cause our estimates to be wrong (such as the COVID-19 pandemic);
•unanticipated legislation, regulatory action or court decisions; or
•unexpected changes in interest rates or inflation.
Such risks may result in the Company’s pricing being based on outdated, inadequate, or inaccurate data, or inappropriate analyses, assumptions, or methodologies, and may increasecause the Company to estimate incorrectly future changes in the frequency or severity of claims. As a result, the Company could underprice risks, which would negatively affect the Company’s margins, or it could overprice risks, which could reduce the Company’s volume and competitiveness.
Pricing accuracy depends upon our costsability to project future losses based on historical loss experience, including policyholder retention. Unanticipated increases in early policyholder withdrawals or surrenders or elections by policyholders to receive lump sum payouts at maturity could negatively impact liquidity.
A primary liquidity concern is the risk of doing business, restrict the conductunanticipated or extraordinary early policyholder withdrawals or surrenders. Some of our businessinsurance policies include provisions, such as surrender charges, that help limit and negatively impactdiscourage early withdrawals. However, early withdrawal and surrender levels may differ from anticipated levels for a variety of reasons, including changes in economic conditions, changes in policyholder behavior or financial needs, changes in relationships with our independent consultants, efforts by foreign governments to tax policyholders or increases in surrenders among policies that have been in force for more than fifteen years and are no longer subject to surrender charges. These changes in surrender activity may result in remeasurement gains or losses which could increase volatility in our results of operations, liquidity and financial condition.
For over 40 years, the Company’s life insurance subsidiaries have been regulated in the U.S. by the state insurance departments of their states of domicile. In 2018, CICA Life Ltd. will be subject to extensive regulation and supervision by the BMA in jurisdictions where we do business, including global insurance regulations, tax, financial services, privacy, anti-money laundering, bank secrecy, anti-corruption and foreign asset control laws. Bermuda insurance company regulation is generally designed to protect the interests of policyholders, with substantially lesser protections to shareholders of the regulated insurance companies. To that end, the BMA has broad powers to regulate business activities of CICA Life Ltd, mandate capital and surplus requirements, regulate trade and claims practices and require strong enterprise risk management and corporate governance activities. The Company has no prior experience operating in a foreign jurisdiction and limited experience with regulation by the BMA.
We face financial, liquidity and capital market risks in our operations.
As an insurance holding company with significant investment exposure,In addition, we face material financial and capital markets risk in our operations. Due to the low interest rate environment in recent years, we experienced significant call activity on our fixed income portfolio that decreased our investment yields compared to prior years. We also have recorded other-than-temporary impairments in the past several years due to credit related market declines and equity market volatility.
We face potential liquidity risks if policyholders with mature policies elect to receive lump sum distributions at greater levels than anticipated. Our whole life and endowment products provide the policyholder with alternatives once the policy matures. The policyholder can choose to take a lump sum payout or leave the money on deposit at interest with the Company. The Company has a significant amount of aging endowment products representing approximately 45.9% of total inforce with older contracts sold historically that will beginhave begun reaching their maturities over the next several years and policyholder election behavior is not known. It is uncertain how policyholders will react in response to these maturities. If a large number of policyholders elect lump sum distributions, the Company could be exposed to liquidity risk in years of high maturities. Meeting these distributions could require the Company to sell securities at inopportune times to pay policyholder withdrawals. Alternatively, if the policyholder were to leave the money on deposit with the Company at interest, our profitability could be negatively impacted if the product guaranteed rate is higher than the current market rate we can earn on our investments.
A large portion of our debt security investment portfolio will mature in the next seven years and could be called sooner as we were subject to significant call activity beginning in 2009 due to the declining interest rate environment and we reinvested into shorter durations that are now approaching maturity. We will need to reinvest these maturing funds in the current interest rate environment. Our profitability could be negatively impacted depending on the market rates at the time of reinvestment. This could result in a decrease in our spread between our policy liability crediting rates and our investment earned rates. This could also negatively impact our liquidity.
Changes in market interest rates may significantly affect our profitability.
Some of our products, principally traditional whole life insurance with annuity riders, expose us to the risk that changes in interest rates will reduce our "spread," or the difference between the amounts we are required to pay under our contracts to policyholders and the rate of return we are able to earn on our investments intended to support obligations under the contracts. Our spread is an integral component of our net income.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
If interest rates decrease or remain at low levels, we may be forced to reinvest proceeds from investments that have matured, prepaid, been sold, or called at lower yields, reducing our investment margin. Our fixed income bond portfolio is exposed to interest rate risk as approximately 55% of the portfolio is callable. Lowering our interest crediting rates can help offset decreases in investment margins on some of our products. However, our ability to lower these rates could be limited by competition or contractually guaranteed minimum rates, and may not match the timing or magnitude of changes in asset yields.
An increase in interest rates will decrease the net unrealized gain position of our investment portfolio and may subject us to disintermediation risk. Disintermediation risk is the risk that in a change from a low interest rate period to a significantly higher and increasing interest rate period, policyholders may surrender their policies or make early withdrawals in order to increase their returns, requiring us to liquidate investments in an unrealized loss position (i.e. the market value less the carrying value of the investments). This risk is discussed further in the two risk factors below.
Our investment portfolio is subject to various risks that may result in realized investment losses. In particular, decreases in the fair value of fixed maturities may significantly reduce the value of our investments, and as a result, our financial condition may suffer.
We are subject to credit risk in our investment portfolio. Defaults by third parties in the payment or performance of their obligations under these securities could reduce our investment income and realized investment gains or result in the recognition of investment losses. The value of our investments may be materially adversely affected by increases in interest rates, downgrades in the bonds included in our portfolio and by other factors that may result in the recognition of other-than-temporary impairments. Each of these events may cause us to reduce the carrying value of our investment portfolio.
In particular, at December 31, 2017, fixed maturities represented $1,208.6 million or 92.5% of our total investments of $1,306.1 million. The fair value of fixed maturities and the related investment income fluctuates depending on general economic and market conditions. The fair value of these investments generally increases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income realized by us will generally increase or decrease in line with changes in market interest rates. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations. An investment has prepayment risk when there is a risk that the timing of cash flows resulting from the repayment of principal might occur earlier than anticipated because of declining interest rates or later than anticipated because of rising interest rates. The impact of value fluctuations affects our consolidated financial statements, as a large portion of our fixed maturities are classified as available-for- sale, with changes in fair value reflected in our stockholders' equity (accumulated other comprehensive income or loss). No similar adjustment is made for liabilities to reflect a change in interest rates. Therefore, interest rate fluctuations and economic conditions could adversely affect our stockholders' equity, total comprehensive income and/or cash flows. Although at December 31, 2017, approximately 97.2% of our fixed maturities were investment grade with 75.2% rated A or above, all of our fixed maturities are subject to credit risk. If any of the issuers of our fixed maturities suffer financial setbacks, the ratings on the fixed maturities could be downgraded (with a concurrent decrease in fair value) and, in a worst-case scenario, the issuer could default on its financial obligations. If the issuer defaults, we could have realized losses associated with the impairment of the securities.
Valuation of our investments and the determination of whether a decline in the fair value of our invested assets is other-than-temporary are based on estimates that may prove to be incorrect.
U.S. GAAP requires that when the fair value of any of our invested assets declines and the decline is deemed to be other-than-temporary, we recognize a loss in either other comprehensive income or in our statement of income based on certain criteria in the period for which the determination is made. The determination of the fair value of certain invested assets, particularly those that do not trade on a regular basis, requires an assessment of available data and the use of assumptions and estimates. Once it is determined that the fair value of an asset is below its carrying value, we must determine whether the decline in fair value is other-than-temporary, which is based on subjective factors and involves a variety of assumptions and estimates.
There are risks and uncertainties associated with determining whether declines in market value are other-than-temporary. These include significant changes in general economic conditions and business markets, trends in certain industry segments, interest rate fluctuations, rating agency actions, changes in significant accounting estimates and assumptions and legislative actions. In the case of mortgage- and asset-backed securities, there is added uncertainty as to the performance of the underlying collateral assets. To the extent that we are incorrect in our determination of the fair value of our investment securities or our determination that a decline in their value is other-than-temporary, we may realize losses that never actually materialize or may fail to recognize losses within the appropriate reporting period.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Gross unrealized losses on fixed maturity and equity securities may be realized or result in future impairments, resulting in a reduction in our net income.
Fixed maturity and equity securities classified as available-for-sale are reported at fair value. Unrealized gains and losses on available-for-sale securities are recognized as a component of other comprehensive income (loss) and are, therefore, excluded from our net income. Our total gross unrealized losses on our available-for-sale securities portfolio at December 31, 2017 were $3.1 million. The accumulated change in estimated fair value of these securities is recognized in net income when the gain or loss is realized upon sale of the security or in the event that the decline in estimated fair value is determined to be other-than-temporary and an impairment charge to earnings is taken. Realized losses or impairments may have a material adverse effect on our net income in a particular quarterly or annual period.
Our actual claims losses may exceed our reserves for claims, and we may be required to establish additional reserves, which in turn may adversely impact our results of operations and financial condition.
We maintain reserves to cover our estimated exposure for claims relating to our issued insurance policies. Reserves, whether calculated under U.S. GAAP or statutory accounting practices prescribed by various state insurance regulators, do not represent an exact calculation of exposure, but instead represent our best estimates, generally involving actuarial projections, of what we expect claims will be based on mortality assumptions that are determined by various regulatory authorities. Many reserve assumptions are not directly quantifiable, particularly on a prospective basis. In addition, when we acquire other domestic life insurance companies, our assessment of the adequacy of acquired policy liabilities is subject to our estimates and assumptions. Reserve estimates are refined as experience develops, and adjustments to reserves are reflected in our statements of operations for the period in which such estimates are updated. Because establishing reserves is an inherently uncertain process involving estimates of future losses, future developments may require us to increase policy benefit reserves, which may have a material adverse effect on our results of operations and financial condition in the periods in which such increases occur.
Unanticipated increases in early policyholder withdrawals or surrenders could negatively impact liquidity.
A primary liquidity concern is the risk of unanticipated or extraordinary early policyholder withdrawals or surrenders. Our insurance policies include provisions, such as surrender charges, that help limit and discourage early withdrawals, and we track and manage liabilities and attempt to align our investment portfolio to maintain sufficient liquidity to support anticipated withdrawal demands. However, early withdrawal and surrender levels may differ from anticipated levels for a variety of reasons, including changes in economic conditions, changes in policyholder behavior or financial needs, changes in relationships with our independent consultants, changes in our claims-paying ability, or increases in surrenders among policies that have been in force for more than fifteen years and are no longer subject to surrender charges. Any of these occurrences could adversely affect our liquidity, profitability and financial condition.
While we own a significant amount of liquid assets, a certain portion of investment assets are relatively illiquid. If we experience unanticipated early withdrawal or surrender activity or greater than expected lump sum distributions of endowment maturities and we could exhaust all other sourcesdo not have sufficient cash flow from our insurance operations to support payment of liquidity andthese benefits, we may have to sell our investments in order to meet our cash needs or be
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forced to obtain additional financing or liquidate assets, perhaps on unfavorable terms.third-party financing. The availability of additionalsuch financing will depend on a variety of factors, such as market conditions, the availability of credit in general or more specifically in the insurance industry, the strength or weakness of the capital markets, the volume of trading activities, our credit capacity, and the perception of our long- or short-term financial prospects if we incur large realized or unrealized investment losses or if the level of business activity declines due to a market downturn. IfTherefore, if we are forced to dispose of assetssell our investments on unfavorable terms or obtain financing with unfavorable terms, it could have an adverse effect on our liquidity, results of operations and financial condition.
The Company’s success depends on its ability to accurately underwrite risks in order to charge adequate premiums to policyholders.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Catastrophes may adversely impact liabilities for policyholder claims and reinsurance availability.
Our insurance operations are exposedHistorically, we have fully underwritten most of our products in order to the riskproperly evaluate risk. For many of catastrophic events. The extent of losses from a catastrophe is a function of both the total amount of insured exposureour newer products, primarily in the area affected by the event and the severity of the event. Most catastrophes are restricted to small geographic areas; however, hurricanes, earthquakes, tsunamis and man-made catastrophes may produce significant damage or loss of life in larger areas, especially those that are heavily populated. Claims resulting from catastrophic events could cause substantial volatility in our financial results for any fiscal quarter or year and could materially reduce our profitability or harm our financial condition. In addition, catastrophic events could harm the financial condition of issuers of obligationsU.S., we hold in our investment portfolio, resulting in impairments to these obligations, and the financial condition of our reinsurers, thereby increasing the probability of default on reinsurance recoveries. Large-scale catastrophes may also reduce the overall level of economic activity in affected countries, which could hurt our business and the value of our investments or our ability to sell new policies.
Ourutilize a “simplified” underwriting process. Simplified issue life insurance operations are exposeduses a simple form of underwriting. Applicants must answer some health-related questions but do not have to the risk of catastrophic mortality, such astake a pandemic or other event that causes a large number of deaths, especially if concentrated in our top foreign markets. A significant pandemic could have a major impactlife insurance medical exam. The underwriting decision is based on questions answered on the global economyapplication and may be supplemented with additional medical claims history and lab data information.
Any shortcomings in the process used to evaluate and price our policies, or significant inaccuracies in the economies of particular countries or regions, including travel, trade, tourism, the health system, food supply, consumption, overall economic output and, eventually, on the financial markets. In addition, a pandemic that affected our employees, our policyholders, our independent consultants or other companies with which we do business could disrupt our business operations. The effectiveness of external parties, including governmental and non-governmental organizations, in combating the spread and severity of such a pandemiclife expectancy estimates relating to those policies, could have a material impact on the losses experienced by us. These events could cause a material adverse effect on our results of operations in any period and depending on their severity, could also materially and adversely affect our financial condition.
We may be required to accelerate the amortization of deferred acquisition costs and the costs of customer relationships acquired, which would increase our expenses and adversely affect our results of operations and financial condition.
At December 31, 2017, we had $167.1 million of deferred policy acquisition costs, or DAC. DAC represents costs that vary with and are directly related to the successful sale and issuance of our insurance policies and are deferred and amortized over the estimated life of the related insurance policies. These costs include commissions in excess of ultimate renewal commissions, solicitation and printing costs, sales material costs and some support costs, such as underwriting and contract and policy issuance expenses. Under U.S. GAAP for our type of insurance products, DAC is amortized over the premium-paying period of the policies.
In addition, when we acquire a block of insurance policies, we assign a portion of the purchase price to the right to receive future net cash flows from existing insurance and investment contracts and policies. This intangible asset, called the cost of customer relationships acquired, or CCRA, represents the actuarially estimated present value of future cash flows from the acquired policies. At December 31, 2017, we had $17.5 million of CCRA. We amortize the value of this intangible asset in a manner similar to the amortization of DAC.
The amortization of DAC and CCRA is subject to acceleration and generally depends upon anticipated profits from investments, surrender and other policy charges, mortality, morbidity, persistency and maintenance expense margins. For example, if our insurance policy lapse and surrender rates were to exceed the assumptions upon which we priced our insurance policies, or if actual persistency proves to be less than our persistency assumptions, especially in the early years of a policy, we might be required to accelerate the amortization of expenses we deferred in connection with the acquisition of the policy. We regularly review the quality of our DAC and CCRA to determine if they are recoverable from future income. If these costs are not recoverable, the amount that is not recoverable is charged to expenses in the financial period in which we make this determination.
Unfavorable experience with regard to expected expenses, investment returns, surrender and other policy charges, mortality, morbidity, lapses or persistency may cause us to increase the amortization of DAC or CCRA, or both, or to record a current period expense to increase benefit reserves, any of which could have a material adverse effect on our results of operations and financial condition.
We may be required to recognize an impairment on the valuePolicyholder claims is one of our goodwill, which would increaselargest expenses. Mismanagement of claims handling or increased fraudulent claims could negatively impact our expenses and materially adversely affect our results of operationscosts and financial condition.
Goodwill representsProper claims handling is critical to managing our benefit expenses. Many factors can affect the excessCompany’s ability to pay claims accurately, including the following:
•the training, experience, and skill of the amount paid by usCompany’s claims representatives;
•the extent of fraudulent claims and the Company’s ability to acquire variousrecognize and respond to such claims; and
•the Company’s ability to develop or select and implement appropriate procedures, technologies, and systems to support claims functions.
The Company’s failure to pay claims fairly, accurately, and in a timely manner, or to deploy claims resources appropriately, could result in unanticipated costs, lead to material litigation, undermine customer goodwill and the Company’s reputation in the marketplace, impair its brand image and, as a result, materially and adversely affect its competitiveness, financial results, prospects, and liquidity.
Higher than expected policyholder claims related to unforeseen events may negatively impact our premium revenues, increase our benefits and expense costs and increase our reinsurance costs, thus negatively affecting our financial condition.
Our life and health insurance companies overproducts are particularly exposed to risks of catastrophic mortality, such as a pandemic or other events that result in a large number of deaths. In addition, the fair valueoccurrence of their net assets atsuch an event in a concentrated geographic area could have a severe disruptive effect on our workforce and business operations. The likelihood and severity of such events cannot be predicted and are difficult to estimate. In such an event, the date of the acquisition. Under U.S. GAAP, we test the carrying value of goodwill for impairment at least annually at the "reporting unit" level, which is either an operating segment or a business that is one level below the operating
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
segment. Goodwill is impaired if its carrying value exceeds its implied fair value. This may occur for various reasons, including changes in actual or expected earnings or cash flows of a reporting unit, generation of earnings by a reporting unit at a lower rate than similar businesses or declines in market prices for publicly traded businesses similarimpact to our reporting units. If any portion of our goodwill becomes impaired, we would be required to recognize the amount of the impairment as a current-period expense, whichoperations could have a material adverse effectimpact on our ability to conduct business and on our results of operations and financial condition.condition, particularly if those problems affect employees performing operational tasks and supporting computer-based data processing, or destroy the capability to transmit, store, and retrieve valuable data. In 2017, we recognizedaddition, in the event that a goodwill impairmentsignificant number of $4.6 million on our Home Service Segment. Goodwill inmanagement were unavailable following a disaster, the achievement of our consolidated financial statements was $12.6 million as of strategic objectives could be negatively impacted.
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Management’s determination of the fair value of each reporting unit incorporates multiple inputs including discounted cash flow calculations based on assumptions that market participants would make in valuing the reporting unit. Other assumptions can include levels of economic capital, future business growth, and earnings projections.
Our conversionReinsurance may not be available or affordable, or reinsurers may be unwilling or unable to a new actuarial valuation system is not yet complete and contains known uncertainties that could result in identification of additional errors inmeet their obligations under our financial reporting.
The Company is in the process of converting its actuarial valuation from a third party service provider to an actuarial valuation modeling software system purchased from a vendor. In connection with our ongoing actuarial valuation conversion, certain legacy system immaterial errors were discovered in both 2017 and 2016. As we complete this validation and conversion, we could identify additional differences that will be evaluated for financial reporting purposes. The conversion to the new system is expected to be completed in 2018.
We are a defendant in lawsuits,reinsurance contracts, which may adversely affect our financial condition and detract from the time our management is able to devote to our business, and we are subject to risks related to litigation and regulatory matters.
From time to time we are, and have been, subject to a variety of legal and regulatory actions and investigations relating to our business operations, including, but not limited to:
disputes over insurance coverage or claims adjudication;
regulatory compliance with state laws, including insurance and securities regulations;
regulatory compliance with U.S. federal securities laws, tax, anti-money laundering, bank secrecy, anti-bribery, anti-corruption and foreign asset control laws, among others;
disputes with our independent marketing firms, independent consultants and employee-agents over compensation, termination of contracts, noncompliance with applicable laws and regulations and related claims;
disputes regarding our tax liabilities;
disputes relating to reinsurance and coinsurance agreements; and
disputes relating to businesses acquired and operated by us.
In the absence of countervailing considerations, we would expect to defend any such claims vigorously. However, in doing so, we could incur significant defense costs, including attorneys' fees, other direct litigation costs and the expenditure of substantial amounts of management time that otherwise would be devoted to our business. Further, if we suffer an adverse judgment as a result of any claim, it could have a material adverse effect on our business, results of operations andor financial condition.
As noted above,part of our overall risk management and as disclosed in prior periods, the legal and regulatory actions facing the Company include those relating to compliance with U.S. federal securities laws. Specifically, the Company has been the subject of an investigation by the Securities and Exchange Commission (“SEC”), which appears to be focused on the Company’s internal control over financial reporting and disclosure controls and procedures in light of the Company’s determination in 2015 that a portion of the life insurance and annuity policies issued by its subsidiary insurance companies failed to qualifycapital management strategies, we purchase reinsurance for the favorable U.S. federal income tax treatment afforded by Sections 7702 and 72(s) of the Internal Revenue Code of 1986. There have been no allegations of fraud presented by the SEC. We have cooperated fully with the investigation and expect that the matter will be resolved soon, although we cannot predict the timing of a resolution or the ultimate outcome of the investigation.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Reinsurers with which we do business could increase their premium rates and may not honor their obligations, leaving us liable for the reinsured coverage.
We reinsure certain risks underwritten by our various insurance subsidiaries. Market conditions beyond our control determine the availability and cost of reinsurance. Any decrease in the amount of reinsurance protection we purchase. The highwill increase our risk of loss and may impact the level of capital requirements for our insurance subsidiaries, and any increase in the cost of reinsurance will, absent a decrease in the amount of reinsurance, reduce our results of operations. Accordingly, we may be forced to incur additional expenses for reinsurance or lack of affordable coverage couldmay be unable to obtain sufficient reinsurance on acceptable terms, which may adversely affect our ability to write future business, result in the assumption of more risk with respect to the policies we issue, and increase our capital requirements. The collectability of our reinsurance recoverable is primarily a function of the solvency of the individual reinsurers. We cannot provide assurance that our reinsurers will pay the reinsurance recoverable owed to us or that they will pay these recoverables on a timely basis. The insolvency of a reinsurer or the inability or unwillingness of a reinsurer to comply with the terms of a reinsurance contract may have an adverse effect on our results of operations or financial condition.
Our actual claims losses may exceed our reserves for claims and we may be required to establish additional reserves, which in turn may adversely impact our results of operations and financial condition.
Our reinsurance facilitiesWe maintain reserves to cover our estimated exposure for claims relating to our issued insurance policies. Reserves do not represent an exact calculation of exposure, but instead represent our best estimates using actuarial and statistical procedures. Reserve estimates are generally subjectrefined as experience develops, and adjustments to annual renewal. We may not be able to maintainreserves are reflected in our current reinsurance facilities and, even if highly desirable or necessary, we may not be able to obtain replacement reinsurance facilities in adequate amounts or at rates economic to us. If we are unable to renew our expiring facilities or to obtain new reinsurance facilities, either our net exposures would increase or, if we are unwilling or unable to bear an increase in net exposures, we may have to reduce the level of our underwriting commitments. In addition, our reinsurance facilities may be canceled for new business, pursuant to their terms, upon the occurrence of certain specified events, including a change of control of our Company (generally defined as the acquisition of 10% or more of our voting equity securities) or the failure of our insurance company subsidiaries to maintain the minimum required levels of statutory surplus. Any of these potential developments could materially adversely affect our revenues, resultsconsolidated statements of operations and financial condition.
In 2017, we reinsured $503.7 millioncomprehensive income (loss) for the period in which such estimates are updated. Because establishing reserves is an inherently uncertain process involving estimates of the face amount of our life insurance policies. Amounts reinsured in 2017 represented 10.1% of the face amount of direct life insurance in force in that year. Although the cost of reinsurance is, in some cases, reflected in premium rates, under certain reinsurance agreements, the reinsurerfuture losses, future developments may increase the rate it chargesrequire us for reinsurance. If our cost of reinsurance were to increase we might not be ablepolicy benefit reserves, which restricts our use of cash to recover thesethe extent of such increased costs,reserves and increases expenses, negatively affecting our results of operations and financial condition could be materially adversely affected. See Note 5 to the Company's consolidated financial statements.
Our international markets face significant competition. If we are unable to compete effectively in our markets, our business, results of operations and profitability may be adversely affected.
Our international marketing plan focuses on making available U.S. dollar-denominated life insurance products to individuals residing in more than 30 countries. New competition could increase the supply of available insurance, which could adversely affect our ability to price our products at attractive profitable rates and thereby adversely affect our revenues, results of operations and financial condition. Existing barriers to entry in the foreign markets we serve may not be sufficient to impede potential competitors from entering such markets. In connection with our business with foreign nationals, we experience competition primarily from the following sources, many of which have substantially greater financial, marketing and other resources than we have:
Foreign operated companies with U.S. dollar-denominated policies. We face direct competition from companies that operate in the same manner as we operate in our international markets.
Another group of our competitors in the international marketplace consists of foreign operated companies that have locally operated subsidiaries that offer both local jurisdiction regulated products in local currency and off-shore U.S. dollar-denominated policies. This arrangement creates competition in that the U.S. dollar-denominated policies are offered in conjunction with high-need local insurance policies such as health insurance.
Local currency policies provide the benefit of assets located in the country of foreign residents, but entail risks of uncertainty due to local currency fluctuations, as well as the perceived instability and weakness of local currencies.
Locally operated companies with local currency policies. We compete with companies formed and operated in the countryperiods in which our foreign insureds reside. Generally, these companies are subject to risks of currency fluctuations, and they primarily use mortality tables based on experience of the local population as a whole. These mortality tables are typically based on significantly shorter life spans than those we use. As a result, the cost of insurance from these companies tends to be higher than ours. Although these companies typically market their policies to a broader section of the population than do our independent marketing firms and independent consultants, there can be no assurance that these companies will not endeavor to place a greater emphasis on our target market and compete more directly with us.such increases occur.
In addition, from time to time, companies enter and exit the markets in which we operate, thereby increasing competition at times when there are new entrants. We may lose business to competitors offering competitive products at lower prices, or for other reasons.THE DISTRIBUTION OF OUR PRODUCTS THROUGH INDEPENDENT CONSULTANTS AND AGENCIES REDUCES OUR CONTROL OVER SALES AND DISTRIBUTION AND THUS SUBJECTS US TO CERTAIN RISKS THAT COULD NEGATIVELY IMPACT OUR REVENUES, OUR IN-FORCE BUSINESS, AND OUR BENEFITS AND EXPENSE COSTS.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
There can be no assurance that we will be able to compete effectively in any of our markets. If we do not, our business, results of operations and financial condition will be materially adversely affected.
Sales of our insurance products could decline if we are unable to (i) establish and maintain commercial relationships with independent marketing firms and independent consultants, (ii) attract and retain employee agents or (iii) develop and maintain our distribution sources.
We distribute our insurance products through several distribution channels, including independent marketing firms,agencies, independent consultants and our employee agents. These relationships are significant for both our revenues and our profits. In our life insurance segment, we
We depend almost exclusively on the services of a small number of independent consulting agencies in our international markets and on independent marketing firmsorganizations, general agencies and independent consultants. In our home service insurance segment, we depend on employee agents whose role in our domestic markets for the distribution process is integral to developingof our products. The loss of any of these producers could negatively affect our sales and maintaining relationships with policyholders. policy retention.
Significant competition exists among insurers in attracting and maintaining marketers of demonstrated ability. Some of our competitors may offer better compensation packages for marketing firms, independent consultants andor commissions or induce agents andto sell their products due to their broader arrays of products and have a greater diversity ofproduct offerings, more distribution resources, better brand recognition, more competitive pricing, lower cost structures andor greater financial strength or claims paying ratings than we do.have. We compete with other insurers for marketing firms,agencies, agents and independent consultants and employee agents primarily on the basis of our compensation, products and support services. Any reduction in our ability to attract and retain effective sales representatives could materially adversely affect our revenues, results of operations and financial condition.
There may be adverse tax, legal or financial consequences if our sales representatives are determined not to be independent contractors.
Our international sales representatives are independent contractors who operate their own businesses. AlthoughAdditionally, we believe that we have properly classified our representatives as independent contractors, there is nevertheless a risk that the IRS, a foreign agency, a court or other authority will take the different view that our sales representatives should be treated like employees. Furthermore, the tests governing the determination of whether an individual is considered to be an independent contractor or an employee are typically fact-sensitive and vary from jurisdiction to jurisdiction. Laws and regulations that govern the status and misclassification of independent sales representatives are subject to changea risk of our independent consultants leaving our Company to sell products for a competitor and inducing our policyholders to lapse or interpretation.surrender their policies, or otherwise terminate their relationship with us, in order to purchase products from the independent consultant with a competitor company.
If there is a change in
Because we sell our products through independent agents, we have less control over the manner in which they sell our independent contractorsproducts.
As described above in Item 1, Business, Regulation, insurance regulators focus on market conduct, i.e., the way we sell our products. In the United States, there are classifiedseveral insurance regulations and federal laws that limit how we
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sell our products, such as the Telephone Consumer Protection Act ("TCPA"), which governs how our agents can contact customers or an adverse determinationpotential customers via telephone and text. While we expect our agents to comply with respecttheir contractual obligations to some or all of our independent contractors by a court or governmental agency,us and laws such as the TCPA, we have limited control over how they conduct their business. If violations, such as TCPA violations, were attributed to us, we could incur significant costsfines and if attributed to our agents, may cause them to stop selling our products.
REGULATORY RISKS
INSURANCE IS A HIGHLY REGULATED BUSINESS. REGULATIONS VARY FROM JURISDICTION TO JURISDICTION AND MAY CHANGE FROM TIME TO TIME. THESE REGULATIONS AFFECT OUR OPERATIONS AND CHANGES COULD NEGATIVELY IMPACT OUR CASH FLOW, THE RESULTS OF OUR OPERATIONS, OUR LIQUIDITY AND OUR FINANCIAL CONDITION.
In addition to the legal risks related to our international operations discussed above in complying with suchthis Item 1A, Risk Factors, we are subject to risks related to the laws and regulations in the jurisdictions where we are domiciled and registered to do business, including in respect of tax withholding, social security payments, governmentPuerto Rico and private pension plan contributions and recordkeeping, or we may be required to modify our business model, any of which could have avarious U.S. states. The material adverse effect on our business, financial condition and results of operations. In addition, there is the risk that we may be subject to significant monetary liabilities arising from fines or judgments as a result of any such actual or alleged non-compliance with applicable federal, state, local or foreign laws.risks are described below.
WeOur insurance subsidiaries are subject to extensive governmental regulation in the United States, which is subject to change and may increase our costs of doing business, restrict the conduct of our business and negatively impact our results of operations, liquidity and financial condition.
We are subject to extensive regulation and supervision in U.S. jurisdictions where we do business, including state insurance regulations and U.S. federal securities, tax, financial services, privacy, anti-money laundering, bank secrecy, anti-corruption and foreign asset control laws. Insurance company regulation is generally designed to protect the interests of policyholders, with substantially lesser protections to shareholders of the regulated insurance companies. To that end, all the states in which we do business have insurance regulatory agencies with broad legal powers with respect to licensing companies to transact business; mandatingminimum capital and surplus requirements; regulating traderequirements, and claims practices; approving policy forms; and restricting companies' abilityany failure to enter and exit markets.meet these requirements could subject us to regulatory action or other restrictions, including ceasing business.
The capacity for an insurance company's growth in premiums is partially a function of its required statutory surplus. Maintaining appropriate levels of statutory surplus, as measured by statutory accounting practices prescribed or permitted by a company's statejurisdiction of domicile, is consideredthe most important by all statesolvency measure for insurance regulatory authorities. Failure to maintain required levels of statutory surplus could result in increased regulatory scrutiny and enforcement action by regulatory authorities.
MostOur insurance subsidiaries are subject to minimum capital and surplus requirements in the U.S. and Puerto Rico. If we fail to meet these standards and requirements, our various regulators may require specified actions to be taken, including without limitation:
•restricting distributions from our subsidiaries to Citizens; or
•requiring Citizens to contribute additional capital to a subsidiary; or
•requiring Citizens to enter into a guaranty or other agreement to contribute capital to such subsidiary under certain circumstances; or
•requiring the applicable insurance company to stop selling new business;
all of which could have a material and adverse impact on the Company’s competitiveness, operational flexibility, financial condition, and results of operations.
In our CICA Domestic business, we pay advance commissions on some of our insurance products, meaning we pay an agent their commission immediately upon sale of a policy, rather than "as earned", or when premiums are received by us. Because of this, another liquidity concern is the risk that rapid growth in first year sales of these products could create a significant increase in commission payments, which increases expenses and thus reduces our statutory capital until the commissions are recouped from premiums paid. CICA Domestic sales have increased significantly since the third quarter of 2023 and continue to grow rapidly. To mitigate this risk and strain on capital, we may seek options, such as reinsurance or loans at the holding company level (from the Credit Facility or otherwise) that would allow us to reduce the liquidity risk should CICA Domestic's required commission payments exceed current resources. If we are unable to purchase reinsurance protection in amounts that we consider sufficient or unable to borrow money to contribute capital to CICA Domestic, we could be exposed to cash flow strain. For CICA Domestic, commission advances are non-admitted assets, which increases required regulatory
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capital and reduces the excess capital available. As discussed above, management is investigating various options in order to reduce both regulatory capital and liquidity risk should the capital required to support this growth exceed current resources. Citizens may have to contribute capital to CICA Domestic to maintain the required RBC ratio.
Citizens is a holding company that has minimal operations of its own and depends on the ability of our insurance subsidiaries to pay dividends or make service payments to us in sufficient amounts to fund our operations. If they cannot make such payments, Citizens may need to sell investments or seek external capital to cover its operational costs.
As a holding company, our assets consist of the capital stock of our subsidiaries, cash and investments. Accordingly, we rely primarily on statutorily permissible payments from our insurance subsidiaries, principally through dividends or service agreements we have with our subsidiaries, to meet our working capital needs. As discussed above, the ability of our insurance subsidiaries to make payments to us is subject to regulation by the states and jurisdictions in which they are domiciled, and in addition to maintaining minimum capital and surplus ratios, these payments depend primarily on regulatory approval of dividend payments and approved service agreements between us and these subsidiaries.
Except to the extent that we are a creditor with recognized claims against our subsidiaries, claims of our subsidiaries' creditors, including policyholders, have priority with respect to the assets and earnings of the subsidiaries over the claims of other creditors (including us) and shareholders. If any of our subsidiaries become insolvent, liquidates or otherwise reorganizes, our policyholders will have a priority to receive the assets of such subsidiary and Citizens may have no rights to receive cash or other assets of such subsidiaries.
If our internal sources of liquidity prove to be insufficient to cover our holding company operations, we may have to sell investments earlier than we want to sell them or in less than favorable market conditions, or we may have to seek external sources of capital. Out of an abundance of caution, in May 2021, we entered into a Credit Facility with Regions Bank. See Part IV, Item 15, Note 8, Commitments and Contingencies in the notes to our consolidated financial statements, herein, for a description of the Credit Facility. To date, we have not utilized the Credit Facility, but if internal sources of capital are not sufficient to meet our operating needs, we may need to utilize the Credit Facility or increase the borrowing availability under the Credit Facility. We may also need to raise capital through issuing our stock. Borrowing money, increasing our borrowing availability under the Credit Facility or obtaining financing for even a small amount of capital could be challenging or expensive in unfavorable market conditions and during periods of economic uncertainty. The availability of financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the financial services industry, and the possibility that customers or lenders could develop a negative perception of our financial prospects. Raising capital in unfavorable market conditions could increase our interest expense or negatively impact our shareholders through dilution of their common stock ownership of the Company.
Citizens and our insurance subsidiaries are subject to extensive governmental regulation in Puerto Rico and in the U.S. The rules and regulations to which we are subject may change and impose greater restrictions on our business, which could increase our costs of doing business, restrict the conduct of our business, increase capital requirements for our insurance subsidiaries and negatively impact our results of operations, liquidity and financial condition.
CICA International is registered in Puerto Rico and is subject to regulation by the Puerto Rico Office of the Insurance Commissioner ("OIC"). As a Puerto Rico International Insurer, CICA International is governed by Chapter 61 of the Puerto Rico Insurance Code. Additionally, CICA International must comply with other laws and regulations of Puerto Rico, most of which apply to our domestic subsidiaries as well, including U.S. federal laws such as the Bank Secrecy Act.
In the U.S., we are primarily subject to regulation at the state-level. Insurance company regulation is generally designed to protect the interests of policyholders, with substantially less protections to shareholders of the regulated insurance companies or their holding companies. To that end, all the U.S. states in which we do business have insurance regulatory agencies with broad legal powers with respect to licensing companies to transact business, mandating capital and surplus requirements, regulating claims practices, approving service agreements between a holding company and its operating subsidiary, restricting companies' ability to enter and exit markets, approving
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product forms and to a lesser extent, rates, and restricting or prohibiting the payment of dividends by our subsidiaries to us.
The OIC and most U.S. insurance regulatory authorities have broad discretion to grant, renew, suspend and revoke licenses and approvals, and could preclude or temporarily suspend us from carrying on some or all of our activities, including acquisitions of other insurance companies, require us to add capital to our insurance company subsidiaries, or fine us. If we are unable to maintain all required licenses and approvals, or if our insurance business is determined not to comply fully with the wide variety of applicable laws and
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
regulations and their interpretations, including the USA Patriot Act, our revenues, results of operations and financial condition and our reputation could be materially adversely affected.
OurNon-compliance with laws or regulations related to customer and consumer privacy and information security, including a failure to ensure that our business associates with access to sensitive customer and consumer information maintain effective information systemsits confidentiality, could materially adversely affect our business.reputation and business operations.
We must maintainThe collection, maintenance, use, disclosure and enhancedisposal of personally identifiable information by our existinginsurance subsidiaries are highly regulated. Applicable laws and rules are subject to change by legislation or administrative or judicial interpretation. Various state laws address the use and disclosure of personally identifiable information systemsto the extent they are more restrictive than those contained in the privacy and develop new information systemssecurity provisions in order to keep pacethe federal Gramm-Leach-Bliley Act. Noncompliance with continuing changes in information processing technology, evolving industry and regulatory standards and changing customer preferences. If we do not maintain adequate systems, we could experience adverse consequences, including products acquired through acquisition, inadequate information on which to base pricing, underwriting and reserve decisions, regulatory problems, failure to meet prompt payment obligations, increases in administrative expenses and loss of customers.
Someany privacy laws, whether by us or by one of our information technology systems and software are mainframe-based, legacy-type systems that require an ongoing commitment of resources to maintain current standards. Our systems utilize proprietary code requiring highly skilled personnel. Due to the unique nature of our proprietary operating environment, we could have difficulty finding personnel with the skills required to provide ongoing system maintenance and development as we seek to keep pace with changes in our products and business models, information processing technology, evolving industry and regulatory standards and policyholder needs. Our success is dependent upon, among other things, maintaining and enhancing the effectiveness of existing systems, as well as continuing to integrate, develop and enhance our information systems to support business processes in a cost-effective manner.
Our failure to maintain effective and efficient information systems, or our failure to efficiently and effectively consolidate our information systems to eliminate redundant or obsolete applications,associates, could have a material adverse effect on our business, reputation and results of operations and could result in material fines and penalties, various forms of damages, consent orders regarding our privacy and security practices, adverse actions against our licenses to do business, and injunctive relief.
FINANCIAL RISKS
Changes in accounting standards may adversely affect our reported results of operations and financial condition.
Failures of disclosure controls and procedures and internal control overOur consolidated financial reporting could materially and adversely affect our business, financial condition and results of operations, impair our ability to timely file reports with the SEC and subject us to litigation and/or regulatory scrutiny and penalties.
We maintain disclosure controls and procedures designed to ensure that we timely report information as specified in SEC rules and regulations. We also maintain a system of internal control over financial reporting. However, these controls may not achieve, and in some cases have not achieved, their intended objectives. Control processes that involve human diligence and oversight, such as our disclosure controls and procedures and internal control over financial reporting,statements are subject to human error. Controls that rely on models may be subjectthe application of GAAP in the U.S., which is periodically revised and/or expanded. Accordingly, we are required to inadequate designadopt new or inaccuraterevised accounting standards issued by recognized authoritative bodies, including the Financial Accounting Standards Board ("FASB") and the National Association of Insurance Commissioners ("NAIC"). Updates or revisions, including underlying assumptions, projections, estimates or estimates. Controls also can be circumventedjudgments/interpretations by improper management, override of such controls. Because of such limitations, there are risks that material misstatements due to error or fraud may not be prevented or detected, and that information may not be reported on a timely basis. The failure of our controls to be effective could have a material adverse effect on our business, financial condition results of operations and the market for our common stock, and could subject us to litigation, regulatory scrutiny and/or penalties.
As disclosed in Part II, Item 9A of this Annual Report on Form 10-K, we have identified control deficiencies in our disclosure controls and financial reporting process that constitute material weaknesses and for which remediation is still in process as of December 31, 2017. If we fail to design effective controls, fail to remediate control deficiencies or fail to otherwise maintain effective internal controls over financial reporting in the future, such failures could result in a material misstatement of our annual or quarterly financial statements that would not be prevented or detected on a timely basis and which could cause investors to lose confidence in our financial statements, have a negative effect on the trading price of our common stock, limit our ability to obtain financing if needed or increase the cost of any financing we may obtain. In addition, these failures may negatively impact our business, financial condition and results of operations, impair our ability to timely file our periodic reports withoperations. In addition, the SEC, subject us to litigation and regulatory scrutiny and cause us to incur substantial additional costs in future periods relating to the implementationrequired adoption of remedial measures.
Our failure to protect confidential information and privacy couldnew accounting standards may result in
significant incremental costs associated with initial implementation and ongoing compliance. See Note 1. Summary of Significant Accounting Policies in the unauthorized disclosure of sensitive or confidential corporate or customer information, damagenotes to our reputation, loss of customers, fines, penalties and adverse effects on our results of operations andconsolidated financial condition.statements contained herein for additional information regarding accounting updates.
Our insurance subsidiaries are subject to privacy regulations. The actions we take to protect confidential information include among other things: monitoring our record retention plans and policies and any changes in state or federal privacy and compliance requirements; maintaining secure storage facilities for tangible records; and limiting access to electronic information in order to safeguard certain information.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
We have a written information security program with appropriate administrative, technical and physical safeguards to protect such confidential information. Cyber security attacks are on the rise throughout the world and while we believe we have taken reasonable steps to secure our customer information we could experience a breach of data. We closely monitor cyber attack attempts on our system, and we are not aware of any material breach of our cybersecurity, administrative, technical and physical safeguards or client data. Nevertheless, it is possible a cyber attack could go undetected and that preventative actions we take to reduce this risk of cyber-incidents and protect our information may be insufficient to prevent cyber attacks or other security breaches.
If we do not comply with privacy regulations and protect confidential information, we could experience adverse consequences, including regulatory sanctions, loss of reputation, litigation exposure, disruptions to our operations or significant technical, legal and operating expenses, any of which could have a material adverse effect on our business, results of operations and financial condition.
Our insurance subsidiaries are restricted by applicable laws and regulations in the amounts of fees, dividends and other distributions they may make to us. The inability of our subsidiaries to make payments to us in sufficient amounts for us to conduct our operations could adversely affect our ability to meet our obligations or expand our business.
As a holding company, our principal asset is the stock of our subsidiaries. We rely primarily on statutorily permissible payments from our insurance company subsidiaries, principally through service agreements we have with our subsidiaries, to meet our working capital and other corporate expenses. The ability of our insurance company subsidiaries to make payments to us is subject to regulation by the states in which they are domiciled, and these payments depend primarily on approved service agreements between us and these subsidiaries and, to a lesser extent, the statutory surplus (which is the excess of assets over liabilities as determined under statutory accounting practices prescribed by an insurance company's state of domicile), future statutory earnings (which are earnings as determined in accordance with statutory accounting practices) and regulatory restrictions.
Generally, the net assets of our insurance company subsidiaries available for dividends are limited to either the lesser or greater (depending on the state of domicile) of the subsidiary's net gain from operations during the preceding year and 10% of the subsidiary's net statutory surplus as of the end of the preceding year as determined in accordance with accounting practices prescribed by insurance regulatory authorities.
Except to the extent that we are a creditor with recognized claims against our subsidiaries, claims of our subsidiaries' creditors, including policyholders, have priority with respect to the assets and earnings of the subsidiaries over the claims of our creditors and shareholders. If any of our subsidiaries becomes insolvent, liquidates or otherwise reorganizes, our creditors and shareholders will have no right to proceed in their own right against the assets of that subsidiary or to cause the liquidation, bankruptcy or winding-up of the subsidiary under applicable liquidation, bankruptcy or winding-up laws.
Unexpected losses in future reporting periods may require us to adjust therecord a valuation allowance against our deferred tax assets.
WeUnder U.S. GAAP, we are required to evaluate our deferred tax asset (“DTA”assets ("DTA") quarterly for recoverability based on available evidence. This process involves management's judgment about assumptions, which are subject to change from period to period due to tax rate changes or variances between our projected operating performance and our actual results. Ultimately, future adjustments to the DTA valuation allowance, if any, will be determined based upon changes in the expected realization of the net deferred tax assets. The realization of the deferred tax assets depends on the existence of sufficient taxable income in either the carry back or carry forward periods under applicable tax law. Due to significant estimates utilized in establishing the valuation allowance and the potential for changes in facts and circumstances, it is reasonably possible that we may be required to record a valuation allowance in future reporting periods. Such an adjustment could have a material adverse effect on our results of operation and financial condition.
A ratings downgrade or other negative action by a rating agency could materially affect our business, financial condition, and capital position.results of operations.
A.M.Best reviews CICA Domestic and publishes its financial strength rating as an indicator of our ability to fulfill our contractual obligations. This rating is important to maintaining public confidence in our insurance products. A downgrade or other negative action by A.M. Best with respect to the financial strength rating of CICA Domestic
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could negatively affect us by limiting or restricting the ability of CICA Domestic to attract independent insurance agencies to distribute our products or reduce the attractiveness of our products to consumers.
ECONOMIC ENVIRONMENT RISKS
INVESTMENT INCOME IS A MATERIAL PORTION OF OUR TOTAL REVENUES. CHANGING FINANCIAL CONDITIONS SUCH AS MARKET VOLATILITY, CHANGES IN INTEREST RATES, OR INFLATION MAY ADVERSELY AFFECT OUR REVENUES, OUR RESULTS OF OPERATION AND OUR FINANCIAL CONDITION.
Global or regional changes in the financial markets or economic conditions could adversely affect our business in many ways, including the following:
•Inflation, a potential recession, as well as declines in consumer confidence or increase in unemployment rates, could lead to a conservation of cash and decline in the volume of new sales and renewal premiums, or increased surrenders and lapses, and therefore to a decline in our premium revenue or increase in benefit expenses paid out.
•Market volatility, specifically declining equity markets, negatively impact the fair market value of our equity securities, leading to investment-related losses that negatively affect our GAAP operating revenue and profitability.
•We face a greaterare subject to credit risk in our investment portfolio. Defaults by third parties in the payment or performance of money laundering activity associated with sales derived from residentstheir obligations under these securities could reduce our investment income or result in the recognition of certain foreign countries.realized losses. Additionally, downgrades in the bonds in our portfolio may result in the recognition of credit related allowances and cause us to reduce the carrying value of our investment portfolio. This could negatively affect our stockholders' equity.
•Low or declining interest rates could negatively affect us for many reasons, including:
◦Our fixed maturity investment portfolio is primarily invested in callable securities. As interest rates have declined and remained ultra-low over the past decade, many of these securities were called and we have had to reinvest in lower interest rate bonds, leading to reduced net investment income and low yields.
◦Some of our top international marketsproducts, principally endowment products and traditional whole life insurance with annuity riders, expose us to the risk that decreases in interest rates will reduce our "spread", or the difference between the amounts we are required to pay under our contracts to policyholders and the rate of return we are able to earn on our investments intended to support obligations under the contracts.
◦An interest or discount rate is used in countries identified bycalculating reserves for our insurance products. We set our reserve discount rate assumptions based on our current and expected future investment yield for assets supporting the U.S. Departmentreserves, considering current and expected future market conditions. If the discount rate assumed in our reserve calculations is higher than our future investment returns (due to lower interest rates), our invested assets will not earn enough investment income to support our future benefit payments. In that case, we may be required to record additional liabilities and/or increase our capital contributions to our insurance subsidiaries in the period this occurs.
•Rising interest rates may negatively affect us as follows:
◦Rising interest rates typically reduce the market values of Statefixed income assets, as jurisdictionsthe interest payments on such assets become less competitive relative to newer high rate fixed income instruments. This leads to material unrealized losses and negatively affects our stockholders' equity.
◦Policies may become less attractive to our policyholders in a rising interest rate environment. They may surrender their policies or make early withdrawals to increase their returns, requiring us to liquidate investments and realize an actual loss.
•Some of high risk for money laundering. As required by Bank Secrecy Act ("BSA”) regulations applicable to insurance companies, we have developed and implemented an anti-money laundering program that includes policies and procedures for complying with our applicable BSA program, auditing, reporting and recordkeeping requirements and for deterring, preventing and detecting potential money laundering, fraudinvestments, such as mortgage-backed and other criminal activity (“BSA Program”). Weasset-backed securities, carry prepayment risk. As interest rates increase, the likelihood of prepayment is lower, as the issuer will want to make payments based on the lower interest rates. If the repayment of principal occurs later than we expected, our cash flow could be negatively impacted. As interest rates decrease, issuers are more likely to pre-pay, which could cause us to have an enhanced BSA Program with additional controls, suchto re-invest the pre-paid cash at lower interest rates, reducing our yields and net investment income.
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•The decision of whether to record a credit loss impairment is determined by our assessment of the financial condition and prospects of a particular issuer, projections of future cash flows and recoverability as list screening software beyond sanctions screening required bywell as our ability and intent to hold the Office of Foreign Assets Control (“OFAC”), enhanced payment due diligence and transaction controls. However, theresecurities to recovery or maturity. There can be no assurance that we have accurately assessed the level of impairments taken. Historical trends may not be indicative of future impairments and additional impairments may need to be taken in the future. Any event reducing the value of our securities on an other than temporary basis may have a material adverse effect on our business, results of operations, or financial condition.
CYBERSECURITY AND TECHNOLOGY RISKS
THE COMPANY RELIES ON OUR INFORMATION TECHNOLOGY SYSTEMS, AND THE DATA MAINTAINED WITHIN THOSE SYSTEMS, TO MANAGE MANY ASPECTS OF OUR BUSINESS. CYBERSECURITY RISKS, THE FAILURE OF OUR SYSTEMS TO OPERATE PROPERLY AND/OR THE FAILURE TO MAINTAIN THE CONFIDENTIALITY, INTEGRITY, AND AVAILABILITY OF POLICYHOLDER AND CLAIMS DATA, INCLUDING PERSONAL IDENTIFYING INFORMATION, COULD RESULT IN A MATERIALLY ADVERSE EFFECT ON OUR BUSINESS, REPUTATION, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our failure to maintain effective information systems could adversely affect our business.
We must maintain and enhance our existing information systems and develop and integrate new information systems to keep pace with continuing changes in information processing technology, evolving industry and regulatory standards and changing customer preferences in a cost-effective manner. If we do not maintain adequate systems, we could experience adverse consequences, including inadequate information on which to base pricing, underwriting and reserve decisions, regulatory problems, failure to meet prompt payment obligations, increases in administrative expenses and loss of customers. Our failure to maintain effective and efficient information systems, or our failure to consolidate our existing systems could have a material adverse effect on our results of operations and financial condition.
Some of our information technology systems and software are mainframe-based, legacy-type systems that require an ongoing commitment of resources to maintain current standards. Our systems utilize proprietary code requiring highly skilled personnel. Due to the unique nature of our proprietary operating environment, we could have difficulty finding personnel with the skills required to provide ongoing system maintenance and development as we seek to keep pace with changes in our products and business models, information processing technology, evolving industry and regulatory standards and policyholder needs.
We are continuously evaluating and enhancing systems and creating new systems and processes as our business depends on our ability to maintain and improve our technology. Due to the complexity and interconnectedness of our systems and processes, these enhanced controls will entirely mitigate money launderingchanges, as well as changes designed to update and enhance our protective measures to address new threats, increase the risk associatedof a system or process failure or the creation of a gap in our security measures. Any such failure or gap could adversely affect our business operations and results of operations.
A cyber attack or other security breach could disrupt our operations, result in the unauthorized disclosure or loss of confidential data, damage our reputation or relationships, and expose us to significant financial and legal liability, which may adversely affect our business, results of operations, or financial condition.
We store confidential information about our business and our policyholders, independent marketing firms, and independent agents, consultants and others on our information technology systems, including proprietary and personally identifiable information. As part of our normal business operations, we use this information and engage third-party providers, including outsourcing, cloud computing, and other business partners, that store, access, process, and transmit such information on our behalf. We devote significant resources and employ security measures to help protect our information technology systems and confidential information, and we have programs in place to detect, contain, and respond to information security incidents. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we and our third-party providers may be unable to anticipate these techniques or implement adequate preventative measures. In addition, hardware, software, or applications we develop or procure from third parties or through open source solutions may contain defects in design or manufacture or other problems that could unexpectedly compromise our information security. Unauthorized parties, whether within or outside our company, may disrupt or gain access to our systems, or those of third parties with these jurisdictions.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
whom we do business, through human error, misfeasance, fraud, trickery, or other forms of deceit, including break-ins, use of stolen credentials, social engineering, phishing, or other cyber attacks, computer viruses, malicious codes, and similar means of unauthorized and destructive tampering.
Risks RelatingWe and our third-party providers experience information security incidents from time to Our Capital Stocktime. There is no assurance that our security systems and measures will be able to prevent, mitigate, or remediate future incidents. A successful penetration or circumvention of the security of our information technology systems, or those of third parties with whom we do business, could cause serious negative consequences for us, including significant disruption of our operations, unauthorized disclosure or loss of confidential information, harm to our brand or reputation, loss of customers and revenues, violations of privacy and other laws, and exposure to litigation, monetary damages, regulatory enforcement proceedings, fines, and potentially criminal proceedings and penalties. If we are unaware of the incident for some time after it occurs, our exposure could increase. In addition, the costs to address or remediate systems disruptions or security threats or vulnerabilities, whether before or after an incident, could be significant. As we continue to build our digital capabilities and focus on enhancing the customer experience, the amount of information that we retain and share with third parties is likely to grow, increasing the cost to prevent data security breaches and the cost and potential consequences of such breaches. An information technology systems failure could also interfere with our ability to comply with financial reporting and other regulatory requirements, exposing us to potential disciplinary action by regulators.
IfAlthough we have insurance against some cyber risks and attacks, we may be subject to litigation and financial losses that exceed our foreign policyholders reducedpolicy limits, are subject to deductibles or ceased participationare not covered under any of our current insurance policies.
The failure of our business recovery and incident management processes to resume our business operations in the event of a catastrophe, an epidemic, a cyber attack, or other event could adversely affect our profitability, results of operations, or financial condition.
In the event of a disaster such as a catastrophe, an epidemic, a cyber attack, cyber security breach or other information technology systems failure, a terrorist attack, or war, unanticipated problems with our disaster recovery systems could have a material adverse impact on our ability to conduct business and on our results of operations and financial condition, particularly if those problems affect our information technology systems and destroy valuable data or result in a significant failure of our internal control environment. In addition, in the event that a significant number of our employees were unavailable in the event of a disaster, our ability to effectively conduct business could be severely compromised.
The failure of our information technology and/or disaster recovery systems for any reason could cause significant interruptions or malfunctions in our Stock Investment Plan (the “Plan”) or ifour customers’ operations and result in the loss, theft, or failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to our customers. Such a securitiesfailure could harm our reputation, subject us to regulatory authority weresanctions, legal claims, and increased expenses, and lead to deem the CISIP's operation contrarya loss of customers and revenues.
RISKS RELATED TO HOLDING OUR SECURITIES
The number and location of our shareholders may make it difficult to securities laws, the volumeobtain approval of certain corporate actions.
Because we allow our policyholders to use their policy dividends to purchase our Class A common stock purchased on the open market through the CISIP,our SIP, we have over 84,000 shareholders and approximately 40% of our shareholders hold less than 100 shares each. Many of these shareholders are located in Latin America and the pricePacific Rim, where most of our policies are sold, and English may not be their native language. We believe that because of this, we typically have low voter turn-out at our annual meetings and therefore any proposal, such as one related to a merger or an acquisition of our Company, or an amendment to our articles of incorporation, that may require the affirmative vote of a majority of the outstanding shares of our Class A common stock, could fall.may be difficult to approve.
More than 96% of the shares ofOur Class A common stock is not registered in any foreign country.
As mentioned above, a significant portion of our Class A common stock has been purchased under the CISIP in 2017 were purchasedSIP by foreign holders of life insurance policies (or related brokers); the remaining 4% of the shares ofpolicies. The Class A common stock purchasedsold under the CISIP in 2017 were purchased by approximately 1,864 participants resident in the United States. The CISIPSIP is registered with the SEC
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pursuant to a Form S-3 registration statement under the Securities Act of 1933 but is not registered under the laws of any foreign jurisdiction. If a foreign securities regulatory authority were to determine the offer and sale of our Class A common stock under the CISIP were contrary toSIP was not allowed under applicable laws and regulations of its jurisdiction, such authority may issue or assert a fine, penalty or cease and desist order against usour offer and sale of Class A common stock in that foreign jurisdiction. There is a risk our Class A common stock price could be negatively impacted by a decrease in participation in the CISIP. If fewer policyholders elect to participateSIP.
Applicable insurance laws in the Plan, orjurisdictions where our international premium collections were to decrease as a result of regulatory, economic, or marketing impediments, the trading volume of our Class A common stock may decline from its present levels, the demand for our Class A common stock could be negatively impacted and the price of our Class A common stock could fall.
Control of our Company, through the ownership of our Class B Common Stock, has transferred from our founder to a 501(c)(3) charitable foundation established by our founder, and we cannot determine whether any change in our management, operations, or operating strategies will occur as a result of this ownership change.
Harold E. Riley, our founder, was the beneficial owner of 100% of our Class B common stock, which was held in the name of the Harold E. Riley Trust ("Trust"), of which he had served as Trustee until his death in September 2017. Our Class A and Class B common stockinsurance subsidiaries are identical in all respects, except the Class B common stock elects a simple majority of the Board and receives one-half of any cash dividends paid, on a per share basis, to the Class A shares. The Class A common stock elects the remainder of the Board. The Trust documents provided that upon Mr. Riley's death, the Class B common stock was transferred from the Trust to the Harold E. Riley Foundation, a charitable organization established under 501(c)(3) of the Internal Revenue Code (the "Foundation"). Therefore, the Foundation controls our Company. The Foundation is organized as a public support charity for the benefit of its charitable beneficiaries, Baylor University and Southwestern Baptist Theological Seminary. The Foundation is governed by 11 trustees, five of which were appointed by Harold Riley prior to his death, three of which were appointed by Baylor University and three of which were appointed by Southwestern Baptist Theological Seminary. It is unclear what, if any, change will occur to our board, management, or corporate operating strategies as a result of different ownership of our Class B common stock. The transfer of our Class B common stock from the Trust has triggered the first of two prongs of certain “change in control” provisions in the employment agreements of our top two executives Chief Executive Officer Geoff Kolander and Chief Financial Officer Kay Osbourn. Under each employment agreement, a "change in control" includes, among other things (1) the transfer of a majority of the Company's Class B common stock from the Trust to an individual other than Harold E. Riley, an entity not beneficially owned by Harold E. Riley, or a trust not controlled by Harold E. Riley and (2) the exercise of a power of attorney granted by Harold E. Riley over the Company's Class B common stock. Upon a termination of the executive by Citizens without cause or the executive’s voluntary termination with Good Reason, in each case other than within the ninety (90) day period prior to the consummation of a change in control or within one (1) year following a change in control, the executive would be entitled to certain cash payments and benefits.
There are a substantial number of our shares of Class A common stock issued to our executive officers and directors which are eligible for future sale in the public market. The sale of these shares could cause the market price of our Class A common stock to fall.
There were 49,080,114 shares of our Class A common stock issued and outstanding as of December 31, 2017. Our executive officers and directors owned approximately 54,436 shares of our Class A common stock as of December 31, 2017, representing approximately 0.1% of our then outstanding Class A common stock. Almost all of these shares have been registered for public resale and generally may be sold freely. In the event of a sale of some or all of these shares or the perceived sale of these shares, the market price of our Class A common stock could fall substantially.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
The price of our Class A common stock may be volatile and may be affected by market conditions beyond our control.
Our Class A common stock price has historically fluctuated and is likely to fluctuate in the future and could decline materially because of the volatility of the stock market in general, decreased participation in the CISIP referred to above or a variety of other factors, many of which are beyond our control, including: quarterly or annual variations in actual or anticipated results of our operations; interest rate fluctuations; changes in financial estimates by securities analysts; competition and other factors affecting the life insurance business generally; and conditions in the U.S. and world economies.
Our international markets, and the specific manner in which we conduct our business in those jurisdictions, may be subject to negative publicity in social media or other channels, which may negatively impact the market price of our Class A common stock.
We interface with and distribute our products to residents of foreign countries that may be subject to the risks disclosed in our Item 1A. Risk Factor under the heading, “The majority of our sales derive from residents of foreign countries and are subject to risks associated with widespread political instability, currency control laws and foreign insurance laws. A significant loss of sales in these foreign markets could have a material adverse effect on our results of operations and financial condition". Venezuela is one such example. Accordingly, from time to time, bloggers or other social media outlets relevant to investors may focus attention on our exposure to these countries and the negative circumstances surrounding their governments, thereby subjecting us to periodic negative publicity. Negative publicity on investor blogs or through other media channels could impact trading in our stock especially due to aggressive and coordinated efforts between anonymous bloggers and short sellers which ultimately cause the market price of our Class A common stock to fall.
Our articles of incorporation and bylaws, as well as applicable state insurance laws,domiciled may discourage takeovers and business combinations that our shareholders might consider to be in their best interests.
Our articlesInsurance laws in the jurisdictions in which our insurance subsidiaries are domiciled require regulatory actions for certain transactions, such as a merger or acquisition of incorporation and bylaws, as well as various state insurance laws, may delay, deter, render more difficult or prevent a takeover attemptour Company, that our shareholders might consider in their best interests. To the extent the interests of our policyholders and stockholders conflict, the insurance regulators consider the best interests of policyholders over the best interests of our shareholders. As a result, our shareholders willmay be prevented from receiving the benefit from any premium to the market price of our Class A common stock that may be offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our Class A common stock if they are viewed as discouraging takeover attempts in the future.
The following provisions in our articles of incorporation and bylaws make it difficult for our Class A shareholders to replacecontext or remove our directors and have other anti-takeover effects thatsuch regulatory approval requirement may delay, deter, render more difficult or prevent a takeover attempt:
holders of shares of our Class B common stock elect a simple majority of our board of directors, and all of these shares are owned by the Harold E. Riley Foundation; and
our board of directors may issue oneattempt or more series of preferred stock without the approval of our shareholders.
State insurance laws generally require prior approval of a change in controlcontrol.
Item 1B.UNRESOLVED STAFF COMMENTS
None.
Item 1C.CYBERSECURITY
Like other firms in the financial services sector, insurers like us are particularly vulnerable to cybercrime due to our large amounts of ancustomer data. Insurance-related data is particularly interesting to cybercriminals because of its inherent confidentiality. Often linked to policyholders, sensitive data helps insurers customize their policies, products, and prices for each client. The scope of personally identifiable information and sensitive data processed by insurers puts the industry at increased risk of cybercrime. Cyber attacks can lead to the loss of confidential data, business, and reputation. Additionally, business disruption through cyber incidents is also a major problem for insurance company. Generally, such laws provide that control over an insurer is presumedcompanies, which need to exist if any person, directly or indirectly, owns, controls, holds withreact quickly to fulfill their contracts and maintain the power to vote, or holds proxies representing 10% or moretrust of their clients. Because of the voting securitiesrisks posed to our business and customers, we have developed robust processes for assessing, identifying and managing our cybersecurity threats.
We recognize the importance of the insurer. In considering an applicationassessing, identifying, and managing material risks associated with cybersecurity threats. Cybersecurity risks related to acquire control of an insurer, an insurance commissioner generally will consider such factors as the experience, competenceour business, technical operations, privacy and financial strength of the proposed acquirer, the integrity of the proposed acquirer's board of directorscompliance issues are identified and executive officers, the proposed acquirer's plans for theaddressed through a multi-faceted approach including third party assessments, IT security, and external audits. Cybersecurity risks are integrated into our overall enterprise risk management process. To defend, detect and operation of the insurer,respond to cybersecurity incidents, we, among other things: perform penetration testing using external third-party tools and any anti-competitive results that may arise from the acquisition. In addition, a person seekingtechniques to acquire control of an insurance company is required in some states to make filings prior to completing an acquisition if the acquirertest security controls and the target insurance company and their affiliates have sufficiently large market shares in particular lines of insurance in those states. These state insurance requirements may delay, deter or prevent our ability to complete an acquisition.conduct employee training.
We have never paid any cash dividends onimplemented incident response and breach management processes which have four overarching and interconnected stages: 1) preparation for a cybersecurity incident, 2) detection and analysis of a security incident, 3) containment, eradication and recovery, and 4) post-incident analysis. Such cybersecurity incident responses are overseen by leaders from our Class A common stockInformation Security, IT, Finance, Compliance and do not anticipate doing so inLegal teams.
Security events and data incidents are evaluated, ranked by severity and prioritized for response and remediation. Incidents are evaluated to determine materiality as well as operational and business impact, and reviewed for privacy impact. We also conduct tabletop exercises to simulate responses to cybersecurity incidents.
Our risk management program also assesses third party risks, and we perform third-party risk management assessments to identify and mitigate risks from third parties such as vendors, suppliers, and other business partners associated with our use of third-party service providers. Cybersecurity risks are evaluated when determining the foreseeable future.
We have never paid cash dividends onselection and oversight of applicable third-party service providers when handling and/or processing our Class A common stock, as it is our policyemployee, business or customer data. In addition to retain earnings for use in the operation and expansionnew vendor onboarding, we perform periodic ongoing security reviews of our business. We do not expect to pay cash dividends on our Class A common stock for the foreseeable future.critical vendors.
23December 31, 2023 | 10-K 24
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
We describe whether and how risks from identified cybersecurity threats, including as a result of any previous cybersecurity incidents, have materially affected or are reasonably likely to materially affect us, including our business strategy, results of operations, or financial condition, under the heading “Cybersecurity and Technology Risks” included as part of our risk factor disclosures at Item 1A - Risk Factors - of this 10-K.
Item 1B. UNRESOLVED STAFF COMMENTS
While we have devoted significant financial and personnel resources to implement and maintain the security measures described above, and in order to meet regulatory requirements and customer expectations, there can be no guarantee that our policies and procedures will be properly followed in every instance or that those policies and procedures will be effective. Although our Risk Factors include further detail about the material cybersecurity risks we face, cybersecurity incidents have not materially affected our business to date. We can provide no assurance that there will not be incidents in the future or that they will not materially affect us, including our business strategy, results of operations, or financial condition.
None.
Cyber Governance.
Cybersecurity is a key element of the Company's enterprise risk management (ERM). Identification and management of the Company's key risks, including cybersecurity, starts with the executive management team, who is responsible for identifying key strategic, insurance, financial, regulatory and operational risks to the Company and managing them on a day-to-day basis. Because of the importance of cybersecurity, the Company has a Chief Information Security Officer ("CISO") who is primarily responsible for managing our cybersecurity risk in conjunction with our Vice President of Information Technology. Our CISO is informed about and monitors prevention, detection, mitigation, and remediation efforts through regular communication and reporting from employees in the information technology team and through the use of technological tools and software and results from third party audits. We have an escalation process in place to inform senior management and the Board of Directors of material issues.
Our CISO has served in that position since 2018 and is an experienced security leader with over 20 years’ experience. In addition to his current role, our CISO has led security and IT audit functions at healthcare technology and population health organizations. His experience includes work in the fields of security, application development, and internal audit at a Fortune 100 company. Our CISO is a Certified Information Security Manager (CISM), Certified Information Systems Auditor (CISA), and a member of the ISACA and ISSA organizations. He received his bachelors’ degree from Middle Tennessee State University and served in the United States Marine Corps. Additionally, Gerald W. Shields, our CEO and a member of the Board, has experience in assessing and managing cybersecurity risk and, in addition to his former roles as Chief Information Officer at several companies, he has a Cyber Security Oversight Certificate from Carnegie Mellon Institute.
Our Audit Committee Charter tasks this committee with oversight of the Company's major enterprise risk exposure, including risks related to cybersecurity, and the steps management takes to monitor and control such exposures. The Audit Committee holds its regular meetings on a quarterly basis and at each of those meetings receives a information security update report from the Company's CISO, which report includes cybersecurity events that may have impacted the Company as well as an overview of the Company's security program and efforts to prevent, detect, mitigate, and remediate issues. The CISO also attends the regularly scheduled Board meetings to give his information security report to all members of the Board.
Item 2.PROPERTIES
We lease our principal office at the Domain in Austin, Texas to service all business entities and operations. We lease space in Puerto Rico for CICA International and in Louisiana, Arkansas and Mississippi related to our Home Service Insurance operations. We also own properties in Austin and Buchanan Dam, Texas used for our general business operations and Louisiana related to our Home Service segment and businessInsurance operations.
Item 3.LEGAL PROCEEDINGS
On or about March 16, 2017, Juan Gamboa filed a putative class action lawsuit against the Company and five of its current and former directors and executive officers in the United States District Court, Western District of Texas. The lawsuit alleges the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making false and/or misleading statements, as well as failing to disclose material adverse facts about the Company’s business, operations and prospects. On May 25, 2017, the court appointed lead plaintiffs, and on July 31, 2017, the lead plaintiffs filed an amended complaint. The amended complaint seeks an award of damages in an unspecified amount on behalf of a putative class consisting of persons who purchased the Company’s common stock between March 11, 2015 and March 8, 2017, inclusive. On September 28, 2017, we filed a motion to dismiss, which remains pending before the court. The Company believes that the lawsuit is without merit, and it intends to vigorously defend against all claims asserted. At this time, the Company is unable to reasonably estimate the outcome of this litigation.None.
In the normal course of business, the Company is subject to various legal and regulatory actions which are immaterial to the Company's financial statements. For more information about the risks related to litigation and regulatory actions, please see the risk factor titled “We are a defendant in lawsuits, which may adversely affect our financial condition and detract from the time our management is able to devote to our business, and we are subject to risks related to litigation and regulatory matters.” in Item 1A. Risk Factors.
As disclosed in prior periods, the legal and regulatory actions facing the Company include those relating to compliance with U.S. federal securities laws. Specifically, the Company has been the subject of an investigation by the Securities and Exchange Commission (“SEC”), which appears to be focused on the Company’s internal control over financial reporting and disclosure controls and procedures in light of the Company’s determination in 2015 that a portion of the life insurance and annuity policies issued by its subsidiary insurance companies failed to qualify for the favorable U.S. federal income tax treatment afforded by Sections 7702 and 72(s) of the Internal Revenue Code of 1986. There have been no allegations of fraud presented by the SEC. We have cooperated fully with the investigation and expect that the matter will be resolved soon, although we cannot predict the timing of a resolution or the ultimate outcome of the investigation.
Item 4.MINE SAFETY DISCLOSURES
Not applicable.
December 31, 2023 | 10-K 25
24
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
| |
Item 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Item 5(a)
Market Information
Information.Our Class A common stock is traded on the New York Stock Exchange ("NYSE") under the symbol CIA.
Quarterly high and low closing prices per share Our Class B common stock is not registered with the SEC nor traded on any exchange. We hold 100% of our Class AB common stock as reported by the NYSEin treasury and thus there are shown below.no Class B shares outstanding.
|
| | | | | | | | | | | | |
| | 2017 | | 2016 |
| Quarter Ended | High | | Low | | High | | Low |
| March 31 | $ | 10.53 |
| | 6.87 |
| | 7.82 |
| | 6.16 |
|
| June 30 | 7.38 |
| | 5.95 |
| | 8.41 |
| | 7.07 |
|
| September 30 | 8.35 |
| | 6.74 |
| | 10.92 |
| | 7.41 |
|
| December 31 | 8.65 |
| | 7.11 |
| | 11.69 |
| | 7.51 |
|
Equity Security Holders
Holders.The number of stockholders onof record on as of March 5, 20186, 2024 was as follows:
| | | | | | | | |
| • | Class A Common Stock - | 84,212 | |
| • | Class B Common Stock - | — | |
Class A Common Stock - 99,226
Dividend Policy.We have never paid cash dividends on our Class A or B common stock and do not expect to pay cash dividends in the foreseeable future. For restrictions onfuture, as it is our presentpolicy to retain earnings for use in the operation and future ability to pay dividends, see Note 6 of the Company's consolidated financial statements.
We did not purchase anyexpansion of our equity securities during any quarter in 2015, 2016 or 2017.business.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information regarding securities authorizedPlans.See Item 15, Note 13 Stock Compensation for issuance under our equity compensation plan information.
Recent Sales of Unregistered Securities; Use of Proceeds. None.
Item 5(c)
Issuer Purchases of Equity Securities. In May 2022, the Citizens Inc. Omnibus Incentive Plan asBoard of Directors authorized an equity repurchase plan for up to $8.0 million. The timing of any share repurchases under the repurchase authorization is dependent upon several factors, including market price of the Company's securities, the Company’s cash on hand, cash flows from operations, general market conditions, the Company's blackout periods, and other considerations. This program has no set termination date and may be suspended or discontinued by the Company’s Board of Directors at any time. The Company purchased the following shares of its Class A common stock during the three months ended December 31, 2017. (See Note 14 - "Subsequent Events"2023.
| | | | | | | | | | | | | | |
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs [2] |
| October 2023 | 66,805 | | $ | 2.99 | | 66,805 | | |
| November 2023 | — | | — | | — | | |
| December 2023 | — | | — | | — | | |
| Total | 66,805 | | | 66,805 | | $ | 4,380,000 | |
[1] The stock repurchase program was publicly announced on May 10, 2022.
[2] The Company was authorized to repurchase up to $8.0 million of its outstanding shares of Class A common stock.
[3] The stock repurchase program does not have an expiration date.
[4] No stock repurchase program has expired during the accompanying consolidated financial statements for additional information regarding our Omnibus Incentive Plan).three months ended December 31, 2023.
[5] There is no stock repurchase program that the Company has determined to terminate prior to expiration, or under which the Company does not intend to make further purchases.
Item 6. [RESERVED]
December 31, 2023 | 10-K 26
|
| | | | | | | | | | |
Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining for future issuance under equity compensation plans |
| | | | | | |
Equity compensation plans approved by security holders | | — |
| | $ | — |
| | 3,000,000 |
|
| | | | | | |
Equity compensation plans not approved by security holders | | — |
| | — |
| | — |
|
| | | | | | |
Total | | — |
| | $ | — |
| | 3,000,000 |
|
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Performance Comparison
The following graph compares the change in the Company’s cumulative total stockholder return on its common stock over a five-year period. The following graph assumes a $100 investment on December 31, 2012, and reinvestment of all dividends in each of the Company’s common shares, the New York Stock Exchange (“NYSE”) Composite and the Hemscott Group Index, a peer group of major U.S.-based insurance companies.
|
| | | | | | | | | | | | | | | | | | |
| | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| Citizens, Inc. | $ | 100.00 |
| | 79.19 |
| | 68.78 |
| | 67.24 |
| | 88.87 |
| | 66.52 |
|
| NYSE Composite | $ | 100.00 |
| | 126.28 |
| | 134.81 |
| | 129.29 |
| | 144.73 |
| | 171.83 |
|
| Peer Group | $ | 100.00 |
| | 154.43 |
| | 162.04 |
| | 151.01 |
| | 162.31 |
| | 192.51 |
|
The peer group index weights individual company returns for stock market capitalization. The companies included in the peer group index are shown in the following table.
| | | | | |
| CITIZENS, INC. | | | | |
| American Equity Investment Life Holding Co | Independence Holding Co | | Primerica, Inc |
Atlantic American Corp | | Investors Heritage Capital Corp | | Prudential Financial, Inc |
Aviva Plc | | Kansas City Life Insurance Co | | Prudential Plc |
China Life Insurance Co Ltd | | Lincoln National Corp | | Reinsurance Group Of America, Inc |
Citizens, Inc | | Metlife Inc | | Torchmark Corp |
Genworth Financial, Inc | | National Western Life Group Inc | | Utg, Inc |
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Item 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of the Company. This should be read in conjunction with Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8. "Financial Statements and Supplementary Data" MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section of this Annual Report on Form 10-K.
|
| | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | (In thousands, except per share data) |
| Operating items | | | | | | | | | |
| Insurance premiums | $ | 197,720 |
| | 197,876 |
| | 194,480 |
| | 188,532 |
| | 176,158 |
|
| Net investment income | 53,146 |
| | 48,560 |
| | 45,782 |
| | 41,062 |
| | 36,597 |
|
| Realized investment gains (losses) | 518 |
| | (1,985 | ) | | (5,459 | ) | | (19 | ) | | (247 | ) |
| Total revenues | 252,627 |
| | 245,406 |
| | 236,268 |
| | 230,225 |
| | 213,636 |
|
| Net income (loss) | (38,127 | ) | | 1,969 |
| | (3,143 | ) | | (5,970 | ) | | 5,279 |
|
| Balance sheet data | |
| | |
| | |
| | |
| | |
|
| Total assets | 1,644,453 |
| | 1,583,668 |
| | 1,480,751 |
| | 1,413,798 |
| | 1,212,837 |
|
| Total liabilities | 1,420,940 |
| | 1,334,568 |
| | 1,233,825 |
| | 1,151,466 |
| | 963,591 |
|
| Total stockholders' equity | 223,513 |
| | 249,100 |
| | 246,926 |
| | 262,332 |
| | 249,246 |
|
| Life insurance in force | 4,469,735 |
| | 4,497,735 |
| | 4,478,202 |
| | 4,662,660 |
| | 4,616,128 |
|
| Per share data | |
| | |
| | |
| | |
| | |
|
| Book value per share | 4.46 |
| | 4.97 |
| | 4.93 |
| | 5.24 |
| | 4.98 |
|
| Basic and diluted earnings (losses) per Class A share | (0.77 | ) | | 0.04 |
| | (0.06 | ) | | (0.12 | ) | | 0.11 |
|
See Item 1. "Business"10-K generally discusses 2023 and Item 7. "Management's Discussion2022 items and Analysis of Financial Conditionyear-to-year comparisons between 2023 and Results of Operations," for information that may affect the comparability of the financial data contained in the above table.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
|
| |
Item 7.
| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following is management's2022. This discussion and analysis of the consolidated financial condition and consolidated results of operations of the Company. It is intended to be a discussion of certain key financial information regarding the Company and should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report.
OVERVIEW
For 55 years, we have been fulfilling the needs of our policyholders and their families by providing insurance products that offer both living and death benefits. Citizens conducts insurance related Notesoperations through its insurance subsidiaries, which provide benefits to this Annual Report on Form 10-K.
Overview
policyholders throughout the United States and in over 75 different countries. We conduct operations as an insurance holding company emphasizingspecialize in offering primarily ordinary whole life insurance, and endowment products and final expense insurance in niche markets where we believe we can achieveoptimize our competitive advantages. position.
As an insurance provider, we collect premiums on an ongoing basis from our policyholders and invest the majority of the premiums to pay future benefits, to our policyincluding claims, surrenders and contract holders. Our core operations include issuing:
whole life insurance;
endowments;
final expense; and
limited liability property policies.
Thepolicyholder dividends. Accordingly, the Company derives its revenues principally from 1)from: (1) life insurance premiums earned for insurance coverages provided to insureds; 2)insureds in our two operating segments – Life Insurance and Home Service Insurance; and (2) net investment income;income. In addition to paying and 3) net realized capital gainsreserving for insurance benefits that we pay to our policyholders, our expenses consist primarily of the costs of selling our insurance products (e.g., commissions, underwriting, marketing expenses), operating expenses and losses.income taxes.
ProfitabilityObjective of our insurance operations depends heavily upon the Company’s underwriting discipline,Management's Discussion and Analysis
We refer to our Management’s Discussion and Analysis of Financial Condition and Results of Operations as we seek to manage exposure to loss through:
favorable risk selection and diversification;
management of claims;
use of reinsurance;
sizingour “MD&A”. The objective of our MD&A is to provide investors with a succinct analysis of the Company's financial performance from management's perspective. We start by discussing the factors that we believe drive our operating results and then we discuss how industry developments and economic circumstances in force block;
careful monitoringgeneral (e.g., interest rate environment) affected or could affect our financial performance. After telling you about our industry, we discuss in detail our results of operations for the year ended December 31, 2023 so an investor or potential investor understands the various line items of our mortalityprofit and morbidity experience; and
managementloss statements from management’s perspective. Since our investments are one of two principal sources of our expense ratio,revenues, we describe them in detail. Finally, we discuss our capital resources and liquidity so investors better understand how those resources are utilized and how we are able to meet our cash needs.
Throughout the MD&A, we describe how we view the Company and which matters we accomplish through economies of scalebelieve are reasonably likely to affect future operations. We describe our priorities for the business in Item 1. Business - “Strategic Initiatives” and management of acquisition costsin the MD&A, we describe how we performed on those initiatives and other underwriting expenses.
Pricing adequacy depends on a number of factors, including theany known trends or uncertainties that might impact our ability to obtain regulatory approvalachieve our goals.
Impact of LDTI on Prior Financial Statements
In 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-12, Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, also known as long-duration targeted improvements, or "LDTI", which impacts all insurers that issue long-duration contracts, such as life insurance. The goal of LDTI is to improve, simplify and enhance aspects of accounting for long-duration contracts generally issued by life insurance companies. The changes are intended to result in improvements to our accounting records in the following ways.
•In the new model, cash flow assumptions utilized in determining the liability for future policyholder benefits for certain insurance contracts are required to be updated on at least an annual basis. This varies from the prior model which only required us to update the assumptions if a triggering event occurred, like if a premium deficiency is recognized.
•The discount rate used in determining the liability for future policyholder benefits has been standardized and is based on upper medium grade (low credit risk) fixed income instruments. The effect of discount rate changes proper evaluation of underwriting risks, the ability to project future losses based on historical loss experience adjusted for known trends, the Company’s response to competitors, and expectations about regulatory and legal developments and expense levels. The Company seeks to price our insurance policies such that insurance premiums and future net investment income earned on premiums received will cover underwriting expenses and the ultimate cost of paying claims reported on the policies and provide for a profit margin. The Company has the ability to adjust dividend scales and interest crediting rates at its discretion based on economic andis recorded immediately through other factors. The profitability of fixed annuities, riders and other “spread-based” product features depends largely on the Company’s ability to earn target spreads between earned investment rates on assets and interest credited to policyholders.
The investment return, or yield, on invested assets is an important element of the Company’s earnings since insurance products are priced with the assumption that premiums received can be invested for a period of time before benefits are paid. The majority of the Company’s invested assets have been held in fixed maturities available-for-sale and held-to-maturity securities, primarily in asset classes of corporate bonds, municipal bonds, and government obligation bonds. The interest rate environment has a significant impact on the determination of insurance contract liabilities, our investment rates and yields and our asset/liability management.
The primary investment objective for the Company is to maximize economic value, consistent with acceptable risk parameters, including the management of credit risk and interest rate sensitivity of invested assets, while generating sufficient after-tax income to meet policyholder and corporate obligations. The Company maintains a conservative investment strategy that may vary based on a variety of factors including business needs, regulatory requirements and tax considerations.
We previously announced that we determined that a portion of the life and annuity insurance policies issued by our subsidiary insurance companies failed to qualify for the favorable U.S. federal income tax treatment afforded by Sections 7702 and 72(s) of the Internal Revenue Code ("IRC") of 1986. To the extent that these policies had unreported income build-up, we may be liable
comprehensive income.
28December 31, 2023 | 10-K 27
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
•Deferred acquisition costs ("DAC") are now amortized on a constant basis over the expected life of the contract, therefore eliminating the prior amortization methods such as proportion to premium (for traditional life), estimated gross profit (for nontraditional life) or estimated gross margin (for participating life). Additionally, amortization rates are now updated prospectively with DAC being reduced when actual terminations and lapses are greater than expected. By conducting this change, the interest accretion and impairment assessment have been eliminated.
LDTI became effective on January 1, 2023 and required us to make certain changes to our financial statements requiring retrospective application back to January 1, 2021, which is known as the IRStransition date. This Form 10-K includes financial statements that reflect the impact of LDTI. See Part II. Item 8. Financial Statements and Supplementary Data and Part IV, Item 15, Note 1 "Significant Accounting Policies" and "Accounting Pronouncements" in the notes to our consolidated financial statements. As a result of implementing LDTI,
•we have included results for failure to withhold taxes or to notify policyholdersthe year ended December 31, 2021 in our consolidated statements of their obligation to pay taxes directly tooperations and comprehensive income (loss) ("Operating Statement") rather than just the IRS. We have undertaken an analysisyears ended December 31, 2023 and December 31, 2022, as required for a smaller reporting company; and
•the discussion of financial results included in this MD&A for the periods ending December 31, 2022 and 2021 may differ, possibly materially, from the discussions included in the MD&A of our potential liability topreviously filed Annual Report on Form 10-K for each respective year.
The implementation of LDTI did not impact our key operating metrics, which are described below in "The Factors that Drive our Operating Results." Accordingly, while we present operating results for the IRS arising fromyear ended December 31, 2021, we will only discuss the 2021 results or year-to-year comparisons between 2022 and 2021 where they were impacted by the implementation of LDTI. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this matter, as well as other expenses we may incur to remediate (i.e., conform to the requirementsForm 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the IRS) certain previously issued domesticCompany’s Annual Reports on Form 10-K for the fiscal years ended December 31, 2022 (the "2022 10-K") and December 31, 2021 (the "2021 10-K").
The Factors that Drive our Operating Results
We see the following as the primary factors that drive our operating results:
•Sales (i.e., premium revenues)
•Investments
•Claims and surrenders
•Operating expenses
Premium revenues and investment income are our two primary sources of income and thus key to our profitability.
Premium revenues consist of all money deposited by customers into new and existing insurance policies. We believe sales statistics are meaningful to gaining an understanding of, among other things, the attractiveness of our new products, how expansion of our distribution channels affects our revenue, customer retention and the performance of our business from period-to-period. Throughout the MD&A and in Item 1 - Business, we describe the actions and initiatives that we are taking to increase sales and improve retention, sales performance in each period and as compared to prior periods, and how we view trends with respect to sales and retention. Because we ceased
December 31, 2023 | 10-K 28
operations in our property insurance business effective June 30, 2023, the premiums charts below only reflect life insurance and annuity policiesaccident and health insurance ("A&H") premium results.
First year premiums (i.e, new sales) increased 12% from 2022 to address any missed reporting for policies issued to non-U.S. citizens and have established a best estimate reserve of $12.3 million, net of tax as of December 31, 2017 for probable liabilities and expenses. The probability weighted range of financial estimates relative to this issue is $5.9 million to $48.2 million, net of tax. This estimated range includes projected toll charges and fees payable to the IRS, as well as estimated increased payout obligations to current and former holders of non-compliant domestic life insurance policies expected to result from remediation of those policies. The amount of our liabilities and expenses depends on a number of uncertainties, including the number of prior tax years for which we may be liable to the IRS, the number of domestic life insurance policies we will be required to remediate, the methodology applicable to the calculation of taxable benefits under non-compliant policies and the amount of time and resources we will require from external advisors who are assisting us with resolving these issues. Given the range of potential outcomes and the significant variables assumed in establishing our estimates, actual amounts incurred may exceed our reserve and also could exceed the high end of our estimated range of liabilities and expenses. To the extent the amount reserved is insufficient to meet the actual amount of our liabilities and expenses, or if our estimates of those liabilities and expenses change in the future, our financial condition and results of operations may be materially adversely affected.
2023. In May 2017, we submitted an offer to enter into closing agreements with the IRS covering the CICA and CNLIC domestic life insurance business. The toll charges calculated and enumerated in the closing agreements totaled $124,000 and $4,000 for the CICA and CNLIC domestic life insurance businesses, respectively. We expect to file closing agreements with the IRS for the SPLIC and MGLIC life insurance business as well as for the CICA international business and our annuity business in 2018.
Current Financial Highlights
Our 2017 financial results are driven by our historical business management model and traditional life insurance product sales. Although interest rates have risen recently, the historically low interest rate environment continues to impact our results and our industry as investment yields are an integral component of our business operations.
Our assets grew $61 million in 2017 and totaled $1.6 billion as of December 31, 2017.
Total stockholders' equity decreased from $249.1 million at December 31, 2016, to $223.5 million at December 31, 2017 due to the New Tax Act enacted on December 22, 2017, which resulted in tax expense for the current period of $35.1 million in 2017.
Insurance premiums decreased 0.1% in 2017 and rose 1.7% in 2016, respectively, primarily from our life insurance segment, which decreased $0.5 million from 2016.
Net investment income increased 9.4% and 6.1% for 2017 and 2016, respectively, primarily due to an increase in the investment asset balances in 2017 compared to the prior year. The average yield on the consolidated investment portfolio has changed from a yield of 4.38% in 2015 down to 4.28% in 2016 and rising to a yield of 4.31% in 2017, as investment rates available have remained low in the sustained low interest rate environment.
Realized net investment gains in the current year resulted from a gain on the sale of a real estate holding totaling $1.1 million offset by other-than-temporary impairments ("OTTI") on investment securities. OTTI items recorded totaled $0.2 million and $4.3 million in 2017 and 2016, respectively, and are reported as realized losses. The OTTI in 2016 was somewhat offset by realized investment gains on sales of fixed maturity securities in our available-for-sale portfolio and sales of equity securities.
During 2017, claims and surrenders expense increased 1.9% from the comparable period in 2016, primarily due to an increase in surrender benefits and matured endowments in the life segment compared to the 2016 levels.
Policyholders' dividends decreased 8.3% in 2017 compared to 2016, due to the dividend rate actions taken by us at the end of 2016 to improve our product profitability.
General expenses increased 39.1% in 2017, due primarily to additional audit fees related to the 2016 audit, higher legal and consulting fees and higher permanent executive salaries and temporary salaries, offset by a decrease in our 7702/72(s)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
tax compliance best estimate liability. In addition, we impaired our Home Service goodwill value by $4.6 million, down to zero.
Amortization of deferred policy acquisition expenses increased from $28.5 million at December 31, 2016 to $29.7 million at December 31, 2017 primarily due to the higher surrender activity.
Life Insurance. For over thirty-seven years, CICA and its predecessors have accepted policy applications from foreign nationals for U.S. dollar-denominated ordinary whole life insurance and endowment policies. We make our insurance products available using third-party marketing organizations and independent marketing consultants.
Endowment product sales have been the primary driver of sales in this segment. The Company currently offers a fifteen and twenty year endowment and our top selling endowment is a product that matures at age sixty-five. The Company repriced its top six selling international products at the end of 2016 to increase profitability.
Through the domestic market of our Life Insurance segment we provide ordinary whole life, credit life insurance, and final expense policies to middle and lower income families and individuals in certain markets in the mountain west, midwest and southern U.S. The majority of our domestic revenues are generated by the policies of domestic life insurance companies we have acquired since 1987.
Home Service Insurance. We provide final expense ordinary and industrial life insurance to middle and lower income individuals in Louisiana, Mississippi and Arkansas. Our policies in this segment are sold and serviced through a home service marketing distribution system utilizing employee-agents who work on a route system to collect premiums and service policyholders, and through networks of funeral homes that collect premiums and provide personal policyholder service.
Premiums in this segment increased slightly in 2017 compared to 2016, as renewal premiums and first year premiums increased. We noted slight increasesincreased by 13% from 2022 to 2023 due to the introduction of critical illness and whole life products in 20162022 in our international markets, as well as expansion of our white label distribution network in our domestic market. In our Home Service Insurance segment, first year premiums increased from 2022 to 2023 by 8% due to focused marketing campaigns and higher critical illness premiums, but were lower in 2022 as compared to 20152021, which we believe is attributed to inflationary pressures beginning in 2022, which impacted this market more than our international market, as well as COVID-19 government aid programs in 2021 that we believe led to increased sales that year.
Renewal premiums declined primarily from our Life Insurance segment due to the impact from a higher level of surrenders during the last few years (and thus a lower amount of policies paying renewal premiums) and from matured endowment benefits, which we expected due to contractual expiration dates.
Our net investment income increased by $3.8 million from 2022 to 2023 due primarily to investment income from our limited partnership investments, a growing diversified invested asset base and reinvesting matured or called fixed income maturity securities into a higher interest rate environment.
December 31, 2023 | 10-K 29
Payment of policyholder benefits for claims and surrenders is our largest expense and thus also key to our profitability. The three largest components of this expense are death claims, surrenders and matured endowments.
Our death claim benefits paid have decreased over the 3-year period ending December 31, 2023 due to a lower number of reported death claims. We believe death claims in 2021, and to a lesser extent in 2022, were negatively impacted by COVID-19-related deaths.
Our surrenders increased from 2022 to 2023, which we believe is due to the number of our international life policies that are nearing maturity as well as policies that have passed their surrender charge period.
Matured endowments have increased as expected due to many of our endowment policies reaching their contractual maturity dates.
Operating expenses are our second largest expense and thus also drive our operating results. Operating expenses are meaningful to gaining an understanding of how we manage our business, including among other things, salaries, benefits, and spending on growth initiatives. Our general operating expenses increased by $2.0 million in 2023 as compared to 2022, driven by renewal premiums.costs related to strategic growth initiatives, our search for a new CEO, and costs related to moving our international business from Bermuda to Puerto Rico. The transfer of the international business was completed on August 31, 2023.
EconomicECONOMIC AND INSURANCE INDUSTRY DEVELOPMENTS
Over the last decade, life insurers have faced numerous disruptions as an industry, including profitability challenges driven by low interest rates, a global pandemic, high inflation followed by a rapid rise in interest rates, volatility in equity markets, and Insurance Industry Developments
Significant economic issuesgeopolitical uncertainty. These significant trends and developments have and are impacting our business and industry currentlyas follows:
•Increase in Interest Rates; Volatility in Equity and Credit Markets; Inflation. The material uptick in interest rates over the past year has benefited the life insurance sector with respect to increased yields, net investment income and spreads. However, this benefit was offset by inflation and macroeconomic volatility in 2022. The volatility was substantial and the industry moved into material unrealized loss positions on fixed-income portfolios.
Inflation has also impacted our industry over the futurepast year. As the price of energy and food rises, customers will have less discretionary income to spend on insurance products. As the inflationary
December 31, 2023 | 10-K 30
environment continues, the industry may see policy lapses rise, especially among lower and middle-income customers.
•Sustained Low Interest Rate Environment Prior to 2022.Market interest rates are discussed below.
Slow increases in the interest rate environment will limit increases in profit margins for insurers. We have been impacted by the historicallya key driver of our results. The multi-year sustained low interest rate environment oversignificantly reduced the pastoverall yield on investments, as regulations require that the vast majority of a life insurance company's portfolio consist of fixed income securities, which are primarily callable. As interest rates declined, these fixed income securities were called and had to be re-invested in lower rate investments. This has reduced and may continue to reduce profit margins for life insurers by:
◦Reducing the spread between guaranteed interest rates credited to policyholders and interest earned on supporting assets. As older endowment and annuity products are maturing, the guaranteed interest rates may be higher than current yields;
◦Products sold during the last several years as our fixed income investment portfolio, primarily invested in callable securities, has been reinvested atwith lower yields. The Company’s conservative investment strategy has not changed but we have focused new investments into securities of state, municipalities, essential services and corporate issuers compared to our historical investment in U.S. government holdings. Our investment earnings also impact the reserve and DAC balances, as assumptions are used in the development of the balances. Due to the recent decline in investment yields on our portfolio, our projection of long-term investment returns has declined. This has resulted in increasing the reserves on policies issued in the current year, as well as reducing the DAC asset.
As an increasing percentage of the world population reaches retirement age, we believe we will benefit from increased demand for living benefit products rather than death benefit products,interest rate guarantees may be surrendered or lapsed, as customers will require cash accumulationlook to pay expenses to meet their lifetime income needs. Our ordinary lifeinvest in higher interest rate products; or
◦Because products are designed to accumulate cash values to provide for living expenses in a policy owner's later years, while continuously providing a death benefit.
There hasmay have been a trend toward consolidationpriced with assumptions of domestichigher interest rates (and higher interest earned on supporting assets), life insurance companies may have to increase reserves or trigger loss recognition that could accelerate amortization of COIA.
•Impact of COVID-19. COVID-19 and its related economic conditions have caused significant uncertainty in the world in the past four years. Initially, COVID-19 caused global lockdowns. In response to the pandemic, the U.S. Federal Reserve lowered interest rates to near zero in order to stimulate the economy. COVID-19 has since created significant issues, from supply chain disruptions and staffing issues to surging production costs and high demand of products and services due to financial help from the government. All of these have a role to play in the dramatic rise of inflation.
•Availability of Reinsurance. Reinsurance market dynamics including increased cybersecurity concerns, significant weather-related losses, incurred bypandemic losses, and similar to the life insurance industry, as a result of the credit crisis and related economic pressures, as well as increasing costs of regulatory compliance for domestic life insurance companies.
Many of the events and trends affecting the life insurance industry have had an impact on the life reinsurance industry. These eventseconomic-related market losses, have led to a decline in the availability of reinsurance.reinsurance, tighter terms (such as, for example, pandemic exclusions) and/or increased reinsurance prices. While we currently cede a limited amount of our primary insurance business to reinsurers, we may find it difficult to obtainencounter difficulty in obtaining reinsurance in the future, forcing us to seek reinsurers who areresort to a more expensive to us.reinsurance market. If we cannotare unable to obtain affordable reinsurance coverage, eitherthis may impact our net exposures will increase or we will have to reduce ourand the number of underwriting commitments.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
•Technology Adoption. Innovation and digital development strategies will be implemented in variouscontinue to evolve and impact all industries, including the insurance industry. The onset of the COVID-19 pandemic in 2020 caused companies to adapt to a more digital operations platform, almost overnight. The insurance industry inis focused on digitizing distribution channels and empowering agents with advanced digital capabilities. Access to real-time data has streamlined the coming years which could significantly impactway we underwrite our business. It will beproducts. The rapid development of artificial intelligence and the demand for fee-based, value-added services are challenging our industry. Therefore, it is critical that we embrace these changes tofor the benefit of our policyholders, agents, employees and stockholders.
WhileEVENTS THAT IMPACTED OUR BUSINESS
From time-to-time, certain events may affect our management has extensive experiencebusiness in writing life insurance policies for foreign residents, changesways that cause current or future results to foreign laws and regulations and their related application and enforcement, along with currency controls affecting our foreign resident insureds could adverselydiffer from past results. In addition to factors described in Part I, Item 1A, "Risk Factors", the following events may impact our revenues,results of operations or financial condition:
Inflation and Market Volatility
As discussed above, the impact of inflation, which has led to market volatility and rising interest rates, had a material impact on both our results of operations and balance sheet in both 2022 and 2023.
December 31, 2023 | 10-K 31
Market volatility has significantly affected the fair value of our equity securities over the past 3 years and led to large swings in our earnings. Our investment related gains and losses were a gain of $0.8 million in 2023, a loss of $10.3 million in 2022 and a gain of $11.0 million in 2021. Investment related gains and losses derive principally from our investments in equity securities and include unrealized gains and losses from market price changes in these equities during the period. As evidenced, investment related gains and losses can cause significant fluctuations from period to period and while they are included in our operating revenue, are not indicative of our operating results. We believe that investment related gains and losses, whether realized from dispositions or unrealized from changes in market prices of equity securities, have no bearing in understanding our reported results or in evaluating the economic performance of our business. These gains and losses have caused and will continue to cause significant volatility in our periodic earnings.
We could experience higher surrenders and lapses and fewer sales as our policyholders conserve cash due to concerns over inflation and rising costs, particularly in our Home Service Insurance segment, whose customer base is primarily middle- and lower-income individuals.
Rising Interest Rates
To combat the inflation that began as a result of the COVID-19 pandemic, interest rates rose significantly starting in 2022 after being ultra-low for almost a decade. In just a 16-month span starting in March 2022, the Federal Open Market Committee of the Federal Reserve lifted their key benchmark rate from near-zero percent to a 22-year high of 5.25% - 5.5%. Higher interest rates typically reduce the market values of fixed income assets, as the interest payments from existing fixed income assets become less competitive relative to newer higher rate fixed income instruments. Long duration fixed maturity securities, which constitute the vast majority of our investment portfolio as a life insurer because we strive to match our asset duration to our liability duration, were particularly impacted by the rising rates. Higher interest rates resulted in a pre-tax net unrealized loss of $150.1 million on our available-for-sale securities at December 31, 2023 compared to pre-tax net unrealized loss of $201.7 million at December 31, 2022. While the 10 year Treasury yield was the same at both periods, the pre-tax unrealized loss was lower at December 31, 2023, as the investment balance includes recent investment purchases with higher interest rates whose fair market values are closer to amortized cost. The credit ratings and default risk of our fixed maturity securities were not significantly impacted by the rise in interest rates in 2023 and because we intend to hold the long-term investments to maturity, we do not believe that the current unrealized loss is indicative of our long-term financial condition.strength, as we expect the market values to recover prior to the maturity date of most of these investments.
We also believe that the inflationary environment has led to higher surrenders and lapses in 2023 as well as lower sales, as our policyholders conserve cash due to concerns over inflation and rising costs, particularly in our Home Service Insurance segment, where our customer base is primarily middle- and lower-income individuals. Consolidated Results
Ceasing Operations of Operationsour Property Insurance Business
The Company made a strategic decision to exit the property insurance business on June 30, 2023. This business focused on selling limited liability property insurance policies in Louisiana and Arkansas. This decision negatively impacted our current year premium revenues and financial results. We were contractually obligated to pay the majority of the remaining premiums for our catastrophic reinsurance through the end of 2023. Additionally, we did not collect premiums in the second half of 2023, as we did in the second half of 2022. Accordingly, property premium revenue is less for the year ended December 31, 2023 compared to prior years.
The property insurance business operates through SPFIC and represented less than 1% of the Company’s total consolidated assets as of December 31, 2023 and less than 1% of the Company's total consolidated revenues for the year then ended. The cessation of this business is not reported as a discontinued operation because it is immaterial to our total operations. Additionally, there were no material charges incurred in relation to the exit of our property insurance operations.
December 31, 2023 | 10-K 32
HIGHLIGHTS
Summary
We had income before federal income tax of $26.2 million in 2023, compared to $27.4 million in 2022. In 2023, (i) changes in the fair value of our limited partnership investments due to improved stock market conditions in 2023 increased investment related gains and losses by $11.1 million; and (ii) net investment income improved by $3.8 million due to higher yields on our investment portfolio. These increases were offset by (i) $6.7 million decrease in premiums due to lower renewal premiums in our life insurance segment and ceasing our property insurance business; (ii) $6.7 million increase in total insurance benefits paid or provided due to higher claims and surrenders and higher policyholder liability remeasurement loss; and (iii) $3.0 million of higher commission expense, driven by higher first year sales (which have higher commission payments) and accrual of expense for renewal commissions we may owe to former independent consultants in Venezuela. Our net income per diluted share of Class A discussioncommon stock was $0.48 for the year ended December 31, 2023.
Key operating results (comparison of 2023 v. 2022):
↓ $6.7 million of premium revenue
Insurance premiums declined 4% in 2023 compared to 2022, totaling $167.0 million and $173.7 million, respectively due to:
•13% growth in first year premiums in our Life Insurance segment was more than offset by lower renewal premiums in this segment due to increases in surrenders and expiring matured endowments;
•our property insurance premiums decreased by $4.1 million due to ceasing this business on June 30, 2023.
↑ $3.8 million of net investment income
Net investment income increased 6% in 2023 compared to 2022, totaling $69.3 million and $65.4 million, respectively, from a higher average portfolio yield in 2023 as well as a growing invested asset base. The average yield on our consolidated results is presented below, followedinvestment portfolio was 5% in 2023, a 16 basis point increase from 2022.
↑ $6.7 million of total insurance benefits paid or provided
Total insurance benefits paid or provided increased by 5% due primarily to higher surrenders and matured endowments in our Life Insurance segment.
↑ $2.0 million of general operating expenses
Operating expenses increased due to costs related to strategic growth initiatives, our search for a new CEO, and costs related to moving our international business from Bermuda to Puerto Rico.
Financial Condition at December 31, 2023
•Total assets of $1.7 billion.
•Total investments of $1.4 billion; fixed maturity securities comprised 88% of total investments.
•$4.9 billion of direct insurance in force.
•No debt.
•Fully diluted income per share of Class A common stock of $0.48
•Book value per share of Class A common stock of $3.47.
December 31, 2023 | 10-K 33
CONSOLIDATED RESULTS OF OPERATIONS
Our Operating Segments
We manage our business in two operating segments: Life Insurance and Home Service Insurance. See Part I. Item 1, Business for a discussion about the business operated in each segment.
Our insurance operations are the primary focus of the Company, as those operations generate most of our income. See the discussion under Segment Operations below for detailed analysis. The amount of insurance, number of policies, and average face amounts for ordinary life policies issued during the periods indicated are shown below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | 2023 | | | | 2022 | |
| | Amount of
Insurance
Issued | | Number of
Policies
Issued | | Average Policy Face
Amount Issued | | Amount of
Insurance
Issued | | Number of
Policies
Issued | | Average Policy Face
Amount Issued | |
| Life Insurance: | | | | | | | | | | | | |
| International | $ | 399,691,578 | | | 4,067 | | | $ | 98,277 | | | $ | 389,338,420 | | | 4,330 | | | $ | 89,916 | | |
| Domestic | 53,356,685 | | | 4,541 | | | 11,750 | | | 1,060,000 | | | 4 | | | 265,000 | | (1) |
| Total Life Insurance | 453,048,263 | | | 8,608 | | | 52,631 | | | 390,398,420 | | | 4,334 | | | 90,078 | | |
| Home Service Insurance | 288,867,758 | | | 22,429 | | | 12,879 | | | 284,320,685 | | | 26,845 | | | 10,591 | | |
| Total | $ | 741,916,021 | | | 31,037 | | | | | $ | 674,719,105 | | | 31,179 | | | | |
(1) The 2022 average domestic policy face amount issued reflects one policy issued for $1.0 million of life insurance in force, driving up the average policy face amount issued. |
In 2023, we issued $741.9 million in new insurance, a 10% increase from 2022. As we previously disclosed, our strategic initiatives include the introduction of new products tailored to our specific markets and expansion of our distribution channels through white-label partnerships. These new products and distribution channels helped drive the increase in total insurance issued of $67.2 million.
The number of policies issued almost doubled in our Life Insurance segment. This growth is attributable to our new white label partnerships and final expense products introduced domestically, which accounted for 53% of the number of policies issued and continued strong sales of our international whole life product introduced in 2022, which accounted for 61% of total insurance issued in this segment operations and financial results by segment.in 2023.
In our Home Service Insurance segment, the increase in average policy face amounts issued is attributable to sales campaigns that focused on increasing the face amount of insurance sold as well as the introduction of our new whole life product in this segment, which has a higher maximum face value than our legacy products. Revenues
InsuranceDecember 31, 2023 | 10-K 34
REVENUES
Our revenues are primarily generated from premium revenuesinsurance renewal premiums and investment income. In addition, realized gains and losses on investment holdings can significantlyincome from invested assets. The implementation of LDTI did not impact revenues from yearour revenues; for a discussion of 2022 to year.2021 comparisons, see the 2022 10-K.
| | | | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
Years ended December 31,
(In thousands) | | Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Revenues: | | | | | | Revenues: | | | |
| Premiums: | | | | | | Premiums: | | | |
| Life insurance | $ | 191,342 |
| | 191,254 |
| | 187,686 |
|
| Accident and health insurance | 1,392 |
| | 1,546 |
| | 1,599 |
|
| Property insurance | 4,986 |
| | 5,076 |
| | 5,195 |
|
| Net investment income | 53,146 |
| | 48,560 |
| | 45,782 |
|
| Realized investment gains (losses), net | 518 |
| | (1,985 | ) | | (5,459 | ) |
| Investment related gains (losses) | |
| Other income | 1,243 |
| | 955 |
| | 1,465 |
|
| Total revenues | $ | 252,627 |
| | 245,406 |
| | 236,268 |
|
Total revenues increased in 2023, as we had investment related gains, versus losses in 2022, and higher net investment income.
| | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Premiums: | | | | | |
| First year | $ | 19,341 | | | 17,529 | | | 17,766 | |
| Renewal | 147,698 | | | 156,185 | | | 156,962 | |
| Total premiums | $ | 167,039 | | | 173,714 | | | 174,728 | |
Premium Income. Premium income derived fromIncome. Despite higher first year premium revenues in both segments, life accidentinsurance premium revenues decreased in 2023 compared to 2022 due to lower renewal premiums. Accident and health insurance premiums increased in 2023 due to sales of our new critical illness products that were launched in late 2022. Property insurance premiums declined in 2023 as we stopped accepting renewal premiums at the end of May and property insurance sales remained relatively flat during 2017ceased our operations on June 30, 2023.
Our renewal premiums comprised 88% of our total premium revenue in 2023 and 90% in 2022. Renewal premiums declined by 5% in 2023 compared to 2016, and increased 1.7% during 2016 compared to 2015.2022; as discussed above, the decline in Life insurance reflected an increase resulting primarily fromInsurance segment renewal premiums which increased 2.2% in 2017is due to the impact from a higher level of surrenders during the last few years and 2.4% in 2016 and totaled $171.9 million, $168.3 million and $164.4 million on the consolidated level in 2017, 2016 and 2015, respectively. New sales, reflected asincreasing matured endowment benefits.
Our first year premiums decreased 18.8% and 0.5%, and 2.7%increased 10% in the life segment in 2017, 2016 and 2015, respectively. In 2017,2023 compared to increase productivity, we introduced a set of repriced products in our international markets that are more expensive policies for our customers and likely negatively impacted2022 due to our new sales. In addition, Venezuela, which has historically been oneproduct offerings and expanded domestic distribution.
December 31, 2023 | 10-K 35
Net Investment Income. Our net investment income and investment performance are summarized as follows:
| | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands, except for %) | 2023 | | 2022 | | 2021 |
| Gross investment income: | | | | | |
| Fixed maturity securities | $ | 60,127 | | | 58,400 | | | 55,579 | |
| Equity securities | 630 | | | 650 | | | 1,024 | |
| Policy loans | 6,011 | | | 6,189 | | | 6,420 | |
| Other long-term investments | 4,509 | | | 2,535 | | | 809 | |
| Other | 576 | | | 246 | | | 54 | |
| Total investment income | 71,853 | | | 68,020 | | | 63,886 | |
| Less investment expenses | (2,599) | | | (2,594) | | | (2,391) | |
| Net investment income | $ | 69,254 | | | 65,426 | | | 61,495 | |
| | | | | |
| Average invested assets, at amortized cost | $ | 1,517,685 | | | 1,488,408 | | | 1,451,701 | |
| Yield on average invested assets | 4.56 | % | | 4.40 | % | | 4.24 | % |
Due to insurance regulations, fixed maturity securities constitute the vast majority, or 88%, of our top markets, has experienced economicinvestment portfolio based on fair value and social turmoil, which has negatively impacted our sales inthus provide the country, decreasing 10% year over year based upon total premiums from 2016 to 2017.
Endowment sales represent a significant portion of new business sales internationally with the 20-year endowment and endowment to age 65 as our top products. In addition, mostvast majority of our life insurance policies contain a policy loan provision, which allows the policyholder to use cash value within a policy to pay premiums. The policy loan asset balance increased 10.6% and 10.8% in 2017 and 2016, year over year and remains in line with historical levels when compared to policy benefit liabilities.
Net Investment Income. Netinvestment income. Our net investment income increased to $53.1 million6% in 20172023 compared to $48.6 millionin 2016, as we experienced2022, primarily due to a higher average invested assetsportfolio yield on our fixed maturity securities in 2023. Long-term investment income increased as our private equity investment asset base grew.
The annualized yield increased by 16 basis points in 2023 compared to 2022 as a result of the rising interest rate environment.
Investment Related Gains (Losses). We recorded an investment related gain of $0.8 million during 2023, compared to a loss of $10.3 million in 2022. As described above, the gains and losses are primarily related to the fair value change of our limited partnership and equity securities investments, mostly in our Life Insurance segment, due to the volatility in equity markets. We did not sell all of these investments; however, the changes in fair values of our equity securities are reflected as investment related gains or losses in our income statement, in addition to executed transactions that result in a gain or loss.
Other Income. Other income consists primarily of incoming premium revenue. Our yield on average invested assets increased three basis points from 2016supplemental contracts issued to 2017 as rates stayed similar on investments.policyholders in our Life Insurance segment upon the surrender or maturity of their original policies.
December 31, 2023 | 10-K 36
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
BENEFITS AND EXPENSES
Net investment income performance is summarized
| | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Benefits and expenses: | | | | | |
| Insurance benefits paid or provided: | | | | | |
| Claims and surrenders | $ | 135,993 | | | 119,935 | | | 119,735 | |
| Increase (decrease) in future policy benefit reserves | (5,624) | | | 4,804 | | | 9,773 | |
| Policyholder liability remeasurement (gain) loss | 4,460 | | | 2,884 | | | 1,434 | |
| Policyholders' dividends | 5,542 | | | 6,013 | | | 6,180 | |
| Total insurance benefits paid or provided | 140,371 | | | 133,636 | | | 137,122 | |
| Commissions | 39,241 | | | 36,222 | | | 35,463 | |
| Other general expenses | 47,131 | | | 45,177 | | | 43,370 | |
| Capitalization of deferred policy acquisition costs | (28,301) | | | (24,899) | | | (22,740) | |
| Amortization of deferred policy acquisition costs | 15,460 | | | 14,390 | | | 13,445 | |
| Amortization of cost of insurance acquired | 604 | | | 621 | | | 757 | |
| Goodwill impairment | — | | | — | | | 12,624 | |
| Total benefits and expenses | $ | 214,506 | | | 205,147 | | | 220,041 | |
Payments of claims and surrenders benefits constitute the majority of our expenses. Total benefits and expenses paid increased in 2023 as follows.compared to same period in 2022 driven by higher surrenders and matured endowments, higher policyholder liability remeasurement loss due to the higher surrenders and $3.0 million of higher commissions, driven by higher first year sales (which have higher commissions) and accrual of expense for renewal commissions we may owe to former independent consultants in Venezuela.
Claims and Surrenders. Payments of death claims, surrender benefits and matured endowment benefits are our primary uses of cash. The implementation of LDTI did not impact our reporting for Claims and Surrenders; for a discussion of 2022 to 2021 comparisons, see the 2022 10-K. |
| | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands, except for %) |
| Net investment income | $ | 53,146 |
| | 48,560 |
| | 45,782 |
|
| Average invested assets, at amortized cost | 1,233,580 |
| | 1,133,705 |
| | 1,045,736 |
|
| Yield on average invested assets | 4.31 | % | | 4.28 | % | | 4.38 | % |
| | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Claims and surrenders: | | | | | |
| Death claim benefits | $ | 22,458 | | | 25,758 | | | 31,380 | |
| Surrender benefits | 56,856 | | | 48,743 | | | 51,638 | |
| Endowment benefits | 8,296 | | | 8,864 | | | 9,572 | |
| Matured endowment benefits | 41,855 | | | 31,478 | | | 20,304 | |
| Property claims | 699 | | | 780 | | | 2,112 | |
| Accident and health benefits | 458 | | | 211 | | | 332 | |
| Other policy benefits | 5,371 | | | 4,101 | | | 4,397 | |
| Total claims and surrenders | $ | 135,993 | | | 119,935 | | | 119,735 | |
•Death claim benefits decreased 13% in 2023 compared to 2022 due primarily to a lower volume of reported death claims.
We
•Surrender benefits increased 17% in 2023 compared to 2022 due to surrenders related to international policies that are nearing maturity as well as policies that have traditionally investedpassed their surrender charge period. While we have implemented retention initiatives over the past few years, we believe that the high interest rates are negatively affecting these efforts, as policyholders surrender their policies to re-invest the cash values in fixed maturity securities with a large percentage held in callable issues. The sustained lowhigher interest rate environmentproducts.
December 31, 2023 | 10-K 37
•Many of our call risk will diminish, resulting in our fixed securities maturing at the statedendowment policies are reaching their contractual maturity dates and our portfolio yield will rise more slowly over time, as new money investments would be made at higher rates.
Investment income from fixedthus matured endowment benefits are increasing. We anticipated the $10.4 million increase in 2023 based upon the contractual maturity securities accounted for approximately 88.0% of total investment income for the year ended December 31, 2017. We have increased our investment purchases of corporatedates and municipal securitiesexpect continued increases in matured endowment benefits over the past severalnext few years with no focus on any particular industry sectors inas more of these security categories, but rather a focus on higher yielding, investment quality securities. In addition, we currently have $15.6 million invested in equity securities related to bond and stock mutual funds as these securities offer a competitive yield with a shorter duration. However, we have reduced our holdings over the last several years due to higher earnings volatility and RBC charges.contracts expire.
|
| | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Gross investment income: | | | | | |
| Fixed maturity securities | $ | 48,164 |
| | 43,637 |
| | 39,570 |
|
| Equity securities | 708 |
| | 851 |
| | 2,909 |
|
| Mortgage loans | 11 |
| | 24 |
| | 36 |
|
| Policy loans | 5,735 |
| | 5,277 |
| | 4,614 |
|
| Long-term investments | 76 |
| | 305 |
| | 247 |
|
| Other | 68 |
| | 89 |
| | 53 |
|
| Total investment income | 54,762 |
| | 50,183 |
| | 47,429 |
|
| Less investment expenses | (1,616 | ) | | (1,623 | ) | | (1,647 | ) |
| Net investment income | $ | 53,146 |
| | 48,560 |
| | 45,782 |
|
Investment income from fixed maturity investments increased in 2017 due to an increase in the portfolio from new money investment purchases as noted above relative to the fixed maturity portfolio. In addition, the increase in the policy loans asset balance, which represents policyholders utilizing their accumulated policy cash value, contributed to the increase to investment income. Investment income from equity securities has declined as we have reduced our holdings as discussed above.
Realized Losses on Investments. Net realized gains in 2017 resulted primarily from a gain of $1.1 million recognized on the sale of a real estate holding reduced by impairments. Net realized investment losses recorded from OTTI on both fixed maturity and equity securities totaling $0.2 million and $4.3 million, in 2017 and 2016. The OTTI in 2016 was somewhat offset by realized investment gains on sales of fixed maturity securities in our available-for-sale portfolio and sales of equity securities.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Realized investment gains (losses) are as follows.
|
| | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Realized investment gains (losses): | | | | | |
| Sales, calls and maturities | | | | | |
| Fixed maturities | $ | (506 | ) | | 2,024 |
| | (111 | ) |
| Equity securities | 121 |
| | 303 |
| | 37 |
|
| Real estate | 1,110 |
| | — |
| | — |
|
| Net realized investment gains (losses) | 725 |
| | 2,327 |
| | (74 | ) |
| Other-than-temporary impairments ("OTTI"): | |
| | |
| | |
|
| Fixed maturities | — |
| | (3,970 | ) | | (2,998 | ) |
| Equity securities | (207 | ) | | (342 | ) | | (2,387 | ) |
| Realized losses on OTTI | (207 | ) | | (4,312 | ) | | (5,385 | ) |
| Net realized investment gains (losses) | $ | 518 |
| | (1,985 | ) | | (5,459 | ) |
Benefits and Expenses
|
| | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Benefits and expenses: | | | | | |
| Insurance benefits paid or provided: | | | | | |
| Claims and surrenders | $ | 82,905 |
| | 81,367 |
| | 78,879 |
|
| Increase in future policy benefit reserves | 76,029 |
| | 75,881 |
| | 77,060 |
|
| Policyholders' dividends | 6,268 |
| | 6,832 |
| | 10,747 |
|
| Total insurance benefits paid or provided | 165,202 |
| | 164,080 |
| | 166,686 |
|
| Commissions | 41,324 |
| | 44,641 |
| | 43,625 |
|
| Other general expenses | 46,388 |
| | 33,356 |
| | 33,287 |
|
| Capitalization of deferred policy acquisition costs | (29,120 | ) | | (32,732 | ) | | (31,104 | ) |
| Amortization of deferred policy acquisition costs | 29,690 |
| | 28,515 |
| | 23,400 |
|
| Amortization of cost of customer relationships acquired | 2,129 |
| | 2,063 |
| | 2,317 |
|
| Total benefits and expenses | $ | 255,613 |
| | 239,923 |
| | 238,211 |
|
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Claims and Surrenders. As noted in the table below, claims, benefits and surrenders increased from $81.4 million in 2016 to $82.9 million in 2017.
|
| | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Death claims | $ | 22,773 |
| | 23,104 |
| | 24,638 |
|
| Surrender expenses | 37,192 |
| | 33,686 |
| | 31,682 |
|
| Endowment benefits | 15,134 |
| | 16,173 |
| | 16,273 |
|
| Matured endowments | 2,882 |
| | 3,392 |
| | 1,773 |
|
| Property claims | 1,744 |
| | 1,941 |
| | 1,689 |
|
| Accident and health benefits | 310 |
| | 462 |
| | 388 |
|
| Other policy benefits | 2,870 |
| | 2,609 |
| | 2,436 |
|
| Total claims and surrenders | $ | 82,905 |
| | 81,367 |
| | 78,879 |
|
The Company monitors death claims based upon expectations. These values may routinely fluctuate from year to year.
Policy surrenders increased 10.4% in 2017 from 2016 and 6.3% from 2015 to 2016, or 0.8% and 0.7% of direct ordinary whole life insurance in force for 2017 and 2016, respectively. The increase in surrender expense is primarily related to our international business and is expected to increase over time due to the aging of this block of business. Our premium persistency rates have remained consistent for 2017 and 2016. A significant portion of surrenders relates to policies that have been in force over fifteen years and no longer have a surrender charge associated with them. Total direct insurance in force reported in 2017 was $5.0 billion and was consistent with 2016 and 2015.
Endowment benefits decreased slightly in 2017 compared to 2016 amounts. We have a series of international policies that carry an immediate endowment benefit of an amount selected by the policy owner. These benefits have been popular in the Pacific Rim and Latin America, where the Company has experienced increased interest in our guaranteed products in recent years. Annual guaranteed endowments are factored into the premium, and, as such, the increase or decrease is expected to have little impact on expected profitability.
Matured endowments decreased in the current year after increasing in 2016 and 2015. We expect this increasing trend to continue as this block of business increases, persists and policies begin to reach maturity.
Property claims decreased 10% to approximately $1.7 million in 2017 compared with the amount reported for 2016 due to a decrease in weather-related claims.
Other policy benefits resulted primarily from interest paid on premium deposits and policy benefit accumulations and increased as these policy liabilities also increased.
Increase (Decrease) in Future Policy Benefit Reserves. The change in futureReserves. Future policy benefit reserves has increasedreflect the liability established to provide for the payment of policy benefits that we expect to pay in 2017 by 0.2%the future and decreasethus generally increase when we have a larger in 2016 by 1.5%. The 2016 decrease was mainlyforce block of business due to higher sales and persistency (i.e., more policies on which we expect to pay future benefits) and decrease when we have lower sales and persistency. LDTI impacted our reported reserves for 2022 and 2021, as LDTI is intended to improve the timeliness of recognizing changes in the liability for future benefits and standardize the rate used to discount future cash flows. Reserves decreased by $5.0 million from 2021 to 2022 and another $10.4 million from 2022 to 2023 despite increases in insurance issued and increases in our in force block of business due to the amount of reserves released in connection with the higher matured endowments and surrenders.
Policyholder Liability Remeasurement (Gain) Loss. Most of our products are long-duration contracts that provide a specified, fixed amount of insurance benefit in exchange for a fixed premium. When a policy is initially issued, we establish a "net premium ratio" ("NPR") using assumptions regarding expected premiums and policyholder benefit liabilities. On a quarterly basis, we review actual versus expected experience in such quarter, which is reported as a policyholder liability remeasurement gain (if better performance than assumptions) or loss (if lower performance than assumptions). The loss increased from 2021 to 2022 and again to 2023 due to unfavorable surrender activity recorded whenexperience.
Commissions. Commission expenses are a cost of acquiring business, as commissions are the primary compensation paid to our independent consultants and independent agents for selling our products. First year commission rates are higher than renewal commission rates. Commissions fluctuate directly in relation to sales and thus the increase in commissions over the 3-year period ending December 31, 2023 was due to higher first year sales in each period as compared to the prior year. Changesperiod. Additionally, commission expense in future policy benefit reserves are largely2023 was higher due to a $1.3 million accrual of expense for renewal commissions we may owe to former independent consultants in Venezuela.
Other General Expenses. Total general expenses increased $2.0 million, or 4%, in 2023 compared to 2022. The increase was primarily driven by policyholder activity (e.g. premiums, surrenders, etc.)costs related to strategic growth initiatives, a search for a new CEO and costs related to moving our international business from Bermuda to Puerto Rico. We continue to work on managing controllable operating expenses while investing in growth initiatives.
Policyholder DividendsCapitalization of Deferred Policy Acquisition Costs ("DAC"). The Company issues long duration participating policies in We capitalize costs related to successful sales of our life segment to foreign residents that are expected to pay dividends to policyholdersinsurance products, which include certain commissions, policy issuance costs, and underwriting and agency expenses. These costs vary based upon actual experience. Initially, policyholder dividend scales are factored into the guaranteedamounts or premiums at the time the product is developed, based on expected future experience and desired profit goals. As actual and expected experience develops over time, it can become necessary to adjust dividends, as we did at the end of 2016, in order to maintain our original expected level of long term product profitability. Policyholders' dividends decreased 8.3% in 2017 compared to 2016, and 36.4% in 2016 compared to 2015 or $0.6 million and $3.9 million, respectively, due to the dividend rate actions that we took at the end of 2016.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Commissions. Commission expense fluctuates in a direct relationshipreceived related to new and renewal insurance premiums and has decreased 7.4% in 2017 compared to 2016 as first year premium revenues, on which higher commission rates are paid, declined in the life segment while renewal premiums were up 2.7%.
Other General Expenses. Total general expenses increased 39.1% on a consolidated basis in 2017 due primarily to increased legal, consulting and audit fees, as well as higher salaries, bonuses and related employee benefits paid to top executives. We also have $4.6 million of expense in the current year due to the write-off of our home service goodwill. Total general expenses increased 0.2% on a consolidated basis in 2016 due primarily to the tax compliance issue we recognized in 2014. In 2015, we recorded an additional $3.4 million of expense related to this tax compliance issue.
We perform an expense study on an annual basis, utilizing an enterprise-wide time study, and we adjust cost allocations among entities as needed based upon this review. Any allocation changes are reflected in the segment operations, but do not impact total expenses.
Deferred Policy Acquisition Costs.business. Capitalized DAC were $29.1 million, $32.7 million and $31.1 millionincreased each year during the 3-year period ended December 31, 2023, which is in 2017, 2016 and 2015. These costs will vary based upon successful efforts related to newly issued policies and renewal business.line with the increases in new sales activity. Significantly lower amounts are capitalized related to renewal business in correlation with the lower commissions paid on that business compared to first year business, which havehas higher commission rates. In addition, the prolonged low interest rate environment impacted the assumptions used in the development
Amortization of the DAC asset for new policies issued.
Deferred Policy Acquisition Costs.Amortization of DAC totaled $29.7 million, $28.5$15.5 million and $23.4$14.4 million in 2017, 20162023 and 2015 primarily2022, respectively. LTDI also changed the manner in which we amortize DAC and thus reported amounts for 2022 and 2021 have changed. DAC is amortized on a constant level basis over the expected term of the related contracts to approximate straight-line amortization.
Goodwill Impairment. In 2021, we recognized a goodwill impairment in our Life Insurance segment of $12.6 million. The impairment was triggered by increases in our carrying value of the Life Insurance segment due to the higher surrender activity, including early duration elections to convert existing policies to reduced paid up ("RPU") or extended term insurance ("ETI") status in 2017 and 2016. There are higher deferred acquisition costs associated with early duration conversions to RPU or ETI, which, when converted, increases amortization expense. Amortizationrelease of deferred policy acquisition costs is impacted by persistency and the higher level of surrenders is impacting our amortization.
Federal Income Tax. Federal income tax expense was $35.1a $43.8 million, $3.5 million and $1.2 million in 2017, 2016 and 2015, respectively, resulting in effective tax rates of (1,176.9)%, 64.1% and (61.8)%, respectively. The significant changes in rates noted are the result of the New Tax Act enacted at the end of 2017 and the tax compliance issue we identified in 2014 which impacted our effective tax rates in each year as these costs are not deductible for tax purposes. Additionally, the Company recorded a tax expense in each year for an uncertain tax position that is affectingin the fourth quarter of 2021 following the expiration of the statute of limitations for the tax rates. Differences betweenyear ended December 31, 2017.
December 31, 2023 | 10-K 38
SEGMENT OPERATIONS
As described above, our effective tax rate and the statutory tax rate result from income and expense items that are treated differently for financial reporting and tax purposes.
Segment Operations
Our business is comprised of two operating business segments and Other Non-insurance Operationssegments:
as detailed below.
•Life Insurance
•Home Service Insurance
Our insurance operations are the primary focus of the Company, as those segments generate the majority of our income. The amount of insurance, number of policies, and average face amounts of policies issued during the periods indicated are shown below.
|
| | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 |
| | Amount of Insurance Issued | | Number of Policies Issued | | Average Policy Face Amount Issued | | Amount of Insurance Issued | | Number of Policies Issued | | Average Policy Face Amount Issued |
| Life | $ | 302,571,460 |
| | 5,296 |
| | $ | 57,132 |
| | $ | 389,125,834 |
| | 6,632 |
| | $ | 58,674 |
|
| Home Service | 182,144,245 |
| | 26,762 |
| | 6,806 |
| | 178,485,493 |
| | 26,847 |
| | 6,648 |
|
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
These segments are reported in accordance with U.S. GAAP. The Company evaluates profit and loss performance based on net income (loss) before federal income taxes.taxes for these segments. The Company's Other Non-Insurance enterprises include non-insurance operations such as IT and corporate-support functions, which are included in the table presented below to properly reconcile the segment information with the consolidated financial statements of the Company.
The following table sets forth income (loss) before federal income taxes by segment during the periods indicated.
| | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Income before federal income taxes: | | | | | |
| Segments: | | | | | |
| Life Insurance | $ | 28,621 | | | 25,423 | | | 31,902 | |
| Home Service Insurance | 3,013 | | | 6,563 | | | 4,173 | |
| Total Segments | 31,634 | | | 31,986 | | | 36,075 | |
| Other Non-Insurance Enterprises | (5,460) | | | (4,609) | | | (5,570) | |
| Total income before federal income taxes | $ | 26,174 | | | 27,377 | | | 30,505 | |
December 31, 2023 | 10-K 39
|
| | | | | | | | | |
| | Income (Loss) Before Federal Income Taxes |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Segments: | | | | | |
| Life Insurance | $ | 5,394 |
| | 5,391 |
| | (4,772 | ) |
| Home Service Insurance | (5,599 | ) | | 2,339 |
| | 4,538 |
|
| Total Segments | (205 | ) | | 7,730 |
| | (234 | ) |
| Other Non-Insurance Operations | (2,781 | ) | | (2,247 | ) | | (1,709 | ) |
| Total | $ | (2,986 | ) | | 5,483 |
| | (1,943 | ) |
Life Insurance
Our Life Insurance segment primarily issues ordinary whole life insurance and endowment policies in U.S. dollar-denominated amounts to foreignnon-U.S. residents in more than 30over 75 countries through approximately 1,244over 1,000 active independent marketing consultants and domestically through over 36 independent marketing firms and consultants throughoutas of December 31, 2023. Detailed results of operations for the United States.Life Insurance segment for the periods indicated are as follows:
| | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Revenues: | | | | | |
| Premiums: | | | | | |
| Life insurance | $ | 121,424 | | | 124,156 | | | 125,558 | |
| Accident and health insurance | 721 | | | 497 | | | 500 | |
| Net investment income | 54,352 | | | 50,680 | | | 47,216 | |
| Investment related gains (losses), net | 301 | | | (8,826) | | | 9,176 | |
| Other income | 3,605 | | | 3,668 | | | 3,362 | |
| Total revenues | 180,403 | | | 170,175 | | | 185,812 | |
| Benefits and expenses: | | | | | |
| Insurance benefits paid or provided: | | | | | |
| Claims and surrenders | 113,428 | | | 95,576 | | | 91,390 | |
| Increase (decrease) in future policy benefit reserves | (10,931) | | | 3,894 | | | 7,822 | |
| Policyholder liability remeasurement (gain) loss | 4,153 | | | 1,728 | | | 829 | |
| Policyholders' dividends | 5,512 | | | 5,990 | | | 6,140 | |
| Total insurance benefits paid or provided | 112,162 | | | 107,188 | | | 106,181 | |
| Commissions | 22,896 | | | 20,031 | | | 18,747 | |
| Other general expenses | 23,969 | | | 23,192 | | | 20,846 | |
| Capitalization of deferred policy acquisition costs | (20,251) | | | (17,942) | | | (16,174) | |
| Amortization of deferred policy acquisition costs | 12,895 | | | 12,160 | | | 11,536 | |
| Amortization of cost of insurance acquired | 111 | | | 123 | | | 150 | |
| Goodwill impairment | — | | | — | | | 12,624 | |
| Total benefits and expenses | 151,782 | | | 144,752 | | | 153,910 | |
| Income (loss) before federal income taxes | $ | 28,621 | | | 25,423 | | | 31,902 | |
|
| | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Revenue: | | | | | |
| Premiums | $ | 150,708 |
| | 151,195 |
| | 147,832 |
|
| Net investment income | 38,578 |
| | 33,350 |
| | 30,206 |
|
| Realized investment losses, net | (461 | ) | | (1,685 | ) | | (3,873 | ) |
| Other income | 1,061 |
| | 882 |
| | 1,008 |
|
| Total revenue | 189,886 |
| | 183,742 |
| | 175,173 |
|
| Benefits and expenses: | |
| | |
| | |
|
| Insurance benefits paid or provided: | |
| | |
| | |
|
| Claims and surrenders | 60,393 |
| | 58,440 |
| | 55,912 |
|
| Increase in future policy benefit reserves | 70,783 |
| | 71,373 |
| | 73,259 |
|
| Policyholders' dividends | 6,226 |
| | 6,774 |
| | 10,695 |
|
| Total insurance benefits paid or provided | 137,402 |
| | 136,587 |
| | 139,866 |
|
| Commissions | 25,760 |
| | 29,235 |
| | 28,336 |
|
| Other general expenses | 18,597 |
| | 14,284 |
| | 16,345 |
|
| Capitalization of deferred policy acquisition costs | (23,157 | ) | | (26,742 | ) | | (25,268 | ) |
| Amortization of deferred policy acquisition costs | 25,295 |
| | 24,428 |
| | 20,025 |
|
| Amortization of cost of customer relationships acquired | 595 |
| | 559 |
| | 641 |
|
| Total benefits and expenses | 184,492 |
| | 178,351 |
| | 179,945 |
|
| Income (loss) before federal income tax expense | $ | 5,394 |
| | 5,391 |
| | (4,772 | ) |
Premiums. Premium revenues decreasedIn our Life Insurance segment we reported income before federal income tax of $28.6 million in 20172023, as compared to 2016 as first$25.4 million in 2022 and $31.9 million in 2021. As in our consolidated operations, investment related gains and losses caused significant fluctuations from period to period and are not indicative of our operating results. Key operating measures resulted in year-over-year revenue gains in each of the 3-year periods reflected above due to increases in net investment income in each year, premiums decreased 18.8% and 0.5%year-over-year benefit and expense increases in 2017 and 2016, respectively. Premium revenues increased in 2016 compared to 2015,each of the 3-year periods due primarily to increases in surrenders and matured endowments and higher internationalcommissions, driven by higher first year sales (which have higher commissions) and accrual of expense for renewal premiums, which have experienced strong persistency as this block of insurance ages. In 2016,commissions we cut dividend ratesmay owe to make our products more profitable. In 2017, to increase profitability, we introduced a set of repriced productsformer independent consultants in our international marketsVenezuela.
36December 31, 2023 | 10-K 40
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
that are more expensive policies for our customers and likely negatively impacted our new sales. In addition, Venezuela, which has historically been one of our top markets, has experienced economic and social turmoil, which has negatively impacted our sales in the country, decreasing 10% from 2016 to 2017. Sales from Colombia, Taiwan and Ecuador represented the majority of the new business premium increases.
Life Insurance segment premium breakout is detailed below. Since LDTI did not impact reported revenue results, comparisons between the 2022 and 2021 years are not discussed below. See the 2022 10-K for such discussion.
| | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Premiums: | | | | | |
| First year | $ | 13,479 | | | 11,892 | | | 11,420 | |
| Renewal | 108,666 | | | 112,761 | | | 114,638 | |
| Total premiums | $ | 122,145 | | | 124,653 | | | 126,058 | |
|
| | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Premiums: | | | | | |
| First year | $ | 17,403 |
| | 21,434 |
| | 21,541 |
|
| Renewal | 133,305 |
| | 129,761 |
| | 126,291 |
|
| Total premium | $ | 150,708 |
| | 151,195 |
| | 147,832 |
|
EndowmentPremiums. First year premiums increased $1.6 million in 2023 compared to 2022 due to sales represent a significant portion of new business sales internationally. In addition,products and expanded domestic distribution. Our total premiums for 2023 decreased $2.5 million compared to 2022 as renewal premiums declined. We derive most of our premium revenue in the Life Insurance segment from renewal premiums, which decreased 4% in 2023 as compared to 2022. As described above, this decline is due to high surrenders and matured endowments over the last several years.
International Premiums. Life insurance premiums are generated largely from our international policyholders living in over 75 different countries across the globe. The majority of our international premiums are derived from whole life insurance policies contain a policy loan provision, which allows the policyholder to use their accumulated cash value of a policy to pay premiums. These accumulated cash values can also be taken as a cash loan from the policy at the request of the policyholder and are secured by the policy values. The policy loan asset balance increased 10.6% year over year and remains at the same approximate ratio to life reserves as noted in prior years.
Endowment sales totaled approximately $13.3 million, $16.5 million and $16.4 million, representing approximately 76.4%, 77.0% and 76.1% of total new first year premiums in 2017, 2016, and 2015, respectively.
endowment products. The following table sets forth by country, our direct premiums collected from our top five producing countries of our international life insurance business for the periods indicated. Our international business and premium collections could be impacted by future changes relative to laws, regulations or economic events in the countries from which we accept applications.
| | | | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands, except for %) |
| Country | | | | | | | | | | | |
Years ended December 31,
(In thousands, except for %) | | Years ended December 31,
(In thousands, except for %) | 2023 | | 2022 | | 2021 |
| Country: | | Country: | | | |
| Colombia | $ | 29,200 |
| | 20.0 | % | | $ | 29,643 |
| | 20.2 | % | | $ | 27,589 |
| | 19.3 | % | Colombia | $ | 25,453 | | | 21.2 | | 21.2 | % | | $ | 25,181 | | | 20.6 | | 20.6 | % | | $ | 24,829 | | | 20.2 | | 20.2 | % |
| Taiwan | |
| Venezuela | 27,997 |
| | 19.2 |
| | 31,107 |
| | 21.2 |
| | 31,948 |
| | 22.4 |
|
| Taiwan | 19,535 |
| | 13.4 |
| | 18,590 |
| | 12.7 |
| | 18,031 |
| | 12.6 |
|
| Ecuador | 16,440 |
| | 11.3 |
| | 15,456 |
| | 10.5 |
| | 15,527 |
| | 10.9 |
|
| Brazil | 11,088 |
| | 7.6 |
| | 9,856 |
| | 6.7 |
| | 8,960 |
| | 6.3 |
|
| Argentina | |
| Other Non-U.S. | 41,714 |
| | 28.5 |
| | 41,992 |
| | 28.7 |
| | 40,529 |
| | 28.5 |
|
| Total | $ | 145,974 |
| | 100.0 | % | | $ | 146,644 |
| | 100.0 | % | | $ | 142,584 |
| | 100.0 | % | Total | $ | 120,211 | | | 100.0 | | 100.0 | % | | $ | 122,261 | | | 100.0 | | 100.0 | % | | $ | 122,805 | | | 100.0 | | 100.0 | % |
We continueDomestic Premiums. Our domestic in-force life insurance business consists primarily of closed blocks of business from various insurance companies we have acquired over the years. As discussed, we have recently re-launched our domestic life insurance business through CICA Domestic by expanding our licenses to report strong first yearnew states, developing new final expense and renewalliving benefit products, entering into new white label and other distribution agreements and obtaining a B++ A.M. Best rating. Because the majority of this business still consists of closed blocks of business, premiums in our top producing countries (other than Venezuela) as noted above; however, this business is dependent ondomestic Life Insurance segment were lower in 2023 compared to 2022 despite growth in our clients having accessnewly relaunched business.
Net Investment Income. Our net investment income increased 7% in 2023 compared to U.S. dollars. Our international business and premium collections could be impacted by our inability to comply with current or future foreign laws or regulations applicable to the Company or our independent consultants in the countries from which we accept applications as well as by marketing or operational changes made by the Company to comply with those laws or regulations. Our international business may also be affected by economic or other events in foreign countries in which our policies are marketed. Venezuela, for example, is continuing to experience civil unrest2022 due to local demonstrations against crime, corruptionour higher average portfolio yield. The majority of investment income is derived from fixed maturity securities; however, long-term investment income continued to increase as our limited partnership asset base grew.
Investment Related Gains (Losses), Net.The investment related gains and soaring inflation. See "Item 1A. Risk Factors"losses in each period were a result of the change in estimated fair market value for additional information.our limited partnerships, as previously discussed.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Claims and Surrenders.The following table sets forth our direct premiums by state from our domestic business for the periods indicated.
|
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands, except for %) |
| State | | | | | | | | | | | |
| Texas | $ | 2,096 |
| | 30.3 | % | | $ | 2,236 |
| | 32.5 | % | | $ | 2,460 |
| | 34.2 | % |
| Indiana | 1,198 |
| | 17.3 |
| | 1,211 |
| | 17.6 |
| | 1,372 |
| | 19.1 |
|
| Florida | 802 |
| | 11.6 |
| | 708 |
| | 10.3 |
| | 685 |
| | 9.5 |
|
| Missouri | 444 |
| | 6.4 |
| | 457 |
| | 6.6 |
| | 452 |
| | 6.3 |
|
| Kentucky | 308 |
| | 4.5 |
| | 391 |
| | 5.7 |
| | 443 |
| | 6.2 |
|
| Other States | 2,061 |
| | 29.9 |
| | 1,887 |
| | 27.3 |
| | 1,783 |
| | 24.7 |
|
| Total | $ | 6,909 |
| | 100.0 | % | | $ | 6,890 |
| | 100.0 | % | | $ | 7,195 |
| | 100.0 | % |
We discontinued sales of the majority of our domestic products in 2017 while we reevaluate our domestic life strategy and therefore the majority of the premium recorded in 2017 is related to renewal business.
Net Investment Income. Net investment income has increased due to continued growth in average invested assets even though the annual yield has increased 5 basis points in this segment from 2016, as discussed in the Consolidated Results of Operations above.
|
| | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands, except for %) |
| Net investment income | $ | 38,578 |
| | 33,350 |
| | 30,206 |
|
| Average invested assets, at amortized cost | 890,705 |
| | 779,592 |
| | 684,590 |
|
| Annualized yield on average invested assets | 4.33 | % | | 4.28 | % | | 4.41 | % |
Realized Investment Losses, Net. In 2017, 2016 and 2015, this segment recognized losses on other-than-temporary impairments totaling $13,500, $2.3 million and $3.8 million, respectively, related to bond and mutual fund holdings.
Claims and Surrenders. A breakout ofprimary claims and surrender benefits is detailed below.within our Life Insurance segment. LDTI did not impact claims and surrender benefit expenses; for a discussion of 2022 to 2021 comparison see the 2022 10-K.
|
| | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| (In thousands) |
| Death claims | $ | 5,530 |
| | 5,886 |
| | 6,843 |
|
| Surrender expenses | 34,275 |
| | 30,502 |
| | 28,767 |
|
| Endowment benefits | 15,117 |
| | 16,160 |
| | 16,256 |
|
| Matured endowments | 2,364 |
| | 2,937 |
| | 1,304 |
|
| Accident and health benefits | 253 |
| | 365 |
| | 325 |
|
| Other policy benefits | 2,854 |
| | 2,590 |
| | 2,417 |
|
| Total claims and surrenders | $ | 60,393 |
| | 58,440 |
| | 55,912 |
|
Death claims expense decreased 6.0% in 2017 compared to 2016 and decreased 14.0% in 2016 compared to 2015. No unusual trends have been noted in our claims experience. Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES | | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Claims and surrenders: | | | | | |
| Death claim benefits | $ | 4,803 | | | 6,091 | | | 8,160 | |
| Surrender benefits | 53,462 | | | 45,554 | | | 49,439 | |
| Endowment benefits | 8,289 | | | 8,851 | | | 9,565 | |
| Matured endowment benefits | 41,252 | | | 30,897 | | | 19,709 | |
| Accident and health benefits | 265 | | | 96 | | | 135 | |
| Other policy benefits | 5,357 | | | 4,087 | | | 4,382 | |
| Total claims and surrenders | $ | 113,428 | | | 95,576 | | | 91,390 | |
We noted increases in surrender expense over the last several years which is primarily related to our international business and is expected to increase over time due to the aging of this block of business. The majority of policy surrender benefits paid is attributable to our international business and historically was related to policies that have been in force over fifteen years, when surrender charges are no longer applicable. However, in 2017 and 2016, the increased surrender activity is also in the earlier durations (years 1-15), which still have surrender charges. We are seeing various reasons for individuals surrendering their policies, including the sustained slow world-wide economy, individuals simply needing their money and former independent consultants moving business to other insurance carriers.
Endowment benefit expense results from the election by policyholders of a product feature that provides an annual benefit. This is a fixed benefit over the life of the contract, and this expense will increase with new sales and improved persistency.
Matured endowments decreased in the current year after increasing in 2016 and 2015. We expect this increasing trend to continue as this block of business increases, persists and policies begin to reach maturity.
Other policy benefits resulted primarily from interest paid on premium deposits and policy benefit accumulations and increased as these policy liabilities also increased.
Increase in Future Policy Benefit Reserves. Policy benefit reserves in 2017 decreased compared to the same period in 2016, primarily as a result of the higher surrenders and the lower new sales as noted above.
Policyholder Dividends. Policyholders' dividends decreased 8.1% and 36.7% or $0.5 million and $3.9 million respectively in 2017 and 2016, due to the dividend rate actions taken by us at the end of 2016 to improve our product profitability. The Company issues long duration participating policies to foreign residents that are expected to pay dividends to policyholders based upon actual experience. The life company boards approve any dividends on an annual basis and may change the dividend rates as needed for business purposes. Policyholder dividends are factored into the premiums at the time the product is developed and therefore have no impact on expected profitability.
Capitalization and Amortization of Deferred Policy Acquisition Costs. Capitalized costs decreased, as commission-related costs have decreased in the current year compared to 2016 based upon first year and renewal sales levels. Amortization of DAC increased in the current year by 3.5% from 2016 as we experienced increased surrender activity in the current year, including early duration elections to convert to reduced paid up ("RPU") or extended term insurance ("ETI") in 2017 and 2016. There are higher deferred acquisition costs associated with early duration conversions to RPU or ETI, which, when converted, increases amortization expense. Amortization of deferred policy acquisition costs is impacted by persistency and the higher level of surrenders is impacting our amortization.
Commissions. Commission expense increases or decreases are directly related to increases or decreases in premiums. First year policy premiums pay a higher commission rate than renewal policy premiums.
Other General Expenses. Expenses increased in the current year 30.2% to $18.6 million in 2017 compared to $14.3 million in 2016, due primarily to increased legal, consulting and audit fees, as well as higher salaries, bonuses and related employee benefits paid to top executives. The expenses are allocated by segment, based upon an annual expense study performed by the Company.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Home Service Insurance
Our Home Service Insurance segment provides pre-need and final expense ordinary life insurance and annuities to middle and lower income individuals primarily in Louisiana, Mississippi and Arkansas. Our policies in this segment are sold and serviced through funeral homes and a home service marketing distribution system utilizing over 650 employees and independent agents.
|
| | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Revenue: | | | | | |
| Premiums | $ | 47,012 |
| | 46,681 |
| | 46,648 |
|
| Net investment income | 13,132 |
| | 13,705 |
| | 14,063 |
|
| Realized investment gains (losses), net | 979 |
| | (300 | ) | | (1,586 | ) |
| Other income | 3 |
| | 5 |
| | 86 |
|
| Total revenue | 61,126 |
| | 60,091 |
| | 59,211 |
|
| Benefits and expenses: | |
| | |
| | |
|
| Insurance benefits paid or provided: | | | |
| | |
|
| Claims and surrenders | 22,512 |
| | 22,927 |
| | 22,967 |
|
| Increase in future policy benefit reserves | 5,246 |
| | 4,508 |
| | 3,801 |
|
| Policyholders' dividends | 42 |
| | 58 |
| | 52 |
|
| Total insurance benefits paid or provided | 27,800 |
| | 27,493 |
| | 26,820 |
|
| Commissions | 15,564 |
| | 15,406 |
| | 15,289 |
|
| Other general expenses | 23,395 |
| | 15,252 |
| | 13,349 |
|
| Capitalization of deferred policy acquisition costs | (5,963 | ) | | (5,990 | ) | | (5,836 | ) |
| Amortization of deferred policy acquisition costs | 4,395 |
| | 4,087 |
| | 3,375 |
|
| Amortization of cost of customer relationships acquired | 1,534 |
| | 1,504 |
| | 1,676 |
|
| Total benefits and expenses | 66,725 |
| | 57,752 |
| | 54,673 |
|
| Income (loss) before federal income tax expense | $ | (5,599 | ) | | 2,339 |
| | 4,538 |
|
Premiums. The premiums in this segment increased in 2017 compared to 2016, as renewal premiums and first year premiums increased. There was no real growth in new business in 2016 compared to 2015.
The following table sets forth our direct premiums by state for the periods indicated.
|
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands, except for %) |
| State | | | | | | | | | | | |
| Louisiana | $ | 42,837 |
| | 89.6 | % | | $ | 42,605 |
| | 89.6 | % | | $ | 42,537 |
| | 89.4 | % |
| Mississippi | 2,369 |
| | 5.0 |
| | 2,450 |
| | 5.2 |
| | 2,564 |
| | 5.4 |
|
| Arkansas | 1,716 |
| | 3.6 |
| | 1,602 |
| | 3.4 |
| | 1,585 |
| | 3.3 |
|
| Other States | 906 |
| | 1.8 |
| | 883 |
| | 1.8 |
| | 871 |
| | 1.9 |
|
| Total | $ | 47,828 |
| | 100.0 | % | | $ | 47,540 |
| | 100.0 | % | | $ | 47,557 |
| | 100.0 | % |
Net Investment Income. Net investment income decreased in 2017 as our average invested assets decreased as did the overall portfolio yield by 13 basis points from 2016 as higher yielding securities matured and lower rate securities are purchased in the current interest rate environment.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Net investment income for our home service insurance segment is summarized as follows:
|
| | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands, except for %) |
| Net investment income | $ | 13,132 |
| | 13,705 |
| | 14,063 |
|
| Average invested assets, at amortized cost | 289,634 |
| | 294,132 |
| | 300,174 |
|
| Annualized yield on average invested assets | 4.53 | % | | 4.66 | % | | 4.68 | % |
Realized Investment Gains (Losses), Net. A gain of $1.1 million was recognized on the sale of real estate property in the current year. In 2017, 2016 and 2015, this segment recognized losses on other-than-temporary impairments totaling $0.2 million, $2.0 million and $1.6 million, respectively, related to bond and mutual fund holdings.
Claims and Surrenders. A breakout of claims and surrender benefits is detailed below.
|
| | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Death claims | $ | 17,243 |
| | 17,218 |
| | 17,794 |
|
| Surrender expenses | 2,917 |
| | 3,184 |
| | 2,915 |
|
| Endowment benefits | 17 |
| | 13 |
| | 17 |
|
| Matured endowments | 518 |
| | 455 |
| | 469 |
|
| Property claims | 1,744 |
| | 1,941 |
| | 1,689 |
|
| Accident and health benefits | 56 |
| | 98 |
| | 63 |
|
| Other policy benefits | 17 |
| | 18 |
| | 20 |
|
| Total claims and surrenders | $ | 22,512 |
| | 22,927 |
| | 22,967 |
|
in our Life Insurance segment were related to payment of surrender benefits and matured endowment benefits. Policy surrenders and matured endowment benefits increased in 2023 as compared to 2022. Many of our endowment policies are reaching their contractual maturity dates and thus matured endowment benefits are increasing. We expect this trend to continue over the next few years. Policy surrenders increased partially due to surrenders related to international policies that are nearing maturity as well as policies that have passed their surrender charge period. Death claims expense was relatively flatbenefits decreased in 20172023 compared to 2016, after decreasing in 2016 from 2015. Death claims can fluctuate from year to year.2022. Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.
Increase (Decrease) in Future Policy Benefit Reserves. The change in future policy benefit reserves decreased in each of the 3-year periods ending December 31, 2023 as a result of reserves released from higher matured endowment and surrender benefits, which decrease was partially offset by increases in insurance issued and increases in our in force block of business.
Policyholder Liability Remeasurement (Gain) Loss. The policyholder liability remeasurement loss increased from 2021 to 2022 and again to 2023 due to unfavorable surrender experience.
Other General Expenses. General expenses increased by 3% in this segment in 2023 compared to 2022 due primarily to expenses related to costs associated with the re-launch of our domestic life insurance business which is a strategic growth initiative.
HOME SERVICE INSURANCE
Our Home Service Insurance products consist primarily of small face amount ordinary whole life and pre-need policies, which are designed to fund final expenses for the insured, primarily consisting of funeral and burial costs. In 2021, we added a new whole life product to this market that has higher allowable face values and a new critical illness insurance product. In June 2023, we stopped selling property insurance.
December 31, 2023 | 10-K 42
Detailed results of operations for the Home Service Insurance segment for the periods indicated are as follows:
| | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Revenues: | | | | | |
| Premiums: | | | | | |
| Life insurance | $ | 43,185 | | | 43,430 | | | 44,243 | |
| Accident and health insurance | 916 | | | 781 | | | 750 | |
| Property insurance | 793 | | | 4,850 | | | 3,677 | |
| Net investment income | 13,832 | | | 13,632 | | | 13,224 | |
| Investment related gains (losses), net | 522 | | | (1,277) | | | 618 | |
| Other income | 17 | | | 1 | | | 7 | |
| Total revenues | 59,265 | | | 61,417 | | | 62,519 | |
| Benefits and expenses: | | | | | |
| Insurance benefits paid or provided: | | | | | |
| Claims and surrenders | 22,565 | | | 24,359 | | | 28,345 | |
| Increase in future policy benefit reserves | 5,307 | | | 910 | | | 1,951 | |
| Policyholder liability remeasurement (gain) loss | 307 | | | 1,156 | | | 605 | |
| Policyholders' dividends | 30 | | | 23 | | | 40 | |
| Total insurance benefits paid or provided | 28,209 | | | 26,448 | | | 30,941 | |
| Commissions | 16,345 | | | 16,191 | | | 16,716 | |
| Other general expenses | 16,690 | | | 16,444 | | | 14,739 | |
| Capitalization of deferred policy acquisition costs | (8,050) | | | (6,957) | | | (6,566) | |
| Amortization of deferred policy acquisition costs | 2,565 | | | 2,230 | | | 1,909 | |
| Amortization of cost of insurance acquired | 493 | | | 498 | | | 607 | |
| Total benefits and expenses | 56,252 | | | 54,854 | | | 58,346 | |
| Income (loss) before federal income taxes | $ | 3,013 | | | 6,563 | | | 4,173 | |
In our Home Service Insurance segment, our net income before federal income taxes decreased by $3.6 million from 2022 to 2023 due primarily to the impact of ceasing our property insurance operations as of June 30, 2023, described above, and higher future policy benefit reserves. Net income before federal income taxes increased from 2021 to 2022 due primarily to lower death claims benefits and fewer hurricane property claims partially offset by investment related losses due to the changes in the fair value of our equity securities and higher other general operating expenses in 2022.
Premiums. Total premium revenue declined in 2023 compared to 2022 due primarily to the impact of ceasing our property insurance operations as of June 30, 2023 and slightly lower life renewal premiums due to lower persistency. Our first year premiums increased 4% in 2023 compared to 2022.
December 31, 2023 | 10-K 43
Claims and Surrenders. Claims and surrender benefits, which are the largest portion of our expenses in the Home Service Insurance segment are summarized below:
| | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Claims and surrenders: | | | | | |
| Death claim benefits | $ | 17,655 | | | 19,667 | | | 23,220 | |
| Surrender benefits | 3,394 | | | 3,189 | | | 2,199 | |
| Endowment benefits | 7 | | | 13 | | | 7 | |
| Matured endowment benefits | 603 | | | 581 | | | 595 | |
| Property claims | 699 | | | 780 | | | 2,112 | |
| Accident and health benefits | 193 | | | 115 | | | 197 | |
| Other policy benefits | 14 | | | 14 | | | 15 | |
| Total claims and surrenders | $ | 22,565 | | | 24,359 | | | 28,345 | |
The majority of claims and surrender benefits in our Home Service Insurance segment are death claim benefits. Death claim benefits decreased 10% in 2023 compared to 2022 due to a lower volume of reported claims. We believe death claims in 2021, and to a lesser extent in 2022 were impacted by COVID-19. Mortality experience is closely monitored by the Company and can fluctuate.
Surrender expenses are consistent with actuarial expectations.
Property claims decreasedbenefits increased in 20172023 compared to 2016 related to reported weather claims. The large increase2022. We believe the impact of inflation and curtailment of COVID-19 relief government aid in 2016 was primarily due to tornado activity in Louisiana earlier in the year and high winds that accompanied the severe flooding in Louisiana.2022 is negatively impacting persistency.
Increase in Future Policy Benefit Reserves. The changeReserves. Future policy benefit reserves increased in reserves increase is related2023 compared to the increase in current year sales.2022 due to lower death claims.
Commissions. Commission expense was comparable for all three periods presented based upon fluctuations in premiums collected.
Other General Expenses. ExpensesExpenses. Other general expenses increased 53.4% due primarily to increased company-allocated expenses based upon our annual time study and related to legal, consulting and audit fees, as well as higher salaries, bonuses and related employee benefits paid to top executives. Expenses are allocated by segment based upon an annual expense study performed by the Company. We recorded expensesslightly in 2017 related to the write-off of our Home Service goodwill value of $4.6 million. The 2017 expenses related to the IRC tax compliance issue for life and annuity insurance remediation expense remained flat2023 compared to the 2016 expense, while in 2016 the expense decreased $1.7 million2022 due to further refinement of our estimates.
Capitalization and Amortization of DAC. DAC capitalization is directly correlated to fluctuations in first year commissions. Amortization of DAC increased from 2016 to 2017 by 7.5% and by 21.1% from 2015 to 2016. This increase in
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
2016 was primarily due to an increase in surrenders, although both 2016 and 2017 increases reflect the impact of updated annual U.S. GAAP assumptions as well. We monitor lapse rates as a key component of our insurance operations. higher employee health benefit costs.
Other Non-Insurance OperationsNON-INSURANCE ENTERPRISES
| | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Income (loss) before federal income tax | $ | (5,460) | | | (4,609) | | | (5,570) | |
This operating unit represents the administrative support entities to the insurance operations whose revenues are primarily intercompany and have been eliminated in consolidation under U.S. GAAP, which typically results in a segment loss. Revenue in this operating unit consists primarily of net investment income and investment related gains or losses, while expenses consist of other general expenses related to corporate functions. The loss reported for 2023 increased as other general expenses increased for reasons discussed above.
InvestmentsINVESTMENTS
Financial stability and capital preservationOur investments are important investment considerations for the Company. A primary investment goal is the conservation of assets due to the long-term nature of a significant portionan integral part of our liabilities.business success, as we invest the majority of premiums collected to pay for future benefits and rely on net investment income for our ongoing operations. The administration of our investment portfoliosportfolio is handled internally,by our management and a third-party investment manager, pursuant to board-approvedBoard-approved investment guidelines, with all trading activity approved byguidelines. As a committeeprimary goal of each entity’s respective boardstate insurance regulation is to ensure the solvency of directors. The guidelines used require that securities are of high quality and investment grade. Statean insurance company, state insurance statutes prescribestrictly regulate the quality and percentage of the various types of investments that may be made by insurance companies and generally permit investmentcompanies. The majority of investments are required to be in qualified state, municipal, federal and foreign government obligations and high quality corporate bonds,bonds. To a lesser extent, we may invest in preferred and common stock, limited partnerships and mortgage loansloans. In executing investing activities our management and real estate within certain specified percentages. The assets selectedthird-party investment manager are generally intended to mature in accordance with the average maturity of the insurance productsincorporating environmental, social and to provide the cash flow for our insurance company subsidiaries to meetgovernance factors into their respective policyholder obligations. Due
December 31, 2023 | 10-K 44
investment processes as appropriate. These factors include investing in opportunities to the prolonged low interest rate environment, we have intentionally shortenedhelp mitigate climate change by pursuing relevant investments across asset classes.
Our cash and invested assets at December 31, 2023 were $1.4 billion, of which 87% was invested in fixed maturity securities, all of which are classified as available-for-sale. We closely monitor the duration of our asset portfolio to capitalize on newfixed maturity investments, and investment purchases as interest rates rise. As rates rise, we planand sales are executed with the objective of having adequate funds available to extend assets durations and increase investment yields.satisfy our insurance obligations.
The following table shows the carrying value of our investments by investment category and cash and cash equivalents, andalong with the percentage of each to total invested assets.
| | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, (In thousands, except for %) | 2023 | | % | | 2022 | | % |
| Cash and invested assets: | | | | | | | |
| Fixed maturity securities: | | | | | | | |
| U.S. Treasury and U.S. Government-sponsored enterprises | $ | 9,715 | | | 0.7 | % | | $ | 13,278 | | | 1.0 | % |
| Corporate | 787,607 | | | 55.1 | | | 715,645 | | | 52.5 | |
Municipal bonds (1) | 287,231 | | | 20.1 | | | 307,358 | | | 22.5 | |
Mortgage-backed (2) | 97,294 | | | 6.8 | | | 99,995 | | | 7.3 | |
| Asset-backed | 57,134 | | | 4.0 | | | 43,242 | | | 3.2 | |
| Foreign governments | — | | | — | | | 101 | | | — | |
| Total fixed maturity securities | 1,238,981 | | | 86.7 | | | 1,179,619 | | | 86.5 | |
| Short-term investments | — | | | — | | | 1,241 | | | 0.1 | |
| Cash and cash equivalents | 26,997 | | | 1.8 | | | 22,973 | | | 1.7 | |
| Other investments: | | | | | | | |
| Policy loans | 75,359 | | | 5.3 | | | 78,773 | | | 5.8 | |
| Equity securities | 5,282 | | | 0.4 | | | 11,590 | | | 0.8 | |
| Other long-term investments | 82,725 | | | 5.8 | | | 69,558 | | | 5.1 | |
| Total cash and invested assets | $ | 1,429,344 | | | 100.0 | % | | $ | 1,363,754 | | | 100.0 | % |
|
| | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | Carrying Value | | % of Total Carrying Value | | Carrying Value | | % of Total Carrying Value |
| | (In thousands, except for %) |
| Fixed maturity securities: | | | | | | | |
| U.S. Treasury and U.S. Government-sponsored enterprises | $ | 16,304 |
| | 1.2 | % | | $ | 22,695 |
| | 1.8 | % |
| Corporate | 409,610 |
| | 30.3 |
| | 306,134 |
| | 24.3 |
|
| Municipal bonds (1) | 780,557 |
| | 57.7 |
| | 797,240 |
| | 63.4 |
|
| Mortgage-backed (2) | 1,978 |
| | 0.1 |
| | 2,477 |
| | 0.2 |
|
| Foreign governments | 121 |
| | — |
| | 126 |
| | — |
|
| Total fixed maturity securities | 1,208,570 |
| | 89.3 |
| | 1,128,672 |
| | 89.7 |
|
| Short-term investments | — |
| | — |
| | 508 |
| | — |
|
| Cash and cash equivalents | 46,064 |
| | 3.4 |
| | 35,510 |
| | 2.8 |
|
| Other investments: | |
| | | | |
| | |
| Policy loans | 73,735 |
| | 5.5 |
| | 66,672 |
| | 5.3 |
|
| Equity securities | 16,164 |
| | 1.2 |
| | 18,159 |
| | 1.5 |
|
| Mortgage loans | 195 |
| | — |
| | 232 |
| | — |
|
| Real estate and other long-term investments | 7,452 |
| | 0.6 |
| | 7,896 |
| | 0.7 |
|
| Total cash, cash equivalents and investments | $ | 1,352,180 |
| | 100.0 | % | | $ | 1,257,649 |
| | 100.0 | % |
(1) Includes $244.3$124.2 million and $273.4$133.2 million of securities guaranteed by third parties for the years endedat December 31, 20172023 and 2016,2022, respectively.
(2) Includes $1.8$96.1 million and $2.2$98.8 million of U.S. Government agencies and government-sponsored enterprise for the years endedenterprises at December 31, 20172023 and 2016,2022, respectively.
The Company has increased investments in corporatecarrying value of the Company’s fixed maturity securities as municipalinvestment portfolio at December 31, 2023 was $1.24 billion compared to $1.18 billion at December 31, 2022. As discussed above, this increase primarily reflects the impact of interest rate sensitivity on the fair value of our fixed maturity securities. The distribution of the credit ratings of our portfolio of fixed maturity securities matured inby carrying value as of December 31, 2023 did not materially change from December 31, 2022 – the current year.weighted average was “A” at both dates.
Cash and cash equivalents increased as of December 31, 2023 compared to December 31, 2022 and fluctuates from period-to-period primarily due to the timing of operating and investing activities.
Equity securities decreased as of December 31, 2023 compared to December 31, 2022 as we reduced our mutual fund exposure to take advantage of higher fixed maturity yields.
Other long-term investments increased to $82.7 million as of December 31, 2023, as compared to $69.6 million as of December 31, 2022 due to additional funding of our limited partnership investments.
42December 31, 2023 | 10-K 45
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
At December 31, 2017, investments in fixed maturity and equity securities were 90.5% of our total cash, cash equivalents and investments. All of our fixed maturities were classified as either available-for-sale or held-to-maturity securities at December 31, 2017 and 2016. We had no fixed maturity or equity securities that were classified as trading securities at December 31, 2017 or 2016.
The following table shows annualized investment yields by segment operationsand on a consolidated basis as of December 31 for each year presented.
| | | | | | | | | | | | | | | | | | | | |
| Year | | Life
Insurance | | Home
Service Insurance | | Consolidated |
| 2023 | | 4.58 | % | | 4.53 | % | | 4.56 | % |
| 2022 | | 4.40 | % | | 4.48 | % | | 4.40 | % |
| 2021 | | 4.26 | % | | 4.37 | % | | 4.24 | % |
|
| | | | | | | | | |
| | | Business Segment |
| Year | | Life Insurance | | Home Service | | Consolidated |
| 2017 | | 4.33 | % | | 4.53 | % | | 4.31 | % |
| 2016 | | 4.28 | % | | 4.66 | % | | 4.28 | % |
| 2015 | | 4.41 | % | | 4.68 | % | | 4.38 | % |
Yields on investmentinvested assets vary between segment operations due to different portfolio mixes and durations in each segment's portfolio. The consolidated yields include our other non-insurance enterprises. The annualized yield increased across our segments in 2023 compared to 2022 resulting primarily from the segments. The life segment previously invested more in U.S. Government securities, however over the past few years it has invested in municipal and corporate issuers andrising interest rate environment.
Credit quality is now more similar to the home service segment which has had concentrations primarily in the municipal and corporate sectors.
an important feature of our investment guidelines for our fixed maturity securities. Credit ratings reported for the periods indicated are assigned by a Nationally Recognized Statistical Rating Organization ("NRSRO") such as Moody’s Investors Service, Standard & Poor’s and Fitch Ratings. A credit rating assigned by a NRSRO is a quality basedquality-based rating, with AAA representing the highest quality and D the lowest, with BBB and above being considered investment grade. In addition,If there is no NRSRO rating, the Company may use credit ratings of the National Association of Insurance Commissioners ("NAIC")NAIC Securities Valuation Office ("SVO") as assigned, if there is no NRSRO rating.assigned. Securities rated by the SVO are grouped in the equivalent NRSRO category as stated by the SVO, and securities that are not rated by a NRSRO are included in the "other" category.
The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value.
| | | | | | | | | | | | | | | | | | | | | | | |
December 31,
(In thousands, except for %) | 2023 | | % | | 2022 | | % |
| AAA | $ | 36,233 | | | 2.9 | % | | $ | 36,254 | | | 3.1 | % |
| AA | 337,841 | | | 27.3 | | | 355,615 | | | 30.1 | |
| A | 394,158 | | | 31.8 | | | 331,840 | | | 28.2 | |
| BBB | 463,581 | | | 37.4 | | | 440,457 | | | 37.3 | |
| BB and other | 7,168 | | | 0.6 | | | 15,453 | | | 1.3 | |
| Totals | $ | 1,238,981 | | | 100.0 | % | | $ | 1,179,619 | | | 100.0 | % |
|
| | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | Carrying Value | | % of Total Carrying Value | | Carrying Value | | % of Total Carrying Value |
| | (In thousands, except for %) |
| AAA | $ | 93,911 |
| | 7.8 | % | | $ | 88,853 |
| | 7.9 | % |
| AA | 488,675 |
| | 40.4 |
| | 554,211 |
| | 49.1 |
|
| A | 325,476 |
| | 27.0 |
| | 238,350 |
| | 21.2 |
|
| BBB | 266,461 |
| | 22.0 |
| | 215,499 |
| | 19.1 |
|
| BB and other | 34,047 |
| | 2.8 |
| | 31,759 |
| | 2.7 |
|
| Totals | $ | 1,208,570 |
| | 100.0 | % | | $ | 1,128,672 |
| | 100.0 | % |
The Company made new investments in A and BBB rated corporateinvestment grade bonds during 2017.2023. Non-investment grade securities are the result of downgrades of issuers or securities acquired during acquisitions of other companies, as the Company doeshas not purchasepurchased below investment grade securities.
December 31, 2023 | 10-K 46
As of December 31, 2017,2023, the Company held municipal fixed maturity securities that include third partythird-party guarantees. Detailed below is a presentation by NRSROcredit rating of our municipal holdings by funding type.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 |
| | General Obligation | | Special Revenue | | Other | | Total | | % Based on
Amortized
Cost |
| (In thousands, except for %) | Fair
Value | | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value | | Amortized
Cost | |
| Municipal fixed maturity securities shown including third-party guarantees | | | | |
| AAA | $ | 13,986 | | | 13,921 | | | 6,783 | | | 6,892 | | | — | | | — | | | 20,769 | | | 20,813 | | | 6.6 | % |
| AA | 43,865 | | | 44,132 | | | 109,319 | | | 124,558 | | | 6,367 | | | 6,554 | | | 159,551 | | | 175,244 | | | 55.8 | |
| A | 4,145 | | | 4,462 | | | 88,420 | | | 98,623 | | | 4,411 | | | 4,397 | | | 96,976 | | | 107,482 | | | 34.2 | |
| BBB | 617 | | | 652 | | | 4,878 | | | 5,323 | | | 1,387 | | | 1,450 | | | 6,882 | | | 7,425 | | | 2.4 | |
| BB and other | 2,983 | | | 3,169 | | | 70 | | | 70 | | | — | | | — | | | 3,053 | | | 3,239 | | | 1.0 | |
| Total | $ | 65,596 | | | 66,336 | | | 209,470 | | | 235,466 | | | 12,165 | | | 12,401 | | | 287,231 | | | 314,203 | | | 100.0 | % |
| Municipal fixed maturity securities shown excluding third-party guarantees | | | | |
| | | | | | | | | | | | | | | | | |
| AA | $ | 32,442 | | | 32,513 | | | 33,874 | | | 37,610 | | | 3,886 | | | 3,822 | | | 70,202 | | | 73,945 | | | 23.5 | |
| A | 16,745 | | | 17,073 | | | 98,202 | | | 108,317 | | | 5,890 | | | 6,129 | | | 120,837 | | | 131,519 | | | 41.9 | |
| BBB | 3,009 | | | 3,268 | | | 18,680 | | | 20,356 | | | — | | | — | | | 21,689 | | | 23,624 | | | 7.5 | |
| BB and other | 13,400 | | | 13,482 | | | 58,714 | | | 69,183 | | | 2,389 | | | 2,450 | | | 74,503 | | | 85,115 | | | 27.1 | |
| Total | $ | 65,596 | | | 66,336 | | | 209,470 | | | 235,466 | | | 12,165 | | | 12,401 | | | 287,231 | | | 314,203 | | | 100.0 | % |
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Municipal fixed maturity securities shown including third party guarantees
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | General Obligation | | Special Revenue | | Other | | Total | | % Based on Amortized Cost |
| | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | |
| | (In thousands, except for %) |
| AAA | $ | 58,974 |
| | 57,134 |
| | 32,658 |
| | 31,978 |
| | — |
| | — |
| | 91,632 |
| | 89,112 |
| | 11.7 | % |
| AA | 169,760 |
| | 165,097 |
| | 267,102 |
| | 259,566 |
| | 24,570 |
| | 23,604 |
| | 461,432 |
| | 448,267 |
| | 58.7 |
|
| A | 25,955 |
| | 25,521 |
| | 158,969 |
| | 151,185 |
| | 12,485 |
| | 11,780 |
| | 197,409 |
| | 188,486 |
| | 24.7 |
|
| BBB | 7,428 |
| | 7,602 |
| | 22,038 |
| | 21,718 |
| | 1,995 |
| | 2,014 |
| | 31,461 |
| | 31,334 |
| | 4.1 |
|
| BB and other | 3,403 |
| | 3,689 |
| | 2,176 |
| | 2,702 |
| | — |
| | — |
| | 5,579 |
| | 6,391 |
| | 0.8 |
|
| Total | $ | 265,520 |
| | 259,043 |
| | 482,943 |
| | 467,149 |
| | 39,050 |
| | 37,398 |
| | 787,513 |
| | 763,590 |
| | 100.0 | % |
Municipal fixed maturity securities shown excluding third party guarantees
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | General Obligation | | Special Revenue | | Other | | Total | | % Based on Amortized Cost |
| | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | |
| | (In thousands, except for %) |
| AAA | $ | 24,012 |
| | 23,687 |
| | 29,958 |
| | 29,439 |
| | — |
| | — |
| | 53,970 |
| | 53,126 |
| | 7.0 | % |
| AA | 156,870 |
| | 152,548 |
| | 196,731 |
| | 191,553 |
| | 16,667 |
| | 15,780 |
| | 370,268 |
| | 359,881 |
| | 47.2 |
|
| A | 47,556 |
| | 46,722 |
| | 191,794 |
| | 182,679 |
| | 15,249 |
| | 14,503 |
| | 254,599 |
| | 243,904 |
| | 31.9 |
|
| BBB | 12,495 |
| | 12,477 |
| | 34,365 |
| | 33,933 |
| | 1,995 |
| | 2,014 |
| | 48,855 |
| | 48,424 |
| | 6.3 |
|
| BB and other | 24,587 |
| | 23,609 |
| | 30,095 |
| | 29,545 |
| | 5,139 |
| | 5,101 |
| | 59,821 |
| | 58,255 |
| | 7.6 |
|
| Total | $ | 265,520 |
| | 259,043 |
| | 482,943 |
| | 467,149 |
| | 39,050 |
| | 37,398 |
| | 787,513 |
| | 763,590 |
| | 100.0 | % |
The table below shows the categories in which the Company held investments in special revenue bonds that were greater than 10% of fair value based upon the Company's portfolio of municipal fixed maturity securities at December 31, 2017, as shown in the table below.2023.
| | | | | | | | | | | | | | | | | | | | |
| (In thousands, except for %) | | Fair
Value | | Amortized Cost | | % of Total Fair Value |
| Education | | $ | 47,659 | | | 53,244 | | | 16.6 | % |
| Utilities | | 42,576 | | | 46,035 | | | 14.8 | % |
| Transportation | | 34,068 | | | 40,724 | | | 11.9 | % |
| | | | | | |
|
| | | | | | | | | | |
| Bond Issue Activity | | Fair Value | | Amortized Cost | | % of Total Fair Value |
| | | (In thousands) | | |
| Utilities | | $ | 159,716 |
| | 152,816 |
| | 20.3 | % |
| Education | | 113,645 |
| | 109,187 |
| | 14.4 | % |
| General Obligations | | 84,164 |
| | 81,883 |
| | 10.7 | % |
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
The tables below represent the Company’s detailed exposure toCompany's municipal holdings in Louisiana,are spread across many states. However, municipal fixed maturity securities from Texas and Florida, whichCalifornia comprise the most significant state concentrationsconcentration of the total municipal fixed maturityholdings portfolio as of December 31, 2017.2023.
|
| | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | General Obligation | | Special Revenue | | Total |
| | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost |
| | (In thousands) |
| Louisiana securities including third party guarantees | | | | | | | | | | | |
| AA | $ | 7,016 |
| | 6,766 |
| | 13,454 |
| | 13,007 |
| | 20,470 |
| | 19,773 |
|
| A | 5,344 |
| | 5,144 |
| | 6,579 |
| | 6,454 |
| | 11,923 |
| | 11,598 |
|
| BB and other | — |
| | — |
| | 362 |
| | 358 |
| | 362 |
| | 358 |
|
| Total | $ | 12,360 |
| | 11,910 |
| | 20,395 |
| | 19,819 |
| | 32,755 |
| | 31,729 |
|
| | | | | | | | | | | | |
| Louisiana securities excluding third party guarantees | |
| | |
| | |
| | |
| | |
| | |
|
| AA | $ | 4,915 |
| | 4,714 |
| | 8,493 |
| | 8,238 |
| | 13,408 |
| | 12,952 |
|
| A | 7,445 |
| | 7,196 |
| | 10,194 |
| | 9,949 |
| | 17,639 |
| | 17,145 |
|
| BB and other | — |
| | — |
| | 1,708 |
| | 1,632 |
| | 1,708 |
| | 1,632 |
|
| Total | $ | 12,360 |
| | 11,910 |
| | 20,395 |
| | 19,819 |
| | 32,755 |
| | 31,729 |
|
The Company invests in municipal securities of issuers in the state of Louisianaholds 22% and receives a credit that reduces its premium tax liability in that state. At December 31, 2017, total holdings of municipal securities in Louisiana represented 4.2% of all municipal holdings based upon fair value.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
The Company also holds 22.8%15% of its municipal holdings in Texas issuers.
|
| | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | General Obligation | | Special Revenue | | Total |
| | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost |
| | (In thousands) |
| Texas securities including third party guarantees | | | | | | | | | | | |
| AAA | $ | 56,936 |
| | 55,146 |
| | 15,042 |
| | 14,470 |
| | 71,978 |
| | 69,616 |
|
| AA | 52,093 |
| | 51,298 |
| | 30,740 |
| | 29,867 |
| | 82,833 |
| | 81,165 |
|
| A | 200 |
| | 199 |
| | 16,208 |
| | 15,549 |
| | 16,408 |
| | 15,748 |
|
| BBB | — |
| | — |
| | 7,015 |
| | 6,601 |
| | 7,015 |
| | 6,601 |
|
| BB and other | — |
| | — |
| | 1,294 |
| | 1,820 |
| | 1,294 |
| | 1,820 |
|
| Total | $ | 109,229 |
| | 106,643 |
| | 70,299 |
| | 68,307 |
| | 179,528 |
| | 174,950 |
|
| | | | | | | | | | | | |
| Texas securities excluding third party guarantees | |
| | |
| | |
| | |
| | |
| | |
|
| AAA | $ | 21,975 |
| | 21,699 |
| | 12,341 |
| | 11,931 |
| | 34,316 |
| | 33,630 |
|
| AA | 78,092 |
| | 76,112 |
| | 21,343 |
| | 20,705 |
| | 99,435 |
| | 96,817 |
|
| A | 8,080 |
| | 7,828 |
| | 25,605 |
| | 24,710 |
| | 33,685 |
| | 32,538 |
|
| BBB | — |
| | — |
| | 7,578 |
| | 7,147 |
| | 7,578 |
| | 7,147 |
|
| BB and other | 1,082 |
| | 1,004 |
| | 3,432 |
| | 3,814 |
| | 4,514 |
| | 4,818 |
|
| Total | $ | 109,229 |
| | 106,643 |
| | 70,299 |
| | 68,307 |
| | 179,528 |
| | 174,950 |
|
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
The Company also holds 12.0% of its municipal holdings in Florida issuers.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | General Obligation | | Special Revenue | | Other | | Total |
| | Fair
Value | | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value | | Amortized
Cost |
| | (In thousands) |
| Florida securities including third party guarantees | | | | | | | | | | | | | | | |
| AAA | $ | 524 |
| | 511 |
| | 3,667 |
| | 3,568 |
| | — |
| | — |
| | 4,191 |
| | 4,079 |
|
| AA | — |
| | — |
| | 59,810 |
| | 58,543 |
| | 3,733 |
| | 3,760 |
| | 63,543 |
| | 62,303 |
|
| A | — |
| | — |
| | 14,062 |
| | 13,647 |
| | 12,485 |
| | 11,780 |
| | 26,547 |
| | 25,427 |
|
| BB and other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 524 |
| | 511 |
| | 77,539 |
| | 75,758 |
| | 16,218 |
| | 15,540 |
| | 94,281 |
| | 91,809 |
|
| | | | | | | | | | | | | | | | |
| Florida securities excluding third party guarantees | | | | | | | | | | | | | | | |
| AAA | $ | 524 |
| | 511 |
| | 3,667 |
| | 3,568 |
| | — |
| | — |
| | 4,191 |
| | 4,079 |
|
| AA | — |
| | — |
| | 49,908 |
| | 48,871 |
| | 3,733 |
| | 3,760 |
| | 53,641 |
| | 52,631 |
|
| A | — |
| | — |
| | 21,434 |
| | 20,902 |
| | 12,485 |
| | 11,780 |
| | 33,919 |
| | 32,682 |
|
| BB and other | — |
| | — |
| | 2,530 |
| | 2,417 |
| | — |
| | — |
| | 2,530 |
| | 2,417 |
|
| Total | $ | 524 |
| | 511 |
| | 77,539 |
| | 75,758 |
| | 16,218 |
| | 15,540 |
| | 94,281 |
| | 91,809 |
|
December 31, 2023. There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal portfolio as of December 31, 2017.2023.
Impairment Considerations Related to Investments in Fixed Maturity and Equity Securities
We evaluate the carrying value of our fixed maturity and equity securities at least quarterly.The Company monitors all debt and equity securities on an on-going basis relative to changes in credit ratings, market prices, earnings trends and financial performance, in addition to specific region or industry reviews. The assessment of whether impairments have occurred is based on a case-by-case evaluation of underlying reasons for the decline in fair value. The Company determines other-than-temporary impairment (“OTTI”) by reviewing all relevant evidence related to the specific security issuer as well as the Company's intent to sell the security, or if it is more likely than not that the Company would be required to sell a security before recovery of its amortized cost.
When an OTTI has occurred, the amount of the OTTI recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis, an OTTI is recognized in earnings equal to the entire difference between the investment's cost and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company is required to sell the security before recovery of its amortized cost basis, the OTTI will be separated into the following: a) the amount representing the credit loss; and b) the amount related to all other factors. The amount of the total OTTI related to the credit loss is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. The new amortized cost is not adjusted for subsequent recoveries in fair value.
December 31, 2023 | 10-K 47
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
The table below represents the Company's detailed exposure to municipal bond portfolio by credit rating in Texas at December 31, 2023.
In 2017 and 2016,
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | General Obligation | | Special Revenue | | Other | | Total |
| (In thousands) | Fair
Value | | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value | | Amortized
Cost |
| Texas securities including third-party guarantees | | | | | | | | |
| AAA | $ | 13,479 | | | 13,416 | | | 2,605 | | | 2,637 | | | — | | | — | | | 16,084 | | | 16,053 | |
| AA | 16,432 | | | 16,405 | | | 13,518 | | | 15,170 | | | — | | | — | | | 29,950 | | | 31,575 | |
| A | — | | | — | | | 17,225 | | | 21,896 | | | — | | | — | | | 17,225 | | | 21,896 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total | $ | 29,911 | | | 29,821 | | | 33,348 | | | 39,703 | | | — | | | — | | | 63,259 | | | 69,524 | |
| | | | | | | | | | | | | | | |
| Texas securities excluding third-party guarantees | | | | | | | | |
| | | | | | | | | | | | | | | |
| AA | $ | 25,058 | | | 24,971 | | | 4,496 | | | 4,979 | | | — | | | — | | | 29,554 | | | 29,950 | |
| A | 4,853 | | | 4,850 | | | 16,245 | | | 18,088 | | | — | | | — | | | 21,098 | | | 22,938 | |
| BBB | — | | | — | | | 3,243 | | | 3,416 | | | — | | | — | | | 3,243 | | | 3,416 | |
| BB and other | — | | | — | | | 9,364 | | | 13,220 | | | — | | | — | | | 9,364 | | | 13,220 | |
| Total | $ | 29,911 | | | 29,821 | | | 33,348 | | | 39,703 | | | — | | | — | | | 63,259 | | | 69,524 | |
The table below represents the Company's detailed exposure to municipal bond portfolio by credit rating in California at December 31, 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| General Obligation | | Special Revenue | | Other | | Total |
| (In thousands) | Fair
Value | | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value | | Amortized
Cost |
| California securities including third-party guarantees |
| | | | | | | | | | | | | | | |
| AA | $ | 2,076 | | | 2,055 | | | 29,662 | | | 35,281 | | | 2,480 | | | 2,732 | | | 34,218 | | | 40,068 | |
| A | 1,280 | | | 1,650 | | | 7,079 | | | 8,685 | | | — | | | — | | | 8,359 | | | 10,335 | |
| BBB | — | | | — | | | 570 | | | 570 | | | — | | | — | | | 570 | | | 570 | |
| | | | | | | | | | | | | | | |
| Total | $ | 3,356 | | | 3,705 | | | 37,311 | | | 44,536 | | | 2,480 | | | 2,732 | | | 43,147 | | | 50,973 | |
| California securities excluding third-party guarantees |
| | | | | | | | | | | | | | | |
| AA | $ | 456 | | | 445 | | | 4,524 | | | 5,259 | | | — | | | — | | | 4,980 | | | 5,704 | |
| A | 2,900 | | | 3,260 | | | 15,298 | | | 18,721 | | | 2,480 | | | 2,732 | | | 20,678 | | | 24,713 | |
| BBB | — | | | — | | | 3,275 | | | 3,514 | | | — | | | — | | | 3,275 | | | 3,514 | |
| BB and other | — | | | — | | | 14,214 | | | 17,042 | | | — | | | — | | | 14,214 | | | 17,042 | |
| Total | $ | 3,356 | | | 3,705 | | | 37,311 | | | 44,536 | | | 2,480 | | | 2,732 | | | 43,147 | | | 50,973 | |
IMPAIRMENT CONSIDERATIONS RELATED TO INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES
The Company recognized losses on other-than-temporary impairments totaling $0.2 million and $4.3 million, respectively, related to bond and mutual fund holdings. In 2015, impairments of $5.4 million were recorded as a result of our OTTI analysis. Based upon our analysis of whether declines in fair value below cost are temporary or other-than-temporary, management believes that our investments inassesses available-for-sale ("AFS") fixed maturity investments at December 31, 2017 weresecurities in an unrealized loss position for expected credit losses. The Company did not impaired, and no additional other-than-temporary losses were recorded. Informationrecord any credit valuation allowances on realized gains and losses by category, including OTTI, is set forthfixed maturity securities in our consolidated financial statements, Note 2 - "Investments."2023 or 2022.
Gross unrealized losses on AFS fixed maturities available-for-salematurity securities amounted to $3.1$158.7 million as of December 31, 20172023 and $9.2$205.3 million as of December 31, 2016.2022. This decrease in gross unrealized losses during 20172023 was a result of a decreasethe increase in average market interest rates at the interest rate environment in the fourth quarterend of 2016. Gross unrealized losses on equity securities were $6,0002023 as of compared to 2022.
December 31, 2017 and $0.1 million as2023 | 10-K 48
Information on both unrealized and realized gains and losses by category is set forth in Note 2. Investments of the notes to our consolidated financial statements, Note 2 - "Investments."statements.
ReinsuranceREINSURANCE
As is customary among insurance companies, our insurance company subsidiaries reinsure, with other companies, portions of the life insurance risks they underwrite. A primary purpose of reinsurance agreements is to enable an insurance company to reduce the amount of risk by reinsuring the amount exceeding the maximum amount the insurance company is willing to retain. Even though a portion of the risk may be reinsured, our insurance company subsidiaries remain liable to perform all the obligations imposed by the policies issued by them and could be liable if their reinsurers were unable to meet their obligations under the reinsurance agreements.
We believe we have established appropriate reinsurance coverage based upon our net retained insured liabilities compared to our surplus.
The effect of reinsurance on premiums is as follows.
| | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Direct premiums | $ | 170,557 | | | 176,973 | | | 178,806 | |
| Reinsurance assumed | 68 | | | 74 | | | 84 | |
| Reinsurance ceded | (3,586) | | | (3,333) | | | (4,162) | |
| Net premiums | $ | 167,039 | | | 173,714 | | | 174,728 | |
|
| | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Direct premiums | $ | 200,711 |
| | 201,074 |
| | 197,337 |
|
| Reinsurance assumed | 142 |
| | 151 |
| | 353 |
|
| Reinsurance ceded | (3,133 | ) | | (3,349 | ) | | (3,210 | ) |
| Net premiums | $ | 197,720 |
| | 197,876 |
| | 194,480 |
|
Our insurance subsidiaries monitor the solvency of their reinsurers in seeking to minimize the risk of loss in the event of default by a reinsurer. The primary reinsurers of our insurance subsidiaries are large, well-capitalized entities.entities who have ratings by A.M. Best Company ranging from A- (Excellent) to A+ (Superior).
The effect of reinsurance on life insurance in force is as follows.
| | | | | | | | | | | | | | | | | |
Years ended December 31,
(In millions) | 2023 | | 2022 | | 2021 |
| Direct written life insurance in force | $ | 4,922 | | | 4,797 | | | 4,628 | |
| Reinsurance assumed | 4 | | | 4 | | | 4 | |
| Reinsurance ceded | (620) | | | (544) | | | (466) | |
| Net life insurance in force | $ | 4,306 | | | 4,257 | | | 4,166 | |
|
| | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In millions) |
| Direct written life insurance inforce | $ | 4,968 |
| | 4,998 |
| | 4,958 |
|
| Reinsurance assumed | 6 |
| | 23 |
| | 37 |
|
| Reinsurance ceded | (504 | ) | | (523 | ) | | (517 | ) |
| Net life insurance inforce | $ | 4,470 |
| | 4,498 |
| | 4,478 |
|
Virtually all of the Company's non-credit accident and healthOur property insurance has been reinsured and is administered by Unified Life Insurance Company, an unaffiliated party. The reinsurance recoverables under this agreement are collateralized by assets held in a trust for the benefit of the reinsured policies.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
The Company monitors the credit ratings of our life and property reinsurers. The ratings by A.M. Best Company range from B+ (Good) to A+ (Superior).
company, SPFIC, hascarried first and second event catastrophe reinsurance coverage of $10.0$11.0 million per event and a retention level of $500,000$2.4 million per event.event until it ceased operations on June 30, 2023. Thus, SPFIC was responsible for the first $500,000$1.0 million of incurred claims and any claims in excess of $10.0$11.0 million per event. In addition, SPFIC shared responsibility with our reinsurers for up to an additional $1.4 million of incurred claims should total incurred claims reach $11.0 million per event.
LIQUIDITY AND CAPITAL RESOURCES
Below are SPFIC's responsibility. The reinsurance premium for first event catastrophe reinsurance was $781,000, $828,000our primary capital resources (based on carrying value) at each of December 31, 2023 and $873,000 in 2017, 2016 and 2015, respectively.2022.
| | | | | | | | | | | |
| (In thousands, except for %) | 2023 | | 2022 |
| Fixed maturity securities | $ | 1,238,981 | | | 1,179,619 | |
| Cash and cash equivalents | 26,997 | | | 22,973 | |
Liquidity and Capital Resources
Liquidity refers to a company's ability to generate sufficient cash flows to meet the needs of its operations. Liquidity is managed onIn the year ended December 31, 2023, our operations provided $22.1 million of net cash. We manage our insurance operations as described herein in order to ensure that we have stable and reliable sources of cash flows to meet obligationsour
December 31, 2023 | 10-K 49
obligations. We currently anticipate meeting our short-term and long-term cash needs with cash generated by our insurance operations and from our invested assets. From time-to-time we may raise capital by selling shares in our SIP (as defined below) and we may also access our Credit Facility if needed (also as described below).
PARENT COMPANY LIQUIDITY AND CAPITAL RESOURCES
Citizens is provided by a varietyholding company and has minimal operations of sources.
its own. Our assets consist of the capital stock of our subsidiaries, cash and investments. Our liquidity requirements are met primarily from two sources: cash we receive from our operating subsidiaries and our invested assets. We can obtain cash from our insurance subsidiaries in two ways - (1) from dividends, and (2) from fees received for providing administrative services under our service agreements. The ability to receive dividends from our insurance subsidiaries is limited by funds providedapplicable laws and regulations of Puerto Rico and our U.S. states of domicile (Colorado, Louisiana and Mississippi), which subject insurance operations to significant regulatory restrictions. As discussed in Part I, Item 1, Business and Part I. Item 1A. Risk Factors, these laws and regulations require, among other things, that our insurance subsidiaries maintain minimum capital and surplus requirements, which limit the amount of dividends that can be paid to Citizens. The regulations also require prior approval of our service agreements with the applicable regulatory authority in order to prevent insurance subsidiaries from operations. Premium depositsmoving large amounts of cash to the less regulated holding company.
In addition to the above-mentioned sources of cash, we offer a Stock Investment Plan ("SIP"), where investors, policyholders, independent contractors and agents, employees and directors can directly purchase our stock. At our option, purchases of stock under the SIP can be made from newly issued or treasury stock, rather than in the open market, in which case, we can raise capital by selling our shares.
On May 5, 2021, we entered into a 3-year Credit Facility with Regions Bank. See Part IV, Item 15, Note 7, Commitments and Contingencies in the notes to our consolidated financial statements, herein, for a description of the Credit Facility. The Credit Facility may provide additional liquidity to the Company. As of the date of this Form 10-K, we have not borrowed any money under the Credit Facility. We intend to renew the Credit Facility in May 2024.
INSURANCE COMPANY SUBSIDIARY LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of our insurance operations are primarily met by premium revenues, investment income and investment maturities are the primary sourcesor sales. Primary cash needs relate to payments of funds, whilepolicyholder benefits, investment purchases, policy benefits, and operating expenses are the primary uses of funds.expenses. Historically, cash flow from our operations has been sufficient to meet our cash needs. We historically have not had to liquidate a material amount of investments to providepay our expenses. We believe we have adequate capital resources to support the liquidity requirements of our insurance operations if the cash flow from our insurance operations is insufficient to meet our cash needs. See Contractual Obligations and there were noOff-balance Sheet Arrangements below for a discussion of known and estimated cash needs. Cash flow projections and cash flow tests under various market interest rate scenarios are performed annually to assist in evaluating liquidity issuesneeds and adequacy.
Cash from Operating Activities. Cash provided by or used in 2017operating activities is an important liquidity metric because it reflects, during a given period, the amount of cash generated that is available to pay our operating expenses, invest in our business or 2016. Ourmake strategic acquisitions. Cash provided by operating activities was $22.1 million and $56.9 million for the years ended December 31, 2023 and 2022, respectively. Cash provided by operations was higher in 2022 than 2023 primarily due to higher surrender and matured endowment benefits paid in 2023 as well as higher cash used for payment of commissions in 2023 due to increased first year sales.
Cash used in Investing Activities. We have traditionally also had significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows, for the most part, are reinvested in fixed income securities and to a lesser extent limited partnerships or other alternative investments. Net cash outflows from investing activities totaled $14.5 million and $60.7 million for the years ended December 31, 2023 and 2022, respectively. The investing activities fluctuate from period to period due to timing of securities activities such as calls and maturities and reinvestment of those funds. We purchased $72.8 million of fixed maturity securities and we also used $17.3 million to purchase other long-term investments in 2023. 88% of our investments consist of 74.6% of marketable debt securities and 1.2% of equityfixed maturity securities classified as available-for-sale that could be readily converted to cash for liquidity needs.
A
December 31, 2023 | 10-K 50
Trends, Demands and Restrictions on our Uses of Cash
Because claims and surrenders are our largest expense, our primary liquidity concern isconcerns include significantly higher than expected (i) early policyholder surrenders or (ii) death claims, as well as high levels of matured endowments in a short timeframe.
In order to mitigate the risk of an extraordinary level of early policyholder withdrawals. Wesurrenders, we include provisions withinin some of our insurance policies, such as surrender charges, that help limit and discourage early withdrawals. Since these contractual withdrawals, as well as the level of surrenders experienced,As previously discussed, surrender benefits have been largely consistent withhigher than usual the last several years as many of our assumptionspolicies have reached the age where surrender charges have expired and due to other reasons, like the loss of one of our biggest distributors in asset liability management,Venezuela in 2018. To the extent that early surrenders are higher than expected, our associatedliquidity could be negatively impacted. We continue to monitor surrenders and early withdrawals and have implemented retention initiatives over the last few years in an effort to prevent early surrenders and preserve cash outflows historically have not had an adverse impact on our overall liquidity. Individual life insurancewhere policies are less susceptiblesurrendered near maturity.
We experienced increased death claim benefits in 2021, primarily due to withdrawal than annuity reservesthe COVID-19 pandemic. Because the pandemic was an unforeseen event that was not priced into our product assumptions, to the extent we continue to experience increased claims and deposit liabilities because policyholders may incur surrender chargesthe associated death benefit payouts as a result of the COVID-19 pandemic or any other unforeseen event, our liquidity could be negatively impacted. Some of our policies include pandemic exclusions, and undergo a new underwriting processwe carry reinsurance to offset some of these risks. However, death claim benefits decreased by 13% in order2023 compared to obtain a new insurance policy. Cash flow projections and cash flow tests under various market interest rate scenarios are also performed annually to assist in evaluating liquidity needs and adequacy. 2022.
Our whole life and endowment products provide the policyholder with alternatives once the policy matures. The policyholdermatures - they can choose to take a lump sum payout or leave the money on deposit at interest with the Company. The Company has a significant amountAs of December 31, 2023, 35% of the Company's total insurance in force was in endowment products representing approximately 45-49%products. Approximately 18% of total inforce with older contracts sold historically thatthe endowments in force will begin reaching their maturities overmature in the next several years and policyholderfive years. Policyholder election behavior is not known. Ifunknown, but if too many policyholders elect lump sum distributions, the Company could be exposed to liquidity risk in years of high maturities. Meeting these distributions could require the Company to sell securitiesits investments at inopportune times to pay policyholder withdrawals. Alternatively, if the policyholderpolicyholders were to leave the money on deposit with the Company at interest, our profitability could be impacted if the product guaranteed rate is higher than the current market rate we can earnare earning on our investments. We currently anticipate that our available liquidity sourcesoperating cash flow and future cash flowscapital resources will be adequate to meet our needsneed for funds, but we will monitor closely our policyholder behavior patterns.
A large portionIn our CICA Domestic business, we pay advance commissions on some of our debt security investment portfolio will matureinsurance products, meaning we pay an agent their commission immediately upon sale of a policy, rather than "as earned", or when premiums are received by us. Because of this, another liquidity concern is the risk that rapid growth in first year sales of these products could create a significant increase in commission payments, which increases expenses and thus reduces our statutory capital until the next seven yearscommissions are recouped from premiums paid. CICA Domestic sales have increased significantly since the third quarter of 2023 and continue to grow rapidly. To mitigate this risk and strain on capital, we may seek options, such as reinsurance or loans at the holding company level (from the Credit Facility or otherwise) that would allow us to reduce the liquidity risk should CICA Domestic's required commission payments exceed current resources. If we are unable to purchase reinsurance protection in amounts that we consider sufficient or unable to borrow money to contribute capital to CICA Domestic, we could be called sooner asexposed to cash flow strain.
As discussed above, we wereare subject to significant call activity beginning in 2009 dueregulatory capital requirements that could affect the Company’s ability to the declining interest rate environment and we reinvested into shorter durations that are now approaching maturity. We will need to reinvest these maturing funds in the current interest rate environment. Our profitability could be negatively impacted depending on the market rates at the time of reinvestment. This could result in a decrease in our spread between our policy liability crediting rates and our investment earned rates. This could also negatively impact our liquidity.
Cash flowsaccess capital from our insurance operations historicallyor cause the Company to have been sufficient to meet current needs. Cash flows from operating activities were $93.0 million, $102.3 million and $87.2 million for the years ended December 31, 2017, 2016 and 2015, respectively. Operatingput additional cash flow declined in 2017, due primarilyour wholly-owned subsidiaries.
Our domestic companies are subject to additional audit fees related to the 2016 audit, internal audit support, higher legal and consulting fees and higher permanent executive salaries and policyholder benefits. We have traditionally also had significant cash flows from both scheduled and unscheduled fixed maturity security calls, maturities, redemptions, and prepayments, which totaled $84.0 million, $70.4 million and $95.6 million in 2017, 2016 and 2015. These cash flows, for the most part, are reinvested in fixed income securities. Net cash outflows from investment activity totaled $85.0 million, $152.1 million and $58.0 million for the years ended December 31, 2017, 2016 and 2015, respectively. The outflows from investing activities for the year ended December 31, 2017, primarily related to the investment of excess cash and cash equivalents generated from operations during 2017 and 2016, in addition to the investment of excess cash held at the end of 2015. The Company's cash flows from financing activities were $2.5 million in 2017, $2.5 million in 2016 and $3.0 million in 2015.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
See "Parent Company Liquidity and Capital Resources" below for a discussion of additional Parent Company liquidity.
In 2015, we determined that a portion of the life insurance and annuity policies issued by our subsidiary insurance companies failed to qualify for the favorable U.S. federal income tax treatment afforded by Sections 7702 and 72(s) of the Internal Revenue Code ("IRC") of 1986. As a result, we have established a liability reserve of $12.3 million, net of tax for probable liabilities and expenses associated with this tax compliance matter, which represents management’s best estimate and we have disclosed an estimated range related to probable liabilities and expenses of $5.9 million to $48.2 million, net of tax. This estimate and range includes projected toll charges and fees payable to the IRS, as well as estimated increased payout obligations to current and former holders of non-compliant domestic life insurance policies expected to result from remediation of those policies. The amount of our liabilities and expenses depends on a number of uncertainties, including the number of prior tax years for which we may be liable to the IRS, the number of domestic life insurance policies we will be required to remediate, and the methodology applicable to the calculation of the toll charge for non-compliant policies. Given the range of potential outcomes and the significant variables assumed in establishing our estimates, actual amounts incurred may exceed our reserve and also could exceed the high end of our estimated range of liabilities and expenses.
This tax compliance issue impacts our policyholders and their tax liabilities relative to these products that fail 7702 and 72(s) for those that will not be remediated. The exposure related to future sales or products in force is unknown at this time. Policyholders could decide to surrender their policies due to this issue which would subsequently result in higher cash outflows due to an increase in surrender activity.
The NAIC has established minimum capital requirements set by the NAIC in the form of RBC.risk-based capital ("RBC"). RBC considers the type of business written by an insurance company, the quality of its assets, and various other aspects of an insurance company's business to develop a minimum level of capital called "Authorized Control Level Risk-basedRisk-Based Capital" and compares this. This level of capital is then compared to an adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level risk-based capitalRBC fall below 200%, for our domestic companies, a series of remedial actions by the affected company would be required.
Additionally, we have a parental guarantee between Citizens and CICA Domestic, Citizens' wholly-owned subsidiary domiciled in Colorado, to maintain a RBC level above 350%. At December 31, 2017, all of2023, our domestic insurance subsidiaries were above the required minimum RBC levels.
In 2017,December 31, 2023 | 10-K 51
For CICA Domestic, commission advances are non-admitted assets, which increases required regulatory capital and reduces the excess capital available. As discussed above, management is investigating various options in order to reduce both regulatory capital and liquidity risk should the capital required to support this growth exceed current resources. Citizens made a $5.0 millionmay have to contribute capital contribution to CICA Life. InDomestic to maintain the third quarterrequired RBC ratio.
CICA International is a Puerto Rico domiciled company. The Insurance Code does not specifically set forth minimum capital and surplus standards, but rather requires that an insurer submit a business plan for approval to the OIC that includes proposed minimum capital and surplus. CICA International is required to maintain a minimum of 2017,$750,000 in capital and maintain a premium to surplus ratio of 7 to 1. CICA International began issuing new business as of January 1, 2023 and received the transfer of all of CICA Bermuda's in force insurance business as of August 31, 2023. On that date, Citizens contributed $250,000entered into a Keep Well Agreement with CICA International to replace the Keep Well Agreement that had been in place between Citizens and CICA Life Ltd.Bermuda. The Keep Well Agreement requires Citizens to capitalize a newly formed Bermuda entity, SPLIC contributed $250,000contribute up to $10 million in capital to MGLIC,CICA International as necessary to ensure that CICA International maintains at least either (i) 112% of its required ratio of premiums to capital and SPLIC declared a dividend payable to CICA of $395,000 which will be paid in 2018.
On November 1, 2016, SPLIC paid a $20.0 million extraordinary dividend to its parent, CICA. The dividend had no impact on the consolidated financial statementssurplus, or (ii) 200% of the Company and was used by CICA for general corporate purposes. The dividend was approved by the Louisiana Department of Insurance, SPLIC’s state of domicile. SPLIC’s risk-based capital after the dividend remains is in excess of minimum capital requirements.and surplus requirement, whichever is higher. The initial term of the Keep Well Agreement is 12 months. Since CICA International's capital exceeds both of the metrics, Citizens is not required to make a capital contribution. Any capital that Citizens is required to contribute could negatively impact the Company's capital resources and liquidity.
In
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
Our material cash requirements from known contractual and other obligations primarily relate to our policy liabilities. Expected timing of those payments are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year ended December 31, 2023 (In thousands) | | Total | | Less than 1
Year | | 1 to 3 Years | | 3 to 5 Years | | More than 5
Years |
| Contractual Obligations: | | | | | | | | | | |
| Investment commitments | | $ | 27,299 | | | 13,149 | | | 11,161 | | | 2,989 | | | — | |
| Real estate leases | | 9,073 | | | 1,283 | | | 2,489 | | | 2,638 | | | 2,663 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Future policy benefit reserves | | 1,403,558 | | | 56,026 | | | 131,253 | | | 103,253 | | | 1,113,026 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Policy claims payable | | 6,637 | | | 6,637 | | | — | | | — | | | — | |
| | | | | | | | | | |
| Total contractual obligations | | $ | 1,446,567 | | | 77,095 | | | 144,903 | | | 108,880 | | | 1,115,689 | |
Future Policy Benefit Reserves and Policy Claims Payable. As a life insurance company, the second quartervast majority of 2016, Citizens, Inc. purchased Class A Common shares from CTI with an approximate fair value of $0.8 million.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Contractual Obligations and Off-balance Sheet Arrangements
We have committed to the following contractual obligations as of December 31, 2017, with the payments due by the period indicated below:
|
| | | | | | | | | | | | | | | | |
| Contractual Obligation | | Total | | Less than 1 Year | | 1 to 3 Years | | 3 to 5 Years | | More than 5 Years |
| | | (In thousands) |
| Operating leases | | $ | 4,860 |
| | 1,858 |
| | 2,829 |
| | 173 |
| | — |
|
| Future policy benefit reserves: | | | | | | | | | | |
| Life insurance | | 1,133,875 |
| | 10,616 |
| | 41,511 |
| | 56,119 |
| | 1,025,629 |
|
| Annuities | | 73,688 |
| | 73,458 |
| | 13 |
| | 4 |
| | 213 |
|
| Accident and health | | 990 |
| | 109 |
| | 525 |
| | 66 |
| | 290 |
|
| Total future policy benefit reserves | | 1,208,553 |
| | 84,183 |
| | 42,049 |
| | 56,189 |
| | 1,026,132 |
|
| Policy claims payable: | | |
| | |
| | |
| | |
| | |
|
| Life insurance | | 7,943 |
| | 7,943 |
| | — |
| | — |
| | — |
|
| Accident and health | | 166 |
| | 166 |
| | — |
| | — |
| | — |
|
| Casualty | | 501 |
| | 501 |
| | — |
| | — |
| | — |
|
| Total policy claims payable | | 8,610 |
| | 8,610 |
| | — |
| | — |
| | — |
|
| Total purchase obligations | | — |
| | — |
| | — |
| | — |
| | — |
|
| Total contractual obligations | | $ | 1,222,023 |
| | 94,651 |
| | 44,878 |
| | 56,362 |
| | 1,026,132 |
|
Theour known cash requirements are for payments related to the future policy benefits and policy claims payable, reflectedwhich we estimated in the table above above. These amounts have been projected utilizing assumptions based upon our historical experience and anticipated future experience. We have reflected the majority of the obligation in the more than five-years category due to the age of the insured, years to policy maturity and our past experience with claims and surrenders.
The Company does not have off-balance sheet arrangements at December 31, 2017 and, therefore, does not expect any future effects on the Company's financial condition related to any such arrangements.2023. We do not utilize special purpose entities as investment vehicles, nor are theredo we invest in any such entities in which we have an investment that engagesengage in speculative activities of any nature, andnature. In addition, we do not use such investments to hedge our investment positions.
We have no known material cash requirements other than those described above. Parent Company Liquidity and Capital Resources
Citizens is a holding company and has had minimal operations of its own. Our assets consist of the capital stock of our subsidiaries, cash, fixed income securities, mutual funds and investment real estate. Our cash flows depend primarily upon the availability of statutorily permissible payments, primarily payments under management agreements from our two primary life insurance subsidiaries, CICA and SPLIC. The ability to make payments is limited by applicable laws and regulations of Colorado, CICA's state of domicile, and Louisiana, SPLIC's state of domicile, which subject insurance operations to significant regulatory restrictions. These laws and regulations require, among other things, that these insurance subsidiaries maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay to the holding company. We historically have not relied upon dividends from subsidiaries for our cash flow needs. However, CICA and SPLIC both dividend available funds from time to time in relation to business strategies. CRITICAL ACCOUNTING POLICIES
As of December 31, 2017, Citizens had fixed maturities available for sale of $39.5 million and cash of $23.9 million, which represents additional liquidity for future acquisitions, liquidity support for the life insurance companies and for general corporate purposes.
Additionally, a substantial portion of our international policyholders invest their policy cash dividends and benefits in our Class A common stock through our Stock Investment Plan (the “Plan”). Once a policyholder elects to participate in the Plan, their policy benefits can be used to purchase Citizens Class A common stock through the Plan in the open market. In addition, our existing holders of Class A common stock, our employees and our independent consultants are eligible to participate in the Plan. If fewer policyholders elect to participate in the Plan, or if our international premium collections were to decrease as a result of regulatory or marketing impediments, the trading volume of our Class A common stock may decline from its present levels.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Critical Accounting Policies
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. Management considers an accounting estimate to be critical if: (1) it requires assumptions to be made that were uncertain at the time the estimate was made; and (2) changes in the estimate, or different estimates that could have been selected, could have a material effect on our consolidated results of operations or financial condition. While we believe that our estimates, assumptions and judgments are reasonable, they are based on information presently
December 31, 2023 | 10-K 52
available. Actual results may differ significantly. Additionally, changesChanges in our assumptions, estimates or assessments as a result of unforeseen events or otherwise could have a material impact on our financial position or results of operations.
Management has discussed the development and selection of its critical accounting estimates with the Audit Committee of the Board of Directors, and the Audit Committee has reviewed the disclosure presented below relating to them.presented. See Note 1 - “Summary1. Summary of Significant Accounting Policies” ofPolicies in the Company'snotes to our consolidated financial statements for further information on our critical accounting policies.
Our critical accounting policies are as follows:VALUATION OF INVESTMENTS IN FIXED MATURITY SECURITIES
Policy Liabilities
Future policy benefit reserves have been computed by the net level premium method with assumptions as to investment yields, dividends on participating business, mortality and withdrawals based upon our experience. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of policy liabilities and the increase in future policy benefit reserves. Management's judgments and estimates for future policy benefit reserves provide for possible unfavorable deviation.
We continue to use the original assumptions (including a provision for the risk of adverse deviation) in subsequent periods to determine the changes in the liability for future policy benefits (the "lock-in concept”) unless a premium deficiency exists. Management monitors these assumptions and has determined that a premium deficiency did not exist as of December 31, 2017. Management believes that our policy liabilities and increase in future policy benefit reserves as of the years ended December 31, 2017, 2016 and 2015 are based upon assumptions, including a provision for the risk of adverse deviation, that do not warrant revision.
Deferred Policy Acquisition Costs
Acquisition costs, consisting of commissions and policy issuance, underwriting and agency expenses that relate to and vary with the successful production of new business, are deferred. These deferred policy acquisition costs are amortized primarily over the premium-paying period of the policies, using the same assumptions as were used in computing liabilities for future policy benefits.
We utilize the factor method to determine the amount of costs to be capitalized and the ending asset balance. The factor method is based on the ratio of premium revenue recognized for the policies in force at the end of each reporting period compared to the premium revenue recognized for policies in force at the beginning of the reporting period. The factor method ensures that policies which lapsed or surrendered during the reporting period are no longer included in the deferred policy acquisition costs calculation. The factor method limits the amount of deferred costs to its estimated realizable value, provided actual experience is comparable to that contemplated in the factors.
Inherent in the capitalization and amortization of deferred policy acquisition costs are certain management judgments about what acquisition costs are deferred, the ending asset balance and the annual amortization. Approximately 95.0% of our capitalized deferred acquisition costs are attributed to first year and renewal excess commissions. The remaining 5.0% are attributed to other costs that vary with and are directly related to the successful acquisition of new insurance business. Those costs generally include costs related to the production, underwriting and issuance of new business.
DAC is subject to recoverability testing at the time of policy issuance and loss recognition testing on an annual basis, or when an event occurs that might require loss recognition testing. If loss recognition or impairment is necessary, DAC would be written off to the extent that anticipated future premiums and investment income is insufficient to cover expected future policy benefits and expenses. Loss recognition testing that considers, among other things, actual experience and projected future experience calculates the available premium (gross premium less the benefit and expense portion of premium) for the next 50 years. The available
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
premium per policy and the deferred policy acquisition costs per policy are then calculated. The deferred policy acquisition costs are then evaluated for recoverability using best estimate assumptions. Management believes that our deferred policy acquisition costs and related amortization for the years ended December 31, 2017, 2016 and 2015 limits the amount of deferred costs to its estimated realizable value. This belief is based upon the analysis performed on capitalized expenses that vary with and are directly related to the acquisition of new and renewal insurance business, utilization of the factor method and recoverability testing at the time of policy issuance and the annual loss recognition testing.
Cost of Customer Relationships Acquired
Cost of Customer Relationships Acquired ("CCRA") is established when we purchase a block of insurance. CCRA is amortized primarily over the emerging profit of the related policies using the same assumptions as were used in computing liabilities for future policy benefits. We utilize various methods to determine the amount of the ending asset balance, including a static model and a dynamic model. Inherent in the amortization of CCRA are certain management judgments about the ending asset balance and the annual amortization. The assumptions used are based upon interest, mortality and lapses at the time of purchase.
A recoverability test that considers, among other things, actual experience and projected future experience is performed at least annually. These annual recoverability tests initially calculate the available premium (gross premium less benefit and expense portion of premium) for the next 50 years. The CCRA is then evaluated for recoverability utilizing best estimate assumptions. Management believes our CCRA and related amortization is recoverable for the years ended December 31, 2017, 2016 and 2015. This belief is based upon the analysis performed on estimated future results of the block and our annual recoverability testing.
Goodwill
Current accounting guidance requires that goodwill balances be reviewed for impairment at least annually or more frequently if events occur or circumstances change that would indicate that a triggering event has occurred. A reporting unit is defined as an operating segment on one level below an operating segment. Most of the Company's reporting units, for which goodwill has been allocated, are equivalent to the Company's operating segment, as there is no discrete financial information reviewed and analyzed by management for the separate components of the segment or all of the components of the segment have similar economic characteristics.
The Company historically has performed a goodwill impairment test that follows a multi-step process as defined under current accounting guidance. An initial review may be performed whereby the assessment is based upon qualitative factors before performing the first test step. In the first step, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. If the carrying amount of the reporting unit goodwill exceeds the implied goodwill value, an impairment loss is recognized in an amount equal to that excess.
We elected to early adopt the FASB's issued Accounting Standards Update ("ASU") No. 2017-04, Simplifying the Test for Goodwill Impairment as discussed in Part IV, Note 1 - "Summary of Significant Accounting Policies". This ASU eliminates the step two test as noted above.
Management’s determination of the fair value of each reporting unit incorporates multiple inputs including discounted cash flow calculations based on assumptions that market participants would make in valuing the reporting unit. Other assumptions can include levels of economic capital, future business growth, and earnings projections.
Valuation of Investments in Fixed Maturity and Equity Securities
The evaluation of securities for impairments is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer's financial condition or future prospects, the effects of changes in interest rates or credit spreads and the expected recovery period.
Based upon current accounting guidance, investment securities must be classified as held-to-maturity, available-for-sale ("AFS") or trading. Management determines the appropriate classification at the time of purchase. The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Fixed maturity securities are classified as
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
held-to-maturity and carried at amortized cost when management has the positive intent and the Company has the ability to hold the securities to maturity. SecuritiesThe Company currently does not hold any fixed maturity securities classified as held-to-maturity areheld-to-maturity. Fixed maturity securities classified as available-for-sale andAFS are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income (loss) and doare not affectreported in earnings until realized. Our fixed maturity securities consist primarily of bonds classified as AFS.
The Company evaluatesmonitors all fixed maturity securities on an on-going basis relative to changes in credit ratings, market prices, earnings trends and financial performance, in addition to specific region or industry reviews. The Company evaluates whether a quarterly basis, and more frequently when economic conditions warrant additional evaluations,credit impairment exists for determining if an OTTI exists pursuant tofixed maturity securities by considering primarily the accounting guidelines. In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than cost,following factors: (a) changes in the financial conditionscondition of the security's underlying collateral; (b) whether the issuer is current on contractually obligated interest and principal payments; (c) changes in the financial condition, credit rating and near-term prospects of the issuer,issuer; and (d) the ability and intentpayment structure of the Companysecurity. The Company's best estimate of expected future cash flows used to retain its investment indetermine the credit loss amount is a quantitative and qualitative process. Quantitative review includes information received from third-party sources such as financial statements, pricing and rating changes, liquidity and other statistical information. Qualitative factors include judgments related to business strategies, economic impacts on the issuer, for a period of time sufficientoverall judgment related to allow for any anticipated recovery in fair value. In analyzing an issuer's financial condition,estimates and industry factors as well as the Company may consider whether the securities are issued by the Federal government or its agencies, by government-sponsored agencies, or whether downgrades by bond rating agencies have occurred, and reviews of the issuer's financial condition.
If management determines that an investment experienced an OTTI, management must then determine the amount of OTTI to be recognized in earnings. If management does not intendCompany's intent to sell the security, andor if it is more likely than not that the Company will notwould be required to sell thea security before recovery of its amortized cost basis less anycost.
The Company's best estimate of future cash flows involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings, and current period loss,delinquency rates. These assumptions require the OTTI will be separated intouse of significant management judgment and include the amount representing the credit lossprobability of issuer default and the amount related to all other factors. Theestimates regarding timing and amount of OTTIexpected recoveries, which may include estimating the underlying collateral value. In addition, projections of expected future fixed maturity security cash flows may change based upon new information regarding the performance of the issuer. Any credit losses are presented as an allowance rather than as a write-down of AFS fixed maturity securities.
DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs ("DAC") are costs that are incremental and directly related to the credit loss is determined based onsuccessful acquisition of new or renewal insurance contracts. Such costs include the present valueincremental direct costs of cash flows expected to be collectedcontract acquisition, such as sales commissions; the portion of employees’ total compensation and is recognized in earnings. The amount of OTTIpayroll-related fringe benefits related to other factors will be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings will become the new amortized cost basis of the investment. If management intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI will be recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date. Any recoveries related to the value of these securities are recorded as an unrealized gain (as other comprehensive income (loss) in shareholders' equity) and not recognized in income until the security is ultimately sold.
The Company from timedirectly to time may dispose of an impaired security in responsespent performing acquisition activities, such as underwriting, issuing, and processing policies for contracts that have actually been acquired; and other costs related directly to asset/liability management decisions, future market movements, business plan changes, oracquisition activities that would not have been incurred if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.contract had not been acquired.
Premium Revenue and Related Expenses
Premiums on life and accident and health policies are reported as earned when due or, for short duration contracts, over the contract period on a pro rata basis. Benefits and expenses are associated with earned premiums so as to resultInherent in recognition of profits over the estimated life of the contracts. This matching is accomplished by means of provisions for future benefits and the capitalization and amortization of DAC are certain management judgments about what acquisition costs are deferred, the ending asset balance and the annual amortization. Approximately 93% of our capitalized DAC are attributed to first year and renewal excess commissions. The remaining 7% are attributed to other costs that vary with and are directly related to the successful acquisition of new insurance business. Those costs generally include costs related to the production, underwriting and issuance of new business.
DAC is amortized on a constant level basis over the expected term of the related contracts to approximate straight-line amortization. For the Life Insurance segment, the constant level basis used is policy acquisition costs.count in force. For the Home Service Insurance segment, the constant level basis used is face amount in force. The constant level bases used for amortization are projected using mortality and lapse assumptions that are based on the Company’s
AnnuitiesDecember 31, 2023 | 10-K 53
experience, industry data, and other factors at the end of each reporting period and are accounted for in a manner consistent with accountingthose used for interest bearing financial instruments. Our primary annuity productsthe liability for future policy benefit life reserves. Annually, the Company completes experience studies to evaluate mortality and lapse assumptions.If those assumptions are updated, the DAC amortization basis is recalculated and the impact of the assumption change will be reflected in the cohort level amortization in future periods.
POLICY LIABILITIES
As premium revenue is recognized, a liability for future policy benefits is accrued. The liability for a future policy benefit is the present value of estimated future policy benefits to be paid to or on behalf of policyholders less the present value of estimated future net premiums to be collected from policyholders. The liability is estimated using current assumptions that include investment yields, discount rate, mortality, lapses and withdrawals. These current assumptions are based on judgements that consider the Company’s historical experience, industry data, and other factors. Annually, the Company completes experience studies to evaluate mortality and lapse assumptions. The results of these studies are used to update current year best estimate assumptions used in establishing benefit liabilities and DAC.
The current discount rate assumption is a yield curve that equals the yield of an upper-medium grade fixed income instrument, based on A-quality corporate bonds. The current discount rate assumption is updated quarterly and used to remeasure the liability at the reporting date, with the resulting change reflected in other comprehensive income. For liability cash flows that are projected beyond the duration of market-observable A credit-rated fixed-income instruments, the Company uses the last market-observable yield level and uses linear interpolation to determine yield assumptions for durations that do not include fees or other such charges.have market observable yields. The locked-in discount rate for policies issued prior to the LDTI transition date equals the rate set at contract issuance. For current year issues, the locked-in discount rate is the average of the current year quarterly discount rates and will change throughout the year as new discount rates are calculated, with the change reflected in net income.
Tax AccountingTAX ACCOUNTING
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in net income in the period in which the change is enacted. GivenCICA International and CICA Bermuda, wholly-owned subsidiaries of Citizens, are considered controlled foreign corporations for U.S. federal tax purposes. As a result, the enactmentinsurance activity of CICA International and CICA Bermuda are subject to Subpart F of the New Tax ActInternal Revenue Code and are included in Citizens taxable income on December 22, 2017,its U.S. federal income tax return. Due to the 0% enacted tax rate in Bermuda there are no deferred taxes recorded for CICA Bermuda's temporary differences. CICA International has applied for a tax exemption decree from the Government of Puerto Rico which will freeze the income tax rate at 4% on any taxable earnings in excess of $1.2 million.
As required by U.S. GAAP, we have re-measured ourevaluated the recoverability of deferred tax assets and the establishment of a valuation allowance, if necessary, to reduce the deferred tax liabilitiesasset to an amount that is more likely than not to be realized. For the years ended December 31, 2023 and 2022, changes in market conditions including rising interest rates, resulted in deferred tax assets related to the new corporatenet unrealized capital losses in our investment portfolio. When assessing the need for a valuation allowance on the unrealized capital loss deferred tax rate of 21% which resulted inassets, we asserted a $35.7 million tax expense.
Contingencies
An estimated loss fromplanning strategy to hold a contingency is accrued and charged to results of operations only if both of the following conditions are met:
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1. | Information available prior to the issuance of the financial statements indicates that it is probable (virtual certainty is not required) that an asset has been impaired or a liability incurred as of the date of the financial statements; and
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
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2. | The amount of the loss can be reasonably estimated. |
Reasonable estimation of a possible loss does not require estimating a single amount of the loss. It requires that a loss be accrued if it can be estimated within a range. If an amount within the range is a better estimate than any other amount within the range, that amount is accrued. If no amount within the range is a better estimate than any other amount, the minimum amount in the range is accrued.
A gain contingency is an uncertain situation that will be resolved in the future, possibly resulting in a gain. We do not allow the recognition of a gain contingency prior to settlementmajority of the underlying event. Ifsecurities to recovery or maturity. Our ability to assert such a tax planning strategy is dependent upon factors such as our asset/liability matching process, overall investment strategy, projected future product sales and expected liquidity needs. In the event these estimates differ from our prior estimates due to the receipt of new information, we weremay be required to havesignificantly change the income tax expense recorded in the consolidated financial statements. This includes a gain contingency, we would disclose itfurther significant decline in the value of assets incorporated into our tax planning strategies which could lead to an increase in our valuation allowance on deferred tax assets having an adverse effect on current and future results.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements
See Item 8. "Financial Statements and Supplementary Data," and Note 1 - "Accounting Pronouncements" to the Company's Consolidated Financial Statements.
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Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
General
The nature of our business exposes us to market risk relative to our invested assets and policy liabilities. Market risk is the risk of loss that may occur when changes in interest rates and public equity prices adversely affect the value of our invested assets. Interest rate risk is our primary market risk exposure. Substantial and sustained increases and decreases in market interest rates can affect the fair value of our investments. The fair value of our fixed maturity portfolio generally increases when interest rates decrease and decreases when interest rates increase.
The following table summarizes net unrealized gains and losses as of the dates indicated.
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| | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | Amortized Cost | | Fair Value | | Net Unrealized Gains (Losses) | | Amortized Cost | | Fair Value | | Net Unrealized Gains (Losses) |
| | (In thousands) |
| Fixed maturities, available-for-sale | $ | 935,977 |
| | 974,609 |
| | 38,632 |
| | 860,473 |
| | 881,668 |
| | 21,195 |
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| Fixed maturities, held-to-maturity | 233,961 |
| | 241,377 |
| | 7,416 |
| | 247,004 |
| | 252,545 |
| | 5,541 |
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| Total fixed maturities | $ | 1,169,938 |
| | 1,215,986 |
| | 46,048 |
| | 1,107,477 |
| | 1,134,213 |
| | 26,736 |
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| Total equity securities | $ | 15,289 |
| | 16,164 |
| | 875 |
| | 17,765 |
| | 18,159 |
| | 394 |
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Market Risk Related to Interest Rates
Our exposure to interest rate changes results from our significant holdings of fixed maturity investments, policy loans and mortgage loans on real estate, all of which comprised over 94.8% of our cash and investment portfolio as of December 31, 2017. These investments are mainly exposed to changes in U.S. Treasury rates. Our fixed maturities investments include U.S. Government-sponsored enterprises, U.S. Government bonds, securities issued by government agencies, state and municipal bonds, and corporate bonds. Approximately 64.8% of the fixed maturities we owned at market value on December 31, 2017 are state and political subdivisions which are primarily municipal holdings. These holdings are diversified over several states though approximately 40% of our state and municipal securities are concentrated in three states - Texas, Florida and Louisiana.2023 | 10-K 54
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Changes in interest rates typically have a sizable effect on the fair value of our debt and equities securities. The interest rate of the ten-year U.S. Treasury bond decreased to 2.40% at December 31, 2017, from 2.45% at December 31, 2016. Net unrealized gains on fixed maturity securities totaled $46.0 million at December 31, 2017, compared to $26.7 million at December 31, 2016, based upon bond interest rates in relation to the U. S. ten-year Treasury yield.
To manage interest risk, we perform periodic projections of asset and liability cash flows to evaluate the potential sensitivity of our investments and liabilities. We assess interest rate sensitivity on an annual basis with respect to our fixed maturities investments using hypothetical test scenarios that assume either upward or downward shifts in the prevailing interest rates. The Company performed an analysis of fair value changes using assumed 100 basis point shifts in interest rates, noting that the fair value of our fixed maturity investment portfolio of $1.2 billion would decrease approximately $9.6 million to a fair value of $1.2 billion upon a 100 basis point increase. The following table shows the effects on the fair values of our fixed maturity investments based upon these scenarios.
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| | | | | | | | | | | | | | | |
| | Fair Values of Fixed Maturity Investments |
| | (100) | | 0 | | +100 | | +200 | | +300 |
| | (In thousands) |
| Assumed fair value | $ | 1,316,890 |
| | 1,215,986 |
| | 1,206,399 |
| | 1,150,063 |
| | 1,085,231 |
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While the test scenarios are for illustrative purposes only and do not reflect our expectations regarding future interest rates or the performance of fixed-income markets, it is a near-term change that illustrates the potential impact of such events. Due to the composition of our book of insurance business, we believe it is unlikely we would encounter large surrender activity due to an interest rate increase that would force us to dispose of our fixed maturities at a loss.
Our fixed maturity portfolio is exposed to call risk as a significant portion of the current holdings are callable. A decreasing interest rate environment can result in increased call activity as experienced over the past several years, and an increasing rate environment will likely result in securities being paid at their stated maturity.
There are no fixed maturities or other investments that we classify as trading instruments. Approximately 80.1% of fixed maturities were held in available-for-sale and 19.9% in held-to-maturity based upon fair value at December 31, 2017. At December 31, 2017 and 2016, we had no investments in derivative instruments, subprime loans or CDOs (collateralized debt obligations).
Market Risk Related to Equity Prices
Changes in the level or volatility of equity prices affect the value of equity securities we hold as investments. Our equity investments portfolio represented 1.2% of our total investments at December 31, 2017, with 96.4% invested in diversified equity and bond mutual funds.
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| CITIZENS, INC. | |
| Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we have elected to comply with certain scaled disclosure reporting obligations and therefore are not required to provide the information required by this Item.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the consolidated financial statements, the notes thereto, and the report of our independent registered public accounting firm, as listed on the table of contents.contents.
All other schedules have been omitted as the required information is inapplicable or the information required is presented in the financial statements or the notes thereto filed elsewhere herein.
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Item 9.
| CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
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Item 9A. | CONTROLS AND PROCEDURES |
(a) Evaluation of Disclosure Controls and ProceduresEVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”"Exchange Act")) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures.
Our management, including our principal executive officer principal financial officer, principal accounting officer and principal operatingfinancial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of December 31, 2017,2023, the end of the period covered by this Annual Report on formForm 10-K. Based on such evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective dueas of December 31, 2023 to provide reasonable assurance that information required to be disclosed by us in the material weaknessesreports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in internal control overthe rules and forms of the SEC and such information is accumulated and reported to management, including our principal executive and financial reporting described below.officers, as appropriate to allow timely decisions regarding disclosure.
(b) Management Report on Internal Control over Financial ReportingMANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). of the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management evaluated the design and operating effectiveness of internal control over financial reporting based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO 2013"COSO"). Based on this evaluation, management has concluded that our internal control over financial reporting as of December 31, 20172023 was not effective due to the material weaknesses described below.effective.
A material weakness, as defined in Exchange Act Rule 12b-2, is a deficiency, or combination
December 31, 2023 | 10-K 55
We did not have a sufficient number of competent individuals to design, document, maintain, and executeGrant Thornton LLP, an appropriate system of controls. In addition, the Company did not provide comprehensive employee training covering COSO 2013 internal control awareness, as required. As a result, we identified control deficiencies in aggregate that constitute material weaknesses in each of the five components of internal control as defined by COSO 2013 (control environment, risk assessment, control activities, information and communication, and monitoring), which resulted in more than a remote likelihood that a material misstatement of our annual or interim financial statements would not be prevented or detected. In part, management identified deficiencies related to its internal staff competency and expertise related to information technology, internal audit, and certain management estimates. As a result of these deficiencies, the Company did not design and maintain effective:
Information technology controls, which includes information security, systems change management and computer operations for systems and applications that are critical to processing financial transactions and capturing and reporting information in the financial reporting process. These ineffective information technology controls contributed to ineffective data validation of spreadsheets and system-generated reports utilized in the preparation of the financial statements and disclosures;
Controls over the accuracy and completeness of spreadsheets and system-generated reports. Management did not assess the operating effectiveness of certain business process or management review controls that were dependent on data utilized in spreadsheets and system generated reports; and
Controls related to monitoring of information provided by third party service providers for the preparation of certain management estimates, including but not limited to the valuation of certain insurance reserves and the computation of income taxes. Management has concluded that the Company’s outsourced service provider policy that governs the data validation controls over data provided to and received from third party service providers and the monitoring, business process and management review controls were not designed with appropriate levels of precision.
Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report onaudited the effectiveness of our internal control over financial reporting. Thereporting as of December 31, 2023. Their attestation report is included in itemItem 9A(c) of this annual report.Annual Report.
Table of Contents(c) ATTESTATION REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
(c) Attestation Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of and Stockholders
Citizens, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Citizens, Inc. (a Colorado corporation) and consolidated subsidiaries (the “Company”) as of December 31, 2017,2023, based on criteria established in the 2013 Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)("COSO"). In our opinion, because of the effect of the material weaknesses identified below on the achievement of the objectives of the control criteria, the Company has not maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2023, based on criteria established in the 2013 Internal Control -— Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB)("PCAOB"), the consolidated financial statements of the Company as of and for the year ended December 31, 2017, of the Company2023, and our report dated March 29, 2018,14, 2024, expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
December 31, 2023 | 10-K 56
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management identified material weaknesses in the Company’s overall control environment due to the aggregate effect of multiple deficiencies in internal controls, which affected each of the five components of internal control as defined by COSO (control environment, risk assessment, control activities, information and communication, and monitoring).
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 31, 2017, of the Company, and this report does not affect our report on such consolidated financial statements.
/s/ DELOITTE & TOUCHEGRANT THORNTON LLP
Austin, Texas
Miami, Florida
March 29, 201814, 2024
(d) Changes in Internal Control over Financial ReportingCHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in the Company’sour internal controlscontrol over financial reporting that occurred during the quarter ended December 31, 2017,2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
Status of Remediation of the Material Weaknesses in Internal Control over Financial Reporting
During 2017, management initiated the following remediation efforts to address the identified material weaknesses described above and to enhance our competency within certain areas of the financial control environment, though these efforts cannot be considered fully remediated until the applicable remedial controls are designed and operate for a sufficient period of time and management has concluded, through its evaluation, that the following personnel enhancements to the control environment are in place as of December 31, 2017:
Hired experienced executives in key management roles to strengthen the Company's expertise in and execution of its actuarial, accounting and operation functions, including a Chief Actuary, Chief Accounting Officer, and Director of Audit Quality Control and refocused personnel to strengthen management review controls over third party provided data;
Formed an internal control task force consisting of our Chief Financial Officer, Chief Operating Officer, and Director of Audit Quality Control to actively direct, manage and implement our control improvements and material weakness remediation plans;
Enhanced our internal control program and remediation efforts by co-sourcing our internal audit function to an experienced, nationally recognized audit firm. At the direction of management and specifically the internal control task force, the co-sourcing provider will continue to assist the internal control task force to enhance the evaluation of the control environment against the criteria established in COSO 2013. This effort includes, but is not limited to, improving our enterprise risk assessment, improving our control documentation, assessing and testing controls, and implementing company-wide internal control training to deepen our employees’ understanding of their role in relation to our overall control environment;
Replaced our third-party tax and actuarial professionals with Ernst & Young LLP’s experienced tax and actuarial team to improve our tax reporting process and 7702 actuarial analysis; and
Added an Interim Chief Information Officer who will focus on enhancing our general IT controls, including required remediation and control improvements.
While the enhancements described above demonstrate a commitment to strengthening the control environment by attracting, developing and retaining competent personnel and outsourced service providers to support the achievement of the Company’s objectives, they occurred during the latter half of 2017. Management intends to take the following actions to further remediate deficiencies during 2018, including enhancing their ability to demonstrate the criteria and principles established in COSO 2013:
For information technology, design and implement controls related to user access, privileged access and change management processes that can operate effectively;
Perform baseline testing of system generated reports that are used in the operation of business process and management review controls;
Implement an End User Control (“EUC”) Policy, which include (i) an inventory and risk assessment of all financially relevant spreadsheets, and (ii) implementing EUC controls over the accuracy and completeness of those spreadsheets;
Reevaluate the design of business process and management review controls to determine the appropriate precision of those controls;
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Review and enhance the design of outsourced service provider controls used to monitor processes that are outsourced to third parties, including the precision of any monitoring, business process, information technology and management review controls;
Enhance and deliver COSO 2013 internal control awareness training for all employees;
Conduct a comprehensive risk and operational risk assessment on industry and financial risks that are relevant for the Company, our products and our geographies; and
Reevaluate the criteria established in COSO 2013 to make further enhancements to entity-level controls in order to demonstrate that our internal controls framework addresses relevant principles and components of COSO 2013.
We believe the remediation steps outlined above have improved and will continue to improve the effectiveness of our internal control over financial reporting and our COSO 2013 framework as a whole. We will test the ongoing operating effectiveness of all new controls subsequent to implementation and consider the material weaknesses remediated after the applicable remedial controls operate effectively for a sufficient period of time.reporting.
Item 9B. OTHER INFORMATION
None.During the three months ended December 31, 2023, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Citizens, Inc. securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”
Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
December 31, 2023 | 10-K 57
PART III
The information in this Part III indicated below is incorporated by reference from other sections of this Annual Report on Form 10-K or from our definitive proxy statement pursuant to General Instruction G(3) of Form 10-K. We plan to file our definitive proxy statement for our 20182024 annual meeting of shareholders within 120 days after December 31, 2017.2023.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10 of this reportAnnual Report on Form 10-K incorporates by reference the information in the sections entitled "Corporate Governance," "Audit Matters," "Directors" and "Executive Officers" in our definitive proxy statement under the headings “Proposal No. 1 - Election of Directors,” “Company Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Code of Ethics,” “Shareholder Proposals and Nominations” and “Audit Committee.”Proxy Statement.
Item 11. EXECUTIVE COMPENSATION
Item 11 of this reportAnnual Report on Form 10-K incorporates by reference the information in the sections entitled "Directors - Director Compensation," "Executive Compensation" and "Board Matters - Compensation Committee Interlocks and Insider Participation" in our definitive proxy statement under the headings “Compensation,” “Governance” and “Compensation Committee Report.”Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Item 12 of this reportAnnual Report on Form 10-K incorporates by reference the information in our definitive proxy statement under the headings “Securitysections entitled "Security Ownership of Directors and Executive Officers”Management" and “Security"Security Ownership of Certain Beneficial Owners” andOwners" in our Proxy Statement.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth information regarding securities authorized for issuance under our equity compensation plan, the Citizens, Inc. Omnibus Incentive Plan, as of December 31, 2023. See Note 13. Stock Compensation in the notes to our consolidated financial statements for additional information in this Annual Report on Form 10-K under the heading “Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Securities Authorized for Issuance under Equity Compensation Plans.”regarding our Omnibus Incentive Plan. | | | | | | | | | | | | | | | | | | | | |
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining for future issuance under equity compensation plans |
| Equity compensation plans approved by security holders | | 573,978 | | | $ | 3.37 | | | 2,234,569 | |
| | | | | | |
| Equity compensation plans not approved by security holders | | — | | | — | | | — | |
| Total | | 573,978 | | | $ | 3.37 | | | 2,234,569 | |
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Item 13 of this reportAnnual Report on Form 10-K incorporates by reference the information in the sections entitled "Board Matters - Director Independence" and "Board Matters - Certain Relationships and Related Party Transactions" in our definitive proxy statement under the headings “Control of the Company” and “Governance.”Proxy Statement.
Item 14. PRINCIPAL ACCOUNTINGACCOUNTANT FEES AND SERVICES
Item 14 of this reportAnnual Report on Form 10-K incorporates by reference the information in the section entitled "Audit Matters" in our definitive proxy statement under the heading “Principal Accountants Fees and Services.”Proxy Statement.
60December 31, 2023 | 10-K 58
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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(a) | (1) and (2) Filings as Part of this Report |
(a)Documents filed as part of this Report
(1) and (2) Financial Statements and Schedules
The financial statements and schedules listed on the following index to financial statements and financial statement schedules are filed under Item 8 as part of this Form 10-K.
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(b) | (3) Exhibits – See the Exhibit Index |
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| Index to Consolidated Financial Statements and Financial Statement Schedules | Page
Reference |
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Report of independent registered public accounting firm - Deloitte & Touche LLP | |
Report of independent registered public accounting firm - Ernst & Young LLP | |
Consolidated statements of financial positionFinancial Statements at December 31, 20172023 and 20162022 and for the Years Ended December 31, 2023, 2022 and 2021: | |
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| Notes to Consolidated Financial Statements | |
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Financial Statement Schedules at December 31, 2017, 20162023 and 2015 | |
Consolidated statements of stockholders' equity - years ended2022 and for the Years Ended December 31, 2017, 20162023, 2022 and 20152021: | |
Consolidated statements of cash flows - years ended December 31, 2017, 2016 and 2015 | |
Notes to consolidated financial statements | |
| Schedule II – Condensed Financial Information of Registrant | |
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All other schedules have been omitted because the required information is inapplicable or the information required is presented in the consolidated financial statements or the notes thereto filed elsewhere herein.
(3) Exhibits
61December 31, 2023 | 10-K 59
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Report of Independent Registered Public Accounting Firm - Deloitte & Touche LLP
To the Shareholders and the Board of Directors of and Shareholders
Citizens, Inc.
Opinion on the Consolidated Financial Statementsfinancial statements
We have audited the accompanying consolidated statement of financial positionbalance sheets of Citizens, Inc. (a Colorado corporation) and subsidiaries (the “Company”) as of December 31, 2017,2023 and 2022, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the year thenthree years in the period ended December 31, 2023, and the related notes and thefinancial statement schedules included under Item 15(a) (collectively referred to as the “consolidated financial“financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017,2023 and 2022 and the results of its operations and its cash flows for each of the year thenthree years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
We also have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB)(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017,2023, based on criteria established in the 2013 Internal Control - Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 29, 2018,14, 2024 expressed an adverse opinion onunqualified opinion.
Change in accounting principle
As discussed in Note 1 to the Company’s internal control over financial reporting becausestatements, the Company has changed its method of material weaknesses.accounting for the liability for future policy benefits, deferred policy acquisition costs, and cost of insurance acquired for all periods presented due to the adoption of Accounting Standard Update No. 2018-12, Financial Services – Insurance (Topic 944) Targeted Improvements to the Accounting for Long-Duration Contracts.
Basis for Opinionopinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit.audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaudits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our auditaudits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our auditaudits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Austin, Texas
March 29, 2018
We have served as the Company’s auditor since 2017.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Report of Independent Registered Public Accounting Firm - Ernst & Young LLP
To the Board of Directors and Shareholders of Citizens, Inc.:
We have audited the accompanying consolidated statement of financial position of Citizens, Inc. and subsidiaries as of December 31, 2016, and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity and cash flows for each of the two years in the period ended December 31, 2016. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion,Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements referredthat was communicated or required to above present fairly,be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in all material respects, the consolidated financial position of Citizens, Inc. and subsidiaries at December 31, 2016, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, inany way our opinion on the related financial statement schedules, when considered in relation to the basic financial statements, taken as a whole, presents fairly in all material respectsand we are not, by communicating the information set forth therein.critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
/s/ Ernst & Young LLP
San Antonio, Texas
April 27, 2017
63December 31, 2023 | 10-K 60
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Financial Position December 31, (In thousands) |
| | | | | | | |
| | | | | |
| | | | | |
| Assets | | 2017 | | 2016 |
| Investments: | | | | |
| Fixed maturities available-for-sale, at fair value (cost: $935,977 and $860,473 in 2017 and 2016, respectively) | | $ | 974,609 |
| | 881,668 |
|
| Fixed maturities held-to-maturity, at amortized cost (fair value: $241,377 and $252,545 in 2017 and 2016, respectively) | | 233,961 |
| | 247,004 |
|
| Equity securities available-for-sale, at fair value (cost: $15,289 and $17,765 in 2017 and 2016, respectively) | | 16,164 |
| | 18,159 |
|
| Mortgage loans on real estate | | 195 |
| | 232 |
|
| Policy loans | | 73,735 |
| | 66,672 |
|
| Real estate held for investment (less $5,479 and $1,083 accumulated depreciation in 2017 and 2016, respectively) | | 7,416 |
| | 5,919 |
|
| Real estate held for sale (less $1,008 accumulated depreciation in 2016) | | — |
| | 1,939 |
|
| Other long-term investments | | 36 |
| | 38 |
|
| Short-term investments | | — |
| | 508 |
|
| Total investments | | 1,306,116 |
| | 1,222,139 |
|
| Cash and cash equivalents | | 46,064 |
| | 35,510 |
|
| Accrued investment income | | 19,062 |
| | 17,903 |
|
| Reinsurance recoverable | | 3,715 |
| | 3,862 |
|
| Deferred policy acquisition costs | | 167,063 |
| | 167,790 |
|
| Cost of customer relationships acquired | | 17,499 |
| | 19,415 |
|
| Goodwill | | 12,624 |
| | 17,255 |
|
| Other intangible assets | | 961 |
| | 966 |
|
| Deferred tax asset | | 50,797 |
| | 76,869 |
|
| Property and equipment, net | | 6,624 |
| | 7,890 |
|
| Due premiums, net (less $1,611 and $1,600 allowance for doubtful accounts in 2017 and 2016, respectively) | | 12,765 |
| | 12,852 |
|
| Prepaid expenses | | 251 |
| | 299 |
|
| Other assets | | 912 |
| | 918 |
|
| Total assets | | $ | 1,644,453 |
| | 1,583,668 |
|
| | | | | |
| CITIZENS, INC. | |
| See accompanying notes to consolidated financial statements. | (Continued)
Assumptions used in the Estimation of the Liability For Future Policy Benefit Reserves - Life Insurance
As described further in Notes 1 and 5 to the financial statements, the Company estimates a liability for future policy benefits which is calculated as the present value of estimated future policy benefits to be paid to or on behalf of policyholders of life insurance contracts, less the present value of estimated future net premiums to be collected from policyholders on those same life insurance contracts. Management’s estimate of the liability for future policy benefit reserves for life insurance was $1.23 billion as of December 31, 2023. The liability is estimated using actuarial assumptions including mortality and lapse. Changes to the mortality and lapse assumptions impact both the timing and amount of estimated future policy payments to be paid and future net premiums to be received on life insurance contracts. These assumptions, which are updated annually, are based on judgements that consider the Company’s historical experience, industry data and other factors. We identified the updating of the mortality and lapse assumptions used in the estimation of the liability for future policy benefit reserves – life insurance as a critical audit matter.
The principal consideration for our determination that the updating of the mortality and lapse assumptions used in the estimation of the liability for future policy benefit reserves for life insurance contracts is a critical audit matter is that the updating of these assumptions requires management to make significant estimates regarding mortality and lapse based on historical experience, industry data and other factors. As such, auditing the updating of such assumptions involved subjective and complex auditor judgment and the involvement of an actuarial specialist.
Our audit procedures related to the updating of the mortality and lapse assumptions used in the estimation of the liability for future policy benefit reserves - life insurance included the following, among others.
•We tested the design and operating effectiveness of management’s review controls over the mortality and lapse assumption updating and approval processes.
•We utilized an actuarial specialist in evaluating management’s methodologies and reasonableness of the assumptions of mortality and lapse, that were used in management’s calculation of future policy benefit reserves on life insurance contracts.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2021.
Miami, Florida
March 14, 2024
64December 31, 2023 | 10-K 61
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Financial Position December 31, Continued (In thousands, except share amounts) |
| | | | | | | |
| | | | | |
| | | | | |
| Liabilities and Stockholders' Equity | | 2017 | | 2016 |
| Liabilities: | | | | |
| Policy liabilities: | | | | |
| Future policy benefit reserves: | | | | |
| Life insurance | | $ | 1,133,875 |
| | 1,060,297 |
|
| Annuities | | 73,688 |
| | 69,003 |
|
| Accident and health | | 990 |
| | 1,022 |
|
| Dividend accumulations | | 23,713 |
| | 20,897 |
|
| Premiums paid in advance | | 51,431 |
| | 48,198 |
|
| Policy claims payable | | 8,610 |
| | 9,538 |
|
| Other policyholders' funds | | 8,483 |
| | 7,744 |
|
| Total policy liabilities | | 1,300,790 |
| | 1,216,699 |
|
| Commissions payable | | 2,430 |
| | 3,540 |
|
| Current federal income tax payable | | 93,365 |
| | 81,270 |
|
| Payable for securities in process of settlement | | — |
| | 3,061 |
|
| Other liabilities | | 24,355 |
| | 29,998 |
|
| Total liabilities | | 1,420,940 |
| | 1,334,568 |
|
| Commitments and contingencies (Notes 5 and 7) | | |
| | |
|
| Stockholders' equity: | | |
| | |
|
| Common stock: | | |
| | |
|
| Class A, no par value, 100,000,000 shares authorized 52,215,852 shares issued and outstanding 2017 and 2016, including shares in treasury of 3,135,738 in 2017 and 2016 | | 259,383 |
| | 259,383 |
|
| Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2017 and 2016 | | 3,184 |
| | 3,184 |
|
| Accumulated deficit | | (54,375 | ) | | (16,248 | ) |
| Accumulated other comprehensive income: | | | | |
|
| Unrealized gains on securities, net of tax | | 26,332 |
| | 13,792 |
|
| Treasury stock, at cost | | (11,011 | ) | | (11,011 | ) |
| Total stockholders' equity | | 223,513 |
| | 249,100 |
|
| Total liabilities and stockholders' equity | | $ | 1,644,453 |
| | 1,583,668 |
|
| | | | | | | | | | | | | | |
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Balance Sheets |
December 31,
(In thousands) | | 2023 | | 2022 |
| Assets: | | | | |
| Investments: | | | | |
| Fixed maturity securities available-for-sale, at fair value (amortized cost: $1,389,038 and $1,381,318 in 2023 and 2022, respectively) | | $ | 1,238,981 | | | 1,179,619 | |
| | | | |
| Equity securities, at fair value | | 5,282 | | | 11,590 | |
| | | | |
| Policy loans | | 75,359 | | | 78,773 | |
| | | | |
| | | | |
| Other long-term investments (portion measured at fair value $82,460 and $66,846 in 2023 and 2022, respectively) | | 82,725 | | | 69,558 | |
| Short-term investments | | — | | | 1,241 | |
| Total investments | | 1,402,347 | | | 1,340,781 | |
| Cash and cash equivalents | | 26,997 | | | 22,973 | |
| Accrued investment income | | 17,360 | | | 17,131 | |
| | | | |
| Reinsurance recoverable | | 3,991 | | | 4,560 | |
| Deferred policy acquisition costs | | 175,768 | | | 162,927 | |
| Cost of insurance acquired | | 10,043 | | | 10,647 | |
| | | | |
| | | | |
| Federal income tax receivable | | 1,546 | | | 601 | |
| | | | |
| Property and equipment, net | | 11,809 | | | 12,926 | |
| Due premiums | | 11,264 | | | 11,829 | |
| | | | |
| Other assets (less allowance for losses of $408 and $347 in 2023 and 2022, respectively) | | 7,803 | | | 6,328 | |
| Total assets | | $ | 1,668,928 | | | 1,590,703 | |
See accompanying notesNotes to consolidated financial statements. Consolidated Financial Statements.
65December 31, 2023 | 10-K 62
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES | | | | | | | | | | | | | | |
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Balance Sheets |
December 31, continued
(In thousands, except share amounts) | | 2023 | | 2022 |
| Liabilities and Stockholders' Equity: | | | | |
| Liabilities: | | | | |
| Policy liabilities: | | | | |
| Future policy benefit reserves: | | | | |
| Life insurance | | $ | 1,229,253 | | | 1,198,647 | |
| Accident and health insurance | | 889 | | | 767 | |
| Total future policy benefit reserves | | 1,230,142 | | | 1,199,414 | |
| Policyholders' funds: | | | | |
| Annuities | | 133,216 | | | 121,422 | |
| Dividend accumulations | | 44,960 | | | 41,663 | |
| Premiums paid in advance | | 32,446 | | | 36,384 | |
| Policy claims payable | | 6,637 | | | 9,884 | |
| Other policyholders' funds | | 7,363 | | | 7,501 | |
| Total policyholders' funds | | 224,622 | | | 216,854 | |
| Total policy liabilities | | 1,454,764 | | | 1,416,268 | |
| Commissions payable | | 3,445 | | | 1,967 | |
| Deferred federal income tax liability, net | | 1,102 | | | 3,653 | |
| | | | |
| | | | |
| Other liabilities | | 37,488 | | | 41,025 | |
| Total liabilities | | 1,496,799 | | | 1,462,913 | |
Commitments and contingencies (Notes 7 and 8) | | | | |
| Stockholders' Equity: | | | | |
| Common stock: | | | | |
| Class A, no par value, 100,000,000 shares authorized, 53,882,661 and 53,758,176 shares issued and outstanding as of December 31, 2023 and 2022, respectively, including shares in treasury of 4,327,810 and 3,935,581 as of December 31, 2023 and 2022 | | 268,675 | | | 268,147 | |
| Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding as of December 31, 2023 and 2022, including shares in treasury of 1,001,714 as of December 31, 2023 and 2022 | | 3,184 | | | 3,184 | |
| Retained earnings | | 42,150 | | | 16,309 | |
| Accumulated other comprehensive income (loss) | | (118,155) | | | (137,044) | |
| Treasury stock, at cost | | (23,725) | | | (22,806) | |
| Total stockholders' equity | | 172,129 | | | 127,790 | |
| Total liabilities and stockholders' equity | | $ | 1,668,928 | | | 1,590,703 | |
Consolidated Statements of Operations and Comprehensive Income (Loss) Years ended December 31, (In thousands, except share amounts) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Revenues: | | | | | | | |
| Premiums: | | | | | | | | | | | |
| Life insurance | | | $ | 191,342 |
| | | | 191,254 |
| | | | 187,686 |
|
| Accident and health insurance | | | 1,392 |
| | | | 1,546 |
| | | | 1,599 |
|
| Property insurance | | | 4,986 |
| | | | 5,076 |
| | | | 5,195 |
|
| Net investment income | | | 53,146 |
| | | | 48,560 |
| | | | 45,782 |
|
| Realized investment gains (losses), net | | | 518 |
| | | | (1,985 | ) | | | | (5,459 | ) |
| Other income | | | 1,243 |
| | | | 955 |
| | | | 1,465 |
|
| Total revenues | | | 252,627 |
| | | | 245,406 |
| | | | 236,268 |
|
| Benefits and expenses: | | | | | | | |
| | | | |
|
| Insurance benefits paid or provided: | | | | | | | |
| | | | |
|
| Claims and surrenders | | | 82,905 |
| | | | 81,367 |
| | | | 78,879 |
|
| Increase in future policy benefit reserves | | | 76,029 |
| | | | 75,881 |
| | | | 77,060 |
|
| Policyholders' dividends | | | 6,268 |
| | | | 6,832 |
| | | | 10,747 |
|
| Total insurance benefits paid or provided | | | 165,202 |
| | | | 164,080 |
| | | | 166,686 |
|
| Commissions | | | 41,324 |
| | | | 44,641 |
| | | | 43,625 |
|
| Other general expenses | | | 46,388 |
| | | | 33,356 |
| | | | 33,287 |
|
| Capitalization of deferred policy acquisition costs | | | (29,120 | ) | | | | (32,732 | ) | | | | (31,104 | ) |
| Amortization of deferred policy acquisition costs | | | 29,690 |
| | | | 28,515 |
| | | | 23,400 |
|
| Amortization of cost of customer relationships acquired | | | 2,129 |
| | | | 2,063 |
| | | | 2,317 |
|
| Total benefits and expenses | | | 255,613 |
| | | | 239,923 |
| | | | 238,211 |
|
| Income (loss) before federal income tax expense | | | (2,986 | ) | | | | 5,483 |
| | | | (1,943 | ) |
| Federal income tax expense | | | 35,141 |
| | | | 3,514 |
| | | | 1,200 |
|
| Net income (loss) | | | (38,127 | ) | | | | 1,969 |
| | | | (3,143 | ) |
| Per Share Amounts: | | | | | | | |
| | | | |
|
| Basic and diluted earnings (losses) per share of Class A common stock | $ | (0.77 | ) | | | | 0.04 |
| | | | (0.06 | ) | | |
| Basic and diluted earnings (losses) per share of Class B common stock | (0.38 | ) | | | | 0.02 |
| | | | (0.03 | ) | | |
| Other comprehensive income (loss): | | | | | | | | | | | |
| Unrealized gains (losses) on available-for-sale securities: | | | | | | | | | | | |
| Unrealized holding gains (losses) arising during period | | | 17,666 |
| | | | (1,659 | ) | | | | (24,217 | ) |
| Reclassification adjustment for losses included in net income | | | 546 |
| | | | 1,974 |
| | | | 5,415 |
|
| Unrealized gains (losses) on available-for-sale securities, net | | | 18,212 |
| | | | 315 |
| | | | (18,802 | ) |
| Income tax expense (benefit) on unrealized gains (losses) on available-for-sale securities | | | 5,672 |
| | | | 110 |
| | | | (6,539 | ) |
| Other comprehensive income (loss) | | | 12,540 |
| | | | 205 |
| | | | (12,263 | ) |
| Total comprehensive income (loss) | | | $ | (25,587 | ) | | | | 2,174 |
| | | | (15,406 | ) |
See accompanying notesNotes to consolidated financial statementsConsolidated Financial Statements.
66December 31, 2023 | 10-K 63
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES | | | | | | | | | | | | | | | | | | | | |
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss) |
Years Ended December 31,
(In thousands, except share amounts) | | 2023 | | 2022 | | 2021 |
| Revenues: | | | | | | |
| Premiums: | | | | | | |
| Life insurance | | $ | 164,609 | | | 167,586 | | | 169,801 | |
| Accident and health insurance | | 1,637 | | | 1,278 | | | 1,250 | |
| Property insurance | | 793 | | | 4,850 | | | 3,677 | |
| Net investment income | | 69,254 | | | 65,426 | | | 61,495 | |
| Investment related gains (losses), net | | 760 | | | (10,291) | | | 10,991 | |
| | | | | | |
| Other income | | 3,627 | | | 3,675 | | | 3,332 | |
| Total revenues | | 240,680 | | | 232,524 | | | 250,546 | |
| Benefits and Expenses: | | | | | | |
| Insurance benefits paid or provided: | | | | | | |
| Claims and surrenders | | 135,993 | | | 119,935 | | | 119,735 | |
| Increase (decrease) in future policy benefit reserves | | (5,624) | | | 4,804 | | | 9,773 | |
| Policyholder liability remeasurement (gain) loss | | 4,460 | | | 2,884 | | | 1,434 | |
| Policyholders' dividends | | 5,542 | | | 6,013 | | | 6,180 | |
| Total insurance benefits paid or provided | | 140,371 | | | 133,636 | | | 137,122 | |
| Commissions | | 39,241 | | | 36,222 | | | 35,463 | |
| Other general expenses | | 47,131 | | | 45,177 | | | 43,370 | |
| Capitalization of deferred policy acquisition costs | | (28,301) | | | (24,899) | | | (22,740) | |
| Amortization of deferred policy acquisition costs | | 15,460 | | | 14,390 | | | 13,445 | |
| Amortization of cost of insurance acquired | | 604 | | | 621 | | | 757 | |
| Goodwill impairment | | — | | | — | | | 12,624 | |
| Total benefits and expenses | | 214,506 | | | 205,147 | | | 220,041 | |
| Income (loss) before federal income tax | | 26,174 | | | 27,377 | | | 30,505 | |
| Federal income tax expense (benefit) | | 1,737 | | | 1,370 | | | (42,201) | |
| Net income (loss) | | 24,437 | | | 26,007 | | | 72,706 | |
| Basic Earnings Per Share: | | | | | | |
| Class A common stock | | $ | 0.49 | | | 0.52 | | | 1.46 | |
| Class B common stock | | — | | | — | | | 0.73 | |
| Diluted Earnings Per Share: | | | | | | |
| Class A common stock | | 0.48 | | | 0.51 | | | 1.44 | |
| Class B common stock | | — | | | — | | | 0.72 | |
| Other Comprehensive Income (Loss): | | | | | | |
| Unrealized gains (losses) on fixed maturity securities: | | | | | | |
| Unrealized holding gains (losses) arising during period | | 50,894 | | | (328,673) | | | (41,123) | |
| Reclassification adjustment for losses (gains) included in net income (loss) | | 756 | | | 104 | | | (243) | |
| Unrealized gains (losses) on fixed maturity securities, net | | 51,650 | | | (328,569) | | | (41,366) | |
| Change in current discount rate for liability for future policy benefits | | (34,790) | | | 337,776 | | | 92,396 | |
| Income tax expense (benefit) on other comprehensive income items | | (2,029) | | | 7,262 | | | 1,449 | |
| Other comprehensive income (loss) | | 18,889 | | | 1,945 | | | 49,581 | |
| Total comprehensive income (loss) | | $ | 43,326 | | | 27,952 | | | 122,287 | |
| Consolidated Statements of Stockholders' Equity |
| | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, 2017, 2016, 2015 |
| (In thousands) |
| | | | | | | | | | | | |
| | Common Stock | | Accumulated deficit | | Accumulated other comprehensive income (loss) | | Treasury stock | | Total Stockholders' equity |
| | Class A | | Class B | | | | |
| Balance at December 31, 2014 | $ | 259,383 |
| | 3,184 |
| | (15,074 | ) | | 25,850 |
| | (11,011 | ) | | 262,332 |
|
| Comprehensive loss: | |
| | |
| | |
| | |
| | |
| | |
|
| Net loss | — |
| | — |
| | (3,143 | ) | | — |
| | — |
| | (3,143 | ) |
| Unrealized investment losses, net | — |
| | — |
| | — |
| | (12,263 | ) | | — |
| | (12,263 | ) |
| Total comprehensive loss | — |
| | — |
| | (3,143 | ) | | (12,263 | ) | | — |
| | (15,406 | ) |
| Balance at December 31, 2015 | 259,383 |
| | 3,184 |
| | (18,217 | ) | | 13,587 |
| | (11,011 | ) | | 246,926 |
|
| Comprehensive income: | |
| | |
| | |
| | |
| | |
| | |
|
| Net income | — |
| | — |
| | 1,969 |
| | — |
| | — |
| | 1,969 |
|
| Unrealized investment gains, net | — |
| | — |
| | — |
| | 205 |
| | — |
| | 205 |
|
| Total comprehensive income | — |
| | — |
| | 1,969 |
| | 205 |
| | — |
| | 2,174 |
|
| Balance at December 31, 2016 | 259,383 |
| | 3,184 |
| | (16,248 | ) | | 13,792 |
| | (11,011 | ) | | 249,100 |
|
| Comprehensive loss: | |
| | |
| | |
| | |
| | |
| | |
|
| Net loss | — |
| | — |
| | (38,127 | ) | | — |
| | — |
| | (38,127 | ) |
| Unrealized investment gains, net | — |
| | — |
| | — |
| | 12,540 |
| | — |
| | 12,540 |
|
| Total comprehensive income (loss) | — |
| | — |
| | (38,127 | ) | | 12,540 |
| | — |
| | (25,587 | ) |
| Balance at December 31, 2017 | $ | 259,383 |
| | 3,184 |
| | (54,375 | ) | | 26,332 |
| | (11,011 | ) | | 223,513 |
|
Consolidated Statements of Stockholders' Equity, Continued Years Ended December 31, 2017, 2016, 2015 (In thousands) |
| | | | | | | | |
| |
| A summary of the number of shares of common stock of Class A, Class B and treasury stock issued is as follows: |
| | | | |
| | Common Stock | | Treasury |
| | Class A | | Class B | | Stock |
| Balance at December 31, 2015 | 52,216 |
| | 1,002 |
| | (3,136 | ) |
| Balance at December 31, 2016 | 52,216 |
| | 1,002 |
| | (3,136 | ) |
| Balance at December 31, 2017 | 52,216 |
| | 1,002 |
| | (3,136 | ) |
See accompanying notesNotes to consolidated financial statements.
Consolidated Financial Statements.
67December 31, 2023 | 10-K 64
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Stockholders' Equity |
|
| Common Stock | Retained Earnings
(Accumulated
Deficit) | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Stockholders' Equity |
| (In thousands) | Class A | | Class B |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| |
| | | | | | |
| | | | |
| Balance at December 31, 2020 | $ | 262,869 | | | 3,184 | | | (82,352) | | | 128,255 | | | (11,011) | | | 300,945 | | |
Accounting Standards adopted January 1, 2021 (1) | — | | | — | | | (52) | | | (316,825) | | | — | | | (316,877) | | |
| | | | | | | | | | | | |
| Comprehensive income (loss): | | | | | | | | | | | | |
| Net income (loss) | — | | | — | | | 72,706 | | | — | | | — | | | 72,706 | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | 49,581 | | | — | | | 49,581 | | |
| Total comprehensive income (loss) | — | | | — | | | 72,706 | | | 49,581 | | | — | | | 122,287 | | |
| Acquisition of treasury stock | — | | | — | | | — | | | — | | | (9,090) | | | (9,090) | | |
| | | | | | | | | | | | |
| Stock-based compensation | 2,692 | | | — | | | — | | | — | | | — | | | 2,692 | | |
| Balance at December 31, 2021 | 265,561 | | | 3,184 | | | (9,698) | | | (138,989) | | | (20,101) | | | 99,957 | | |
| Comprehensive income (loss): | | | | | | | | | | | | |
| Net income (loss) | — | | | — | | | 26,007 | | | — | | | — | | | 26,007 | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | 1,945 | | | — | | | 1,945 | | |
| Total comprehensive income (loss) | — | | | — | | | 26,007 | | | 1,945 | | | — | | | 27,952 | | |
| Acquisition of treasury stock | — | | | — | | | — | | | — | | | (2,705) | | | (2,705) | | |
| Issuance of common stock | 2,244 | | | — | | | — | | | — | | | — | | | 2,244 | | |
| Stock-based compensation | 342 | | | — | | | — | | | — | | | — | | | 342 | | |
| Balance at December 31, 2022 | 268,147 | | | 3,184 | | | 16,309 | | | (137,044) | | | (22,806) | | | 127,790 | | |
| Comprehensive income (loss): | | | | | | | | | | | | |
| Net income (loss) | — | | | — | | | 24,437 | | | — | | | — | | | 24,437 | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | 18,889 | | | — | | | 18,889 | | |
| Total comprehensive income (loss) | — | | | — | | | 24,437 | | | 18,889 | | | — | | | 43,326 | | |
| Acquisition of treasury stock | — | | | — | | | — | | | — | | | (919) | | | (919) | | |
| | | | | | | | | | | | |
| Stock-based compensation | 528 | | | — | | | — | | | — | | | — | | | 528 | | |
Other (2) | — | | | — | | | 1,404 | | | — | | | — | | | 1,404 | | |
| Balance at December 31, 2023 | $ | 268,675 | | | 3,184 | | | 42,150 | | | (118,155) | | | (23,725) | | | 172,129 | | |
(1)See Note 1 and (2) see Note 11 in the Notes to Consolidated Financial Statements for more details.
See accompanying Notes to Consolidated Financial Statements.
December 31, 2023 | 10-K 65
Consolidated Statements of Cash Flows Years Ended December 31, (In thousands) |
| | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | (38,127 | ) | | 1,969 |
| | (3,143 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| | |
| | |
|
| Net realized (gains) losses on investments and other assets | (518 | ) | | 1,985 |
| | 5,459 |
|
| Net deferred policy acquisition costs | 570 |
| | (4,217 | ) | | (7,704 | ) |
| Amortization of cost of customer relationships acquired | 2,129 |
| | 2,063 |
| | 2,317 |
|
| Depreciation | 1,065 |
| | 806 |
| | 779 |
|
| Amortization of premiums and discounts on investments | 16,606 |
| | 14,676 |
| | 12,021 |
|
| Deferred federal income tax expense (benefit) | 20,687 |
| | (9,834 | ) | | 3,515 |
|
| Write-off of goodwill | 4,631 |
| | — |
| | — |
|
| Change in: | |
| | |
| | |
|
| Accrued investment income | (1,159 | ) | | (2,497 | ) | | (1,949 | ) |
| Reinsurance recoverable | 147 |
| | 304 |
| | 259 |
|
| Due premiums | 87 |
| | (1,033 | ) | | (1,042 | ) |
| Future policy benefit reserves | 75,920 |
| | 74,583 |
| | 76,901 |
|
| Other policyholders' liabilities | 5,860 |
| | 7,521 |
| | 6,059 |
|
| Federal income tax payable | 11,808 |
| | 9,287 |
| | (6,837 | ) |
| Commissions payable and other liabilities | (6,753 | ) | | 6,434 |
| | 617 |
|
| Other, net | 59 |
| | 224 |
| | (99 | ) |
| Net cash provided by operating activities | 93,012 |
| | 102,271 |
| | 87,153 |
|
| Cash flows from investing activities: | |
| | |
| | |
|
| Sale of fixed maturities, available-for-sale | 1,077 |
| | 20,638 |
| | — |
|
| Maturities and calls of fixed maturities, available-for-sale | 74,902 |
| | 56,032 |
| | 75,231 |
|
| Maturities and calls of fixed maturities, held-to-maturity | 9,095 |
| | 14,405 |
| | 20,395 |
|
| Purchase of fixed maturities, available-for-sale | (167,699 | ) | | (234,964 | ) | | (134,126 | ) |
| Purchase of fixed maturities, held-to-maturity | — |
| | (5,507 | ) | | (55,360 | ) |
| Sale of equity securities, available-for-sale | 1,940 |
| | 5,100 |
| | 43,163 |
|
| Calls of equity securities, available-for-sale | 450 |
| | 822 |
| | 150 |
|
| Purchase of equity securities, available-for-sale | — |
| | — |
| | (602 | ) |
| Principal payments on mortgage loans | 37 |
| | 362 |
| | 34 |
|
| Increase in policy loans, net | (7,063 | ) | | (6,506 | ) | | (6,134 | ) |
| Sale of other long-term investments | 3,041 |
| | 37 |
| | 60 |
|
| Purchase of other long-term investments and real estate | — |
| | (75 | ) | | — |
|
| Purchase of property and equipment | (1,326 | ) | | (2,214 | ) | | (590 | ) |
| Sale of property and equipment | 41 |
| | 59 |
| | — |
|
| Maturity of short-term investments | 500 |
| | 256 |
| | — |
|
| Purchase of short-term investments | — |
| | (522 | ) | | (255 | ) |
| Net cash used in investing activities | (85,005 | ) | | (152,077 | ) | | (58,034 | ) |
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES | | | | | | | | | | | | | | | | | |
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows |
|
| | | | | |
Years Ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Cash Flows from Operating Activities: | | | | | |
| Net income (loss) | $ | 24,437 | | | 26,007 | | | 72,706 | |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | |
| Investment related (gains) losses, net on sales of investments and other assets | (760) | | | 10,291 | | | (10,991) | |
| Net deferred policy acquisition costs | (12,841) | | | (10,509) | | | (9,295) | |
| Amortization of cost of insurance acquired | 604 | | | 621 | | | 757 | |
| Depreciation | 515 | | | 536 | | | 1,140 | |
| Amortization of premiums and discounts on investments | 4,940 | | | 4,240 | | | 5,568 | |
| Stock-based compensation | 588 | | | 461 | | | 646 | |
| Deferred federal income tax expense (benefit) | 860 | | | 1,923 | | | 1,701 | |
| Goodwill Impairment | — | | | — | | | 12,624 | |
| Change in: | | | | | |
| Accrued investment income | (229) | | | (934) | | | (60) | |
| Reinsurance recoverable | 569 | | | 979 | | | 214 | |
| Due premiums | 565 | | | (1,081) | | | 561 | |
| Future policy benefit reserves | (4,062) | | | 4,694 | | | 3,890 | |
| Other policyholders' liabilities | 10,325 | | | 7,553 | | | 20,247 | |
| Federal income tax payable | (922) | | | 161 | | | (44,678) | |
| Commissions payable and other liabilities | (917) | | | 12,652 | | | (15,450) | |
| Other, net | (1,616) | | | (674) | | | 875 | |
| Net cash provided by (used in) operating activities | 22,056 | | | 56,920 | | | 40,455 | |
| Cash Flows from Investing Activities: | | | | | |
| Sales of fixed maturity securities, available-for-sale | 29,883 | | | 33,914 | | | 8,238 | |
| Maturities and calls of fixed maturity securities, available-for-sale | 29,488 | | | 44,493 | | | 53,089 | |
| | | | | |
| Purchases of fixed maturity securities, available-for-sale | (72,802) | | | (120,094) | | | (94,265) | |
| | | | | |
| | | | | |
| Sales of equity securities | 6,631 | | | 500 | | | 7,383 | |
| Principal payments on mortgage loans | 7 | | | 1,098 | | | 10 | |
| Funding of mortgage loans | — | | | — | | | (1,000) | |
| Change in policy loans, net | 3,414 | | | 1,534 | | | 3,011 | |
| Sales of other long-term investments and real estate | 5,394 | | | 5,033 | | | 24,238 | |
| Purchases of other long-term investments | (17,318) | | | (25,870) | | | (40,788) | |
| Purchases of property and equipment | (442) | | | (100) | | | (1,007) | |
| Sales of property and equipment | — | | | — | | | 14 | |
| Maturities of short-term investments | 750 | | | — | | | — | |
| Sales of short-term investments | 499 | | | — | | | — | |
| Purchases of short-term investments | — | | | (1,250) | | | — | |
| Net cash provided by (used in) investing activities | (14,496) | | | (60,742) | | | (41,077) | |
| | | | | |
| See accompanying Notes to Consolidated Financial Statements. |
| | | | | |
December 31, 2023 | 10-K 66
Consolidated Statements of Cash Flows Years Ended December 31, Continued (In thousands) | | CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows | | CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows |
| Years Ended December 31,
(In thousands) | |
| Years Ended December 31,
(In thousands) | |
| Years Ended December 31,
(In thousands) | |
| Years Ended December 31,
(In thousands) | |
| Years Ended December 31,
(In thousands) | |
| Years Ended December 31,
(In thousands) | |
| Years Ended December 31,
(In thousands) | |
| Years Ended December 31,
(In thousands) | |
| Years Ended December 31,
(In thousands) | |
| Years Ended December 31,
(In thousands) | |
| Years Ended December 31,
(In thousands) | |
| Years Ended December 31,
(In thousands) | |
| Years Ended December 31,
(In thousands) | |
| Years Ended December 31,
(In thousands) | |
| Years Ended December 31,
(In thousands) | |
| Years Ended December 31,
(In thousands) | |
| Years Ended December 31,
(In thousands) | |
| Years Ended December 31,
(In thousands) | | 2023 | | 2022 | | 2021 |
| Cash Flows from Financing Activities: | |
| | Annuity deposits | |
| | Annuity deposits | |
| | Annuity deposits | |
| Annuity withdrawals | |
| Issuance of common stock | |
| Acquisition of treasury stock | |
| Other | |
| Net cash used in financing activities | |
| Net increase (decrease) in cash and cash equivalents | |
| Cash and cash equivalents at beginning of year | |
| Cash and cash equivalents at end of year | |
| | | 2017 | | 2016 | | 2015 |
| | | | | | |
| | | | | | |
| Cash flows from financing activities: | | | | | |
| Annuity deposits | $ | 9,346 |
| | 8,673 |
| | 8,103 |
|
| Annuity withdrawals | (6,799 | ) | | (6,184 | ) | | (5,103 | ) |
| Net cash provided by financing activities | 2,547 |
| | 2,489 |
| | 3,000 |
|
| Net increase (decrease) in cash and cash equivalents | 10,554 |
| | (47,317 | ) | | 32,119 |
|
| Cash and cash equivalents at beginning of year | 35,510 |
| | 82,827 |
| | 50,708 |
|
| Cash and cash equivalents at end of year | $ | 46,064 |
| | 35,510 |
| | 82,827 |
|
| Supplemental Disclosure of Operating Activities: | |
| | |
| | |
|
| Cash paid during the year for income taxes | $ | 2,675 |
| | 4,061 |
| | 4,522 |
|
SUPPLEMENTAL DISCLOSURE OF OPERATING ACTIVITIES:
Supplemental Disclosure of Noncash Investing
Cash paid for income taxes during 2023, 2022 and Financing Activities:2021 was $1.8 million, $0.3 million and $1.2 million, respectively.
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 2017, 20162023, 2022 and 20152021, various fixed maturity issuers exchanged securities with book values of $4.8$5.4 million, $1.1$6.9 million and $0.1$12.1 million, respectively, for securities of equal value.
The Company recognized right-of-use assets of $0.1 million and $0.4 million in exchange for new operating lease liabilities during 2023 and 2022, respectively, and none during 2021.
See accompanying notes to consolidated financial statements.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial StatementsStatements.
December 31, 2023 | 10-K 67
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
| |
Note 1: Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying consolidated financial statements of Citizens, Inc. and its wholly-owned subsidiaries have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. GAAP").
The consolidated financial statements include the accounts and operations of Citizens, Inc. ("Citizens" or the "Company"), a Colorado corporation, and its wholly-owned subsidiaries, CICA Life Insurance Company of America ("CICA"CICA Domestic"), CICA Life Ltd. ("CICA Bermuda"), CICA Life, A.I., a Puerto Rico company ("CICA International"), Citizens National Life Insurance Company ("CNLIC"), Security Plan Life Insurance Company ("SPLIC"), Security Plan Fire Insurance Company ("SPFIC"), Magnolia Guaranty Life Insurance Company ("MGLIC"), CICA Life Ltd. Bermuda, Computing Technology, Inc. ("CTI"), Nexo Global Services LLC, a Puerto Rico holding company ("Nexo") and Insurance Investors, Inc.Nexo Enrollment Services LLC, a Puerto Rico service company ("III"NES"). All significant inter-company accounts and transactions have been eliminated. Citizens and its wholly-owned subsidiaries are collectively referred to as "the Company",the "Company," "we," "it," "us," or "our.""our".
We provide primarilyOur Life Insurance segment operates through CICA International and CICA Domestic. Until December 31, 2022, our international life insurance business operated through CICA Bermuda. Beginning January 1, 2023, all new international policies are issued by CICA International. These companies provide U.S. dollar-denominated endowment contracts internationally, which are principally accumulation contracts that incorporate an element of life insurance protection and endowments,ordinary whole life insurance in U.S. dollar-denominated amounts sold to non-U.S. residents. These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and may utilize rider benefits to provide additional increasing or decreasing coverage and annuity benefits to enhance accumulations. On August 31, 2023, CICA Bermuda transferred all of its insurance in force business to CICA International. Prior to July 1, 2023, our domestic life insurance business operated through CICA Domestic and CNLIC. CICA Domestic issues ordinary whole life, final expense, life products with living benefits, critical illness and credit life and disability policies throughout the U.S. and CNLIC issued ordinary whole life and critical illness policies through June 30, 2023. CNLIC merged into CICA Domestic on July 1, 2023.
Our Home Service Insurance segment operates through our subsidiaries SPLIC, MGLIC and SPFIC, and focuses on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas. Our products in this segment consist primarily of small face amount ordinary whole life, industrial life and pre-need policies, which are designed to fund final expenses for the insured, primarily consisting of funeral and burial costs as well as a small amount of healthcritical illness and property insurance policies, through fourwhich cover dwelling and contents. As of our subsidiaries - CICA, SPLIC, MGLIC and CNLIC. CICA and CNLIC issue ordinary whole-life policies, burial insurance, pre-need policies, and accident and health related policies throughoutJune 30, 2023, the Midwest and southern United States. CICA also issues ordinary whole-life and endowment policies to non-U.S. residents. SPLIC and MGLIC offer final expense and industrial life insurance in Louisiana, Arkansas and Mississippi, and SPFIC, a wholly-owned subsidiary of SPLIC, writes a limited amount of property insurance in Louisiana. CICA Life Ltd. is a newly established Bermuda entity with noCompany ceased all operations to date. for SPFIC.
CTI provides data processing systems and services as well as furniture and equipment, to the Company. III provides aviation transportation to the Company.
Significant Accounting PoliciesSIGNIFICANT ACCOUNTING POLICIES
InvestmentsINVESTMENTS
Investment securities are classified as held-to-maturity ("HTM"), available-for-sale ("AFS") or trading. Management determines the appropriate classification at the time of purchase. The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Fixed maturity securities are classified as held-to-maturityHTM and carried at amortized cost when management has the positive intent and the Company has the ability to hold the securities to maturity. Securities not classified as held-to-maturity are classified as available-for-sale andAFS are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income (loss) and doare not affectreported in earnings until realized. Fixed maturitiesOur fixed maturity securities consist primarily of bonds classified as available-for-sale or held-to-maturity.AFS. The Company does not classify any fixed maturitiesmaturity securities as trading.trading or as HTM. Equity securities (including non-redeemable preferred stock) are considered available-for-sale and are reportedmeasured at fair value.value with the change in fair value recorded through net income (loss).
Unrealized gains (losses) of equityfixed maturity securities and fixed maturities held as available-for-sale isAFS are shown as a separate component of stockholders' equity, net of tax, and is a separate component of other comprehensive income.income (loss).
The Company evaluates allassesses AFS fixed maturity securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations,in an unrealized loss position for determining if an other-than-temporary impairment ("OTTI") exists pursuant to the accounting guidelines. In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial conditions and near-term prospects of the issuer, and the ability and intent of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may considerexpected credit losses. First, we assess whether the securities are issued by the Federal government or its agencies, by government-sponsored agencies, or whether downgrades by bond rating agencies have occurred, and reviews of the issuer’s financial condition.
If management determines that an investment experienced an OTTI, management must then determine the amount of OTTI to be recognized in earnings. If management does notwe intend to sell, the security andor it is more likely than not that the Company will not be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI will be separated into the amount representing the credit loss and the amount related to all other factors. The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of OTTI related to other factors will be recognized in other comprehensive
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings will become the new amortized cost basis of the investment. If management intends to sell the security or more likely than notwe will be required to sell, the security
December 31, 2023 | 10-K 68
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
before recovery of its amortized cost. If either of the criteria is met, the security's amortized cost basisis written down to its fair value. For AFS fixed maturity securities that do not meet either criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any current period credit loss, the OTTI will be recognized in earnings equalchanges to the entire difference betweenrating of the investment's amortized cost basissecurity by a rating agency, and its fair value at the balance sheet date. Any recoveriesadverse conditions specifically related to the value of these securitiessecurity, among other factors. If management deems a credit loss has occurred, the impairment is recorded through an allowance for credit losses rather than as a write-down. Changes in the allowance for credit losses are recorded asthrough investment related gains and losses. Any impairment that has not been recorded through an unrealized gain (asallowance for credit losses is recognized in accumulated other comprehensive income (loss) on our consolidated balance sheets.
The Company made a policy election to exclude accrued interest from the amortized cost of AFS fixed maturity securities and report accrued interest separately in stockholders' equity) and not recognized inaccrued investment income untilon the consolidated balance sheets. AFS fixed maturity securities are placed on non-accrual status when we no longer expect to receive all contractual amounts due. Accrued interest receivable is reversed against interest income when a security is ultimatelyplaced on non-accrual status. Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable.
Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold.
The Company from time to time may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.
Mortgage loans on real estate and policyPolicy loans are reported at unpaid principal balances.
Real estate and otherOther long-term investments consist primarily of landinvestments in limited partnerships, Federal Home Loan Bank ("FHLB") common stock and buildings that are recorded at depreciated cost. Ifmortgage loans. We initially estimate the fair value of investments in limited partnerships by reference to the real estatetransaction price. Subsequently, we obtain the fair value of these investments from net asset value information provided by the general partner or manager of the investments, the financial statements of which are audited annually. Recognition of investment income on these funds is less thandelayed due to the carrying value, an impairment loss is recognized and charged to earnings.
Real estate held for sale represented a building we owned in Arkansas, which was sold in 2017.
Premiums and discounts are amortized or accreted over the lifeavailability of the related security as an adjustmentfinancial statements, which are generally obtained from the partnerships' general partners. As a result, our limited partnerships are generally reported on a three-month delay.
We are a member of the FHLB of Dallas and such membership requires members to yield usingown stock in the effective interest method. Dividend and interest incomeFHLB. Our FHLB stock is recognized when earned. Realized gains and lossescarried at amortized cost, which approximates fair value.
Mortgage loans on real estate are included in earnings and are derived using the specific identification method for determining the cost of securities sold.reported at unpaid principal balances.
The Company had cash equivalents and fixed maturities and equitymaturity securities with an aggregate fair value of $8.6 million and $9.8 million and $10.0 millionat December 31, 20172023 and 2016,2022, respectively, on deposit with various state regulatory authorities to fulfill statutory requirements.
Premium RevenueSHORT-TERM INVESTMENTS
The Company considers investments maturing within one year at acquisition as short-term. These securities are carried at fair value.
CASH AND CASH EQUIVALENTS
Cash consists of balances on hand and Related Expenses
Premiums on life policies are recognized as earned when due. Due premiums on the statements of financial position are net of allowances. Premiums paid in advance on the statements of financial position are held on deposit in banks and accrue interestfinancial institutions. Cash equivalents consists of securities whose duration does not exceed 90 days at rates ranging from 2.5% to 6.0% until such time the premiums become due. Accident and health policies are recognized as revenue over the contract period on a pro rata basis. Benefits and expenses are associated with earned premiums so as to result in the recognitiondate of profits over the estimated lives of the contracts. This matching is accomplished by means of a provision for future policy benefits and the capitalization and amortization of deferred policy acquisition costs.acquisition.
Annuity policies, primarily flexible premium fixed annuity products, are accounted for in a manner consistent with accounting for interest bearing financial instruments. Premium receipts are not reported as revenue, rather as deposit liabilities to annuity contracts. The annuity products issued do not include fees or other such charges.
Deferred Policy Acquisition Costs
Acquisition costs, consisting of commissions and policy issuance, underwriting and agent convention expenses that are directly related to and vary with the successful production of new and renewal business, have been deferred. These deferred amounts, referred to as deferred policy acquisition costs ("DAC"), are recorded as an asset on the consolidated balance sheet and amortized to income in a systematic manner, based on related contract revenues or gross profits as appropriate.
Traditional life insurance and accident and health insurance acquisition costs are being amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing future policy benefit liabilities. For universal life type contracts and investment contracts that include significant surrender charges or that yield significant revenues from sources other than the investment contract holders' funds, the deferred contract acquisition cost amortization is matched to the recognition of gross profit. The effect on the DAC asset that would result from realization of unrealized gains or losses is recognized with an offset to accumulated other comprehensive income in consolidated stockholders' equity. If an internal replacement of insurance or investment contract modification substantially changes a contract as defined in current accounting guidance, then the DAC is written off immediately
71December 31, 2023 | 10-K 69
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
REINSURANCE RECOVERABLE
through income and any new deferrable costs associated with the new replacement are deferred. If a contract modification does not substantially change the contract, the DAC amortization on the original contract will continue and any acquisition costs associated with the related modification are immediately expensed.
We utilize the factor method to determine the amount of costs to be capitalized and the ending asset balance. The factor method is based on the ratio of premium revenue recognized for the policies in force at the end of each reporting period compared to the premium revenue recognized for policies in force at the beginning of the reporting period. The factor method ensures that policies lapsed or surrendered during the reporting period are no longer included in the deferred policy acquisition costs calculation. The factor method limits the amount of deferred costs to its estimated realizable value, provided actual experience is comparable to that contemplated in the factors.
Inherent in the capitalization and amortization of deferred policy acquisition costs are certain management judgments about what acquisition costs are deferred, the ending asset balance and the annual amortization. Approximately 95% of our capitalized deferred acquisition costs are attributed to first year and renewal excess commissions. The remaining 5% are attributed to costs that vary with and are directly related to the successful acquisition of new insurance business. Those costs generally include costs related to the production, underwriting and issuance of new business.
DAC is subject to recoverability testing at the time of policy issuance and loss recognition testing on an annual basis, or when an event occurs that might require loss recognition testing. If loss recognition or impairment is necessary, DAC would be written off to the extent that anticipated future premiums and investment income is insufficient to cover expected future policy benefits and expenses. Loss recognition testing that considers, among other things, actual experience and projected future experience calculates the available premium (gross premium less the benefit and expense portion of premium) for the next 50 years. The available premium per policy and the deferred policy acquisition costs per policy are then calculated. The deferred policy acquisition costs are then evaluated for recoverability using best estimate assumptions. Management believes that our deferred policy acquisition costs and related amortization for the years ended December 31, 2017, 2016 and 2015 limits the amount of deferred costs to its estimated realizable value. This belief is based upon the analysis performed on capitalized expenses that vary with and are directly related to the acquisition of new and renewal insurance business, utilization of the factor method and recoverability testing at the time of policy issuance and the annual loss recognition testing.
The components of deferred acquisition costs from year to year are summarized as follows:
|
| | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Balance at beginning of period | $ | 167,790 |
| | 163,692 |
| | 155,859 |
|
| Capitalized | 29,120 |
| | 32,732 |
| | 31,104 |
|
| Amortized | (29,690 | ) | | (28,515 | ) | | (23,400 | ) |
| Effects of unrealized (gains) losses | (157 | ) | | (119 | ) | | 129 |
|
| Balance at end of period | $ | 167,063 |
| | 167,790 |
| | 163,692 |
|
Cost of Customer Relationships Acquired
Cost of customer relationships acquired ("CCRA") is established when we purchase a block of insurance. CCRA is amortized primarily over the emerging profit of the related policies using the same assumptions as were used in computing liabilities for future policy benefits. Inherent in the amortization of CCRA are certain management judgments about the ending asset balance and the annual amortization. The assumptions used are based upon interest, mortality and lapses at the time of purchase.
A recoverability test that considers, among other things, actual experience and projected future experience is performed at least annually. These annual recoverability tests initially calculate the available premium (gross premium less the benefit and expense portion of premium) for the next 50 years. The CCRA is then evaluated utilizing reasonable assumptions. Management believes that our CCRA and related amortization is recoverable for the years ended
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2017, 2016 and 2015. This belief is based upon the analysis performed on estimated future results of the block and our annual recoverability testing.
Cost of customer relationships acquired relative to purchased blocks of insurance is summarized as follows:
|
| | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Balance at beginning of period | $ | 19,415 |
| | 21,585 |
| | 23,542 |
|
| Acquisitions | — |
| | — |
| | — |
|
| Amortization | (2,129 | ) | | (2,063 | ) | | (2,317 | ) |
| Change in effects of unrealized (gains) losses on CCRA | 213 |
| | (107 | ) | | 360 |
|
| Balance at end of period | $ | 17,499 |
| | 19,415 |
| | 21,585 |
|
Estimated amortization of cost of customer relationship acquired in each of the next five years and thereafter is as follows. Actual future amortization will differ from these estimates due to variances from estimated future withdrawal assumptions.
|
| | | |
| | Amount |
| | (In thousands) |
| Year: | |
| 2018 | $ | 1,619 |
|
| 2019 | 1,424 |
|
| 2020 | 1,289 |
|
| 2021 | 1,168 |
|
| 2022 | 1,060 |
|
| Thereafter | 11,285 |
|
| | 17,845 |
|
| Effects of unrealized (gains) losses on CCRA | (346 | ) |
| Total | $ | 17,499 |
|
The value of CCRA in our various acquisitions, which is included in cost of customer relationships acquired in the accompanying consolidated financial statements, was determined based on the present value of future profits discounted at annual rates ranging from 3.7% to 8.5%.
Future Policy Benefits and Expenses
Future policy benefit reserves for traditional life insurance and accident and health insurance contract benefits and expenses are computed using a net level premium method, with assumptions as to investment yields, dividends on participating business, mortality and withdrawals based upon our experience, modified as necessary to reflect anticipated trends and to include provisions for possible unfavorable deviations.
The accrued account balance for non-traditional life insurance and investment contracts is computed as deposits net of withdrawals made by the contract holder, plus amounts credited based on contract specifications, less contract fees and charges assessed, plus any additional interest. Annuity interest crediting rates range from 2.5% to 5.5% annually. Benefits and expenses are charged against the account balance to recognize costs as incurred over the estimated lives of the contracts. Expenses include interest credited to contract account balances and benefits paid in excess of contract account balances.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Unpaid claims on accident and health and specialty property insurance policies represent the estimated liability for benefit expenses, both reported but not paid and incurred but not reported to the Company. The liability for incurred but not reported claims includes estimates for additional claim amounts due related to reported claims. Liabilities for unpaid claims are estimated using individual case basis valuations and statistical analysis. Those estimates are subject to the effects of trends in claim severity and frequency.
Anticipated investment income is not considered in determining whether a premium deficiency exists with respect to short-duration contracts. Premium deposits accrue interest at rates ranging from 2.5% to 6.0% per annum. The cost of insurance is included in the premium when collected and interest is credited annually to deposit accounts.
The development of liabilities for future policy benefits requires management to make estimates and assumptions regarding mortality, morbidity, lapse, expense, and investment experience. These estimates are based primarily on historical experience and future expectations of mortality, morbidity, expense, persistency, and investment assumptions. Actual results could differ materially from estimates. We monitor actual experience and revise assumptions as necessary.
Goodwill and Other Intangible Assets
Goodwill is the difference between the purchase price in a business combination and the fair value of assets and liabilities acquired, and is not amortized. Other intangible assets include various state insurance licenses, which have been determined to have indefinite useful lives and, therefore, are not amortized. Both goodwill and other intangible assets with indefinite useful lives are subject to annual impairment analysis.
The goodwill impairment test uses a two-step process as set forth under current accounting guidance. In the first step, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair value of projected new business is compared to the carrying value of goodwill. A requirement of this method is that the inforce must pass loss recognition testing. If the carrying amount of the reporting unit goodwill exceeds the fair value of projected new business, an impairment loss is recognized in an amount equal to that excess. In January 2017, the FASB issued Accounting Standards Update ("ASU") No. 2017-04, Simplifying the Test for Goodwill Impairment. An entity will no longer perform a hypothetical purchase price allocation to measure impairment, eliminating step 2 of the goodwill impairment test. Instead, impairment will be measured using the difference of the carrying amount to the fair value of the reporting unit. The ASU is effective prospectively for annual and interim periods in fiscal year beginning after December 15, 2019, but early adoption is permitted for goodwill impairment tests with measurement dates after January 1, 2017. The Company elected to early adopt this ASU for our 2017 annual evaluation.
Management’s determination of the fair value of each reporting unit incorporates multiple inputs including discounted cash flow calculations based on assumptions that market participants would make in valuing the reporting unit. Other assumptions can include levels of economic capital, future business growth, and earnings projections.
As of December 31, 2017, the Company had goodwill of $12.6 million allocated to the Life Insurance segment. The Company completes its annual goodwill assessment for the individual reporting units within the Life Insurance segment and Home Service Insurance segment as of December 31 each year. We recorded an impairment of $4.6 million in 2017 in our Home Service segment. This impairment is recorded in other general expenses on the Consolidated Statement of Operations. We adjusted our discount rate used in our fair value calculation from 10% in 2016 to 12% in 2017 based upon current market inputs as well as decreasing our estimate related to long term investment earned rates from 5.85% in 2016 to 4.95% in 2017 due to the current interest environment. These revisions resulted in decreasing the fair value of this segment. We also estimated lower new business projections in our 2017 valuation based upon the lack of market share growth in this segment. There was no impairment of goodwill in 2016 or 2015 related to the Life or Home Service segment.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Goodwill is summarized as follows:
|
| | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Balance at January 1, | $ | 17,255 |
| | 17,255 |
| | 17,255 |
|
| Acquisition | — |
| | — |
| | — |
|
| Adjustments | — |
| | — |
| | — |
|
| Impairment | (4,631 | ) | | — |
| | — |
|
| Balance at December 31, | $ | 12,624 |
| | 17,255 |
| | 17,255 |
|
Participating Policies
At December 31, 2017 and 2016, participating business approximated 62.5% and 62.2% of direct life insurance in force, respectively.
Future policy benefits on participating policies are estimated based on net level premium reserves for death and endowment policy benefits with interest rates ranging from 3.2% to 9.0%, and the cash surrender values described in such contracts. The scaling rate used for the 2017 portfolio ranged between 3.19% for 1 year and then going up to 4.45% over 20 years and remaining there for the duration. Earnings and dividends on participating policies are allocated based on policies in force.
Policyholder dividends are determined based on the discretion of the Board of Directors of the policy issuing subsidiary. Policyholder dividends are accrued over the premium paying periods of the insurance contract.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Earnings Per Share
Basic earnings per share are computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share are computed under the if-converted method for convertible securities and the treasury stock method for warrants, giving effect to all potential dilutive common stock, including options, warrants and convertible/redeemable preferred stock. The basic and diluted earnings per share of Class B common stock are one half the earnings per share of the Class A common stock.
The following table sets forth the computation of basic and diluted earnings per share.
|
| | | | | | | | | | |
| | Years Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| | (In thousands, except per share amounts) |
| Basic and diluted earnings per share: | | | | | | |
| Numerator: | | | | | | |
| Net income (loss) | | $ | (38,127 | ) | | 1,969 |
| | (3,143 | ) |
| Net income (loss) allocated to Class A common stock | | $ | (37,742 | ) | | 1,949 |
| | (3,112 | ) |
| Net income (loss) allocated to Class B common stock | | (385 | ) | | 20 |
| | (31 | ) |
| Net income (loss) | | $ | (38,127 | ) | | 1,969 |
| | (3,143 | ) |
| Denominator: | | |
| | |
| | |
|
| Weighted average shares of Class A outstanding - basic and diluted | | 49,080 |
| | 49,080 |
| | 49,080 |
|
| Weighted average shares of Class B outstanding - basic and diluted | | 1,002 |
| | 1,002 |
| | 1,002 |
|
| Total weighted average shares outstanding - basic and diluted | | 50,082 |
| | 50,082 |
| | 50,082 |
|
| Basic and diluted earnings (losses) per share of Class A common stock | | $ | (0.77 | ) | | 0.04 |
| | (0.06 | ) |
| Basic and diluted earnings (losses) per share of Class B common stock | | (0.38 | ) | | 0.02 |
| | (0.03 | ) |
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered.
A deferred tax asset is recorded only if a determination is made that it is more-likely-than-not that the tax treatment on which the deferred tax asset depends will be sustained in the event of an audit. These determinations inherently involve management's judgment. In addition, the Company must record a tax valuation allowance with respect to deferred tax assets if it is more-likely-than-not that the tax benefit will not be realized. This valuation allowance is in essence a contra account to the deferred tax asset. Management must determine the portion of the deferred tax asset and resulting tax benefit that may not be realized based upon judgment of expected outcomes.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation of property and equipment is computed using the straight-line method over the useful lives of the assets, ranging from three to thirty years.
The following is a summary of property and equipment.
|
| | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | (In thousands) |
| Property and equipment: | | | |
| Home office, land and buildings | $ | 4,139 |
| | 10,051 |
|
| Furniture and equipment | 3,189 |
| | 2,994 |
|
| Electronic data processing equipment and computer software | 8,042 |
| | 6,914 |
|
| Automobiles | 91 |
| | 175 |
|
| Airplane | — |
| | 3,356 |
|
| Total property and equipment | 15,461 |
| | 23,490 |
|
| Accumulated depreciation | (8,837 | ) | | (15,600 | ) |
| Balance at end of period | $ | 6,624 |
| | 7,890 |
|
During August 2017, the Company relocated its home office to a different location and entered into a lease with an unrelated party. The Company's previous home office was in a building owned by a Company affiliate. During the fourth quarter of 2017, the building was reclassified in the amount of $1.6 million from property and equipment to real estate held for investment on the Consolidated Statement of Financial Position, and the Company is currently searching for tenants to lease the office space.
Lease payments at the new home office are $114,000 per month during the twelve months beginning August 1, 2017 and increase to $118,000 per month for the second year beginning August 1, 2018. After that, the Company will renegotiate with the landlord for a long term lease.
The Company sold its airplane in 2017 for a gain of $99,000, which is included in other income on the Consolidated Statement of Operations.
Reinsurance Recoverable
Reinsurance recoverable includes expected reimbursements for policyholder claim amounts in excess of the Company's retention, as well as profit sharing and experience refund accruals. Reinsurance recoverable is reduced for estimated uncollectible amounts, if any.
Reinsurance premiums, benefits and expenses are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. The cost of reinsurance related to long duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. The cost of reinsurance related to short duration contracts is accounted for over the coverage period. Profit-sharing and similar adjustable provisions are accrued based on the experience of the underlying policies.
DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs (“DAC”) are costs that are incremental and directly related to the successful acquisition of new or renewal insurance contracts. Such costs include the incremental direct costs of contract acquisition, such as sales commissions; the portion of employees’ total compensation and payroll-related fringe benefits related directly to time spent performing acquisition activities, such as underwriting, issuing and processing policies for contracts that have actually been acquired; and other costs related directly to acquisition activities that would not have been incurred if the contract had not been acquired.
Contracts are grouped by contract type and issue year into cohorts consistent with the grouping used in estimating the associated liability. DAC is amortized on a constant level basis for the grouped contracts over the expected term of the related contracts to approximate straight-line amortization. For the Life Insurance segment, the constant level basis used is policy count in force. For the Home Service Insurance segment, the constant level basis used is face amount in force. The constant level bases used for amortization are projected using mortality and lapse assumptions that are based on the Company’s experience, industry data, and other factors at the end of each reporting period and are consistent with those used for the liability for future policy benefit life reserves. Annually, the Company completes experience studies with respect to mortality and lapse assumptions. If those assumptions are updated, the DAC amortization basis is recalculated and the effect of the assumption change will be reflected in the cohort level amortization in future periods.
Inherent in the capitalization and amortization of DAC are certain management judgments about what acquisition costs are deferred, the ending asset balance and the annual amortization. Approximately 93% of our capitalized DAC are attributed to first year and renewal excess commissions. The remaining 7% are attributed to other costs that vary with and are directly related to the successful acquisition of new insurance business. Those costs generally include costs related to the production, underwriting and issuance of new business.
Amortization of DAC is included in the consolidated statements of operations and comprehensive income (loss). The DAC balance on the consolidated balance sheets is reduced for actual experience in excess of expected experience. Changes in future estimates are recognized prospectively over the remaining expected contract term.
COST OF INSURANCE ACQUIRED
The Company recognizes an intangible asset that arises in the application of U.S. GAAP purchase accounting as the difference between the reported value and the fair value of insurance contract liabilities, or comparable amounts determined in purchased insurance business combinations. This intangible asset is referred to as the Cost of Insurance Acquired (“COIA”), which is amortized on a basis consistent with DAC, such that it is amortized in proportion to policies in force for the Life Insurance segment and face amount in force for the Home Service Insurance segment to approximate straight-line amortization.
A recoverability test that considers, among other things, actual experience and projected future experience is performed at least annually. These annual recoverability tests are based initially on an estimate of the available premium (gross premium less the benefit and expense portion of premium) for the next 50 years. Management believes that our COIA is recoverable for the years ended December 31, 2023 and 2022. This belief is based upon the analysis performed on estimated future results of the block and our annual recoverability testing.
77December 31, 2023 | 10-K 70
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
The value of COIA resulting from our various acquisitions was determined based on the present value of future profits discounted at annual rates ranging from 3.7% to 8.5%.
Contingencies
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is the difference between the purchase price in a business combination and the fair value of assets and liabilities acquired and is not amortized. Other intangible assets include various state insurance licenses, which have been determined to have indefinite useful lives and, therefore, are not amortized. Both goodwill and other intangible assets with indefinite useful lives are subject to annual impairment analysis.
Goodwill is tested for impairment on an annual basis or more frequently if indicators of potential impairment exist. The goodwill testing requires us to compare the estimated fair value of a reporting unit to its carrying value. If the carrying value of the reporting unit is lower than its estimated fair value, no further evaluation is required. If the carrying value of the reporting unit exceeds its estimated fair value, an impairment charge is recorded for that excess, limited to the total amount of goodwill allocated to that reporting unit. We have the option of performing an assessment of certain qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value or proceeding directly to a quantitative impairment test. We elected to apply the quantitative assessment for the goodwill in our reporting units within the Life Insurance segment as of December 31, 2021.
We recorded an impairment of $12.6 million in 2021 in our Life Insurance segment caused by increases in our carrying value of the segment due to recognition of a $43.8 million uncertain tax position in the fourth quarter of 2021, following the expiration of the statute of limitations on the tax year ended December 31, 2017. This impairment is recorded on the consolidated statements of operations and comprehensive income (loss). The Company has no remaining goodwill as of December 31, 2021.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation. Depreciation of property and equipment is computed using the straight-line method over the useful lives of the assets, ranging from three years to thirty years.
The following is a summary of property and equipment.
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December 31,
(In thousands) | 2023 | | 2022 |
| Property and equipment: | | | |
| Home office, land and buildings | $ | 3,980 | | | 3,980 | |
| Furniture and equipment | 1,389 | | | 1,267 | |
| Electronic data processing equipment and computer software | 7,800 | | | 7,485 | |
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Real estate and equipment leases (See Note 8) | 9,073 | | | 10,116 | |
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| Total property and equipment | 22,242 | | | 22,848 | |
| Accumulated depreciation | (10,433) | | | (9,922) | |
| Property and equipment, net | $ | 11,809 | | | 12,926 | |
The Company has several lease agreements for real estate and equipment, such as its corporate home office, Puerto Rico service center and several district office locations related to our Home Service Insurance segment. The Company recognizes these lease agreements on the consolidated balance sheets as a right-of-use asset and a corresponding lease liability. The Company uses its estimated incremental borrowing rate, which is derived from information available at lease commencement date, in determining the present value of lease payments.
FUTURE POLICY BENEFITS AND EXPENSES
As premium revenue is recognized, a liability for future policy benefits, which is the present value of estimated future policy benefits to be paid to or on behalf of policyholders less the present value of estimated future net premiums to be collected from policyholders, is accrued. The liability is estimated using current assumptions that include
December 31, 2023 | 10-K 71
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| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
discount rate, mortality and lapses. These current assumptions are based on judgements that consider the Company’s historical experience, industry data, and other factors.
Our traditional and limited-payment contracts are grouped into cohorts by contract type and issue year. Our reporting cohorts are (i) Permanent, which summarizes insurance policies with premiums payable over the lifetime of the policy, and (ii) Permanent Limited Pay, which summarizes insurance policies with premiums payable for a limited time after which the policy is fully paid up. Both reporting cohorts include whole life and endowment policies. The liability is adjusted for differences between actual and expected experience. The Company reviews its historical cash flow assumptions quarterly and in the third quarter of the year, the Company reviews its future cash flow assumptions. The net premium ratio used to calculate the liability is updated each quarter based on the current period's actual experience relative to expected experience. The revised net premium ratio is used to derive an updated liability for future policy benefits as of the beginning of the current reporting period, discounted at the locked-in discount rate. This amount is then compared to the carrying amount of the liability as of that same date, before the updating of cash flow assumptions, to determine the current period change in liability estimate. The current period change in the liability is the policyholder liability remeasurement gain or loss and is presented as a separate component of total insurance benefits paid or provided in the consolidated statements of operations and comprehensive income (loss). In subsequent periods, the revised net premiums are used to measure the liability for future policy benefits, subject to future revisions.
For traditional and limited-payment contracts, the current discount rate assumption is a yield curve that equals the yield of an upper-medium grade fixed income instrument, based on A-quality corporate bonds. The Company selects fixed-income instruments that have been A rated by one of the major credit rating agencies, such as Moody’s, Standard & Poor’s, or Fitch. The current discount rate assumption is updated quarterly and used to remeasure the liability at the reporting date, with the resulting change reflected in other comprehensive income. For liability cash flows that are projected beyond the duration of market-observable A credit-rated fixed-income instruments, the Company uses the last market-observable yield level and linear interpolation to determine yield assumptions for durations that do not have market observable yields. The locked-in discount rate for policies issued prior to transition equals the rate set at contract issuance. For current year issues, the locked-in discount rate is the average of the current year quarterly discount rates and will change throughout the year as new discount rates are calculated, with the change reflected in net income.
The accrued account balance for non-traditional life insurance and investment contracts is computed as deposits net of withdrawals made by the contract holder, plus amounts credited based on contract specifications, less contract fees and charges assessed, plus any additional interest. Annuity interest crediting rates range from 2.5% to 5.5% annually. Benefits and expenses are charged against the account balance to recognize costs as incurred over the estimated lives of the contracts. Expenses include interest credited to contract account balances and benefits paid in excess of contract account balances.
Unpaid claims on accident and health and specialty property insurance policies represent the estimated liability for benefit expenses, both reported but not paid and incurred but not reported to the Company. The liability for incurred but not reported claims includes estimates for additional claim amounts due related to reported claims. Liabilities for unpaid claims are estimated using individual case basis valuations and statistical analysis. Those estimates are subject to the effects of trends in claim severity and frequency.
Anticipated investment income is not considered in determining whether a premium deficiency exists with respect to short-duration contracts. Premium deposits accrue interest at rates ranging from 1.5% to 6.0% per annum. The cost of insurance is included in the premium when collected and interest is credited annually to deposit accounts.
DEFERRED PROFIT LIABILITY
For limited-payment products, gross premiums received in excess of net premiums are deferred at initial recognition as a deferred profit liability (“DPL”). Gross premiums are measured using assumptions consistent with those used in the measurement of the liability for future policy benefit life reserves, including discount rate, mortality and lapses.
The DPL is amortized and recognized in net income within the increase (decrease) in future policy benefit reserves.The amortization basis for the DPL is the present value of insurance in force for life insurance contracts. Interest is accreted on the balance of the DPL using the locked-in discount rate. The Company reviews and updates its estimates of cash flows for the DPL at the same time as the estimates of cash flows for the liability for future policy benefit life reserves. The DPL is updated each quarter based on the current period's actual experience relative to
December 31, 2023 | 10-K 72
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| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
expected experience with the changes recorded within the increase (decrease) in future policy benefit reserves in the consolidated statements of operations and comprehensive income (loss).On the consolidated balance sheets, DPL is recorded as a component of the liability for future policy benefit life reserves.
PARTICIPATING POLICIES
At December 31, 2023 and 2022, participating business approximated 51% and 55%, respectively, of direct life insurance in force.
Policyholder dividends are determined based on the discretion of the board of directors of the policy issuing subsidiary. Policyholder dividends are accrued over the premium paying periods of the insurance contract.
CONTINGENCIES
An estimated loss from a contingency is accrued and charged to results of operations only if both of the following conditions are met:
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1. | Information available prior to the issuance of the financial statements indicates that it is probable (virtual certainty is not required) that an asset has been impaired or a liability incurred as of the date of the financial statements; and
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2. | The amount of the loss can be reasonably estimated. |
1.Information available prior to the issuance of the consolidated financial statements indicates that it is probable(virtual certainty is not required) that an asset has been impaired or a liability incurred as of the date of the consolidated financial statements; and
2.The amount of the loss can be reasonably estimated.
Reasonable estimation of a possible loss does not require estimating a single amount of the loss. It requires that a loss be accrued if it can be estimated within a range. If an amount within the range is a better estimate than any other amount within the range, that amount is accrued. If no amount within the range is a better estimate than any other amount, the minimum amount in the range is accrued.
A gain contingency is an uncertain situation that will be resolved in the future, possibly resulting in a gain. We do not allow the recognition of a gain contingency prior to settlement of the underlying event. If weThere were none as of December 31, 2023 and 2022.
PREMIUM REVENUE AND RELATED EXPENSES
Premiums on life policies are recognized as earned when due. Premiums paid in advance on the consolidated balance sheets are held on deposit and accrue interest at rates ranging from 1.5% to have6.0% until such time as the premiums become due. Premiums on accident and health policies are recognized as revenue over the contract period on a material gain contingency, we would disclose itpro rata basis. Benefits and expenses are associated with earned premiums resulting in the notesrecognition of profits over the estimated lives of the contracts. This matching is accomplished by means of a provision for future policy benefits and the capitalization and amortization of deferred policy acquisition costs and amortization of deferred profit liability for limited pay plans.
Annuity policies, primarily flexible premium fixed annuity products, are accounted for in a manner consistent with accounting for interest bearing financial instruments. Premium receipts are not reported as revenue, rather as deposit liabilities to annuity contracts. The annuity products issued do not include fees or other such charges. There is also a block of annuity products accounted for as FAS97 insurance products. Reserves are set up for surrenders and death benefits. Acquisition costs and premium loads are capitalized and amortized.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the consolidatedestimated future tax consequences attributable to differences between the financial statements.statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered.
Cash EquivalentsA deferred tax asset is recorded only if a determination is made that it is more-likely-than-not that the tax treatment on which the deferred tax asset depends will be sustained in the event of an audit. These determinations inherently involve management's judgment. In addition, the Company must record a tax valuation allowance with respect to deferred tax assets if it is more-likely-than-not that the tax benefit will not be realized.
December 31, 2023 | 10-K 73
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| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
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The Company considers cash equivalents asreleases stranded tax effects in accumulated other comprehensive income on an aggregate portfolio basis.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share are computed under the if-converted method for convertible securities and the treasury stock method for warrants, giving effect to all securities whose duration does not exceed 90 days atpotential dilutive common stock, including options, warrants and convertible/redeemable preferred stock. The basic and diluted earnings per share of Class B common stock are one half the dateearnings per share of acquisition.the Class A common stock. We hold 100% of our Class B common stock in treasury.
Short-term InvestmentsUSE OF ESTIMATES
The Company considers investments maturing within one year at acquisition as short-term. These securities are carried at amortized cost, which approximates market value.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates.
ReclassificationsSignificant estimates include those used in the evaluation of credit losses on fixed maturity securities, actuarially determined assets and liabilities and assumptions, valuation allowance on deferred tax assets, valuation of uncertain tax positions and contingencies relating to litigation and regulatory matters.
RECLASSIFICATIONS
Certain amounts presented in prior years have been reclassified to conform to the current presentation. No individual amounts were material.
Accounting PronouncementsACCOUNTING PRONOUNCEMENTS
Accounting Standards Recently AdoptedACCOUNTING STANDARDS RECENTLY ADOPTED
On May 21, 2015, the FASB issued ASU 2015-09, Disclosures about Short-Duration Contracts, addressing enhanced disclosure requirements for insurers relating to short-duration insurance contract claims and the unpaid claims liability rollforward for long and short-duration contracts. The disclosures are intended to provide users of financial statements with more transparent information about an insurance entity’s initial claim estimates and subsequent adjustments to those estimates, the methodologies and judgments used to estimate claims, and the timing, frequency, and severity of claims. The new disclosures required the accumulation and reporting of new and different groupings of claims data than previously reported. For public business entities, the new guidance is effective for annual reporting periods beginning after December 15, 2015.Impacts at Transition Date
In January 2017, the FASB issued Accounting Standards Update ("ASU") No. 2017-04, Simplifying the Test for Goodwill Impairment. An entity will no longer perform a hypothetical purchase price allocation to measure impairment, eliminating step 2 of the goodwill impairment test. Instead, impairment will be measured using the difference of the carrying amount to the fair value of the reporting unit. The ASU is effective prospectively for annual and interim periods in fiscal year
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
beginning after December 15, 2019, but early adoption is permitted for goodwill impairment tests with measurement dates after January 1, 2017. The Company elected to early adopt this ASU for our 2017 annual evaluation.
Accounting Standards Not Yet Adopted
In May 2014,August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting StandardsStandard Update ("ASU") No. 2014-09, Revenue from Contracts with Customers2018-12, Financial Services-Insurance (Topic 606), which supersedes944): Targeted Improvements to the revenue recognition requirements in ASC 605, Revenue Recognition. Accounting for Long-Duration Contracts. The core principleCompany adopted ASU 2018-12 for the liability for future policy benefits, DAC and COIA on a modified retrospective basis such that those balances were adjusted to conform to ASU 2018-12 effective January 1, 2021.
December 31, 2023 | 10-K 74
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| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
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The following table summarizes the transferbalance of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle. ASU 2014-09 requires disclosures enabling users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about contracts with customers, significant judgments and changes in judgments,the liability for future policy benefits, annuity reserves, DAC and assets recognizedCOIA due to the adoption of ASU 2018-12.
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| (In thousands) | Life Insurance | Home Service Insurance | | | Consolidated |
| Liability for Future Policy Benefits | | | | | |
| Pre-adoption liability as of 12/31/2020 | $ | 987,373 | | 255,513 | | | | 1,242,886 | |
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| Change in discount rate assumptions | 261,823 | | 108,468 | | | | 370,291 | |
| Effect of reserve changes | 6 | | 96 | | | | 102 | |
| Post-adoption liability as of 1/1/2021 | $ | 1,249,202 | | 364,077 | | | | 1,613,279 | |
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| Fixed Annuity Liability | | | | | |
| Pre-adoption liability as of 12/31/2020 | $ | 60,027 | | 18,277 | | | | 78,304 | |
| Adjustments for the removal of shadow adjustments | — | | 3,426 | | | | 3,426 | |
| Post-adoption liability as of 1/1/2021 | $ | 60,027 | | 21,703 | | | | 81,730 | |
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| Deferred Acquisition Costs | | | | | |
| Pre-adoption balance as of 12/31/2020 | $ | 94,771 | | 10,142 | | | | 104,913 | |
| Adjustments for the removal of shadow adjustments | 8,270 | | 29,905 | | | | 38,175 | |
| Impact of flooring cohorts at zero | 23 | | 12 | | | | 35 | |
| Post adoption balance as of 1/1/2021 | $ | 103,064 | | 40,059 | | | | 143,123 | |
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| Cost of Insurance Acquired | | | | | |
| Pre-adoption balance as of 12/31/2020 | $ | 1,734 | | 9,807 | | | | 11,541 | |
| Adjustments for the removal of shadow adjustments | — | | 484 | | | | 484 | |
| Post adoption balance as of 1/1/2021 | $ | 1,734 | | 10,291 | | | | 12,025 | |
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At transition, the Company recorded a charge of $0.1 million to retained earnings, net of tax, primarily from capping net premium ratios for certain policyholder benefit cohorts at 100%, increasing reserves for certain non-premium paying cohorts and flooring certain DAC cohorts at zero. Other comprehensive income (loss) ("OCI") was reduced by $316.8 million primarily due to the costsdifference in the discount rate used prior to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, using one of two retrospective application methods. We have evaluatedtransition and the effect the guidance will have on our consolidated financial statements. We do not expect that any portion of our revenue will be affected by the new standard, primarily as the new guidance does not apply to revenue from insurance contracts and our non-insurance subsidiaries do not receive revenues from customers.
discount rate at January 1, 2021. The FASB’s new lease accounting standard, ASU 2016-02, Leases (Topic 842), was issued on February 25, 2016. The ASU will require organizations that lease assets, referred to as “lessees”, to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The ASUCompany also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amountsremoved shadow adjustments previously recorded in the financial statements. The accounting by organizations that own the assets leased by the lessee, also known as lessor accounting, will remain largely unchanged from current U.S. GAAP. However, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. The ASU on leases will take effectOCI for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is assessing the impact of this new standard.unrealized gains and losses on annuity products that previously amortized unearned revenue, DAC and COIA over expected future gross profits.
In
December 31, 2023 | 10-K 75
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| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
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Impacts to Previously Reported Results
Adoption of the standard impacted our previously reported consolidated financial results as follows:
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As of December 31, 2022 (In thousands) | As Previously Reported | Adoption of New Standard | Post Adoption |
| Consolidated Balance Sheet | | | |
| Deferred policy acquisition costs | $ | 140,167 | | 22,760 | | 162,927 | |
| Cost of insurance acquired | 10,260 | | 387 | | 10,647 | |
| Deferred tax asset, net | 2,414 | | (2,414) | | — | |
| Total assets | 1,569,970 | | 20,733 | | 1,590,703 | |
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| Future policy benefit reserves: | | | |
| Life insurance | 1,305,506 | | (106,859) | | 1,198,647 | |
| Annuities | 91,234 | | (91,234) | | — | |
| Policyholders' funds: | | | |
| Annuities | — | | 121,422 | | 121,422 | |
| Other policyholders' funds | 40,497 | | (32,996) | | 7,501 | |
| Deferred federal income tax liability, net | — | | 3,653 | | 3,653 | |
| Total liabilities | 1,568,927 | | (106,014) | | 1,462,913 | |
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| Retained earnings (accumulated deficit) | (52,203) | | 68,512 | | 16,309 | |
| Accumulated other comprehensive income (loss) | (195,279) | | 58,235 | | (137,044) | |
| Total stockholders' equity | 1,043 | | 126,747 | | 127,790 | |
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| Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
(In thousands, except per share amounts) | As Previously Reported | Adoption of New Standard | Post Adoption | | As Previously Reported | Adoption of New Standard | Post Adoption |
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| Consolidated Statements of Operations | | | | | | |
| Increase (decrease) in future policy benefit reserves | $ | 29,640 | | (24,836) | | 4,804 | | | 36,444 | | (26,671) | | 9,773 | |
| Policyholder liability remeasurement (gain) loss | — | | 2,884 | | 2,884 | | | — | | 1,434 | | 1,434 | |
| Amortization of deferred policy acquisition costs | 26,529 | | (12,139) | | 14,390 | | | 24,952 | | (11,507) | | 13,445 | |
| Amortization of cost of insurance acquired | 974 | | (353) | | 621 | | | 1,206 | | (449) | | 757 | |
| Federal income tax expense (benefit) | (429) | | 1,799 | | 1,370 | | | (43,475) | | 1,274 | | (42,201) | |
| Net income (loss) | (6,638) | | 32,645 | | 26,007 | | | 36,787 | | 35,919 | | 72,706 | |
| Basic earnings (losses) per share of Class A common stock | (0.13) | | 0.65 | | 0.52 | | | 0.74 | | 0.72 | | 1.46 | |
| Basic earnings (losses) per share of Class B common stock | — | | — | | — | | | 0.37 | | 0.36 | | 0.73 | |
| Diluted earnings (losses) per share of Class A common stock | (0.13) | | 0.64 | | 0.51 | | | 0.73 | | 0.71 | | 1.44 | |
| Diluted earnings (losses) per share of Class B common stock | — | | — | | — | | | 0.36 | | 0.36 | | 0.72 | |
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December 31, 2023 | 10-K 76
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| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
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| Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
(In thousands) | As Previously Reported | Adoption of New Standard | Post Adoption | | As Previously Reported | Adoption of New Standard | Post Adoption |
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| Consolidated Statement of Comprehensive Income (Loss) | | | | | |
| Unrealized holding gains (losses) arising during period | $ | (330,765) | | 2,196 | | (328,569) | | | (5,298) | | (36,068) | | (41,366) | |
| Change in current discount rate for liability for future policy benefits | — | | 337,776 | | 337,776 | | | — | | 92,396 | | 92,396 | |
| Income tax expense (benefit) on other comprehensive income items | (17,994) | | 25,256 | | 7,262 | | | 5,465 | | (4,016) | | 1,449 | |
| Other comprehensive income (loss) | (312,771) | | 314,716 | | 1,945 | | | (10,763) | | 60,344 | | 49,581 | |
| Total comprehensive income (loss) | (319,409) | | 347,361 | | 27,952 | | | 26,024 | | 96,263 | | 122,287 | |
On June 2016,30, 2022, the FASB issued ASU 2016-13, Financial Instruments-Credit LossesNo. 2022-03, Fair Value Measurement (Topic 326), with the main objective820: Fair Value Measurement of Equity Securities Subject to provide financial statement users with more decision-useful information about the expected credit lossesContractual Sale Restrictions. This standard clarifies that contractual restrictions on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this ASU require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basisequity security sales are not considered part of the financial asset(s) to presentsecurity unit of account and, therefore, are not considered in measuring fair value. In addition, the net carrying value at the amount expected to be collected on the financial asset. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit lossesamendments clarify that have taken place during the period. Credit losses on available-for-sale debt securities should be measured in a manner similar to current U.S. GAAP; however, the credit losses are recorded through an allowance for credit losses rather thanentity cannot, as a write-down. This approach is an improvement to current U.S. GAAP because an entity will be able to record reversalsseparate unit of credit losses (in situations in which the estimate of credit losses declines) in current period net income, which in turn should align the income statement recognition of credit losses with the reporting period in which changes occur. Current U.S. GAAP prohibits reflecting those improvements in current-period earnings. For public business entities, theaccount, recognize and measure a contractual sale restriction. Disclosures on such restrictions are also required. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019,2023, including interim periods within those fiscal years. The Companyyears, and are required to be applied prospectively, with any adjustments from the adoption recognized in earnings and disclosed. Early adoption is evaluating theavailable. Citizens' elected to adopt this standard as of December 31, 2023 as adoption of this standard has no impact this guidance will have on our consolidated financial statements, but it is not expected to have a significant impact on the Company's consolidated financial statements.
In March 2017,ACCOUNTING STANDARDS NOT YET ADOPTED
On November 27, 2023, the FASB issued Accounting Standards Update ("ASU")ASU No. 2017-08, Receivables-Nonrefundable Fees2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This amendment expands a public entity's segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker, clarifying when an entity may report one or more additional measures to assess segment performance, requiring enhanced interim disclosures, providing new disclosure requirements for entities with a single reportable segment, and Other Costs (Subtopic 310-20). requiring other new disclosures. The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The Company has a large portfolio of callable debt securities purchased at a premium. As such, the Company had already been amortizing the premium to the earliest call date to reduce volatility in earnings by eliminating reporting large realized losses when debt securities are called. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
On February 14, 2018, the FASB issued Accounting Standards Update ("ASU") No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. It allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The ASU is effective for all entities for fiscal years beginning after December 15, 2018,2023 and interim periods within those fiscal years.years beginning after December 15, 2024. Early adoption is permitted, including adoption in any interim period for public business entities for reporting periods for which financial statements have not yet been issued. However,available. Although the ASU only requires additional disclosures about the Company's operating segments, the Company has chosenis currently evaluating the effects of adopting this guidance on the consolidated financial statements.
On December 14, 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to notIncome Tax Disclosures, which is intended to enhance the transparency, decision usefulness and effectiveness of income tax disclosures.The amendments in this ASU require a public entity to disclose a tabular tax rate reconciliation, using both percentages and currency, with specific categories. A public entity is also required to provide a qualitative description of the state and local jurisdictions that make up the majority of the effect of the state and local income tax category and the net amount of income taxes paid, disaggregated by federal, state and foreign taxes and also disaggregated by individual jurisdictions. The amendments also remove certain disclosures that are no longer considered cost beneficial. The amendments are effective prospectively for annual periods beginning after December 15, 2024 and early adoptadoption and retrospective application are permitted. The Company is currently evaluating the impact of adopting this guidance.pronouncement on the consolidated financial statements.
No other new accounting pronouncement issued or effective during the fiscal year2023 had, or is expected to have, a material impact on our consolidated financial statements.
Regulatory Reform
Tax Reform
U.S. tax legislation enacted on December 22, 2017 is referred to as the Tax Cuts and Jobs Act ("New Tax Act"). The New Tax Act made fundamental changes to the U.S. Internal Revenue Code that impacted the Company. The primary impact on our 2017 financial results was associated with the effect of reducing the U.S. statutory tax rate from 35% to 21% which required us to remeasure our deferred tax assets and liabilities using the lower rate at December 22, 2017, the date of enactment. Other provisions of the New Tax Act that will impact us but are not effective until January 1, 2018, include, but are not limited to: 1) provisions reducing the dividends received deduction; 2) eliminating the corporate alternative minimum tax ("AMT"); 3) changing the rules regarding use of net operating losses; and 4) changing the way in which tax reserves will be measured.
Financial Reform
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Dodd-Frank Act”) includes a provision to establish a Federal Insurance Office with the primary purpose of collecting information to better understand insurance issues at the federal level and to monitor the extent to which traditional underserved communities and consumers, minorities and low and moderate income persons have access to affordable insurance products. The Dodd-Frank Act also contains provisions affecting financial institutions, credit rating agencies and other commercial and consumer businesses. The Company is monitoring the impact that the presidential administration and Congress will have on this Act.
80December 31, 2023 | 10-K 77
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
(2)INVESTMENTS
Note 2: Investments
The Company invests primarily in fixed maturity securities, which totaled 89.3%86.7% of total investments and cash and cash equivalentsinvested assets at December 31, 2017. Holdings in high quality fixed maturity securities rated A or higher by Standard & Poor's, Inc. totaled 75.2% of investment holdings in this category, reflecting2023.
| | | | | | | | | | | | | | | | | | | | | | | |
Carrying Value as of December 31, (In thousands, except for %) | 2023 | | % | | 2022 | | % |
| Cash and invested assets: | | | | | | | |
| Fixed maturity securities | $ | 1,238,981 | | | 86.7 | % | | $ | 1,179,619 | | | 86.5 | % |
| Equity securities | 5,282 | | | 0.4 | | | 11,590 | | | 0.8 | |
| Policy loans | 75,359 | | | 5.3 | | | 78,773 | | | 5.8 | |
| Other long-term investments | 82,725 | | | 5.8 | | | 69,558 | | | 5.1 | |
| Short-term investments | — | | | — | | | 1,241 | | | 0.1 | |
| Cash and cash equivalents | 26,997 | | | 1.8 | | | 22,973 | | | 1.7 | |
| Total cash and invested assets | $ | 1,429,344 | | | 100.0 | % | | $ | 1,363,754 | | | 100.0 | % |
The following table represents the conservative investment philosophy of the Company.
|
| | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | Carrying Value | | % of Total Carrying Value | | Carrying Value | | % of Total Carrying Value |
| | (In thousands, except for %) |
| Fixed maturity securities | $ | 1,208,570 |
| | 89.3 | | $ | 1,128,672 |
| | 89.7 |
| Equity securities | 16,164 |
| | 1.2 | | 18,159 |
| | 1.6 |
| Mortgage loans | 195 |
| | — | | 232 |
| | — |
| Policy loans | 73,735 |
| | 5.5 | | 66,672 |
| | 5.3 |
| Real estate and other long-term investments | 7,452 |
| | 0.6 | | 7,896 |
| | 0.6 |
| Short-term investments | — |
| | — | | 508 |
| | — |
| Cash and cash equivalents | 46,064 |
| | 3.4 | | 35,510 |
| | 2.8 |
| Total cash, cash equivalents and investments | $ | 1,352,180 |
| | 100.0 | | $ | 1,257,649 |
| | 100.0 |
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Theamortized cost, gross unrealized gains and losses and fair value of investments in fixed maturities and equitymaturity securities as of December 31, 20172023 and 2016, are as follows.2022.
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2023
(In thousands) | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value |
| Fixed maturity securities: | | | | | | | |
| Available-for-sale: | | | | | | | |
| U.S. Treasury securities | $ | 5,983 | | | 127 | | | 48 | | | 6,062 | |
| U.S. Government-sponsored enterprises | 3,404 | | | 250 | | | 1 | | | 3,653 | |
| States and political subdivisions | 314,203 | | | 2,160 | | | 29,132 | | | 287,231 | |
| Corporate: | | | | | | | |
| Financial | 266,485 | | | 2,066 | | | 31,255 | | | 237,296 | |
| Consumer | 250,672 | | | 2,145 | | | 37,094 | | | 215,723 | |
| Utilities | 123,625 | | | 615 | | | 20,253 | | | 103,987 | |
| Energy | 73,808 | | | 64 | | | 8,049 | | | 65,823 | |
| All other | 185,153 | | | 956 | | | 21,331 | | | 164,778 | |
| Commercial mortgage-backed | 171 | | | — | | | — | | | 171 | |
| Residential mortgage-backed | 107,174 | | | 9 | | | 10,060 | | | 97,123 | |
| Asset-backed | 58,360 | | | 290 | | | 1,516 | | | 57,134 | |
| | | | | | | |
| Total fixed maturity securities | $ | 1,389,038 | | | 8,682 | | | 158,739 | | | 1,238,981 | |
|
| | | | | | | | | | | | |
| | December 31, 2017 |
| | Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | (In thousands) |
| Fixed maturities: | | | | | | | |
| Available-for-sale securities: | | | | | | | |
| U.S. Treasury securities | $ | 9,860 |
| | 1,948 |
| | — |
| | 11,808 |
|
| U.S. Government-sponsored enterprises | 3,570 |
| | 926 |
| | — |
| | 4,496 |
|
| States and political subdivisions | 550,536 |
| | 18,507 |
| | 1,540 |
| | 567,503 |
|
| Foreign governments | 103 |
| | 18 |
| | — |
| | 121 |
|
| Corporate | 370,043 |
| | 20,212 |
| | 1,552 |
| | 388,703 |
|
| Residential mortgage-backed | 1,865 |
| | 118 |
| | 5 |
| | 1,978 |
|
| Total available-for-sale securities | 935,977 |
| | 41,729 |
| | 3,097 |
| | 974,609 |
|
| Held-to-maturity securities: | |
| | |
| | |
| | |
|
| States and political subdivisions | 213,054 |
| | 7,585 |
| | 629 |
| | 220,010 |
|
| Corporate | 20,907 |
| | 1,118 |
| | 658 |
| | 21,367 |
|
| Total held-to-maturity securities | 233,961 |
| | 8,703 |
| | 1,287 |
| | 241,377 |
|
| Total fixed maturity securities | $ | 1,169,938 |
| | 50,432 |
| | 4,384 |
| | 1,215,986 |
|
| Equity securities: | |
| | |
| | |
| | |
|
| Stock mutual funds | $ | 2,867 |
| | 350 |
| | — |
| | 3,217 |
|
| Bond mutual funds | 11,880 |
| | 487 |
| | — |
| | 12,367 |
|
| Common stock | 22 |
| | 2 |
| | — |
| | 24 |
|
| Redeemable preferred stock | 520 |
| | 42 |
| | 6 |
| | 556 |
|
| Total equity securities | $ | 15,289 |
| | 881 |
| | 6 |
| | 16,164 |
|
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022
(In thousands) | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value |
| Fixed maturity securities: | | | | | | | |
| Available-for-sale: | | | | | | | |
| U.S. Treasury securities | $ | 9,425 | | | 152 | | | 9 | | | 9,568 | |
| U.S. Government-sponsored enterprises | 3,434 | | | 277 | | | 1 | | | 3,710 | |
| States and political subdivisions | 344,208 | | | 1,114 | | | 37,964 | | | 307,358 | |
| Corporate: | | | | | | | |
| Financial | 243,758 | | | 512 | | | 42,383 | | | 201,887 | |
| Consumer | 247,824 | | | 758 | | | 47,138 | | | 201,444 | |
| Utilities | 115,738 | | | 39 | | | 23,790 | | | 91,987 | |
| Energy | 76,065 | | | — | | | 11,395 | | | 64,670 | |
| All other | 184,022 | | | 683 | | | 29,048 | | | 155,657 | |
| Commercial mortgage-backed | 171 | | | — | | | 2 | | | 169 | |
| Residential mortgage-backed | 110,582 | | | 9 | | | 10,765 | | | 99,826 | |
| Asset-backed | 45,991 | | | 18 | | | 2,767 | | | 43,242 | |
| Foreign governments | 100 | | | 1 | | | — | | | 101 | |
| Total fixed maturity securities | $ | 1,381,318 | | | 3,563 | | | 205,262 | | | 1,179,619 | |
|
| | | | | | | | | | | | |
| | December 31, 2016 |
| | Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | (In thousands) |
| Fixed maturities: | | | | | | | |
| Available-for-sale securities: | | | | | | | |
| U.S. Treasury securities | $ | 9,929 |
| | 2,261 |
| | — |
| | 12,190 |
|
| U.S. Government-sponsored enterprises | 7,639 |
| | 863 |
| | — |
| | 8,502 |
|
| States and political subdivisions | 563,279 |
| | 15,017 |
| | 5,022 |
| | 573,274 |
|
| Foreign governments | 103 |
| | 23 |
| | — |
| | 126 |
|
| Corporate | 277,226 |
| | 12,095 |
| | 4,222 |
| | 285,099 |
|
| Commercial mortgage-backed | 50 |
| | 1 |
| | — |
| | 51 |
|
| Residential mortgage-backed | 2,247 |
| | 181 |
| | 2 |
| | 2,426 |
|
| Total available-for-sale securities | 860,473 |
| | 30,441 |
| | 9,246 |
| | 881,668 |
|
| Held-to-maturity securities: | |
| | |
| | |
| | |
|
| U.S. Government-sponsored enterprises | 2,003 |
| | 28 |
| | — |
| | 2,031 |
|
| States and political subdivisions | 223,966 |
| | 6,916 |
| | 1,599 |
| | 229,283 |
|
| Corporate | 21,035 |
| | 888 |
| | 692 |
| | 21,231 |
|
| Total held-to-maturity securities | 247,004 |
| | 7,832 |
| | 2,291 |
| | 252,545 |
|
| Total fixed maturity securities | $ | 1,107,477 |
| | 38,273 |
| | 11,537 |
| | 1,134,213 |
|
| Equity securities: | |
| | |
| | |
| | |
|
| Stock mutual funds | $ | 2,867 |
| | 79 |
| | — |
| | 2,946 |
|
| Bond mutual funds | 14,040 |
| | 265 |
| | 108 |
| | 14,197 |
|
| Common stock | 39 |
| | 3 |
| | 17 |
| | 25 |
|
| Redeemable preferred stock | 819 |
| | 174 |
| | 2 |
| | 991 |
|
| Total equity securities | $ | 17,765 |
| | 521 |
| | 127 |
| | 18,159 |
|
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
For fixed maturity andthe Company's equity security investments that have unrealized losses as of securities are invested in a non-redeemable preferred stock fund at December 31, 2017, the cost, gross unrealized losses that have been in a continuous unrealized loss position for less than 12 months, gross unrealized losses that have been in a continuous unrealized loss position for 12 months or longer and fair value are as follows.2023.
| | | | | | | | | | | |
Fair Value as of December 31, (In thousands) | 2023 | | 2022 |
| Equity securities: | | | |
| Stock mutual funds | $ | — | | | 2,615 | |
| Bond mutual funds | 740 | | | 4,337 | |
| Common stock | 665 | | | 857 | |
| Non-redeemable preferred stock | 7 | | | 8 | |
| Non-redeemable preferred stock fund | 3,870 | | | 3,773 | |
| Total equity securities | $ | 5,282 | | | 11,590 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Less than 12 months | | Greater than 12 months | | Total |
| | Fair Value | | Unrealized Losses | | # of Securities | | Fair Value | | Unrealized Losses | | # of Securities | | Fair Value | | Unrealized Losses | | # of Securities |
| | (In thousands, except for # of securities) |
| Fixed maturities: | | | | | | | | | | | | | | | | | |
| Available-for-sale securities: | | | | | | | | | | | | | | | | | |
| States and political subdivisions | $ | 49,408 |
| | 312 |
| | 46 |
| | 47,233 |
| | 1,228 |
| | 46 |
| | 96,641 |
| | 1,540 |
| | 92 |
|
| Corporate | 61,071 |
| | 732 |
| | 39 |
| | 7,651 |
| | 820 |
| | 10 |
| | 68,722 |
| | 1,552 |
| | 49 |
|
| Residential mortgage-backed | 132 |
| | 3 |
| | 4 |
| | 157 |
| | 2 |
| | 4 |
| | 289 |
| | 5 |
| | 8 |
|
| Total available-for-sale securities | 110,611 |
| | 1,047 |
| | 89 |
| | 55,041 |
| | 2,050 |
| | 60 |
| | 165,652 |
| | 3,097 |
| | 149 |
|
| Held-to-maturity securities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| States and political subdivisions | 14,178 |
| | 45 |
| | 15 |
| | 7,460 |
| | 584 |
| | 14 |
| | 21,638 |
| | 629 |
| | 29 |
|
| Corporate | — |
| | — |
| | — |
| | 2,169 |
| | 658 |
| | 2 |
| | 2,169 |
| | 658 |
| | 2 |
|
| Total held-to-maturity securities | 14,178 |
| | 45 |
| | 15 |
| | 9,629 |
| | 1,242 |
| | 16 |
| | 23,807 |
| | 1,287 |
| | 31 |
|
| Total fixed maturities | $ | 124,789 |
| | 1,092 |
| | 104 |
| | 64,670 |
| | 3,292 |
| | 76 |
| | 189,459 |
| | 4,384 |
| | 180 |
|
| Equity securities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Redeemable preferred stock | $ | 95 |
| | 6 |
| | 1 |
| | — |
| | — |
| | — |
| | 95 |
| | 6 |
| | 1 |
|
| Total equities | $ | 95 |
| | 6 |
| | 1 |
| | — |
| | — |
| | — |
| | 95 |
| | 6 |
| | 1 |
|
VALUATION OF INVESTMENTS
The available-for-sale fixed maturities in a gross unrealized loss position for more than 12 months is primarily related to rises in interest rates which results in lower market prices on
AFS fixed maturity securities that have lower coupons thanare reported in the current market rate. This is interest rate riskconsolidated financial statements at fair value. Equity securities are measured at fair value with the change in fair value recorded through net income (loss). The Company recognized net investment related losses of $0.2 million and is not a signal$2.7 million on equity securities held for the years ended December 31, 2023 and 2022, respectively and net investment related gains of impairment. Management has completed its assessment of other-than-temporary impairment of these securities. Based on our evaluation of$0.4 million for the credit worthiness of the issuers and because we do not intend to sell the investments, nor is it likely that we would be required to sell these investments before recovery of their amortized cost bases, which may beyear ended December 31, 2021.
The Company monitors all AFS fixed maturity none of the unrealized losses are considered to be other-than-temporary.
We monitor all debt and equity securities on an on-going basis relative to changes in credit ratings, market prices, earnings trends and financial performance, in addition to specific region or industry reviews. OurThe Company evaluates whether a credit impairment exists for fixed maturity securities by considering primarily the following factors: (a) changes in the financial condition of the security's underlying collateral; (b) whether the issuer is current on contractually obligated interest and principal payments; (c) changes in the financial condition, credit rating and near-term prospects of the issuer; and (d) the payment structure of the security. The Company's best estimate of expected future cash flows used to determine the credit loss amount is a quantitative and qualitative process. Quantitative review in accordance with current guidance, is performed by the Company at each reporting dateincludes information received from third-party sources such as financial statements,
December 31, 2023 | 10-K 79
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
pricing and management uses its best judgment to decide if impairment is other-than-temporary. We determine other-than-temporary impairment by reviewing relevant evidencerating changes, liquidity and other statistical information. Qualitative factors include judgments related to business strategies, economic impacts on the specific security issuer, overall judgment related to estimates and industry factors as well as ourthe Company's intent to sell the security, or whether weif it is more likely than not that the Company would be required to sell a security before recovery of its amortized cost.
The Company's best estimate of future cash flows involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings, and current delinquency rates. These assumptions require the use of significant management judgement and include the probability of issuer default and estimates regarding timing and amount of expected recoveries, which may include estimating the underlying collateral value. In addition, projections of expected future fixed maturity security cash flows may change based upon new information regarding the performance of the issuer. Any credit losses are presented as an allowance rather than as a write-down on AFS fixed maturity securities management does not intend to sell or believes that it is more likely than not we will be required to sellsell.
The Company recorded no credit valuation losses on fixed maturity securities for the security before its anticipated recovery. All securities with a market price below par were segregated and reviewed as of years ended December 31, 2017 based upon the items above for impairment.2023 and 2022.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
For fixed maturity and equity security investments that have unrealized losses as of December 31, 2016,2023 and 2022, the cost, gross unrealized losses and related fair values that have been in a continuous unrealized loss position for less than 12 months, gross unrealized losses that have been in a continuous unrealized loss position for 12 months or longer and fair valueby timeframe are as follows.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | Less than 12 months | Greater than 12 months | Total |
| (In thousands, except for # of securities) | Fair
Value | Unrealized
Losses | # of
Securities | Fair
Value | Unrealized
Losses | # of
Securities | Fair
Value | Unrealized
Losses | # of
Securities |
| Fixed maturity securities: | | | | | | | | |
| Available-for-sale securities: | | | | | | | | | |
| U.S. Treasury securities | $ | 1,203 | | 40 | | 5 | | 65 | | 8 | | 2 | | 1,268 | | 48 | | 7 | |
| U.S. Government-sponsored enterprises | 221 | | 1 | | 1 | | — | | — | | — | | 221 | | 1 | | 1 | |
| States and political subdivisions | 19,540 | | 357 | | 35 | | 164,264 | | 28,775 | | 192 | | 183,804 | | 29,132 | | 227 | |
| Corporate: | | | | | | | | | |
| Financial | 12,584 | | 383 | | 19 | | 176,521 | | 30,872 | | 217 | | 189,105 | | 31,255 | | 236 | |
| Consumer | 10,175 | | 265 | | 16 | | 176,725 | | 36,829 | | 223 | | 186,900 | | 37,094 | | 239 | |
| Utilities | 3,596 | | 66 | | 20 | | 85,169 | | 20,187 | | 137 | | 88,765 | | 20,253 | | 157 | |
| Energy | 3,291 | | 57 | | 1 | | 59,392 | | 7,992 | | 76 | | 62,683 | | 8,049 | | 77 | |
| All Other | 7,864 | | 185 | | 10 | | 141,865 | | 21,146 | | 169 | | 149,729 | | 21,331 | | 179 | |
| | | | | | | | | |
| Residential mortgage-backed | 849 | | 38 | | 5 | | 95,806 | | 10,022 | | 86 | | 96,655 | | 10,060 | | 91 | |
| Asset-backed | 4,757 | | 111 | | 8 | | 32,764 | | 1,405 | | 40 | | 37,521 | | 1,516 | | 48 | |
| Total fixed maturity securities | $ | 64,080 | | 1,503 | | 120 | | 932,571 | | 157,236 | | 1,142 | | 996,651 | | 158,739 | | 1,262 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Less than 12 months | | Greater than 12 months | | Total |
| | Fair Value | | Unrealized Losses | | # of Securities | | Fair Value | | Unrealized Losses | | # of Securities | | Fair Value | | Unrealized Losses | | # of Securities |
| | (In thousands, except for # of securities) |
| Fixed maturities: | | | | | | | | | | | | | | | | | |
| Available-for-sale securities: | | | | | | | | | | | | | | | | | |
| States and political subdivisions | $ | 202,788 |
| | 3,513 |
| | 184 |
| | 8,018 |
| | 1,509 |
| | 8 |
| | 210,806 |
| | 5,022 |
| | 192 |
|
| Corporate | 91,527 |
| | 3,578 |
| | 70 |
| | 6,102 |
| | 644 |
| | 8 |
| | 97,629 |
| | 4,222 |
| | 78 |
|
| Residential mortgage-backed | 116 |
| | 1 |
| | 4 |
| | 105 |
| | 1 |
| | 2 |
| | 221 |
| | 2 |
| | 6 |
|
| Total available-for-sale securities | 294,431 |
| | 7,092 |
| | 258 |
| | 14,225 |
| | 2,154 |
| | 18 |
| | 308,656 |
| | 9,246 |
| | 276 |
|
| Held-to-maturity securities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| States and political subdivisions | 43,659 |
| | 1,562 |
| | 47 |
| | 509 |
| | 37 |
| | 1 |
| | 44,168 |
| | 1,599 |
| | 48 |
|
| Corporate | 3,587 |
| | 12 |
| | 3 |
| | 2,171 |
| | 680 |
| | 2 |
| | 5,758 |
| | 692 |
| | 5 |
|
| Total held-to-maturity securities | 47,246 |
| | 1,574 |
| | 50 |
| | 2,680 |
| | 717 |
| | 3 |
| | 49,926 |
| | 2,291 |
| | 53 |
|
| Total fixed maturities | $ | 341,677 |
| | 8,666 |
| | 308 |
| | 16,905 |
| | 2,871 |
| | 21 |
| | 358,582 |
| | 11,537 |
| | 329 |
|
| Equity securities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Bond mutual funds | $ | 10,160 |
| | 108 |
| | 2 |
| | — |
| | — |
| | — |
| | 10,160 |
| | 108 |
| | 2 |
|
| Redeemable preferred stock | 201 |
| | 2 |
| | 2 |
| | — |
| | — |
| | — |
| | 201 |
| | 2 |
| | 2 |
|
| Common stocks | — |
| | — |
| | — |
| | — |
| | 17 |
| | 1 |
| | — |
| | 17 |
| | 1 |
|
| Total equities | $ | 10,361 |
| | 110 |
| | 4 |
| | — |
| | 17 |
| | 1 |
| | 10,361 |
| | 127 |
| | 5 |
|
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | Less than 12 months | Greater than 12 months | Total |
| (In thousands, except for # of securities) | Fair
Value | Unrealized
Losses | # of
Securities | Fair
Value | Unrealized
Losses | # of
Securities | Fair
Value | Unrealized
Losses | # of
Securities |
| Fixed maturity securities: | | | | | | | | |
| Available-for-sale securities: | | | | | | | | | |
| U.S. Treasury securities | $ | — | | — | | — | | 64 | | 9 | | 2 | | 64 | | 9 | | 2 | |
| U.S. Government-sponsored enterprises | 223 | | 1 | | 1 | | — | | — | | — | | 223 | | 1 | | 1 | |
| States and political subdivisions | 189,084 | | 30,866 | | 242 | | 14,184 | | 7,098 | | 14 | | 203,268 | | 37,964 | | 256 | |
| Corporate: | | | | | | | | | |
| Financial | 182,447 | | 39,122 | | 237 | | 6,144 | | 3,261 | | 16 | | 188,591 | | 42,383 | | 253 | |
| Consumer | 164,224 | | 34,823 | | 220 | | 23,417 | | 12,315 | | 30 | | 187,641 | | 47,138 | | 250 | |
| Utilities | 73,483 | | 15,959 | | 152 | | 16,413 | | 7,831 | | 18 | | 89,896 | | 23,790 | | 170 | |
| Energy | 59,053 | | 9,601 | | 75 | | 5,617 | | 1,794 | | 8 | | 64,670 | | 11,395 | | 83 | |
| All Other | 140,955 | | 25,337 | | 171 | | 7,910 | | 3,711 | | 15 | | 148,865 | | 29,048 | | 186 | |
| Commercial mortgage-backed | 168 | | 2 | | 2 | | — | | — | | — | | 168 | | 2 | | 2 | |
| Residential mortgage-backed | 98,758 | | 10,514 | | 95 | | 759 | | 251 | | 5 | | 99,517 | | 10,765 | | 100 | |
| Asset-backed | 37,067 | | 2,485 | | 41 | | 4,264 | | 282 | | 9 | | 41,331 | | 2,767 | | 50 | |
| Total fixed maturity securities | $ | 945,462 | | 168,710 | | 1,236 | | 78,772 | | 36,552 | | 117 | | 1,024,234 | | 205,262 | | 1,353 | |
In each category of our fixed maturity securities described above, we do not intend to sell our investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases. At December 31, 2023 and 2022, 99.4% and 98.7%, respectively, of the fair value of our fixed maturity securities portfolio was rated investment grade. While the losses are currently unrealized, we continue to monitor all fixed maturity securities on an on-going basis as future information may become available which could result in an allowance being recorded.
The unrealized losses on fixed maturity securities detailed in the previous tables are due to noncredit-related factors, including widening credit spreads and rising interest rates since purchase, which have little bearing on the recoverability of our investments, hence they are not recognized as credit losses. The fair value is expected to recover as the securities approach maturity or if market yields for such investments decline.
The amortized cost and fair value of fixed maturitiesmaturity securities at December 31, 20172023 by contractual maturity are shown in the table below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date have been reflected based upon the final stated maturity.
| | | | | | | | | | | |
| (In thousands) | Amortized Cost | | Fair Value |
| Fixed maturity securities: | | | |
| Due in one year or less | $ | 11,055 | | | 11,017 | |
| Due after one year through five years | 122,681 | | | 121,443 | |
| Due after five years through ten years | 296,313 | | | 290,023 | |
| Due after ten years | 958,989 | | | 816,498 | |
| Total fixed maturity securities | $ | 1,389,038 | | | 1,238,981 | |
|
| | | | | | |
| | Cost or Amortized Cost | | Fair Value |
| | (In thousands) |
| Available-for-sale securities: | | | |
| Due in one year or less | $ | 44,805 |
| | 45,049 |
|
| Due after one year through five years | 101,337 |
| | 104,873 |
|
| Due after five years through ten years | 123,319 |
| | 131,125 |
|
| Due after ten years | 666,516 |
| | 693,562 |
|
| Total available-for-sale securities | 935,977 |
| | 974,609 |
|
| Held-to-maturity securities: | |
| | |
|
| Due in one year or less | 19,025 |
| | 19,123 |
|
| Due after one year through five years | 46,497 |
| | 48,014 |
|
| Due after five years through ten years | 46,502 |
| | 48,436 |
|
| Due after ten years | 121,937 |
| | 125,804 |
|
| Total held-to-maturity securities | 233,961 |
| | 241,377 |
|
| Total fixed maturities | $ | 1,169,938 |
| | 1,215,986 |
|
The Company had no investments in any one entity which exceeded 10% of stockholders' equity at December 31, 2017. In addition, thereThere were no investments that were non-income producing for the yearyears ended December 31, 2017.2023 or 2022.
December 31, 2023 | 10-K 81
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
Major categories of net investment income are summarized as follows:
| | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Gross investment income: | | | | | |
| Fixed maturity securities | $ | 60,127 | | | 58,400 | | | 55,579 | |
| Equity securities | 630 | | | 650 | | | 1,024 | |
| Policy loans | 6,011 | | | 6,189 | | | 6,420 | |
| Other long-term investments | 4,509 | | | 2,535 | | | 809 | |
| Other | 576 | | | 246 | | | 54 | |
| Total investment income | 71,853 | | | 68,020 | | | 63,886 | |
| Investment expenses | (2,599) | | | (2,594) | | | (2,391) | |
| Net investment income | $ | 69,254 | | | 65,426 | | | 61,495 | |
|
| | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Investment income: | | | | | |
| Fixed maturities | $ | 48,164 |
| | 43,637 |
| | 39,570 |
|
| Equity securities | 708 |
| | 851 |
| | 2,909 |
|
| Mortgage loans on real estate | 11 |
| | 24 |
| | 36 |
|
| Policy loans | 5,735 |
| | 5,277 |
| | 4,614 |
|
| Long-term investments | 76 |
| | 305 |
| | 247 |
|
| Other | 68 |
| | 89 |
| | 53 |
|
| Total investment income | 54,762 |
| | 50,183 |
| | 47,429 |
|
| Investment expenses | (1,616 | ) | | (1,623 | ) | | (1,647 | ) |
| Net investment income | $ | 53,146 |
| | 48,560 |
| | 45,782 |
|
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notesthe individual security to Consolidated Financial Statements, Continued
Proceeds and grossdetermine the cost basis used in the calculation of realized gains and losses from sales of fixed maturities available-for-sale for 2017, 2016 and 2015 are summarized as follows:related to security sales.
| | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Fixed maturity securities, available-for-sale: | | | | | |
| Proceeds | $ | 29,883 | | | 33,914 | | | 8,238 | |
| Gross realized gains | 53 | | | 120 | | | 189 | |
| Gross realized losses | 602 | | | 112 | | | 1 | |
| | | | | |
| Equity securities: | | | | | |
| Proceeds | $ | 6,631 | | | 500 | | | 7,383 | |
| Gross realized gains | 568 | | | 44 | | | — | |
| Gross realized losses | 55 | | | — | | | 149 | |
|
| | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Proceeds | $ | 1,077 |
| | 20,638 |
| | — |
|
| Gross realized gains | $ | 19 |
| | 1,487 |
| | — |
|
| Gross realized losses | $ | 16 |
| | — |
| | — |
|
In 2017, SPLIC sold one bond from the available for sale portfolio for cash flow purposes and SPFIC sold three bonds. In 2016, SPLIC sold eleven bonds from their available-for-sale portfolio to generate funds to pay the extraordinary dividend to CICA. These sales produced proceeds of $20.6 million and realized gains of $1.5 million. In 2015, there were no sales of fixed maturities available-for-sale. There were no securities sold from the held-to-maturity portfolio in 2017, 2016 or 2015. The Company uses specific identification for securities sold.
Proceeds and gross realized gains and losses from sales of equity securities for 2017, 2016 and 2015 are summarized as follows:
|
| | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Proceeds | $ | 1,940 |
| | 5,100 |
| | 43,163 |
|
| Gross realized gains | $ | — |
| | 291 |
| | 634 |
|
| Gross realized losses | $ | 30 |
| | 35 |
| | 599 |
|
In 2017, the Company sold one bond mutual fund, which had been previously impaired, that resulted in a net loss of $30,000. All mutual funds are considered common stocks for regulatory accounting purposes and the RBC charge for stocks is extremely high. In 2016, five equity and bond mutual funds were sold that resulted in a net gain of $256,000 due to regulatory accounting considerations. During 2015, six equity and bond mutual funds were sold resulting in a net gain of $35,000 due to circumstances that arose based on the current environment and due to the fact that they were shorter duration funds.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Realized investmentInvestment related gains (losses) are as follows:
| | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Investment related gains (losses): | | | | | |
| Sales, calls and maturities: | | | | | |
| Fixed maturity securities | $ | (756) | | | (104) | | | 243 | |
| Equity securities | 513 | | | 62 | | | (152) | |
| Real estate | — | | | — | | | 981 | |
| Property and equipment | — | | | — | | | 13 | |
| Other long-term investments | 342 | | | 2,320 | | | 1,892 | |
| Investment related gains (losses) | 99 | | | 2,278 | | | 2,977 | |
| Change in fair value of equity securities | (190) | | | (2,665) | | | 376 | |
| Change in fair value of limited partnerships | 912 | | | (9,667) | | | 7,452 | |
| Change in credit loss allowance | (61) | | | (237) | | | 186 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Net investment related gains (losses) | $ | 760 | | | (10,291) | | | 10,991 | |
December 31, 2023 | 10-K 82
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
|
| | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Realized investment gains (losses): | | | | | |
| Sales, calls and maturities: | | | | | |
| Fixed maturities | $ | (506 | ) | | 2,024 |
| | (111 | ) |
| Equity securities | 121 |
| | 303 |
| | 37 |
|
| Real estate | 1,110 |
| | — |
| | — |
|
| Net realized gains (losses) | 725 |
| | 2,327 |
| | (74 | ) |
| Other-than-temporary impairments ("OTTI") | | | |
| | |
|
| Fixed maturities | — |
| | (3,970 | ) | | (2,998 | ) |
| Equity securities | (207 | ) | | (342 | ) | | (2,387 | ) |
| Realized loss on OTTI | (207 | ) | | (4,312 | ) | | (5,385 | ) |
| Net realized investment gains (losses) | $ | 518 |
| | (1,985 | ) | | (5,459 | ) |
During 2017, theThe Company sold its Markham building in Little Rock, Arkansasformer training facility near Austin, Texas during 2021 for a gross salessale price of $3.25$3.8 million, resulting in a gain on the sale of $1.1$1.0 million. The facility was owned by Citizens and was held in Other Non-Insurance Enterprises.
Note 3: Fair Value Measurements(3)FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We hold AFS fixed maturity and equity securities, thatwhich are carried at fair value.value with changes in fair value reported through other comprehensive income (loss). We also report our equity securities and certain other long-term investments at fair value with changes in fair value reported through the consolidated statements of operations and comprehensive income (loss).
Fair value measurements are generally based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. All assets and liabilities carried at fair value are required to be classified and disclosed in one of the following three categories:
•Level 1 - Quoted prices for identical instruments in active markets.
•Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs or whose significant value drivers are observable.
•Level 3 - Instruments whose significant value drivers are unobservable.
Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as U.S. Treasury securities publiclyand actively traded mutual fund investments and individual stocks.stock investments.
Level 2 includes those financial instruments that are valued by independent pricing services or broker quotes. These pricing models are primarily industry-standard models that consider various inputs, such as interest rates, credit spreads and foreign exchange rates for the underlying financial instruments. All significant inputs are observable or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category primarily include corporate fixed maturity securities, U.S. Government-sponsored enterprise securities, municipal securities issued by states and political subdivisions and certain mortgage and asset-backed securities.
Level 3 is comprised of financial instruments whose fair value is estimated based on non-binding broker prices utilizing significant inputs not based on or corroborated by readily available market information. We have no level 3 assets as of investments in this category.
December 31, 2017.2023 | 10-K 83
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued | | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
The following table setstables set forth our assets and liabilities that are measured at fair value on a recurring basis asbasis.
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2023
(In thousands) | Level 1 | | Level 2 | | Level 3 | | Total
Fair Value |
| Financial assets: | | | | | | | |
| Fixed maturity securities, available-for-sale: | | | | | | | |
| U.S. Treasury and U.S. Government-sponsored enterprises | $ | 6,062 | | | 3,653 | | | — | | | 9,715 | |
| States and political subdivisions | — | | | 287,231 | | | — | | | 287,231 | |
| Corporate | 43 | | | 787,564 | | | — | | | 787,607 | |
| Commercial mortgage-backed | — | | | 171 | | | — | | | 171 | |
| Residential mortgage-backed | — | | | 97,123 | | | — | | | 97,123 | |
| Asset-backed | — | | | 57,134 | | | — | | | 57,134 | |
| | | | | | | |
| Total fixed maturity securities available-for-sale | 6,105 | | | 1,232,876 | | | — | | | 1,238,981 | |
| | | | | | | |
| Equity securities: | | | | | | | |
| | | | | | | |
| Bond mutual funds | 740 | | | — | | | — | | | 740 | |
| Common stock | 665 | | | — | | | — | | | 665 | |
| Non-redeemable preferred stock | 7 | | | — | | | — | | | 7 | |
| Non-redeemable preferred stock fund | 3,870 | | | — | | | — | | | 3,870 | |
| Total equity securities | 5,282 | | | — | | | — | | | 5,282 | |
Other long-term investments (1) | — | | | — | | | — | | | 82,460 | |
| Total financial assets | $ | 11,387 | | | 1,232,876 | | | — | | | 1,326,723 | |
(1) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table permit reconciliation of the date indicated.
fair value hierarchy to the amounts presented in the consolidated balance sheet.
|
| | | | | | | | | | | | |
| | December 31, 2017 |
| Available-for-sale investments | Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
| | (In thousands) |
| Financial assets: | | | | | | | |
| Fixed maturities: | | | | | | | |
| U.S. Treasury and U.S. Government-sponsored enterprises | $ | 11,808 |
| | 4,496 |
| | — |
| | 16,304 |
|
| States and political subdivisions | — |
| | 567,503 |
| | — |
| | 567,503 |
|
| Corporate | — |
| | 388,703 |
| | — |
| | 388,703 |
|
| Residential mortgage-backed | — |
| | 1,978 |
| | — |
| | 1,978 |
|
| Foreign governments | — |
| | 121 |
| | — |
| | 121 |
|
| Total fixed maturities | 11,808 |
| | 962,801 |
| | — |
| | 974,609 |
|
| Equity securities: | |
| | |
| | |
| | |
|
| Stock mutual funds | 3,217 |
| | — |
| | — |
| | 3,217 |
|
| Bond mutual funds | 12,367 |
| | — |
| | — |
| | 12,367 |
|
| Common stock | 24 |
| | — |
| | — |
| | 24 |
|
| Redeemable preferred stock | 556 |
| | — |
| | — |
| | 556 |
|
| Total equity securities | 16,164 |
| | — |
| | — |
| | 16,164 |
|
| Total financial assets | $ | 27,972 |
| | 962,801 |
| | — |
| | 990,773 |
|
|
| | | | | | | | | | | | |
| | December 31, 2016 |
| Available-for-sale investments | Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
| | (In thousands) |
| Financial assets: | | | | | | | |
| Fixed maturities: | | | | | | | |
| U.S. Treasury and U.S. Government-sponsored enterprises | $ | 12,190 |
| | 8,502 |
| | — |
| | 20,692 |
|
| States and political subdivisions | — |
| | 573,274 |
| | — |
| | 573,274 |
|
| Corporate | — |
| | 285,099 |
| | — |
| | 285,099 |
|
| Commercial mortgage-backed | — |
| | — |
| | 51 |
| | 51 |
|
| Residential mortgage-backed | — |
| | 2,426 |
| | — |
| | 2,426 |
|
| Foreign governments | — |
| | 126 |
| | — |
| | 126 |
|
| Total fixed maturities | 12,190 |
| | 869,427 |
| | 51 |
| | 881,668 |
|
| Equity securities: | |
| | |
| | |
| | |
|
| Stock mutual funds | 2,946 |
| | — |
| | — |
| | 2,946 |
|
| Bond mutual funds | 14,197 |
| | — |
| | — |
| | 14,197 |
|
| Common stock | 25 |
| | — |
| | — |
| | 25 |
|
| Redeemable preferred stock | 991 |
| | — |
| | — |
| | 991 |
|
| Total equity securities | 18,159 |
| | — |
| | — |
| | 18,159 |
|
| Total financial assets | $ | 30,349 |
| | 869,427 |
| | 51 |
| | 899,827 |
|
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022
(In thousands) | Level 1 | | Level 2 | | Level 3 | | Total
Fair Value |
| Financial assets: | | | | | | | |
| Fixed maturity securities, available-for-sale: | | | | | | | |
| U.S. Treasury and U.S. Government-sponsored enterprises | $ | 9,567 | | | 3,711 | | | — | | | 13,278 | |
| States and political subdivisions | — | | | 307,358 | | | — | | | 307,358 | |
| Corporate | 44 | | | 715,601 | | | — | | | 715,645 | |
| Commercial mortgage-backed | — | | | 169 | | | — | | | 169 | |
| Residential mortgage-backed | — | | | 99,826 | | | — | | | 99,826 | |
| Asset-backed | — | | | 43,242 | | | — | | | 43,242 | |
| Foreign governments | — | | | 101 | | | — | | | 101 | |
| Total fixed maturity securities available-for-sale | 9,611 | | | 1,170,008 | | | — | | | 1,179,619 | |
| | | | | | | |
| Equity securities: | | | | | | | |
| Stock mutual funds | 2,615 | | | — | | | — | | | 2,615 | |
| Bond mutual funds | 4,337 | | | — | | | — | | | 4,337 | |
| Common stock | 857 | | | — | | | — | | | 857 | |
| Non-redeemable preferred stock | 8 | | | — | | | — | | | 8 | |
| Non-redeemable preferred stock fund | 3,773 | | | — | | | — | | | 3,773 | |
| Total equity securities | 11,590 | | | — | | | — | | | 11,590 | |
Other long-term investments (1) | — | | | — | | | — | | | 66,846 | |
| Total financial assets | $ | 21,201 | | | 1,170,008 | | | — | | | 1,258,055 | |
(1) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheet.
FINANCIAL INSTRUMENTS VALUATION
FINANCIAL INSTRUMENTS CARRIED AT FAIR VALUE
Financial Instruments Valuation
Fixed maturity securities, available-for-sale.available-for-sale. At December 31, 2017, the2023, fixed maturities,maturity securities, valued using a third-party pricing source, totaled $962.8 million$1.2 billion for Level 2 assets and comprised 97.2%92.9% of total reported fair value. Fair values for Level 3 assets are based upon unadjusted broker quotes that are non-binding.value of our financial assets. The Level 1 and Level 2 valuations are reviewed and validatedupdated quarterly through random testing by comparisons to separate pricing models, other third partythird-party pricing services, and back tested to recent trades. In addition, we obtain information annually relative to the third partythird-party pricing models and review model parameters for reasonableness. There were no Level 3 assets as of December 31, 2023 and 2022. For the periodyear ended December 31, 2017,2023, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third partythird-party prices were changed from the values received.
There were no transfers made between LevelsEquity securities. Our equity securities are classified as Level 1 and 2 securities at December 31, 2017 or 2016.
Equity securities, available-for-sale. Fairassets as their fair values of these securities are based upon quoted market priceprices.
Limited partnerships. The Company considers the net asset value ("NAV") to represent the value of the investment fund and are classified as Level 1 assets.
is measured by the total value of assets minus the total value of liabilities. The following table presents additionalincludes information about fixed maturity securitiesrelated to our investments in limited partnerships that calculate NAV per share. For these investments, which are measured at fair value on a recurring basis, we use the NAV per share to measure fair value. The Company recognized net investment related gains of $0.9 million and for which we have utilized significant unobservable (Level 3) inputs to determine fair value:
|
| | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | (In thousands) |
| Beginning Balance at January 1, | $ | 51 |
| | 145 |
|
| Total realized and unrealized gains (losses) | | | |
|
| Included in net income | — |
| | — |
|
| Included in other comprehensive income | — |
| | (4 | ) |
| Principal paydowns | (51 | ) | | (90 | ) |
| Transfer in and (out) of Level 3 | — |
| | — |
|
| Ending Balance at December 31, | $ | — |
| | 51 |
|
We review the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets. Such reclassifications, if any, are reported as transfers in and out of Level 3 at the beginning fair value$7.5 million on limited partnerships held for the reporting period in whichyears ended December 31, 2023 and 2021, respectively, and losses of $9.7 million for the changes occur.
year ended
90December 31, 2023 | 10-K 85
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
December 31, 2022. These investments are included in other long-term investments on the consolidated balance sheets.
Financial Instruments | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 | | December 31, 2022 |
(In thousands, except years) | | Fair Value Using NAV Per Share | Unfunded Commit-
ments | Range
(In years) | | Fair Value Using NAV Per Share | Unfunded Commit-
ments | Range
(In years) |
| Description | |
| Limited partnerships: | | | | | | | |
| Middle market | Investments in privately-originated, performing senior secured debt primarily in North America-based companies | $ | 34,858 | | 3,452 | | 4 | | $ | 33,234 | | 6,011 | | 5 |
| Global equity fund | Investments in common stocks of U.S., international developed and emerging markets with a focus on long-term capital growth | 10,345 | | — | | 0 | | 9,037 | | — | | 0 |
| | | | | | | | |
| Late-stage growth | Investments in private late-stage, established companies seeking capital to accelerate growth prior to an IPO or sale | 20,524 | | 14,271 | | 4 to 6 | | 16,892 | | 18,444 | | 5 to 7 |
| Infrastructure | Investments in environmental infrastructure and related technology, focusing on renewable power generation and distribution | 16,733 | | 9,576 | | 10 | | 7,683 | | 4,107 | | 11 |
| Total limited partnerships | $ | 82,460 | | 27,299 | | | | $ | 66,846 | | 28,562 | | |
The majority of our limited partnership investments are not Carriedredeemable because distributions from the funds will be received when the underlying investments of the funds are liquidated. The life spans indicated above may be shortened or extended at Fair Valuethe fund manager's discretion, typically in one or two-year increments. The global equity fund is redeemable monthly.
FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE
Estimates of fair values are made at a specific point in time, based on relevant market prices and information about the financial instrument.instruments. The estimated fair values of financial instruments presented below are not necessarily indicative of the amounts the Company might realize in actual market transactions.
The carrying amount and fair value for the financial assets and liabilities on the consolidated balance sheets at each year-endfinancial statements not otherwise disclosed for the periods indicated were as follows:
| | | | | | | | | | | | December 31, 2023 | | December 31, 2022 |
| (In thousands) | | (In thousands) | Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value |
| Financial assets: | | Financial assets: | | | | | |
| Policy loans | |
| Residential mortgage loans | |
| | December 31, 2017 | | December 31, 2016 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| | (In thousands) |
| Financial assets: | | | | | | | |
| Fixed maturities, held-to-maturity | $ | 233,961 |
| | 241,377 |
| | 247,004 |
| | 252,545 |
|
| Mortgage loans | 195 |
| | 228 |
| | 232 |
| | 269 |
|
| Policy loans | 73,735 |
| | 73,735 |
| | 66,672 |
| | 66,672 |
|
| Short-term investments | — |
| | — |
| | 508 |
| | 508 |
|
| Cash and cash equivalents | |
| Cash and cash equivalents | |
| Cash and cash equivalents | 46,064 |
| | 46,064 |
| | 35,510 |
| | 35,510 |
|
| Financial liabilities: | |
| | |
| | |
| | |
| Financial liabilities: | | | | | | | |
| Annuities - investment contracts | $ | 55,035 |
| | 57,575 |
| | 50,952 |
| | 52,173 |
|
| Annuity - investment contracts | |
Fair values for fixed income securities, which are characterized as Level 2 assets in the fair value hierarchy, are based on quoted market prices for the same or similar securities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other assumptions, including the discount rate and estimates of future cash flows.
Mortgage loans are secured principally by residential properties and commercial properties. Weighted average interest rates for these loans were approximately 6.6% and 6.8% per year, as of December 31, 2017 and 2016, respectively, with maturities ranging from 21 to 25 years. Management estimated the fair value using an annual interest rate of 6.25% at December 31, 2017 and 2016. Our mortgage loans are considered Level 3 assets in the fair value hierarchy.
Policy loans. Policy loans havehad a weighted average annual interest rate of 7.7% as of at both December 31, 20172023 and 2016, respectively,2022 and have no specified maturity dates. The aggregatePolicy loans are an integral part of the life insurance policies we have in force, cannot be valued separately and are not marketable. Therefore, the fair value of policy loans approximates the carrying value reflected on the consolidated balance sheet. These loans typically carry an interest rate that is tied to the crediting rate applied to the related policysheets and contract reserves. Policy loans are an integral part of the life insurance policies that we have in force and cannot be valued separately and are not marketable. Therefore, the fair value approximates the carrying value and policy loans are considered Level 3 assets in the fair value hierarchy.
December 31, 2023 | 10-K 86
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
Residential mortgage loan.The mortgage loan is secured principally by a residential property. The interest rate for this loan was 7.0% at December 31, 2023 and 2022. At December 31, 2023, the remaining loan matures in five years. Management estimated the fair value using an annual interest rate of short-term investments approximate carrying value due to their short-term nature.6.25% at both December 31, 2023 and 2022. Our short-term investments aremortgage loan is considered a Level 2 assets3 asset in the fair value hierarchy.hierarchy and is included in other long-term investments on the consolidated balance sheets.
Cash and cash equivalents.The fair value of cash and cash equivalents approximate carrying value and are characterized as Level 1 assets in the fair value hierarchy.
Annuity liabilities.The fair value of the Company's liabilities under annuity contract policies,contracts, which are considered Level 3 instruments,liabilities, was estimated at December 31, 20172023 and 2022 using discounted cash flows based upon a swap rate curve with interest rates ranging from 1.84% to 3.34% based upon swapspot rates adjusted for various risk adjustments.adjustments ranging from 3.80% to 4.50% and 4.74% to 5.09%, respectively. The fair value of liabilities under all insurance contracts are taken into consideration in the overall management of interest rate risk, which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.
Other long-term investments. The following table summarizes the carrying amounts of other long-term investments.
| | | | | | | | |
As of December 31, (In thousands) | 2023 | 2022 |
| Other long-term investments: | | |
| Limited partnerships | $ | 82,460 | | 69,294 | |
| FHLB common stock | 202 | | 193 | |
| Mortgage loans | 42 | | 49 | |
| All other investments | 21 | | 22 | |
| Total other long-term investments | $ | 82,725 | | 69,558 | |
We carried no limited partnership investments at cost at December 31, 2023 and $2.4 million were carried at cost at December 31, 2022.
We are a member of the FHLB of Dallas and such membership requires members to own stock in the FHLB. Our FHLB stock is carried at amortized cost, which approximates fair value.
(4) DEFERRED POLICY ACQUISITION COSTS AND COST OF INSURANCE ACQUIRED
The following tables roll forward the DAC and COIA balances for the years ended December 31, 2023 and 2022 by reporting cohort. Our reporting cohorts are Permanent, which summarizes insurance policies with premiums payable over the lifetime of the policy, and Permanent Limited Pay, which summarizes insurance policies with premiums payable for a limited time after which the policy is fully paid up. Both reporting cohorts include whole life and endowment policies.
91December 31, 2023 | 10-K 87
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
DAC
Note 4: Policy Liabilities
| | | | | | | | | | | | | | | |
| Year Ended December 31, 2023 |
| (In thousands) | Permanent | Permanent Limited Pay | | Other Business | Total |
| Life Insurance: | | | | | |
| Balance, beginning of year | $ | 100,926 | | 11,542 | | | 1,016 | | 113,484 | |
| Capitalizations | 16,451 | | 3,332 | | | 468 | | 20,251 | |
| Amortization expense | (11,825) | | (799) | | | (271) | | (12,895) | |
| | | | | |
| Balance, end of year | 105,552 | | 14,075 | | | 1,213 | | 120,840 | |
| | | | | |
| Home Service Insurance: | | | | | |
| Balance, beginning of year | 38,793 | | 9,729 | | | 921 | | 49,443 | |
| Capitalizations | 6,570 | | 1,232 | | | 248 | | 8,050 | |
| Amortization expense | (2,083) | | (397) | | | (85) | | (2,565) | |
| | | | | |
| Balance, end of year | 43,280 | | 10,564 | | | 1,084 | | 54,928 | |
| | | | | |
| Consolidated: | | | | | |
| Balance, beginning of year | 139,719 | | 21,271 | | | 1,937 | | 162,927 | |
| Capitalizations | 23,021 | | 4,564 | | | 716 | | 28,301 | |
| Amortization expense | (13,908) | | (1,196) | | | (356) | | (15,460) | |
| | | | | |
| Balance, end of year | $ | 148,832 | | 24,639 | | | 2,297 | | 175,768 | |
| | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| (In thousands) | Permanent | Permanent Limited Pay | | Other Business | Total |
| Life Insurance: | | | | | |
| Balance, beginning of year | $ | 97,675 | | 9,001 | | | 1,026 | | 107,702 | |
| Capitalizations | 14,599 | | 3,193 | | | 150 | | 17,942 | |
| Amortization expense | (11,348) | | (652) | | | (160) | | (12,160) | |
| | | | | |
| Balance, end of year | 100,926 | | 11,542 | | | 1,016 | | 113,484 | |
| | | | | |
| Home Service Insurance: | | | | | |
| Balance, beginning of year | 35,137 | | 8,723 | | | 856 | | 44,716 | |
| Capitalizations | 5,501 | | 1,372 | | | 84 | | 6,957 | |
| Amortization expense | (1,845) | | (366) | | | (19) | | (2,230) | |
| | | | | |
| Balance, end of year | 38,793 | | 9,729 | | | 921 | | 49,443 | |
| | | | | |
| Consolidated: | | | | | |
| Balance, beginning of year | 132,812 | | 17,724 | | | 1,882 | | 152,418 | |
| Capitalizations | 20,100 | | 4,565 | | | 234 | | 24,899 | |
| Amortization expense | (13,193) | | (1,018) | | | (179) | | (14,390) | |
| | | | | |
| Balance, end of year | $ | 139,719 | | 21,271 | | | 1,937 | | 162,927 | |
DAC capitalization increased for the year ended December 31, 2023, compared to the same prior year period mainly from increased commissions from higher first year sales across our business segments.
December 31, 2023 | 10-K 88
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
COIA
| | | | | | | | | | | | | | | |
| Year Ended December 31, 2023 |
| (In thousands) | Permanent | Permanent Limited Pay | | Other Business | Total |
| Life Insurance: | | | | | |
| Balance, beginning of year | $ | 267 | | 750 | | | 444 | | 1,461 | |
| Amortization expense | (18) | | (55) | | | (38) | | (111) | |
| | | | | |
| Balance, end of year | 249 | | 695 | | | 406 | | 1,350 | |
| | | | | |
| Home Service Insurance: | | | | | |
| Balance, beginning of year | 7,583 | | 176 | | | 1,427 | | 9,186 | |
| Amortization expense | (389) | | (8) | | | (96) | | (493) | |
| | | | | |
| Balance, end of year | 7,194 | | 168 | | | 1,331 | | 8,693 | |
| | | | | |
| Consolidated: | | | | | |
| Balance, beginning of year | 7,850 | | 926 | | | 1,871 | | 10,647 | |
| Amortization expense | (407) | | (63) | | | (134) | | (604) | |
| | | | | |
| Balance, end of year | $ | 7,443 | | 863 | | | 1,737 | | 10,043 | |
| | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| (In thousands) | Permanent | Permanent Limited Pay | | Other Business | Total |
| Life Insurance: | | | | | |
| Balance, beginning of year | $ | 287 | | 812 | | | 485 | | 1,584 | |
| Amortization expense | (20) | | (62) | | | (41) | | (123) | |
| | | | | |
| Balance, end of year | 267 | | 750 | | | 444 | | 1,461 | |
| | | | | |
| Home Service Insurance: | | | | | |
| Balance, beginning of year | 7,989 | | 184 | | | 1,511 | | 9,684 | |
| Amortization expense | (406) | | (8) | | | (84) | | (498) | |
| | | | | |
| Balance, end of year | 7,583 | | 176 | | | 1,427 | | 9,186 | |
| | | | | |
| Consolidated: | | | | | |
| Balance, beginning of year | 8,276 | | 996 | | | 1,996 | | 11,268 | |
| Amortization expense | (426) | | (70) | | | (125) | | (621) | |
| | | | | |
| Balance, end of year | $ | 7,850 | | 926 | | | 1,871 | | 10,647 | |
December 31, 2023 | 10-K 89
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
Estimated amortization of COIA in each of the next five years and Short Duration Contractsthereafter is as follows. Actual future amortization will differ from these estimates due to variances from estimated future withdrawal assumptions.
Various assumptions used to determine | | | | | |
| (In thousands) | Amount |
| Cost of insurance acquired: | |
| Year: | |
| 2024 | $ | 647 | |
| 2025 | 599 | |
| 2026 | 555 | |
| 2027 | 515 | |
| 2028 | 479 | |
| Thereafter | 7,248 | |
| Total cost of insurance acquired | $ | 10,043 | |
(5) POLICYHOLDERS’ LIABILITIES
LIABILITY FOR FUTURE POLICY BENEFITS
The following tables summarize balances of and changes in the liability for future policy benefits for our reporting cohorts: Permanent, which summarizes insurance policies with premiums payable over the lifetime of the policy, and Permanent Limited Pay, which summarizes insurance policies with premiums payable for a limited time after which the policy is fully paid up. Both reporting cohorts include whole life and endowment policies.
December 31, 2023 | 10-K 90
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2023 (In thousands) | Life Insurance | | Home Service Insurance |
| Permanent | Permanent Limited Pay | | Total | | Permanent | Permanent Limited Pay | | Total |
| Present Value of Expected Net Premiums: | | | | | | | | |
| Balance, beginning of year | $ | 235,228 | | 10,209 | | | 245,437 | | | 93,508 | | 13,255 | | | 106,763 | |
| Beginning balance at original discount rate | 247,601 | | 10,682 | | | 258,283 | | | 100,225 | | 14,394 | | | 114,619 | |
| Effect of changes in cash flow assumptions | (210) | | 38 | | | (172) | | | (343) | | 85 | | | (258) | |
| Effects of actual variances from expected experience | 4,184 | | 1,536 | | | 5,720 | | | (8,287) | | (6,402) | | | (14,689) | |
| Adjusted beginning of year balance | 251,575 | | 12,256 | | | 263,831 | | | 91,595 | | 8,077 | | | 99,672 | |
| Issuances | 34,285 | | 3,607 | | | 37,892 | | | 17,668 | | 3,951 | | | 21,619 | |
| Interest accrual | 9,291 | | 355 | | | 9,646 | | | 4,045 | | 468 | | | 4,513 | |
| Net premiums collected | (43,307) | | (2,955) | | | (46,262) | | | (11,901) | | 2,832 | | | (9,069) | |
| Derecognition and other | 582 | | 270 | | | 852 | | | 638 | | 184 | | | 822 | |
| Ending balance at original discount rate | 252,426 | | 13,533 | | | 265,959 | | | 102,045 | | 15,512 | | | 117,557 | |
| Effect of changes in discount rates | (7,509) | | (273) | | | (7,782) | | | (3,214) | | (586) | | | (3,800) | |
| Balance, end of year | $ | 244,917 | | 13,260 | | | 258,177 | | | 98,831 | | 14,926 | | | 113,757 | |
| | | | | | | | | |
| Present Value of Expected Future Policy Benefits: | | | | | | | |
| Balance, beginning of year | $ | 947,415 | | 195,612 | | | 1,143,027 | | | 200,351 | | 116,356 | | | 316,707 | |
| Beginning balance at original discount rate | 996,169 | | 208,051 | | | 1,204,220 | | | 214,188 | | 121,908 | | | 336,096 | |
| Effect of changes in cash flow assumptions | (389) | | (702) | | | (1,091) | | | (257) | | 331 | | | 74 | |
| Effects of actual variances from expected experience | 7,370 | | 5,330 | | | 12,700 | | | (8,126) | | (2,103) | | | (10,229) | |
| Adjusted beginning of year balance | 1,003,150 | | 212,679 | | | 1,215,829 | | | 205,805 | | 120,136 | | | 325,941 | |
| Issuances | 34,922 | | 3,792 | | | 38,714 | | | 17,664 | | 3,973 | | | 21,637 | |
| Interest accrual | 43,275 | | 8,355 | | | 51,630 | | | 9,339 | | 5,667 | | | 15,006 | |
| Benefit payments | (85,257) | | (22,129) | | | (107,386) | | | (15,891) | | (6,002) | | | (21,893) | |
| Derecognition and other | (128) | | 58 | | | (70) | | | 607 | | 167 | | | 774 | |
| Ending balance at original discount rate | 995,962 | | 202,755 | | | 1,198,717 | | | 217,524 | | 123,941 | | | 341,465 | |
| Effect of changes in discount rates | (22,612) | | (7,633) | | | (30,245) | | | (5,578) | | (1,157) | | | (6,735) | |
| Balance, end of year | $ | 973,350 | | 195,122 | | | 1,168,472 | | | 211,946 | | 122,784 | | | 334,730 | |
| | | | | | | | | |
| Net liability for future policy benefits | $ | 728,433 | | 181,862 | | | 910,295 | | | 113,115 | | 107,858 | | | 220,973 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
December 31, 2023 | 10-K 91
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 (In thousands) | Life Insurance | | Home Service Insurance |
| Permanent | Permanent Limited Pay | | Total | | Permanent | Permanent Limited Pay | | Total |
| Present Value of Expected Net Premiums: | | | | | | | | |
| Balance, beginning of year | $ | 269,528 | | 4,939 | | | 274,467 | | | 104,556 | | 10,196 | | | 114,752 | |
| Beginning balance at original discount rate | 246,386 | | 5,093 | | | 251,479 | | | 90,012 | | 9,532 | | | 99,544 | |
| Effect of changes in cash flow assumptions | (3,662) | | 237 | | | (3,425) | | | 4,253 | | 1,214 | | | 5,467 | |
| Effects of actual variances from expected experience | 3,466 | | 1,534 | | | 5,000 | | | (3,744) | | (8,407) | | | (12,151) | |
| Adjusted beginning of year balance | 246,190 | | 6,864 | | | 253,054 | | | 90,521 | | 2,339 | | | 92,860 | |
| Issuances | 35,826 | | 4,086 | | | 39,912 | | | 19,030 | | 5,288 | | | 24,318 | |
| Interest accrual | 8,382 | | 82 | | | 8,464 | | | 3,454 | | 244 | | | 3,698 | |
| Net premiums collected | (41,560) | | (258) | | | (41,818) | | | (11,202) | | 6,752 | | | (4,450) | |
| Derecognition and other | (1,237) | | (92) | | | (1,329) | | | (1,578) | | (229) | | | (1,807) | |
| Ending balance at original discount rate | 247,601 | | 10,682 | | | 258,283 | | | 100,225 | | 14,394 | | | 114,619 | |
| Effect of changes in discount rates | (12,373) | | (473) | | | (12,846) | | | (6,717) | | (1,139) | | | (7,856) | |
| Balance, end of year | $ | 235,228 | | 10,209 | | | 245,437 | | | 93,508 | | 13,255 | | | 106,763 | |
| | | | | | | | | |
| Present Value of Expected Future Policy Benefits: | | | | | | | |
| Balance, beginning of year | $ | 1,168,282 | | 240,679 | | | 1,408,961 | | | 266,206 | | 161,715 | | | 427,921 | |
| Beginning balance at original discount rate | 990,921 | | 207,105 | | | 1,198,026 | | | 205,340 | | 117,425 | | | 322,765 | |
| Effect of changes in cash flow assumptions | (3,916) | | 374 | | | (3,542) | | | 4,822 | | 1,765 | | | 6,587 | |
| Effects of actual variances from expected experience | 4,528 | | 4,910 | | | 9,438 | | | (3,278) | | (992) | | | (4,270) | |
| Adjusted beginning of year balance | 991,533 | | 212,389 | | | 1,203,922 | | | 206,884 | | 118,198 | | | 325,082 | |
| Issuances | 36,604 | | 4,187 | | | 40,791 | | | 19,054 | | 5,286 | | | 24,340 | |
| Interest accrual | 42,547 | | 8,474 | | | 51,021 | | | 8,754 | | 5,452 | | | 14,206 | |
| Benefit payments | (72,383) | | (16,765) | | | (89,148) | | | (18,870) | | (6,770) | | | (25,640) | |
| Derecognition and other | (2,132) | | (234) | | | (2,366) | | | (1,634) | | (258) | | | (1,892) | |
| Ending balance at original discount rate | 996,169 | | 208,051 | | | 1,204,220 | | | 214,188 | | 121,908 | | | 336,096 | |
| Effect of changes in discount rates | (48,754) | | (12,439) | | | (61,193) | | | (13,837) | | (5,552) | | | (19,389) | |
| Balance, end of year | $ | 947,415 | | 195,612 | | | 1,143,027 | | | 200,351 | | 116,356 | | | 316,707 | |
| | | | | | | | | |
| Net liability for future policy benefits | $ | 712,187 | | 185,403 | | | 897,590 | | | 106,843 | | 103,101 | | | 209,944 | |
| Plus: Flooring impact | 1 | | — | | | 1 | | | — | | — | | | — | |
| | | | | | | | | |
| Net liability for future policy benefits, after flooring impact | $ | 712,188 | | 185,403 | | | 897,591 | | | 106,843 | | 103,101 | | | 209,944 | |
Net premiums collected is defined as the transactional gross premiums collected in the current period times the net premium ratio. Issuances are calculated as the present value, using the locked-in discount rate, of the expected net premiums or the expected future policy benefits related to new policies issued during the years ended December 31, 2023 and 2022. Interest accrual is the interest earned on the beginning present value of either the expected net premiums or the expected future policy benefits using the locked-in discount rate. Benefit payments are the transactional benefits (death, lapse, surrenders and maturities) paid in the current period. Derecognition refers to a subset of the issuances or the present value of future premiums released on new issues that lapsed during the years ended December 31, 2023 and 2022 as well as other reconciling items. The effects of actual variances from expected experience lines are primarily impacted by the actual policy cash flows during the period
December 31, 2023 | 10-K 92
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
compared to that which was expected in the reserve assumptions. If the net of the two lines is a positive number, the implication is an unfavorable result with policy cash flows less favorable than assumed while a negative number implies a favorable result compared to assumptions. Our policy experience will vary from actual experience in any one period, either favorably or unfavorably.
The following table reconciles the net liability for future policy benefits shown above to the liability for future policy benefits reported in the consolidated balance sheets.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| (In thousands) | Life
Insurance | Home Service
Insurance | Consolidated | | Life
Insurance | Home Service
Insurance | Consolidated |
| Life Insurance: | | | | | | | |
| Permanent | $ | 728,433 | | 113,115 | | 841,548 | | | 712,188 | | 106,843 | | 819,031 | |
| Permanent limited pay | 181,862 | | 107,858 | | 289,720 | | | 185,403 | | 103,101 | | 288,504 | |
| Deferred profit liability | 28,933 | | 26,804 | | 55,737 | | | 25,655 | | 24,459 | | 50,114 | |
| Other | 28,319 | | 13,929 | | 42,248 | | | 27,370 | | 13,628 | | 40,998 | |
| Total life insurance | 967,547 | | 261,706 | | 1,229,253 | | | 950,616 | | 248,031 | | 1,198,647 | |
| Accident & Health: | | | | | | | |
| | | | | | | |
| Other | 588 | | 301 | | 889 | | | 533 | | 234 | | 767 | |
| | | | | | | |
| Total future policy benefit reserves | $ | 968,135 | | 262,007 | | 1,230,142 | | | 951,149 | | 248,265 | | 1,199,414 | |
The following table provides the amount of undiscounted and discounted expected gross premiums and expected future benefit reservespayments for long-term duration contracts.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| (In thousands) | Life
Insurance | | Home Service
Insurance | | Life
Insurance | | Home Service
Insurance |
| Undiscounted: | | | | | | | |
| Permanent: | | | | | | | |
| Expected future gross premiums | $ | 621,935 | | | 455,552 | | | 612,531 | | | 461,298 | |
| Expected future benefit payments | 1,495,206 | | | 484,740 | | | 1,479,562 | | | 473,039 | |
| | | | | | | |
| Permanent Limited Pay: | | | | | | | |
| Expected future gross premiums | 47,161 | | | 77,266 | | | 47,447 | | | 74,278 | |
| Expected future benefit payments | 326,821 | | | 320,810 | | | 323,559 | | | 316,225 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Discounted: | | | | | | | |
| Permanent: | | | | | | | |
| Expected future gross premiums | $ | 481,963 | | | 275,629 | | | 472,754 | | | 271,440 | |
| Expected future benefit payments | 973,350 | | | 211,946 | | | 947,415 | | | 200,351 | |
| | | | | | | |
| Permanent Limited Pay: | | | | | | | |
| Expected future gross premiums | 42,138 | | | 53,075 | | | 41,853 | | | 52,030 | |
| Expected future benefit payments | 195,122 | | | 122,784 | | | 195,612 | | | 116,356 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
December 31, 2023 | 10-K 93
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
The following tables summarize the following: a) valuationamount of revenue and interest rates; b) mortality assumptions;related to long-term duration contracts recognized in the consolidated statements of operations and c) withdrawals.comprehensive income (loss):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 2023 | | 2022 | | 2021 |
| (In thousands) | | | | | | | Gross Premiums | Interest Expense | | Gross Premiums | Interest Expense | | Gross Premiums | Interest Expense |
| Life Insurance Segment: | | | | | | | | | | | | | |
| Life Insurance: | | | | | | | | | | | | | | |
| Permanent | | | | | | | $ | 93,917 | | 33,984 | | | 94,905 | | 34,165 | | | 96,766 | | 34,067 | |
| Permanent Limited Pay | | | | | | | 16,396 | | 8,923 | | | 15,023 | | 9,214 | | | 13,678 | | 9,331 | |
| Other | | | | | | | 12,813 | | — | | | 16,047 | | — | | | 16,856 | | — | |
| Less: | | | | | | | | | | | | | | |
| Reinsurance | | | | | | | 1,702 | | — | | | 1,819 | | — | | | 1,742 | | — | |
| Total, net of reinsurance | | | | | | | 121,424 | | 42,907 | | | 124,156 | | 43,379 | | | 125,558 | | 43,398 | |
| Accident & Health: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Other | | | | | | | 725 | | — | | | 502 | | — | | | 505 | | — | |
| Less: | | | | | | | | | | | | | | |
| Reinsurance | | | | | | | 4 | | — | | | 5 | | — | | | 5 | | — | |
| Total, net of reinsurance | | | | | | | 721 | | — | | | 497 | | — | | | 500 | | — | |
| Total | | | | | | | $ | 122,145 | | 42,907 | | | 124,653 | | 43,379 | | | 126,058 | | 43,398 | |
| | | | | | | | | | | | | | |
| Home Service Insurance Segment: | | | | | | | | | | | | |
| Life Insurance: | | | | | | | | | | | | | | |
| Permanent | | | | | | | $ | 33,263 | | 5,294 | | | 33,312 | | 5,300 | | | 33,706 | | 5,447 | |
| Permanent Limited Pay | | | | | | | 8,576 | | 6,388 | | | 8,396 | | 6,255 | | | 8,324 | | 6,187 | |
| Other | | | | | | | 1,371 | | — | | | 1,749 | | — | | | 2,236 | | — | |
| Less: | | | | | | | | | | | | | | |
| Reinsurance | | | | | | | 25 | | — | | | 27 | | — | | | 23 | | — | |
| Total, net of reinsurance | | | | | | | 43,185 | | 11,682 | | | 43,430 | | 11,555 | | | 44,243 | | 11,634 | |
| Accident & Health: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Other | | | | | | | 916 | | — | | | 781 | | — | | | 750 | | — | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Total | | | | | | | $ | 44,101 | | 11,682 | | | 44,211 | | 11,555 | | | 44,993 | | 11,634 | |
The following table provides the weighted-average durations of the liability for future policy benefits.
| | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| (In years) | Life
Insurance | Home Service
Insurance | | Life
Insurance | Home Service
Insurance |
| Permanent: | | | | | |
| Duration at original discount rate | 8.5 | 16.4 | | 8.0 | 15.4 |
| Duration at current discount rate | 8.5 | 16.4 | | 8.5 | 16.2 |
| Permanent Limited Pay: | | | | | |
| Duration at original discount rate | 8.2 | 14.8 | | 7.6 | 14.3 |
| Duration at current discount rate | 8.1 | 15.3 | | 7.5 | 15.7 |
| | | | | |
| | | | | |
| | | | | |
December 31, 2023 | 10-K 94
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
The following table provides the weighted-average interest rates for the liability for future policy benefits.
| | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| Life
Insurance | Home Service
Insurance | | Life
Insurance | Home Service
Insurance |
| Permanent: | | | | | |
| Interest rate at original discount rate | 4.89 | % | 4.97 | % | | 4.93 | % | 5.00 | % |
| Interest rate at current discount rate | 4.79 | % | 4.96 | % | | 5.10 | % | 5.22 | % |
| Permanent Limited Pay: | | | | | |
| Interest rate at original discount rate | 4.29 | % | 5.04 | % | | 4.30 | % | 5.05 | % |
| Interest rate at current discount rate | 4.77 | % | 4.95 | % | | 5.07 | % | 5.21 | % |
| | | | | |
| | | | | |
| | | | | |
LIABILITY FOR POLICYHOLDERS’ ACCOUNT BALANCES
The following table presents the policyholders' account balances by range of guaranteed minimum crediting rates and the related range of the difference, in basis points, between rates being credited and the respective guaranteed minimums.
| | | | | | | | | | | | | | | | | |
| At Guaranteed Minimum | 1 Basis Point-50 Basis Points Above | 51 Basis Points-150 Basis Points Above | Greater Than 150 Basis Points Above | Total |
December 31, 2023 (In thousands) |
| Range of Guaranteed Minimum Crediting Rates: | | | | |
| 0.00% - 1.49% | $ | 784 | | — | | 1,146 | | 34,886 | | 36,816 | |
| 1.50% - 2.99% | 33,073 | | 671 | | 49 | | — | | 33,793 | |
| 3.00% - 4.49% | 105,684 | | 9 | | — | | — | | 105,693 | |
| Greater or equal to 4.50% | 31,400 | | — | | — | | — | | 31,400 | |
| Total | $ | 170,941 | | 680 | | 1,195 | | 34,886 | | 207,702 | |
| | | | | | | | | | | | | | | | | |
| At Guaranteed Minimum | 1 Basis Point-50 Basis Points Above | 51 Basis Points-150 Basis Points Above | Greater Than 150 Basis Points Above | Total |
December 31, 2022 (In thousands) |
| Range of Guaranteed Minimum Crediting Rates: | | | | |
| 0.00% - 1.49% | $ | 736 | | — | | 1,089 | | 38,671 | | 40,496 | |
| 1.50% - 2.99% | 24,155 | | 631 | | 51 | | — | | 24,837 | |
| 3.00% - 4.49% | 98,902 | | 9 | | — | | — | | 98,911 | |
| Greater or equal to 4.50% | 31,825 | | — | | — | | — | | 31,825 | |
| Total | $ | 155,618 | | 640 | | 1,140 | | 38,671 | | 196,069 | |
December 31, 2023 | 10-K 95
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
The following tables summarize balances of and changes in policyholders' account balances.
| | | | | | | | | | | | | | |
December 31, 2023 (In thousands, except for %) | Supplemental Contracts Without Life Contingencies | Fixed Annuity | Dividend Accumulations | Premiums Paid in Advance |
| Balance, beginning of year | $ | 32,995 | | 86,807 | | 41,663 | | 34,603 | |
| Issuances | 22,387 | | 2,741 | | 660 | | 3,693 | |
| Premiums received | 123 | | 4,387 | | 5,860 | | 793 | |
| | | | |
| Interest credited | 1,483 | | 2,653 | | 1,364 | | 1,627 | |
| Other | 1 | | — | | — | | — | |
| Less: | | | | |
| Surrenders and withdrawals | — | | 9,454 | | 4,587 | | 9,677 | |
| Benefit payments | 12,420 | | — | | — | | — | |
| Balance, end of year | $ | 44,569 | | 87,134 | | 44,960 | | 31,039 | |
| Weighted-average crediting rates | 4.00 | % | 3.56 | % | 3.04 | % | 2.95 | % |
| | | | |
| Cash surrender value | $ | 44,569 | | 87,134 | | 44,960 | | 31,039 | |
| | | | | | | | | | | | | | |
December 31, 2022 (In thousands, except for %) | Supplemental Contracts Without Life Contingencies | Fixed Annuity | Dividend Accumulations | Premiums Paid in Advance |
| Balance, beginning of year | $ | 23,950 | | 83,917 | | 37,760 | | 38,875 | |
| Issuances | 12,071 | | 3,044 | | 683 | | 2,820 | |
| Premiums received | 176 | | 4,940 | | 5,538 | | 779 | |
| | | | |
| Interest credited | 1,067 | | 2,631 | | 1,216 | | 964 | |
| Other | 2 | | — | | — | | — | |
| Less: | | | | |
| Surrenders and withdrawals | — | | 7,725 | | 3,534 | | 8,835 | |
| Benefit payments | 4,271 | | — | | — | | — | |
| Balance, end of year | $ | 32,995 | | 86,807 | | 41,663 | | 34,603 | |
| Weighted-average crediting rates | 4.08 | % | 3.59 | % | 3.07 | % | 3.04 | % |
| | | | |
| Cash surrender value | $ | 32,995 | | 86,807 | | 41,663 | | 34,603 | |
December 31, 2023 | 10-K 96
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
The following table reconciles policyholders' account balances shown above to the policyholders' account balances liability in the consolidated balance sheets.
| | | | | | | | | | | | | | | |
As of December 31, (In thousands) | | | 2023 | | | | 2022 |
| Annuities: | | | | | | | |
| Supplemental contracts without life contingencies | | | $ | 44,569 | | | | | 32,995 | |
| Fixed annuity | | | 87,134 | | | | | 86,807 | |
| Unearned revenue reserve | | | 1,513 | | | | | 1,619 | |
| Other | | | — | | | | | 1 | |
| Total annuities | | | $ | 133,216 | | | | | 121,422 | |
| | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Premiums Paid in Advance: | | | | | | | |
| Premiums paid in advance | | | $ | 31,039 | | | | | 34,603 | |
| Other | | | 1,407 | | | | | 1,781 | |
| Total premiums paid in advance | | | $ | 32,446 | | | | | 36,384 | |
(6) POLICY CLAIM LIABILITY AND SHORT DURATION CONTRACTS
The following table presents information on changes in the liability for life, accident and health and property policy and contract claims for the years ended December 31, 2017, 2016 and 2015.claims.
| | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Policy claims payable: | | | | | |
| Balance at January 1 | $ | 9,884 | | | 14,590 | | | 13,206 | |
| Less: reinsurance recoverable | 2,070 | | | 2,469 | | | 3,012 | |
| Net balance at January 1 | 7,814 | | | 12,121 | | | 10,194 | |
| Add claims incurred, related to: | | | | | |
| Current year | 25,630 | | | 28,720 | | | 32,595 | |
Prior years(1) | (522) | | | (46) | | | 1,052 | |
| | 25,108 | | | 28,674 | | | 33,647 | |
| Deduct claims paid, related to: | | | | | |
| Current year | 20,786 | | | 22,771 | | | 23,369 | |
| Prior years | 6,797 | | | 10,210 | | | 8,351 | |
| | 27,583 | | | 32,981 | | | 31,720 | |
| Net balance December 31 | 5,339 | | | 7,814 | | | 12,121 | |
| Plus: reinsurance recoverable | 1,298 | | | 2,070 | | | 2,469 | |
| Balance at December 31 | $ | 6,637 | | | 9,884 | | | 14,590 | |
(1) This line is primarily impacted by the level of claim resolutions in the period compared to that which is expected by the reserve assumption. A positive number implies an unfavorable result where claim resolutions were less favorable than assumed while a negative number implies a favorable result compared to assumptions. Our claim assumptions will vary from actual experience in any one period, either favorably or unfavorably. |
|
| | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Policy claims payable at January 1 | $ | 9,538 |
| | 9,653 |
| | 9,560 |
|
| Less: reinsurance recoverable | 407 |
| | 543 |
| | 950 |
|
| Net balance at January 1 | 9,131 |
| | 9,110 |
| | 8,610 |
|
| Add claims incurred, related to: | |
| | |
| | |
|
| Current year | 25,036 |
| | 26,000 |
| | 26,911 |
|
| Prior years | (209 | ) | | (493 | ) | | (197 | ) |
| | 24,827 |
| | 25,507 |
| | 26,714 |
|
| Deduct claims paid, related to: | |
| | |
| | |
|
| Current year | 18,037 |
| | 18,681 |
| | 19,584 |
|
| Prior years | 7,678 |
| | 6,805 |
| | 6,630 |
|
| | 25,715 |
| | 25,486 |
| | 26,214 |
|
| Net balance December 31 | 8,243 |
| | 9,131 |
| | 9,110 |
|
| Plus: reinsurance recoverable | 367 |
| | 407 |
| | 543 |
|
| Policy claims payable, December 31 | $ | 8,610 |
| | 9,538 |
| | 9,653 |
|
SHORT DURATION CONTRACTS
The Company experienced favorable development in 2017 of $209,000 and favorable development in 2016 of $493,000. No unusual claims or trends have been noted.
Short Duration Contracts
The Company's short duration contracts consist of credit life and credit disability in the Life Insurance segment and property insurance in the Home Service Insurance segment. The credit insurance lines are an immaterial part of
December 31, 2023 | 10-K 97
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
short duration contracts so the following disclosures cover only the property insurance line of business in the Home Service Insurance segment.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Special Property Insurance (Allied and Fire)
The following table presents incurred claims development as of December 31, 2017,2023, net of reinsurance, as well as cumulative claim frequency and the total of incurred-but-not-reported liabilities plus expected development on reported claims included within the net incurred claims amounts. This information is presented for the last five years as these claims rarely pay out over a longer period of time. Claims data for 2013 through 2015 is supplementary information to the consolidated financial statements and is unaudited.
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2023 |
| Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | Total of Incurred-but-Not-Reported Liabilities Plus Expected Development on Reported Claims | Cumulative Number of Reported Claims |
| For the Years Ended December 31, |
| ($ In thousands) | 2019 | 2020 | 2021 | 2022 | 2023 |
| Accident Year: | (Unaudited) | | | |
| 2019 | $ | 1,549 | | 1,150 | | 1,161 | | 1,106 | | 1,105 | | — | | 610 | |
| 2020 | | 2,598 | | 2,670 | | 2,577 | | 2,694 | | — | | 2,415 | |
| 2021 | | | 2,087 | | 1,644 | | 1,312 | | 2 | | 2,397 | |
| 2022 | | | | 1,213 | | 1,262 | | 4 | | 362 | |
| 2023 | | | | | 776 | | 27 | | 191 | |
| Total | | | | | $ | 7,149 | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2017 |
| | | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | | Total of Incurred-but-Not-Reported Liabilities Plus Expected Development on Reported Claims | | Cumulative Number of Reported Claims |
| | | Years ended December 31, | | |
| Accident Year | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | |
| ($ In thousands) | | (Unaudited) | | | | | | | | |
| 2013 | | $ | 2,058 |
| | 1,977 |
| | 1,970 |
| | 1,964 |
| | 1,964 |
| | — |
| | 328 |
|
| 2014 | | | | 1,744 |
| | 1,650 |
| | 1,575 |
| | 1,570 |
| | — |
| | 254 |
|
| 2015 | | | | | | 1,777 |
| | 1,731 |
| | 1,692 |
| | 4 |
| | 358 |
|
| 2016 | | | | | | | | 2,071 |
| | 2,096 |
| | 6 |
| | 531 |
|
| 2017 | | | | | | | | | | 1,761 |
| | 210 |
| | 555 |
|
| Total | | | | | | | | | | $ | 9,083 |
| | | | |
The following table presents paid claims development as of December 31, 2017,2023, net of reinsurance. Claims data for 2013 through 2015 are unaudited.
| | | | | | | | | | | | | | | | | |
| Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance |
| Years Ended December 31, |
| (In thousands) | 2019 | 2020 | 2021 | 2022 | 2023 |
| Accident Year: | (Unaudited) | |
| 2019 | $ | 1,166 | | 1,071 | | 1,091 | | 1,105 | | 1,105 | |
| 2020 | | 1,997 | | 2,639 | | 2,576 | | 2,694 | |
| 2021 | | | 1,435 | | 1,638 | | 1,311 | |
| 2022 | | | | 1,011 | | 1,259 | |
| 2023 | | | | | 755 | |
| Total | | | | | $ | 7,124 | |
| All outstanding liabilities before 2019, net of reinsurance | | $ | — | |
| Liabilities for claims and claim adjustment expenses, net of reinsurance | | $ | 33 | |
|
| | | | | | | | | | | | | | | | | |
| | | Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance |
| | | Years ended December 31, |
| Accident Year | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| (In thousands) | | (Unaudited) | | | | |
| 2013 | | $ | 1,751 |
| | 1,964 |
| | 1,964 |
| | 1,964 |
| | 1,964 |
|
| 2014 | | | | 1,361 |
| | 1,556 |
| | 1,560 |
| | 1,560 |
|
| 2015 | | | | | | 1,410 |
| | 1,637 |
| | 1,638 |
|
| 2016 | | | | | | | | 1,680 |
| | 2,061 |
|
| 2017 | | | | | | | | | | 1,359 |
|
| Total | | | | | | | | | | $ | 8,582 |
|
| All outstanding liabilities before 2013, net of reinsurance | | | | | | $ | — |
|
| Liabilities for claims and claim adjustment expenses, net of reinsurance | | | | $ | 501 |
|
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued | | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
The reconciliation of the net incurred and paid claims development tables to the liability for claims and claim adjustment expenses in the consolidated statement of financial position isbalance sheets are as follows.follows:
| | | | | | | | | | | |
As of December 31,
(In thousands) | 2023 | | 2022 |
| Net outstanding liabilities: | | | |
| Special property | $ | 33 | | | 263 | |
| Other short duration insurance lines | 151 | | | 158 | |
| Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance | 184 | | | 421 | |
| Reinsurance recoverable on unpaid claims: | | | |
| Special property | 1,220 | | | 1,275 | |
| Other short duration insurance lines | 78 | | | 798 | |
| Total reinsurance recoverable on unpaid claims | 1,298 | | | 2,073 | |
| Insurance lines other than short duration | 5,155 | | | 7,390 | |
| Total gross liability for unpaid claims and claim adjustment expense | $ | 6,637 | | | 9,884 | |
|
| | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 |
| | (In thousands) |
| Net outstanding liabilities |
|
| |
|
|
| Special property | $ | 501 |
| | 500 |
|
| Other short-duration insurance lines | 72 |
| | 43 |
|
| Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance | 573 |
| | 543 |
|
| | |
| | |
|
| Reinsurance recoverable on unpaid claims | | | |
| Special property | — |
| | — |
|
| Other insurance lines | 261 |
| | 340 |
|
| Total reinsurance recoverable on unpaid claims | 261 |
| | 340 |
|
| | | | |
| Insurance lines other than short duration | 7,776 |
| | 8,655 |
|
| |
|
| |
|
|
| Total gross liability for unpaid claims and claim adjustment expenses | $ | 8,610 |
| | 9,538 |
|
The following is supplementary information to the consolidated financial statements about average historical claims duration as of December 31, 2017.2023.
| | | | | | | | | | | | | | | | | |
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (Unaudited) |
| Years | 1 | 2 | 3 | 4 | 5 |
| | | | | |
| Special property | 93 | % | 13 | % | (8) | % | 3 | % | — | % |
(7)REINSURANCE
|
| | | | | | | | | | | | | | | |
| Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (Unaudited) |
| Years | | 1 | | 2 | | 3 | | 4 | | 5 |
| | | | | | | | | | | |
| Special Property | | 83.30 | % | | 13.68 | % | | 0.10 | % | | — | % | | — | % |
Note 5: Reinsurance
In the normal course of business, the Company reinsures portions of certain policies that we underwrite to limit disproportionate risks. During 20172023 and 2016,2022, we generally retained varying amounts of individual insurance up to a maximum retention of $100,000$100,000 on any life.one individual life insurance policy. The Company also reinsures 100% of our accidental death benefit rider coverage. CatastropheThe Company maintained catastrophe reinsurance with the net retention on any one loss of $30,000, which is in place for our property policies. In 2017 and 2016,the maximum policy limit on any single risk. During 2023, this reinsurance provided $10,000,000$11.0 million of coverage abovewith the Company retaining $2.4 million of the risk. In 2022, this reinsurance provided $11.0 million of coverage once the Company paid a $500,000$1.4 million deductible. Our health insurance policies are substantially all reinsured onIn consideration for a 100% coinsurance basis. We remainreinstatement premium, second event coverage was provided under the same terms for both years. The Company remains contingently liable toin the extentevent that any of the reinsuring companies cannotreinsurers are unable to meet their obligations under theseany reinsurance treaties.agreement.
Our amounts recoverable from reinsurers represent receivables from and reserves ceded to reinsurers. We obtain reinsurance from multiple reinsurers, and we monitor concentration as well as financial strength ratings of our principal reinsurers. The ratings by A.M. Best Company range from A- (Excellent) to A+ (Superior) to B+ (Good). To protect our position, we have established and funded a trust to cover the contingent liabilities related to accident and health reinsurance ceded to Unified Life Insurance Company, which represents $27,000 of the $3.7 million of reinsurance recoverable at December 31, 2017.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Assumed and ceded life reinsurance activity as of December 31, 2017 and 2016is summarized as follows:
| | | | | | | | | | | |
December 31,
(In thousands) | 2023 | | 2022 |
| Aggregate assumed life insurance in force | $ | 3,772 | | | 4,074 | |
| Aggregate ceded life insurance in force | $ | 619,597 | | | 543,496 | |
| Net life insurance in force | $ | 4,306,429 | | | 4,257,148 | |
December 31, 2023 | 10-K 99
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
|
| | | | | | |
| | At December 31, |
| | 2017 | | 2016 |
| | (In thousands) |
| Aggregate assumed life insurance in force | $ | 5,564 |
| | 22,915 |
|
| Aggregate ceded life insurance in force | $ | (503,685 | ) | | (522,821 | ) |
| Net life insurance in force | $ | 4,469,735 |
| | 4,497,735 |
|
The Company's reinsurance recoveriesrecoverable on ceded reinsurance were $3.7was $4.0 million and $4.6 million in 20172023 and $3.9 million in 2016.2022, respectively. Premiums and claims and surrenders assumed and ceded for all lines of business for these years are summarized as follows:
| | | | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Premiums from short-duration contracts: | | | | | |
Years ended December 31,
(In thousands) | | Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Premiums from short duration contracts: | | Premiums from short duration contracts: | | | |
| Direct | $ | 6,933 |
| | 6,927 |
| | 7,223 |
|
| Assumed | — |
| | — |
| | — |
|
| Ceded | (781 | ) | | (828 | ) | | (873 | ) |
| Net premiums earned | 6,152 |
| | 6,099 |
| | 6,350 |
|
| Premiums from long-duration contracts: | |
| | |
| | |
|
| Premiums from long duration contracts: | | Premiums from long duration contracts: | | | |
| Direct | 193,778 |
| | 194,147 |
| | 190,114 |
|
| Assumed | 142 |
| | 151 |
| | 353 |
|
| Ceded | (2,352 | ) | | (2,521 | ) | | (2,337 | ) |
| Net premiums earned | 191,568 |
| | 191,777 |
| | 188,130 |
|
| Total premiums earned | $ | 197,720 |
| | 197,876 |
| | 194,480 |
|
| Claims and surrenders assumed | $ | 247 |
| | 237 |
| | 414 |
|
| Claims and surrenders ceded | $ | (946 | ) | | (877 | ) | | (1,013 | ) |
During the third quarter of 2021, SPFIC has catastrophe reinsurance that coverswas impacted by Hurricane Ida, the first eventsecond-most damaging and intense hurricane in excess of a $500,000 deductible up to $10.0 million. In consideration for a reinstatement premium, second event coverage is providedLouisiana on record, behind Hurricane Katrina in excess of a $500,000 deductible up to $10.0 million. The annual premium was approximately $0.8 million in 2017 and 2016 and $0.9 million in 2015.
Note 6: Stockholders' Equity and Restrictions
The two classes of our common stock are equal in all respects, except (a) each Class A share is entitled to receive twice the cash dividends paid on a per share basis to the Class B common stock, if any; and (b) the Class B common stock has the exclusive right to elect a simple majority of the Board of Directors of Citizens and the Class A common stock elects the remaining directors.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The table below shows the combined total of all of our insurance subsidiaries' capital and surplus and net income (loss) for life insurance operations and property insurance operations, although these amounts are not all available as dividends to Citizens, Inc., because only CICA is directly owned by Citizens, Inc. All other subsidiaries are owned by CICA.
|
| | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 |
| Combined Statutory Stockholders' Equity | (In thousands) |
| | |
| Life insurance operations | $ | 28,101 |
| | 28,009 |
|
| Property insurance operations | 7,029 |
| | 6,863 |
|
| Total statutory equity | $ | 35,130 |
| | 34,872 |
|
|
| | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Combined Statutory Net Income (Loss) | (In thousands) |
| | |
| Life insurance operations | $ | 4,179 |
| | 11,987 |
| | (7,972 | ) |
| Property insurance operations | 152 |
| | 401 |
| | 607 |
|
| Total statutory net income (loss) | $ | 4,331 |
| | 12,388 |
| | (7,365 | ) |
Generally, the net assets of the insurance subsidiaries available for transfer to their immediate parent are limited to the greater of the subsidiary net gain from operations during the preceding year or 10% of the subsidiary net statutory surplus as of the end of the preceding year as determined in accordance with accounting practices prescribed or permitted by insurance regulatory authorities. Under these practices, total surplus at December 31, 2017 was $32.0 million and net gain from operations was $5.8 million for CICA. Based upon statutory net gain from operations and surplus of CICA as of and for the year ended December 31, 2017, a dividend of approximately $5.8 million could be paid to the Company without prior regulatory approval in 2018. Payments of dividends in excess of such amounts would generally require approval by regulatory authorities.
CICA, CNLIC, SPLIC, MGLIC and SPFIC have calculated their risk based capital ("RBC") in accordance with the National Association of Insurance Commissioners' Model Rule and the RBC rules as adopted by their respective states of domicile. All insurance subsidiaries exceeded RBC minimum levels at December 31, 2017.
On June 10, 2016, the National Association of Insurance Commissioners (“NAIC”) Executive Committee and Plenary voted to adopt a recommendation for January 1, 2017 as the operative date for the implementation of Principles-Based Reserves (“PBR”) as a national standard for life insurance products. Although this NAIC standard does not change the reserving requirements under U.S. GAAP, it can be significant for many life insurers. PBR replaces the current formulaic approach to determining policy reserves with an approach that more closely reflects the risks of highly complex products. Companies will be expected to develop “right-sized” reserves that better align with their specific product features, their observed actuarial experience, and their overall risk management procedures. There is a three-year transition period where PBR is optional until PBR becomes required on January 1, 2020. The Company is assessing the impact that this standard will have on its statutory reserving and capital and surplus.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 7: Commitments and Contingencies
Qualification of Life Products
As of December 31, 2014, we reported that a portion of the life insurance policies issued by our subsidiary insurance companies failed to qualify for the favorable U.S. federal income tax treatment afforded by Section 7702 of the Internal Revenue Code ("IRC") of 1986. This tax code section allows for qualifying products sold to clients to have favorable tax treatment such as the product's inside build up is not taxable, unless distributions are made. Because these policies were sold with the intention that they would qualify for this favorable tax treatment, holders of these policies and the Company may now be subject to additional tax liabilities. The policies at issue were sold most substantially to non-U.S. citizens residing abroad and to a lesser extent domestically. Based upon a review of the options available to the Company, we have determined we will not remediate our endowments and life products that we have sold to non-U.S. citizens but will propose an offer to the IRS to settle potential liabilities. We do intend to remediate the domestic products we have sold to U.S. citizens. Accordingly, we submitted an offer to enter into a Closing Agreement for CICA and CNLIC in May 2017. We have not received a response from the IRS on this submission. In addition, as part of our continuing review, we determined in July 2015 that certain annuity contracts do not contain qualifying language under IRC 72(s) as intended that would have provided for favorable tax treatment of the annuities. This issue affects both our domestic and international contract holders. We generally endorsed affected domestic annuity contracts to comply with the Code in December 2017 and intend to submit a Closing Agreement offer in 2018 to address past non-compliance.2005. The Company has continueda reinsurance agreement that covers catastrophic events such as Hurricane Ida. We paid the $0.5 million retention in claim amounts for Ida and do not expect to refine the understanding of the tax failures as previously reported by preparing an individual policy calculation and has reflected the related exposure for the current reporting period as noted below. Failure of these policies to qualify under IRC Sections 7702 and 72(s) has resulted in additional liabilities and expenses as described below. The products have been and continue to be appropriately reported under U.S. GAAP for financial reporting.
The failure of these policies to qualify under Sections 7702 and 72(s) results in an estimated liability as of December 31, 2017 of $12.3 million, after tax, related to projected IRS toll charges and fees of $12.0 million and reserves increases to bring policies into compliance totaling $0.3 million. The estimated liability at December 31, 2017 is down $2.1 million from the estimated liability at December 31, 2016 of $14.4 million, after tax, due to a continued refinement of our estimate and additional accrued interest charges. The probability weighted range of financial estimates relative to this issue is $5.9 million to $48.2 million, after tax. This estimated range includes projected toll charges and fees payable to the IRS, as well as estimated increased payout obligations to current holders of non-compliant domestic life insurance policies expected to result from remediation of those policies. The estimated liability and the estimated range will be updated as we continue to refine our estimates. The amount of our liabilities and expenses depends on a number of uncertainties, including the number of prior tax years for which we may be liable to the IRS, the number of domestic life insurance policies we will be required to remediate, and the methodology applicable to the calculation of the toll charge for non-compliant policies. Given the range of potential outcomes and the significant variables assumed in establishing our estimates, actual amounts incurred may exceed our reserve and also could exceed the high end of our estimated range of liabilities and expenses. To the extent the amount reserved by the Company is insufficient to meet the actual amount of our liability and expenses, or if our estimates of those liabilities and expenses change in the future, our financial condition and results of operations may be materially adversely affected. Management believes that based upon current information we have recorded the best estimate liability to date.maximum reinsurance coverage.
Accruals for loss contingencies are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. The process of determining our best estimate and the estimated range was a complex undertaking including insight from external consultants and involved management’s judgment based upon a variety of factors known at the time. Additional costs will be incurred in 2018 associated with these issues and we believe these costs will range from $1.0 million to $2.0 million, but due to the uncertainty of actions we cannot reasonably estimate these costs with any reliability. Actual amounts incurred may exceed this estimate and will be recorded as they become probable and can be reasonably estimated.
(8)COMMITMENTS AND CONTINGENCIES
Litigation and Regulatory Actions
LITIGATION AND REGULATORY ACTIONS
On or about March 16, 2017, Juan Gamboa filed a putative class action lawsuit against the Company and five of its current and former directors and executive officers in the United States District Court, Western District of Texas. The lawsuit alleges the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making false and/or misleading statements, as well as failing to disclose material adverse facts about the Company’s business, operations and prospects. On May 25, 2017, the court appointed lead plaintiffs, and
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
on July 31, 2017, the lead plaintiffs filed an amended complaint. The amended complaint seeks an award of damages in an unspecified amount on behalf of a putative class consisting of persons who purchased the Company’s common stock between March 11, 2015 and March 8, 2017, inclusive. On September 28, 2017, we filed a motion to dismiss, which remains pending before the court. The Company believes that the lawsuit is without merit, and it intends to vigorously defend against all claims asserted. At this time, the Company is unable to reasonably determine the outcome of this litigation.
From time to time, we are subject to legal and regulatory actions relating to our business. We defend all claims vigorously. As a result, we incur defense costs, including attorneys' fees, other direct litigation costs and the expenditure of management time that otherwise would be devoted to our business. If we suffer an adverse judgment as a result of litigation claims or if a regulator fines us, it could have a material adverse effect on our business, results of operations and financial condition.
As disclosed in prior periods, the legal and regulatory actions facing the company include those relating to compliance with U.S. federal securities laws. Specifically,CREDIT FACILITY
On May 5, 2021, the Company entered into a $20 million senior secured revolving credit facility (the “Credit Facility”) with Regions Bank ("Regions"). The Credit Facility has beena three-year term, maturing on May 5, 2024, and allows the subject of an investigationCompany to borrow up to $20 million for working capital purposes, capital expenditures and other corporate purposes.
Revolving loans may be requested by the Securities and Exchange Commission (“SEC”)Company in aggregate minimum principal amounts of $0.5 million per loan. At the Company's election, the revolving loans may either bear a base rate, which is 1.75% plus a base rate (a fluctuating rate per annum) equal to the greatest of (a) Regions' prime rate, (b) the federal funds rate plus 0.50%, which appearsor (c) 0.75%. The Company is required to be focused on the Company’s internal control over financial reporting and disclosure controls and procedures in lightpay Regions a quarterly commitment fee of 0.375% of the Company’s determination in 2015 that aunused portion of the life insurance and annuity policies issuedCredit Facility, which the Company expenses as it is incurred.
Obligations under the Credit Facility are secured by its subsidiary insurance companies failed to qualify for the favorable U.S. federal income tax treatment afforded by Sections 7702 and 72(s)substantially all of the Internal Revenue Codeassets of 1986. There have been no allegationsthe Company other than the equity interests in all of fraud presentedthe regulated insurance subsidiaries, real estate owned by the SEC. We have cooperated fully withCompany, and other limited exceptions. The Credit Facility contains customary events of default and financial, affirmative and negative covenants, including but not limited to restrictions on indebtedness, liens, investments, asset dispositions and restricted payments. As of December 31, 2023, the investigationCompany had not borrowed any funds against the Credit Facility and expect that the matter will be resolved soon, although we cannot predict the timingwas not in violation of a resolution or the ultimate outcomeany covenants.
December 31, 2023 | 10-K 100
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
CONTRACTUAL OBLIGATIONS
The Company does not believeleases home office space in Austin, Texas for Citizens and in Puerto Rico for NES as well as several district office locations related to our Home Service Insurance segment across Louisiana, Mississippi and Arkansas, which are classified as operating leases. Certain operating leases include renewal options that extend the lease term. The exercise of lease renewal options is at our sole discretion when it is reasonably possiblecertain that resolutionwe will exercise such option. Leases with an initial term of this matter could result in a material loss12 months or less are immaterial to the Company.consolidated financial statements and are recognized as lease expense on a straight-line basis over the lease term and not recorded on the consolidated balance sheets.
UnclaimedOur operating lease liabilities had a weighted-average lease term of 6.8 years remaining as of December 31, 2023.
Maturities of our remaining operating lease liabilities as of December 31, 2023 are as follows.
| | | | | | | | |
| (In thousands) | | Operating Lease Payments |
| Maturity of operating lease liabilities: | | |
| 2024 | | $ | 1,499 | |
| 2025 | | 1,433 | |
| 2026 | | 1,385 | |
| 2027 | | 1,403 | |
| 2028 | | 1,438 | |
| After 2028 | | 2,728 | |
| Total operating lease liabilities | | 9,886 | |
| Interest expense | | (813) | |
| Present value of operating lease liabilities | | $ | 9,073 | |
We record the lease right-of-use asset in Property Contingencies
The Company was informed in 2012 by the Louisiana Department of Treasury, Arkansas Auditor of Stateand Equipment, net and the Texas State Comptroller, that they authorized an auditlease liability in Other Liabilities using a weighted average discount rate of Citizens, Inc. and its affiliates for compliance with unclaimed property laws. This audit is being conducted by Verus Financial LLC on behalf of the states. This audit is not an active audit and there has been no activity relative to this audit for several years.
If the external audit was performed it could result in additional2.59%. Cash payments to beneficiaries, additional escheatment of funds deemed abandoned under state laws, administrative penalties, interest, and changesrelated to the Company's procedures for the identification and escheatment of abandoned property. The Company believes additional escheatment of funds in Arkansas or Texas will not be material to our financial condition or results of operations. However, additional escheatment of funds in Louisiana, which may subsequently be deemed abandoned under the Louisiana Department of Treasury’s audit, could be substantial for SPLIC if the Louisiana Department of Treasury chooses to disregard recent court decisions regarding unclaimed property litigation in favor of the insurance industry. At this time, the Company is not able to estimate any of these possible amounts.
We have the following operating lease commitments as of December 31, 2017 with the payments due by the periods indicated below.
|
| | | |
| | Lease Commitments |
| | (In thousands) |
| Less than 1 year | $ | 1,858 |
|
| 1 year to 3 years | 2,829 |
|
| 3 years to 5 years | 173 |
|
| More than 5 years | — |
|
| Total | $ | 4,860 |
|
Operating lease expense was $1.1 million for the year ended December 31, 2017 and $0.6liabilities were $1.4 million for both of the years ended December 31, 20162023 and 2015.2022 and were reported in operating cash flows.
The Company does not engage in lease agreements among related parties.
As of December 31, 2023, CICA International is committed to fund investments up to $27.3 million related to limited partnership investments.
(9)STOCKHOLDERS' EQUITY AND RESTRICTIONS
STOCK
Our Restated and Amended Articles of Incorporation authorize the issuance of 127,000,000 shares, of which 100,000,000 shares shall be Class A common stock, 2,000,000 shares shall be Class B common stock, and 25,000,000 shall be preferred stock. Both authorized classes of common stock are equal in all respects, except (a) each share of Class A common stock is entitled to receive twice the cash dividends paid on a per share basis to the Class B common stock, if any; and (b) the holders of the Class B common stock have the exclusive right to elect a simple majority of the Board of Directors of Citizens. In April 2021, we repurchased all of the outstanding Class B common stock and it is now classified as treasury stock. As a result, all of the directors are elected by the holders of the Class A common stock. Citizens has never issued any preferred stock.
98December 31, 2023 | 10-K 101
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
A summary of the change in the number of shares of Class A and Class B common stock and treasury stock issued is as follows:
Note 8: Segment | | | | | | | | | | | | | | | | | |
| (In thousands) | Common Stock | | Treasury |
| Class A | | Class B | | Stock |
| Balance at December 31, 2020 | 52,654 | | | 1,002 | | | 3,136 | |
| Stock issued under stock investment plan | 404 | | | — | | | — | |
| Stock issued for compensation | 112 | | | — | | | — | |
| | | | | |
| Acquisition of Class B shares | — | | | — | | | 1,002 | |
| | | | | |
| Balance at December 31, 2021 | 53,170 | | | 1,002 | | | 4,138 | |
| Stock issued under stock investment plan | 475 | | | — | | | — | |
| Stock issued for compensation | 91 | | | — | | | — | |
| Acquisition of Class A shares | — | | | — | | | 799 | |
| | | | | |
| Other share issuance | 22 | | | — | | | — | |
| Balance at December 31, 2022 | 53,758 | | | 1,002 | | | 4,937 | |
| | | | | |
| Stock issued for compensation | 125 | | | — | | | — | |
| Acquisition of Class A shares | — | | | — | | | 393 | |
| | | | | |
| | | | | |
| Balance at December 31, 2023 | 53,883 | | | 1,002 | | | 5,330 | |
EARNINGS PER SHARE
The following table sets forth the computation of basic and Other Operating Informationdiluted earnings per share.
| | | | | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands, except per share amounts) | | 2023 | | 2022 | | 2021 |
| Net income (loss) | | $ | 24,437 | | | 26,007 | | | 72,706 | |
| Numerator for Basic Earnings Per Share: | | | | | | |
| Net income (loss) allocated to Class A common stock | | $ | 24,437 | | | 26,007 | | | 72,481 | |
| Net income (loss) allocated to Class B common stock | | — | | | — | | | 225 | |
| Net income (loss) | | $ | 24,437 | | | 26,007 | | | 72,706 | |
| Denominator for Basic Earnings Per Share: | | | | | | |
| Weighted average shares of Class A outstanding | | 49,696 | | | 50,139 | | | 49,664 | |
| Weighted average shares of Class B outstanding | | — | | | — | | | 308 | |
| Total weighted average shares outstanding | | 49,696 | | | 50,139 | | | 49,972 | |
| Basic earnings (loss) per share of Class A common stock | | $ | 0.49 | | | 0.52 | | | 1.46 | |
| Basic earnings (loss) per share of Class B common stock | | — | | | — | | | 0.73 | |
| | | | | | |
| Numerator for Diluted Earnings Per Share: | | | | | | |
| Net income (loss) allocated to Class A common stock | | $ | 24,437 | | | 26,007 | | | 72,484 | |
| Net income (loss) allocated to Class B common stock | | — | | | — | | | 222 | |
| Net income (loss) | | $ | 24,437 | | | 26,007 | | | 72,706 | |
| Denominator for Diluted Earnings Per Share: | | | | | | |
| Weighted average shares of Class A outstanding | | 50,681 | | | 50,867 | | | 50,337 | |
| Weighted average shares of Class B outstanding | | — | | | — | | | 308 | |
| Total weighted average shares outstanding | | 50,681 | | | 50,867 | | | 50,645 | |
| Diluted earnings (loss) per share of Class A common stock | | $ | 0.48 | | | 0.51 | | | 1.44 | |
| Diluted earnings (loss) per share of Class B common stock | | — | | | — | | | 0.72 | |
December 31, 2023 | 10-K 102
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
STATUTORY CAPITAL AND SURPLUS
The table below shows the combined total of all of our domestic insurance subsidiaries' statutory capital and surplus and statutory net income (loss) for life insurance operations and property insurance operations, although these amounts are not all available as dividends to Citizens since CICA Domestic is the only subsidiary directly owned by Citizens. All other domestic subsidiaries are owned by CICA Domestic.
| | | | | | | | | | | |
As of December 31,
(In thousands) | 2023 | | 2022 |
| Combined statutory capital and surplus: | | | |
| Life insurance operations | $ | 29,416 | | | 35,433 | |
| Property insurance operations | 5,692 | | | 6,912 | |
| Total combined statutory capital and surplus | $ | 35,108 | | | 42,345 | |
| | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Combined statutory net income (loss): | | | | | |
| Life insurance operations | $ | (3,606) | | | (1,885) | | | 5,280 | |
| Property insurance operations | (1,219) | | | 1,615 | | | (1,512) | |
| Total combined statutory net income (loss) | $ | (4,825) | | | (270) | | | 3,768 | |
Generally, the net assets of the domestic insurance subsidiaries available for transfer to their immediate parent are limited to the lesser of the subsidiary's net gain from operations during the preceding year or 10% of the subsidiary's net statutory surplus as of the end of the preceding year as determined in accordance with accounting practices prescribed or permitted by insurance regulatory authorities. Under these practices, total surplus at December 31, 2023 was $26.3 million and net loss from operations was $0.9 million for CICA Domestic for the year ended December 31, 2023. Based upon these amounts, no dividend could be paid to the Company without prior regulatory approval in 2024. Payments of dividends in excess of such amounts would generally require approval by regulatory authorities.
Our domestic insurance subsidiaries have calculated their risk-based capital ("RBC") in accordance with the National Association of Insurance Commissioners' ("NAIC") Model Rule and the RBC rules as adopted by their respective states of domicile. As part of the novation transaction with CICA Bermuda, the Company agreed to infuse capital into CICA Domestic as required by the Colorado Department of Insurance to maintain CICA Domestic's RBC above 350% in any future calendar year-end periods. All domestic insurance subsidiaries exceeded RBC minimum levels at December 31, 2023.
CICA International is a Puerto Rico domiciled company. The Insurance Code of Puerto Rico does not specifically set forth minimum capital and surplus standards, but rather requires that an insurer submit a business plan for approval to the Office of the Commissioner of Insurance ("OIC") that includes proposed minimum capital and surplus. CICA International is required to maintain a minimum of $750,000 in capital and maintain a premium to surplus ratio of 7 to 1. CICA International began issuing new business as of January 1, 2023 and received the transfer of all of CICA Bermuda's in force insurance business as of August 31, 2023. On that date, Citizens entered into a Keep Well Agreement with CICA International to replace the Keep Well Agreement that had been in place between Citizens and CICA Bermuda. The Keep Well Agreement requires Citizens to contribute up to $10 million in capital to CICA International as necessary to ensure that CICA International maintains at least either (i) 112% of its required ratio of premiums to capital and surplus, or (ii) 200% of the minimum capital and surplus requirement, whichever is higher. The initial term of the Keep Well Agreement is 12 months. Since CICA International's capital exceeds both of the metrics, Citizens is not required to make a capital contribution. Any capital that Citizens is required to contribute could negatively impact the Company's capital resources and liquidity.
December 31, 2023 | 10-K 103
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
| | | | | | | | | | | |
As of December 31,
(In thousands) | 2023 | | 2022 |
| CICA Bermuda capital and surplus | $ | — | | | 61,801 | |
| CICA International capital and surplus | $ | 66,619 | | | — | |
CICA Bermuda requested a modification as permitted under Section 6C (1) of the Bermuda Insurance Act 1978 (the "Insurance Act") to remove the impact of unrealized gains or losses from the Minimum Margin of Solvency requirement. On January 19, 2023, the Bermuda Monetary Authority granted CICA Bermuda a permitted practice, effective December 31, 2022, pursuant to Section 6C (1) of the Insurance Act to report its fixed income maturity securities at amortized cost in its unconsolidated statutory financial statements.
| | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| CICA Bermuda net income (loss) | $ | — | | | (1,024) | | | 14,029 | |
| CICA International net income (loss) | $ | 27,484 | | | — | | | — | |
As stated above, CICA International exceeded both of the capital and surplus metrics established by the OIC. CICA International could pay up to $5.0 million in dividends during 2024 without regulatory approval.
(10) SEGMENT AND OTHER OPERATING INFORMATION
The Company has two reportable segments: Life Insurance and Home Service Insurance. Our Life Insurance segment issues endowment contracts, which are principally accumulation contracts that incorporate an element of life insurance protection, and ordinary whole life insurance to non-U.S. residents through CICA International. These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and may utilize rider benefits to provide additional coverage and annuity benefits to enhance accumulations. CICA Domestic issues ordinary whole life, final expense, life products with living benefits, critical illness and credit life and credit disability policies throughout the U.S.
Our Home Service Insurance segment operates through our subsidiaries SPLIC, MGLIC and SPFIC, and focuses on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas. Our policies are sold and serviced through funeral homes and independent agents who sell policies, collect premiums and service policyholders. Our Home Service Insurance segment also sold property insurance policies in Louisiana and Arkansas until operations were ceased effective June 30, 2023.
The Life Insurance and Home Service Insurance portions of the Company constitute separate businesses. In addition to the Life Insurance and Home Service Insurance business, the Company also operates other non-insurance portions of the Company ("Other Non-Insurance Enterprises"), which primarily includesinclude the Company’s IT and Corporate-support functions, which is included in the table presentation below to properly reconcile the segment information with consolidated financial statements of the Company.corporate-support functions.
The accounting policies of the reportable segments and Other Non-Insurance Enterprises are presented in accordance with U.S. GAAP and are the same as those described in the summary of significant accountaccounting policies. We evaluateThe Company evaluates profit and loss performance based on U.S. GAAP net income (loss) before federal income taxes for ourits two reportable segments.
The Company's Other Non-insurance operations isNon-Insurance Enterprises represents the only reportable difference between segments and reported consolidated operations.
December 31, 2023 | 10-K 104
|
| | | | | | | | | | | | |
| | Year ended December 31, 2017 |
| | Life Insurance | | Home Service | | Other Non-Insurance Operations | | Consolidated |
| | (In thousands) |
| Revenues: | | | | | | | |
| Premiums | $ | 150,708 |
| | 47,012 |
| | — |
| | 197,720 |
|
| Net investment income | 38,578 |
| | 13,132 |
| | 1,436 |
| | 53,146 |
|
| Realized investment gains (losses), net | (461 | ) | | 979 |
| | — |
| | 518 |
|
| Other income | 1,061 |
| | 3 |
| | 179 |
| | 1,243 |
|
| Total revenue | 189,886 |
| | 61,126 |
| | 1,615 |
| | 252,627 |
|
| Benefits and expenses: | |
| | |
| | |
| | |
|
| Insurance benefits paid or provided: | |
| | |
| | |
| | |
|
| Claims and surrenders | 60,393 |
| | 22,512 |
| | — |
| | 82,905 |
|
| Increase in future policy benefit reserves | 70,783 |
| | 5,246 |
| | — |
| | 76,029 |
|
| Policyholders' dividends | 6,226 |
| | 42 |
| | — |
| | 6,268 |
|
| Total insurance benefits paid or provided | 137,402 |
| | 27,800 |
| | — |
| | 165,202 |
|
| Commissions | 25,760 |
| | 15,564 |
| | — |
| | 41,324 |
|
| Other general expenses | 18,597 |
| | 23,395 |
| | 4,396 |
| | 46,388 |
|
| Capitalization of deferred policy acquisition costs | (23,157 | ) | | (5,963 | ) | | — |
| | (29,120 | ) |
| Amortization of deferred policy acquisition costs | 25,295 |
| | 4,395 |
| | — |
| | 29,690 |
|
| Amortization of cost of customer relationships acquired | 595 |
| | 1,534 |
| | — |
| | 2,129 |
|
| Total benefits and expenses | 184,492 |
| | 66,725 |
| | 4,396 |
| | 255,613 |
|
| Income (loss) before income tax expense | $ | 5,394 |
| | (5,599 | ) | | (2,781 | ) | | (2,986 | ) |
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
| | | | | | | | | | | | | | | | | | | | | | | |
Year ended December 31, 2023 (In thousands) | Life
Insurance | | Home
Service Insurance | | Other
Non-Insurance
Enterprises | | Consolidated |
| Revenues: | | | | | | | |
| Premiums: | | | | | | | |
| Life insurance | $ | 121,424 | | | 43,185 | | | — | | | 164,609 | |
| Accident and health insurance | 721 | | | 916 | | | — | | | 1,637 | |
| Property insurance | — | | | 793 | | | — | | | 793 | |
| Net investment income (loss) | 54,352 | | | 13,832 | | | 1,070 | | | 69,254 | |
| Investment related gains (losses), net | 301 | | | 522 | | | (63) | | | 760 | |
| Other income (loss) | 3,605 | | | 17 | | | 5 | | | 3,627 | |
| Total revenues | 180,403 | | | 59,265 | | | 1,012 | | | 240,680 | |
| Benefits and expenses: | | | | | | | |
| Insurance benefits paid or provided: | | | | | | | |
| Claims and surrenders | 113,428 | | | 22,565 | | | — | | | 135,993 | |
| Increase in future policy benefit reserves | (10,931) | | | 5,307 | | | — | | | (5,624) | |
| Policyholder liability remeasurement (gain) loss | 4,153 | | | 307 | | | — | | | 4,460 | |
| Policyholders' dividends | 5,512 | | | 30 | | | — | | | 5,542 | |
| Total insurance benefits paid or provided | 112,162 | | | 28,209 | | | — | | | 140,371 | |
| Commissions | 22,896 | | | 16,345 | | | — | | | 39,241 | |
| Other general expenses | 23,969 | | | 16,690 | | | 6,472 | | | 47,131 | |
| Capitalization of deferred policy acquisition costs | (20,251) | | | (8,050) | | | — | | | (28,301) | |
| Amortization of deferred policy acquisition costs | 12,895 | | | 2,565 | | | — | | | 15,460 | |
| Amortization of cost of insurance acquired | 111 | | | 493 | | | — | | | 604 | |
| Total benefits and expenses | 151,782 | | | 56,252 | | | 6,472 | | | 214,506 | |
| Income (loss) before federal income tax | $ | 28,621 | | | 3,013 | | | (5,460) | | | 26,174 | |
|
| | | | | | | | | | | | |
| | Year ended December 31, 2016 |
| | Life Insurance | | Home Service | | Other Non-Insurance Enterprises | | Consolidated |
| | (In thousands) |
| Revenues: | | | | | | | |
| Premiums | $ | 151,195 |
| | 46,681 |
| | — |
| | 197,876 |
|
| Net investment income | 33,350 |
| | 13,705 |
| | 1,505 |
| | 48,560 |
|
| Realized investment losses, net | (1,685 | ) | | (300 | ) | | — |
| | (1,985 | ) |
| Other income | 882 |
| | 5 |
| | 68 |
| | 955 |
|
| Total revenue | 183,742 |
| | 60,091 |
| | 1,573 |
| | 245,406 |
|
| Benefits and expenses: | |
| | |
| | |
| | |
|
| Insurance benefits paid or provided: | |
| | |
| | |
| | |
|
| Claims and surrenders | 58,440 |
| | 22,927 |
| | — |
| | 81,367 |
|
| Increase in future policy benefit reserves | 71,373 |
| | 4,508 |
| | — |
| | 75,881 |
|
| Policyholders' dividends | 6,774 |
| | 58 |
| | — |
| | 6,832 |
|
| Total insurance benefits paid or provided | 136,587 |
| | 27,493 |
| | — |
| | 164,080 |
|
| Commissions | 29,235 |
| | 15,406 |
| | — |
| | 44,641 |
|
| Other general expenses | 14,284 |
| | 15,252 |
| | 3,820 |
| | 33,356 |
|
| Capitalization of deferred policy acquisition costs | (26,742 | ) | | (5,990 | ) | | — |
| | (32,732 | ) |
| Amortization of deferred policy acquisition costs | 24,428 |
| | 4,087 |
| | — |
| | 28,515 |
|
| Amortization of cost of customer relationships acquired | 559 |
| | 1,504 |
| | — |
| | 2,063 |
|
| Total benefits and expenses | 178,351 |
| | 57,752 |
| | 3,820 |
| | 239,923 |
|
| Income (loss) before income tax expense | $ | 5,391 |
| | 2,339 |
| | (2,247 | ) | | 5,483 |
|
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
| | | | | | | | | | | | | | | | | | | | | | | |
Year ended December 31, 2022 (In thousands) | Life
Insurance | | Home
Service Insurance | | Other
Non-Insurance
Enterprises | | Consolidated |
| Revenues: | | | | | | | |
| Premiums: | | | | | | | |
| Life insurance | $ | 124,156 | | | 43,430 | | | — | | | 167,586 | |
| Accident and health insurance | 497 | | | 781 | | | — | | | 1,278 | |
| Property insurance | — | | | 4,850 | | | — | | | 4,850 | |
| Net investment income (loss) | 50,680 | | | 13,632 | | | 1,114 | | | 65,426 | |
| Investment related gains (losses), net | (8,826) | | | (1,277) | | | (188) | | | (10,291) | |
| Other income (loss) | 3,668 | | | 1 | | | 6 | | | 3,675 | |
| Total revenues | 170,175 | | | 61,417 | | | 932 | | | 232,524 | |
| Benefits and expenses: | | | | | | | |
| Insurance benefits paid or provided: | | | | | | | |
| Claims and surrenders | 95,576 | | | 24,359 | | | — | | | 119,935 | |
| Increase in future policy benefit reserves | 3,894 | | | 910 | | | — | | | 4,804 | |
| Policyholder liability remeasurement (gain) loss | 1,728 | | | 1,156 | | | — | | | 2,884 | |
| Policyholders' dividends | 5,990 | | | 23 | | | — | | | 6,013 | |
| Total insurance benefits paid or provided | 107,188 | | | 26,448 | | | — | | | 133,636 | |
| Commissions | 20,031 | | | 16,191 | | | — | | | 36,222 | |
| Other general expenses | 23,192 | | | 16,444 | | | 5,541 | | | 45,177 | |
| Capitalization of deferred policy acquisition costs | (17,942) | | | (6,957) | | | — | | | (24,899) | |
| Amortization of deferred policy acquisition costs | 12,160 | | | 2,230 | | | — | | | 14,390 | |
| Amortization of cost of insurance acquired | 123 | | | 498 | | | — | | | 621 | |
| | | | | | | |
| Total benefits and expenses | 144,752 | | | 54,854 | | | 5,541 | | | 205,147 | |
| Income (loss) before federal income tax | $ | 25,423 | | | 6,563 | | | (4,609) | | | 27,377 | |
December 31, 2023 | 10-K 106
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
| | | | Year ended December 31, 2015 |
| | Life Insurance | | Home Service | | Other Non-Insurance Enterprises | | Consolidated |
| | (In thousands) |
Year ended December 31, 2021 (In thousands) | |
Year ended December 31, 2021 (In thousands) | |
Year ended December 31, 2021 (In thousands) | | Life
Insurance | | Home
Service Insurance | | Other
Non-Insurance
Enterprises | | Consolidated |
| Revenues: | | | | | | | | Revenues: | | | |
| Premiums | $ | 147,832 |
| | 46,648 |
| | — |
| | 194,480 |
|
| Net investment income | 30,206 |
| | 14,063 |
| | 1,513 |
| | 45,782 |
|
| Realized investment losses, net | (3,873 | ) | | (1,586 | ) | | — |
| | (5,459 | ) |
| Other income | 1,008 |
| | 86 |
| | 371 |
| | 1,465 |
|
| Premiums: | | Premiums: | | | |
| Life insurance | |
| Accident and health insurance | |
| Property insurance | |
| Net investment income (loss) | |
| Investment related gains (losses), net | |
| Other income (loss) | |
| Total revenue | 175,173 |
| | 59,211 |
| | 1,884 |
| | 236,268 |
|
| Benefits and expenses: | |
| | |
| | |
| | |
| Benefits and expenses: | | | |
| Insurance benefits paid or provided: | |
| | |
| | |
| | |
| Insurance benefits paid or provided: | | | |
| Claims and surrenders | 55,912 |
| | 22,967 |
| | — |
| | 78,879 |
|
| Increase in future policy benefit reserves | 73,259 |
| | 3,801 |
| | — |
| | 77,060 |
|
| Policyholder liability remeasurement (gain) loss | |
| Policyholders' dividends | 10,695 |
| | 52 |
| | — |
| | 10,747 |
|
| Total insurance benefits paid or provided | 139,866 |
| | 26,820 |
| | — |
| | 166,686 |
|
| Commissions | 28,336 |
| | 15,289 |
| | — |
| | 43,625 |
|
| Other general expenses | 16,345 |
| | 13,349 |
| | 3,593 |
| | 33,287 |
|
| Capitalization of deferred policy acquisition costs | (25,268 | ) | | (5,836 | ) | | — |
| | (31,104 | ) |
| Amortization of deferred policy acquisition costs | 20,025 |
| | 3,375 |
| | — |
| | 23,400 |
|
| Amortization of cost of customer relationships acquired | 641 |
| | 1,676 |
| | — |
| | 2,317 |
|
| Amortization of cost of insurance acquired | |
| Goodwill impairment | |
| Total benefits and expenses | 179,945 |
| | 54,673 |
| | 3,593 |
| | 238,211 |
|
| Income (loss) before income tax expense | $ | (4,772 | ) | | 4,538 |
| | (1,709 | ) | | (1,943 | ) |
| Income (loss) before federal income tax | |
The table below summarizes assets by segment.
| | | | | | | | | | | |
December 31,
(In thousands) | 2023 | | 2022 |
| Assets: | | | |
| Segments: | | | |
| Life Insurance | $ | 1,267,243 | | | 1,194,285 | |
| Home Service Insurance | 359,773 | | | 341,671 | |
| Total Segments | 1,627,016 | | | 1,535,956 | |
| Other Non-Insurance Enterprises | 41,912 | | | 54,747 | |
| Total assets | $ | 1,668,928 | | | 1,590,703 | |
|
| | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | (In thousands) |
| Assets: | | | |
| Life Insurance | $ | 1,191,051 |
| | 1,130,288 |
|
| Home Service Insurance | 377,578 |
| | 374,986 |
|
| Other Non-Insurance Operations | 75,824 |
| | 78,394 |
|
| Total assets | $ | 1,644,453 |
| | 1,583,668 |
|
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
GEOGRAPHIC INFORMATION
Major categories of earned premiums are summarized as follows:
|
| | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Premium income: | | | | | |
| Ordinary life | $ | 191,342 |
| | 191,226 |
| | 187,479 |
|
| Group life | — |
| | 28 |
| | 207 |
|
| Accident and health | 1,392 |
| | 1,546 |
| | 1,599 |
|
| Property | 4,986 |
| | 5,076 |
| | 5,195 |
|
| Total premium income | $ | 197,720 |
| | 197,876 |
| | 194,480 |
|
Geographic Information
The following table sets forth, by country, the Company's annual total of earned premiums from geographic area for the years indicated:
| | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Area: | | | | | |
| United States | $ | 50,594 | | | 54,712 | | | 56,000 | |
| Colombia | 25,453 | | | 25,181 | | | 24,829 | |
| Taiwan | 17,760 | | | 18,236 | | | 19,042 | |
| Venezuela | 15,143 | | | 16,429 | | | 17,788 | |
| Ecuador | 13,379 | | | 12,992 | | | 13,115 | |
| Argentina | 9,533 | | | 9,251 | | | 9,160 | |
| Other foreign countries | 38,695 | | | 40,172 | | | 38,871 | |
| Net reinsurance | (3,518) | | | (3,259) | | | (4,077) | |
| Total premiums | $ | 167,039 | | | 173,714 | | | 174,728 | |
(11)INCOME TAXES
|
| | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Area: | | | | | |
| United States | $ | 54,737 |
| | 54,430 |
| | 54,753 |
|
| Colombia | 29,200 |
| | 29,643 |
| | 27,589 |
|
| Venezuela | 27,997 |
| | 31,107 |
| | 31,948 |
|
| Taiwan | 19,535 |
| | 18,590 |
| | 18,031 |
|
| Ecuador | 16,440 |
| | 15,456 |
| | 15,527 |
|
| Brazil | 11,088 |
| | 9,856 |
| | 8,960 |
|
| Other foreign countries | 41,714 |
| | 41,992 |
| | 40,529 |
|
| Net reinsurance | (2,991 | ) | | (3,198 | ) | | (2,857 | ) |
| Total | $ | 197,720 |
| | 197,876 |
| | 194,480 |
|
Note 9: Income Taxes
CICA International and CICA Bermuda, wholly-owned subsidiaries of Citizens, are considered controlled foreign corporations for federal income tax purposes. As a result, the insurance activity of CICA International and CICA Bermuda are subject to Subpart F of the Internal Revenue Code ("IRC") and are included in Citizens’ taxable income. Due to the reduced statutory tax rate under the New Tax Act, we were required to remeasure our deferred tax assets and liabilities using the lower rate at December 22, 2017, the date of enactment. This re-measurement resulted in a reduction of net deferred tax assets of $35.7 million, which includes a $4.8 million benefit related to deferred taxes previously recognized in accumulated other comprehensive income. In accordance with the SEC's Staff Accounting Bulletin No. 118 ("SAB 118"), the Company has recorded provisional amounts related to the impacts of the New Tax Act, including but not limited to the change in corporate tax rate and immediate expensing of certain capital assets. The amounts are considered provisional estimates due to complexities and ambiguities in New Tax Act which resulted in incomplete accounting for the tax effects of these provisions. Further guidance, either legislative or interpretive, and analysis will be required to complete the accounting for these items. A final determination is required to be made within a measurement period not to extend beyond one year from the enactment date of the New Tax Act. No other provisions of the New Tax Act had a significant impact on our 2017 income tax provisions.
Our federal income tax expense was $35.1 million, $3.5 million and $1.2 million in 2017, 2016 and 2015, respectively. This represents effective tax rates of (1,176.9)%, 64.1% and (61.8)%, respectively. The high negative effective0% enacted tax rate in 2017 was primarily related to remeasurement underBermuda, there are no deferred taxes recorded for CICA Bermuda's temporary differences. CICA International has applied for a tax exemption decree from the New Tax Act reformGovernment of Puerto Rico which went into effectwill freeze the income tax rate at 4% on December 22, 2017. The high effective rateany taxable earnings in 2016 and 2015 was primarily due toexcess of $1.2 million. For the effect of our uncertain tax position and the nondeductible costs to remediate our tax compliance issues.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company holds no valuation allowance in other comprehensive income atyear ended December 31, 2017 or 2016.
A reconciliation2023, the Subpart F income inclusion generated $1.6 million of federal income tax expense computed by applying the federal income tax rateand $2.1 million of35% in 2017, 2016 and 2015 to income (loss) before federal income tax expense for the years ended December 31, 2022 and 2021.
In connection with the transfer of CICA Bermuda’s business from a zero tax jurisdiction to CICA International’s 4% tax jurisdiction in Puerto Rico, certain opening tax assets and liabilities, mainly related to investments, DAC and reserves, were established. The net deferred tax asset of $1.4 million was recorded to retained earnings during 2023 in accordance with ASC Topic 805.
December 31, 2023 | 10-K 108
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
A reconciliation between the U.S. corporate income tax rate and the effective income tax rate is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands, except for %) | 2023 | | % | | 2022 | | % | | 2021 | | % |
| Expected tax expense (benefit) | $ | 5,497 | | | 21.0 | % | | $ | 5,749 | | | 21.0 | % | | $ | 6,406 | | | 21.0 | % |
| Change in valuation allowance | — | | | — | | | 1 | | | — | | | — | | | — | % |
| | | | | | | | | | | |
| Foreign income tax rate differential | (5,029) | | | (19.2) | | | (5,260) | | | (19.2) | | | (9,427) | | | (30.9) | |
| | | | | | | | | | | |
| Tax-exempt interest and dividends-received deduction | (35) | | | (0.1) | | | (63) | | | (0.2) | | | (114) | | | (0.4) | |
| | | | | | | | | | | |
| Adjustment of prior year taxes | — | | | — | | | — | | | — | | | (83) | | | (0.3) | |
| | | | | | | | | | | |
| Effect of uncertain tax position | (971) | | | (3.7) | | | (1,185) | | | (4.3) | | | (43,834) | | | (143.7) | |
| Nondeductible costs to remediate tax compliance issue | — | | | — | | | — | | | — | | | (176) | | | (0.6) | |
| Compensation limitation under 162(m) and 280(g) | 80 | | | 0.3 | | | 67 | | | 0.2 | | | (21) | | | (0.1) | |
| Subpart F income | 1,595 | | | 6.1 | | | 2,053 | | | 7.5 | | | 2,102 | | | 6.9 | |
| PFIC QEF inclusions | 570 | | | 2.2 | | | — | | | — | | | — | | | — | |
| Puerto Rico income tax exclusion | (48) | | | (0.2) | | | — | | | — | | | — | | | — | |
| Rate differential on net operating loss carryback claim | — | | | — | | | — | | | — | | | 290 | | | 1.0 | |
| | | | | | | | | | | |
| Goodwill impairment | — | | | — | | | — | | | — | | | 2,651 | | | 8.7 | |
| Other | 78 | | | 0.2 | | | 8 | | | — | | | 5 | | | — | |
| Total federal income tax expense (benefit) | $ | 1,737 | | | 6.6 | % | | $ | 1,370 | | | 5.0 | % | | $ | (42,201) | | | (138.4) | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | Amount | | % | | Amount | | % | | Amount | | % |
| | (In thousands) | | |
| Expected tax expense (benefit) | $ | (1,045 | ) | | 35.0 | % | | $ | 1,919 |
| | 35.0 | % | | $ | (680 | ) | | 35.0 | % |
| Release of valuation allowance previously held in other comprehensive income | — |
| | — |
| | — |
| | — |
| | (42 | ) | | 2.2 |
|
| Taxable stock sales | — |
| | — |
| | 263 |
| | 4.8 |
| | — |
| | — |
|
| Tax-exempt interest and dividends-received deduction | (360 | ) | | 12.1 |
| | (553 | ) | | (10.1 | ) | | (746 | ) | | 38.4 |
|
| Adjustment of prior year taxes | 68 |
| | (2.3 | ) | | 29 |
| | 0.5 |
| | (317 | ) | | 16.3 |
|
| Effect of graduated rates | (140 | ) | | 4.7 |
| | (57 | ) | | (1.0 | ) | | (71 | ) | | 3.7 |
|
| Effect of uncertain tax position | (355 | ) | | 11.9 |
| | 1,672 |
| | 30.5 |
| | 1,890 |
| | (97.3 | ) |
| Nondeductible costs to remediate tax compliance issue | (384 | ) | | 12.9 |
| | 241 |
| | 4.4 |
| | 1,152 |
| | (59.3 | ) |
| Tax reform re-measurement | 35,718 |
| | (1,196.2 | ) | | — |
| | — |
| | — |
| | — |
|
| Goodwill impairment | 1,621 |
| | (54.3 | ) | | — |
| | — |
| | — |
| | — |
|
| Other | 18 |
| | (0.7 | ) | | — |
| | — |
| | 14 |
| | (0.8 | ) |
| Total income tax expense | $ | 35,141 |
| | (1,176.9 | )% | | $ | 3,514 |
| | 64.1 | % | | $ | 1,200 |
| | (61.8 | )% |
Income tax expense (benefit) consists of:
| | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Income tax expense (benefit): | | | | | |
| Current - normal operations | $ | 1,848 | | | 632 | | | (68) | |
| Current - UTP release impact | (971) | | | (1,185) | | | (43,834) | |
| Deferred | 860 | | | 1,923 | | | 1,701 | |
| Total income tax expense (benefit) | $ | 1,737 | | | 1,370 | | | (42,201) | |
|
| | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Current | $ | 14,454 |
| | 13,348 |
| | (2,315 | ) |
| Deferred | 20,687 |
| | (9,834 | ) | | 3,515 |
|
| Total income tax expense | $ | 35,141 |
| | 3,514 |
| | 1,200 |
|
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued | | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
The components of deferred federal income taxes are as follows:
| | | | | | | | | | | |
December 31,
(In thousands) | 2023 | | 2022 |
| Deferred tax assets: | | | |
| Future policy benefit reserves | $ | 739 | | | — | |
| Net operating and capital loss carryforwards | 353 | | | 388 | |
| Accrued policyholder dividends and expenses | 218 | | | 134 | |
| Investments | — | | | 113 | |
| | | |
| Deferred intercompany loss | 1,780 | | | 1,744 | |
| Unrealized losses on investments available-for-sale | 12,786 | | | 11,688 | |
| Accrued compensation | 379 | | | 360 | |
| Lease liability | 1,895 | | | 2,124 | |
| Fixed assets | 249 | | | 237 | |
| Other | 270 | | | 203 | |
| Total gross deferred tax assets | 18,669 | | | 16,991 | |
| Less: | | | |
| Valuation allowance | 4,468 | | | 4,238 | |
| Net deferred tax assets | 14,201 | | | 12,753 | |
| Deferred tax liabilities: | | | |
| DAC, COIA and intangible assets | (11,556) | | | (10,274) | |
| Future policy benefit reserves | — | | | (1,756) | |
| Unrealized gains on investments available-for-sale | (322) | | | — | |
| | | |
| Tax reserves transition liability | (1,494) | | | (2,242) | |
| Right-of-use lease asset | (1,895) | | | (2,124) | |
| Other | (36) | | | (10) | |
| Total gross deferred tax liabilities | (15,303) | | | (16,406) | |
| Net deferred tax liability | $ | (1,102) | | | (3,653) | |
|
| | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | (In thousands) |
| Deferred tax assets: | | | |
| Future policy benefit reserves | $ | 78,372 |
| | 123,101 |
|
| Net operating and capital loss carryforwards | 485 |
| | — |
|
| Accrued expenses | 65 |
| | 104 |
|
| Investments | 6,002 |
| | 6,837 |
|
| State income tax credits | — |
| | 119 |
|
| Other | 276 |
| | 56 |
|
| Total gross deferred tax assets | 85,200 |
| | 130,217 |
|
| Deferred tax liabilities: | |
| | |
|
| Deferred policy acquisition costs, cost of customer relationships acquired and intangible assets | (25,518 | ) | | (44,709 | ) |
| Unrealized gains on investments available-for-sale | (8,297 | ) | | (7,556 | ) |
| Accrued policyholder dividends | (441 | ) | | (815 | ) |
| Other | (147 | ) | | (268 | ) |
| Total gross deferred tax liabilities | (34,403 | ) | | (53,348 | ) |
| Net deferred tax asset | $ | 50,797 |
| | 76,869 |
|
A summary of the changes in the components of deferred federal and state income taxes is as follows:
| | | | | | | | | | | |
December 31,
(In thousands) | 2023 | | 2022 |
| Deferred federal and state income taxes: | | | |
| Balance January 1, | $ | (3,653) | | | 5,533 | |
| Deferred tax benefit (expense) | (860) | | | (1,923) | |
| | | |
| Investments available-for-sale | 2,424 | | | 21,770 | |
| Change in valuation allowance | (230) | | | (4,238) | |
| | | |
| Effects of unrealized gains (losses) on reserves | 1,217 | | | (24,795) | |
| | | |
| | | |
| Balance December 31, | $ | (1,102) | | | (3,653) | |
|
| | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | (In thousands) |
| Deferred federal and state income taxes: | | | |
| Balance January 1, | $ | 76,869 |
| | 67,145 |
|
| Deferred tax benefit | (20,687 | ) | | 9,834 |
|
| Investments available-for-sale | (5,570 | ) | | (128 | ) |
| Effects of unrealized gains on DAC, CCRA and reserves | (103 | ) | | 18 |
|
| Reclassification of MGLIC NOL from current taxes payable | 288 |
| | — |
|
| Balance December 31, | $ | 50,797 |
| | 76,869 |
|
MGLIC, who is not eligible to join the Company's consolidated tax return until 2020, had a $1.2 million net operating loss carryforward at December 31, 2017, which begin expiring in 2032.
The Company and our subsidiaries had $1.1 million of capitalhave no net operating loss carryforwards at December 31, 2017, which will expire, if unused, in 2022.
At 2023. The Company and our subsidiaries have capital loss carryforwards of $1.6 million at December 31, 20172023, which begin expiring in 2026.
December 31, 2023 | 10-K 110
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
At December 31, 2023 and 2016,2022, we determined that as a result of our taxable income in carryback periods, tax planning strategies, and the expected reversal of existing deferred tax liabilities, it was more likely than not that thea portion of our capital deferred tax assets would not be realized.realized in their entirety. Thus, the Company holds valuation allowances of $4.5 million and $4.2 million in other comprehensive income (loss) at December 31, 2023 and 2022.
The Company recognizes only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
A reconciliation of unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | |
Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Balance January 1, | $ | 971 | | | 2,156 | | | 45,990 | |
| | | | | |
| | | | | |
| | | | | |
| Reductions for tax positions of prior years | (971) | | | (1,185) | | | (43,834) | |
| Balance December 31, | $ | — | | | 971 | | | 2,156 | |
|
| | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| | | | | | |
| Balance at January 1, | $ | 85,762 |
| | 78,079 |
| | 81,459 |
|
| Additions based on tax positions related to the current year | 7,384 |
| | 3,546 |
| | 3,608 |
|
| Additions for tax positions of prior years | 2,685 |
| | 4,706 |
| | 1,570 |
|
| Reductions for tax positions of prior years | — |
| | (569 | ) | | (8,558 | ) |
| Balance December 31, | $ | 95,831 |
| | 85,762 |
| | 78,079 |
|
This unrecognized tax benefit iswas reported net in the balance of current federal income tax payable inon the Consolidated Statements of Financial Position.consolidated balance sheets. Included in these amounts is $6.5 million, $5.7are interest expense of $0.2 million and $3.5$0.4 million of interest expense with respect to unrecognized tax benefitbenefits as of December 31, 2017, 20162022 and 2015,2021, respectively.
None of the Company’s There are no unrecognized tax benefits at remaining as of December 31, 20172023.
The Company accrued an uncertain tax position of $1.0 million and $2.2 million at December 31, 2022 and 2021, respectively, which would affecthave affected the effective tax rate if recognized. TheHowever, the Company does not believe there is a reasonable possibilityreleased all of the total amount ofremaining uncertain tax benefits will significantly increase or decrease inpositions, including interest, during the next twelve months.fourth quarter of 2023 following the expiration of the statute of limitations on the tax year ended December 31, 2019.
The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense. In the Consolidated Statementsconsolidated statements of Comprehensive Income (Loss)operations and comprehensive income (loss), the amount of interest expenseincome recorded was $0.8$0.2 million, $2.2$0.2 million and $0.4$9.5 million for the years ended December 31, 2017, 20162023, 2022 and 2015,2021, respectively.
The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted on March 27, 2020 in response to the COVID-19 pandemic. The CARES Act, among other things, permitted net operating losses incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. During the year ended December 31, 2022, the Company was able to claim a net refund for taxes paid in preceding years as a result of the CARES Act. As of December 31, 2023, the Company has an accrued tax refund remaining of $1.5 million.
The American Rescue Plan Act of 2021 was enacted March 11, 2021 and the Inflation Reduction Act was enacted on August 16, 2022. These Acts did not have a material impact on the Company's financial statements.
The Company's Federalfederal income tax return is filed on a consolidated basis with the following entities:
Citizens, Inc.
CICA Life Insurance Company of America
Magnolia Guaranty Life Insurance Company
Security Plan Life Insurance Company
Security Plan Fire Insurance Company
Computing Technology, Inc.
Insurance Investors, Inc.
Citizens National Life Insurance Company
Magnolia Guaranty Life Insurance Company files its Federal income tax return on a stand-alone basis as it is not eligible to join the consolidated group until 2020. CICA Life Ltd., a Bermuda company, is a newly established entity and will file separate tax reporting.
The method of tax allocation among companies is subject to a written tax sharing agreement, approved by the Board of Directors, whereby allocation is made primarily on a separate return basis withpursuant to the wait-and-see method. Under this method, consolidated group members are not given current credit or refunds for any net operating losses or other items utilized in the consolidated tax return.until taxable income on a separate return basis is generated. Intercompany tax balances are settled quarterly.at least annually.
The Company and our subsidiaries file income tax returns in the U.S. Federalfederal jurisdiction and various U.S. states. None of ourOur subsidiaries are subject to examination by U.S. tax authorities for tax years prior to 2014.
ending after December 31, 2019.
105December 31, 2023 | 10-K 111
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
Note 10: Other Comprehensive Income (Loss)
(12)OTHER COMPREHENSIVE INCOME (LOSS)
The changes in the components of other comprehensive income (loss) are reported net of the effects of income taxes of 31.1% in 2017 due21% for domestic entities and 4% for Puerto Rican entities as indicated below.
| | | | | | | | | | | | | | | | | |
| (In thousands) | Amount | | Tax Effect | | Total |
| Year ended December 31, 2023: | | | | | |
| Unrealized gains (losses): | | | | | |
| Unrealized holding gains (losses) arising during the period | $ | 50,894 | | | 971 | | | 51,865 | |
| Reclassification adjustment for (gains) losses included in net income (loss) | 756 | | | (159) | | | 597 | |
| Unrealized holding gains (losses), net | 51,650 | | | 812 | | | 52,462 | |
| Change in current discount rate for liability for future policy benefits | (34,790) | | | 1,217 | | | (33,573) | |
| Other comprehensive income (loss) | $ | 16,860 | | | 2,029 | | | 18,889 | |
| Year ended December 31, 2022: | | | | | |
| Unrealized gains (losses): | | | | | |
| Unrealized holding gains (losses) arising during the period | $ | (328,673) | | | 17,555 | | | (311,118) | |
| Reclassification adjustment for (gains) losses included in net income (loss) | 104 | | | (22) | | | 82 | |
| Unrealized holding gains (losses), net | (328,569) | | | 17,533 | | | (311,036) | |
| Change in current discount rate for liability for future policy benefits | 337,776 | | | (24,795) | | | 312,981 | |
| Other comprehensive income (loss) | $ | 9,207 | | | (7,262) | | | 1,945 | |
| Year ended December 31, 2021: | | | | | |
| Unrealized gains (losses): | | | | | |
| Unrealized holding gains (losses) arising during the period | $ | (41,123) | | | 3,084 | | | (38,039) | |
| Reclassification adjustment for (gains) losses included in net income (loss) | (243) | | | 51 | | | (192) | |
| Unrealized holding gains (losses), net | (41,366) | | | 3,135 | | | (38,231) | |
| Change in current discount rate for liability for future policy benefits | 92,396 | | | (4,584) | | | 87,812 | |
| Other comprehensive income (loss) | $ | 51,030 | | | (1,449) | | | 49,581 | |
(13)STOCK COMPENSATION
In 2023, 2022 and 2021, the Company's Board of Directors approved awards of restricted stock units ("RSUs") under the Citizens, Inc. Omnibus Incentive Plan for non-employee directors and the executive management team. The RSUs granted to the reduced statutory tax ratedirectors vest one year from the date of the annual shareholders meeting, subject to continued service on the Board. RSUs granted to the executive management team are subject to achieving performance goals and once the goals are met, RSUs are awarded. These awarded RSUs have a time-based vesting component of three years, subject to continued employment. In addition, the Board also approved an allotment of RSUs for other employees with a delegation to the Chief Executive Officer to determine the participants and number of RSUs to be awarded. There were three million shares originally authorized to be granted under the new tax act,plan.
December 31, 2023 | 10-K 112
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
The following table provides a rollforward of restricted stock activity.
| | | | | | | | | | | | | | | | | | | | | | | |
| Restricted Stock Units | Units | | Weighted Average Grant Price | | Weighted Average Remaining Contractual Life | | Aggregate Fair Value (1) |
| (In thousands) | | | | (In years) | | (In thousands) |
| Outstanding at December 31, 2020 | 190 | | | $ | 6.03 | | | 0.88 | | $ | 1,142 | |
| Granted | 178 | | | 5.83 | | | | | 1,040 | |
| Less: | | | | | | | |
| Vested | 147 | | | 6.21 | | | | | 913 | |
| Forfeited | 8 | | | 5.96 | | | | | 47 | |
| Outstanding at December 31, 2021 | 213 | | | $ | 5.75 | | | 1.63 | | $ | 1,222 | |
| Granted | 184 | | | 4.00 | | | | | 734 | |
| Less: | | | | | | | |
| Vested | 119 | | | 5.63 | | | | | 669 | |
| Forfeited | 12 | | | 4.27 | | | | | 51 | |
| Outstanding at December 31, 2022 | 266 | | | 4.65 | | | 1.61 | | 1,236 | |
| Granted | 464 | | | 3.03 | | | | | 1,409 | |
| Less: | | | | | | | |
| Vested | 148 | | | 4.56 | | | | | 673 | |
| Forfeited | 8 | | | 4.47 | | | | | 37 | |
| Outstanding at December 31, 2023 | 574 | | | $ | 3.37 | | | 1.63 | | $ | 1,935 | |
(1) Fair value per share of restricted stock units was equal to Grant Date fair value per share, which was calculated based on the closing price of the Company's Class A common stock on the NYSE on the grant date, in accordance with ASC Topic 718.
As of December 31, 2023, we recognized $0.9 million of expense, while $1.3 million was unrecognized and 35%is expected to be amortized up to two years.
Restricted stock unit awards give the participant the right to receive common stock in 2016the future, subject to certain restrictions and 2015, as indicated below.a risk of forfeiture. Forfeitures are recognized in the period they occur. Compensation expense of $0.6 million, $0.5 million and $0.6 million was recognized in 2023, 2022 and 2021, respectively, related to these awards.
|
| | | | | | | | | |
| | Amount | | Tax Effect | | Amount |
| | (In thousands) |
| Year ended December 31, 2017 | | | | | |
| Unrealized gains (losses) on securities: | | | | | |
| Unrealized holding gains (losses) arising during the period | $ | 17,374 |
| | (5,379 | ) | | 11,995 |
|
| Reclassification adjustment for (gains) losses included in net income | 546 |
| | (191 | ) | | 355 |
|
| Effects on DAC and CCRA | 292 |
| | (102 | ) | | 190 |
|
| Other comprehensive income (loss) | $ | 18,212 |
| | (5,672 | ) | | 12,540 |
|
| Year ended December 31, 2016 | |
| | |
| | |
|
| Unrealized gains (losses) on securities: | |
| | |
| | |
|
| Unrealized holding gains (losses) arising during the period | $ | (1,608 | ) | | 563 |
| | (1,045 | ) |
| Reclassification adjustment for (gains) losses included in net income | 1,974 |
| | (691 | ) | | 1,283 |
|
| Effects on DAC and CCRA | (51 | ) | | 18 |
| | (33 | ) |
| Other comprehensive income (loss) | $ | 315 |
| | (110 | ) | | 205 |
|
| Year ended December 31, 2015 | |
| | |
| | |
|
| Unrealized gains (losses) on securities: | |
| | |
| | |
|
| Unrealized holding gains (losses) arising during the period | $ | (24,545 | ) | | 8,591 |
| | (15,954 | ) |
| Reclassification adjustment for (gains) losses included in net income | 5,415 |
| | (1,895 | ) | | 3,520 |
|
| Effects on DAC and CCRA | 328 |
| | (115 | ) | | 213 |
|
| Change in tax valuation allowance | — |
| | (42 | ) | | (42 | ) |
| Other comprehensive income (loss) | $ | (18,802 | ) | | 6,539 |
| | (12,263 | ) |
Note 11: Benefit Plans
The Company sponsors a defined contribution profit-sharingretirement plan. Employees with one year of service can participate. Contributions are made at the discretion of the Board of Directors and are subject to a tiered vesting schedule. There were no employer contributions to the plan in 2017, 2016 and 2015. The plan does not permit employee contributions.
The Company introduced an employer-sponsoredwas initially established as the Citizens, Inc. Profit Sharing Plan and was restated as the Citizens, Inc. 401(k) plan to all eligible employees,Retirement and Profit Sharing Plan effective March 1, 2016. This is an additional benefit offered toThere have been no profit sharing contributions since 2014.
The 401(k) plan automatically enrolls employees which supplements the defined contribution profit-sharing plan which was already in existence. Employees with one yearwho have completed three months of service can participate in the new plan. Contributionsservice. Voluntary contributions are made by employees and the Company provides a matching contribution based upon the employee's level of contribution. The Company's expense related to the new 401(k) plan was $0.8 million in 2023 and $0.7 million in both 2022 and $0.5 million in 2017 and 2016, respectively. On the effective date, the Company's defined contribution profit-sharing plan was merged into the 401(k) plan and it became the Citizens, Inc. 401(k) Retirement and Profit Sharing Plan. Although merged, the profit sharing plan remains a separate and distinct employee benefit for eligible employees.2021.
The Company is primarily self-insured for employee health benefits. The Company records its self-insurance liability based on an estimate of claims incurred but not yet reported. There is stop-loss coverage for amounts in excess of $100,000$80,000 per individual per year. If more claims are made than were estimated or if the costs of actual claims increase beyond what was anticipated, reserves recorded may not be sufficient and additional accruals may be required in future periods.
December 31, 2023 | 10-K 113
106
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | | | |
| CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (Continued) |
| |
(15)RELATED PARTY TRANSACTIONS
Note 12: Related Party Transactions
The Company has various routine related party transactions in conjunction with our holding company structure, such as a management service agreementagreements related to costs incurred, a tax sharing agreement between entities, and inter-company dividends and capital contributions. We perform an expense study on an annual basis, utilizing an enterprise-wide time study, and we adjust cost allocations among entities as needed based upon this review. Any allocation changes are reflected in the segment operations, but do not impact consolidated expenses. There were no changes related to these relationships during the year ended December 31, 2017.2023 and no additional related party transactions.
In 2017, Citizens made a $5.0 million capital contribution to CICA. In the third quarter of 2017, Citizens contributed $250,000 to CICA Life Ltd. to capitalize a newly formed Bermuda entity, SPLIC contributed $250,000 in capital to MGLIC, and SPLIC declared a dividend payable to CICA of $395,000 which will be paid in 2018.
(16)QUARTERLY FINANCIAL INFORMATION (Unaudited)
Note 13: Quarterly Financial Information (Unaudited)
The following table contains selected unaudited financial data for each quarter.
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands, except per share amounts) | Fourth
Quarter | | Third
Quarter | | Second
Quarter | | First
Quarter |
| 2023 | | | | | | | |
| Revenues | $ | 66,849 | | | 59,390 | | | 58,527 | | | 55,914 | |
| Benefits and expenses | 58,075 | | | 54,749 | | | 52,483 | | | 49,199 | |
| Federal income tax expense (benefit) | (1,967) | | | 1,943 | | | (82) | | | 1,843 | |
| Net income (loss) | 10,741 | | | 2,698 | | | 6,126 | | | 4,872 | |
| Net income (loss) available to common shareholders | 10,741 | | | 2,698 | | | 6,126 | | | 4,872 | |
| Basic earnings (losses) per share of Class A common stock | 0.21 | | | 0.06 | | | 0.12 | | | 0.10 | |
| | | | | | | |
| Diluted earnings (losses) per share of Class A common stock | 0.21 | | | 0.05 | | | 0.12 | | | 0.10 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| 2022 | | | | | | | |
| Revenues | $ | 67,257 | | | 56,176 | | | 53,734 | | | 55,357 | |
| Benefits and expenses | 55,846 | | | 51,354 | | | 49,768 | | | 48,179 | |
| Federal income tax expense (benefit) | (2,248) | | | 1,415 | | | 1,474 | | | 729 | |
| Net income (loss) | 13,659 | | | 3,407 | | | 2,492 | | | 6,449 | |
| Net income (loss) available to common shareholders | 13,659 | | | 3,407 | | | 2,492 | | | 6,449 | |
| Basic earnings (losses) per share of Class A common stock | 0.27 | | | 0.07 | | | 0.05 | | | 0.13 | |
| | | | | | | |
| Diluted earnings (losses) per share of Class A common stock | 0.27 | | | 0.06 | | | 0.05 | | | 0.13 | |
| | | | | | | |
(17)SUBSEQUENT EVENTS
The Company has evaluated the impact of subsequent events as defined by the accounting guidance through the date this report was issued and determined that no subsequent events need to be recognized or disclosed.
December 31, 2023 | 10-K 114
|
| | | | | | | | | | | | |
| | Fourth Quarter (a) | | Third Quarter | | Second Quarter | | First Quarter |
| | (In thousands, except per share amounts) |
| 2017 | | | | | | | |
| Revenues | $ | 67,863 |
| | 64,331 |
| | 60,852 |
| | 59,581 |
|
| Benefits and expenses | 76,998 |
| | 61,221 |
| | 58,756 |
| | 58,638 |
|
| Federal income tax expense (benefit) | 35,069 |
| | (339 | ) | | 1,524 |
| | (1,113 | ) |
| Net income (loss) | (44,204 | ) | | 3,449 |
| | 572 |
| | 2,056 |
|
| Net income (loss) available to common shareholders | (44,204 | ) | | 3,449 |
| | 572 |
| | 2,056 |
|
| Basic & Diluted earnings (losses) per share of Class A common stock | (0.89 | ) | | 0.07 |
| | 0.01 |
| | 0.04 |
|
| Basic & Diluted earnings (losses) per share of Class B common stock | (0.44 | ) | | 0.03 |
| | 0.01 |
| | 0.02 |
|
(a) Federal income tax expense (benefit), Net income (loss) and Basic and Diluted earnings (loss) per share reflect the effects of the new tax reform re-measurement of $35.7 million. Net income (loss) and Basic and Diluted earnings (loss) per share also reflect the effects of the goodwill impairment of $4.6 million. For more information, please refer to Note 1 and Note 9.
|
| | | | | | | | | | | | |
| | Fourth
Quarter | | Third
Quarter | | Second
Quarter | | First
Quarter |
| | (In thousands, except per share amounts) |
| 2016 | | | | | | | |
| Revenues | $ | 67,903 |
| | 61,741 |
| | 61,237 |
| | 54,525 |
|
| Benefits and expenses | 68,277 |
| | 57,134 |
| | 58,678 |
| | 55,834 |
|
| Federal income tax expense (benefit) | (490 | ) | | 1,845 |
| | 1,077 |
| | 1,082 |
|
| Net income (loss) | 116 |
| | 2,762 |
| | 1,482 |
| | (2,391 | ) |
| Net income (loss) available to common shareholders | 116 |
| | 2,762 |
| | 1,482 |
| | (2,391 | ) |
| Basic & Diluted earnings (losses) per share of Class A common stock | — |
| | 0.06 |
| | 0.03 |
| | (0.05 | ) |
| Basic & Diluted earnings (losses) per share of Class B common stock | — |
| | 0.03 |
| | 0.01 |
| | (0.02 | ) |
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
| | | | | |
| CITIZENS, INC. | FINANCIAL SCHEDULES |
| |
| |
Note 14: Subsequent Event | | | | | | | | | | | |
Schedule II
Condensed Financial Information of Registrant
CITIZENS, INC. (Parent Company)
Balance Sheets |
December 31, (In thousands) | 2023 | | 2022 |
| | | | |
| Assets: | | | |
Investment in subsidiaries (1) | $ | 140,557 | | | 88,222 | |
| Fixed maturity securities available-for-sale, at fair value | 21,190 | | | 28,566 | |
| Equity securities, at fair value | 23 | | | 770 | |
| | | |
| | | |
| | | |
| Short-term investments | — | | | 1,241 | |
| Cash | 3,905 | | | 2,163 | |
| Accrued investment income | 230 | | | 342 | |
Accounts receivable from subsidiaries (1) | 4,332 | | | 5,126 | |
| Property and equipment, net | 9,251 | | | 10,387 | |
| | | |
| Other assets | 1,151 | | | 1,715 | |
| Total assets | $ | 180,639 | | | 138,532 | |
| Liabilities and Stockholders' Equity: | | | |
| Liabilities: | | | |
| Accrued expense and other liabilities | $ | 8,510 | | | 10,743 | |
| Total liabilities | 8,510 | | | 10,743 | |
| Stockholders' equity: | | | |
| Common stock: | | | |
| Class A | 268,675 | | | 268,147 | |
| Class B | 3,184 | | | 3,184 | |
| Retained earnings | 42,150 | | | 16,308 | |
| Unrealized investment gains (losses) on securities held by parent and subsidiaries, net of tax | (118,155) | | | (137,044) | |
| Treasury stock | (23,725) | | | (22,806) | |
| Total stockholders' equity | 172,129 | | | 127,789 | |
| Total liabilities and stockholders' equity | $ | 180,639 | | | 138,532 | |
In January 2018, the Company's Board of Directors approved awards of Restricted Stock Units under the Citizens Inc. Omnibus Incentive Plan for non-employee directors and the executive management team totaling $10,500 per director and $976,000 in total to the executive management team. The grant date was February 15, 2018 with a one year vesting schedule for the directors and a two year vesting schedule for the executive management team. In addition, the Board also approved equity grants for 2018 not to exceed $1.2 million for other employees with a delegation to the CEO to determine the value to be awarded.
Note 15: Correction of Immaterial Errors and Reclassification of Certain Amounts
Correction of Immaterial Errors
In the course of preparing its consolidated financial statements for the year ended December 31, 2016, the Company identified immaterial errors in its previously filed financial statements. The errors were in the Company’s accounting for DAC and future policy benefits in the life insurance segment and several other immaterial errors in our other two segments.
Two of the errors were discovered in connection with the Company’s ongoing conversion of its actuarial valuation from a third party service provider to an actuarial valuation modeling software system purchased from a vendor. The errors in valuing DAC and future policy benefits caused the Company to understate amortization of DAC over several years and to overstate the increase in future policy benefit reserves during the same periods, resulting in an overstatement of DAC of $0.3 million and an overstatement of future policy benefits of $7.9 million at December 31, 2015. There were several other immaterial errors that resulted in negligible impact at December 31, 2015. Correcting the errors resulted in a reduction in the Company’s net losses of $0.4 million in 2015.
The Company assessed the materiality of these errors on its previously reported annual financial statements in accordance with SEC Staff Accounting Bulletin ("SAB") No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements and determined that the errors were immaterial to each of the previously reported periods. However, the Company determined that the adjustment to correct the error, if recorded in 2016 operating results, would materially misstate the 2016 financial statements. Accordingly, we are correcting the errors by restating the prior period information, and therefore have revised the Consolidated Statement of Financial Position as of December 31, 2015, the Consolidated Statements of Operations and Comprehensive Income (Loss), the Consolidated Statements of Stockholders’ Equity and the Consolidated Statements of Cash Flows for the years ended December 31, 2015.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The line item effects of these immaterial error corrections are detailed below.
|
| | | | | | | | | |
| 2015 | As Reported | | Restatement | | As Adjusted |
| | (In thousands) |
| Consolidated Statements of Financial Position | | | | | |
| | | | | | |
| Deferred policy acquisition costs | $ | 165,362 |
| | (1,670 | ) | | 163,692 |
|
| Deferred tax asset | 68,764 |
| | (1,619 | ) | | 67,145 |
|
| Total assets | 1,484,040 |
| | (3,289 | ) | | 1,480,751 |
|
| Liabilities: | | | | | |
| Future policy benefit reserves: | | | | | |
| Life insurance | $ | 995,972 |
| | (8,599 | ) | | 987,373 |
|
| Total policy liabilities | 1,140,879 |
| | (8,599 | ) | | 1,132,280 |
|
| Current federal income tax payable | 71,225 |
| | 757 |
| | 71,982 |
|
| Other liabilities | 24,205 |
| | 144 |
| | 24,349 |
|
| Total liabilities | 1,241,523 |
| | (7,698 | ) | | 1,233,825 |
|
| Accumulated deficit | (22,626 | ) | | 4,409 |
| | (18,217 | ) |
| Total stockholders' equity | 242,517 |
| | 4,409 |
| | 246,926 |
|
| Total liabilities and stockholders' equity | 1,484,040 |
| | (3,289 | ) | | 1,480,751 |
|
| | | | | | |
| Consolidated Statements of Operations and Comprehensive Income (Loss) | | | | |
| | | | | | |
| Increase in future policy benefit reserves | $ | 77,929 |
| | (869 | ) | | 77,060 |
|
| Total insurance benefits paid or provided | 167,555 |
| | (869 | ) | | 166,686 |
|
| Other general expenses | 33,143 |
| | 144 |
| | 33,287 |
|
| Amortization of deferred policy acquisition costs | 23,339 |
| | 61 |
| | 23,400 |
|
| Total benefits and expenses | 238,875 |
| | (664 | ) | | 238,211 |
|
| Income (loss) before federal income tax expense | (2,607 | ) | | 664 |
| | (1,943 | ) |
| Federal income tax expense | 972 |
| | 228 |
| | 1,200 |
|
| Net income (loss) | (3,579 | ) | | 436 |
| | (3,143 | ) |
| Basic and diluted earnings (losses) per share of Class A common stock | (0.07 | ) | | 0.01 |
| | (0.06 | ) |
| Basic and diluted earnings (losses) per share of Class B common stock | (0.04 | ) | | 0.01 |
| | (0.03 | ) |
| Comprehensive income (loss) | (15,842 | ) | | 436 |
| | (15,406 | ) |
| | | | | | |
| Consolidated Statements of Stockholders' Equity | | | | | |
| | | | | | |
| Balance at December 31, 2014 | $ | 258,359 |
| | 3,973 |
| | 262,332 |
|
| Net income (loss) | (3,579 | ) | | 436 |
| | (3,143 | ) |
| Balance at December 31, 2015 | 242,517 |
| | 4,409 |
| | 246,926 |
|
| | | | | | |
| Consolidated Statements of Cash Flows | | | | | |
| | | | | | |
| Net income (loss) | $ | (3,579 | ) | | 436 |
| | (3,143 | ) |
| Net deferred policy acquisition costs | (7,765 | ) | | 61 |
| | (7,704 | ) |
| Deferred federal income tax benefit | 4,043 |
| | (528 | ) | | 3,515 |
|
| Future policy benefit reserves | 77,770 |
| | (869 | ) | | 76,901 |
|
| Commission payable and other liabilities | 473 |
| | 144 |
| | 617 |
|
| Federal income tax payable | (7,593 | ) | | 756 |
| | (6,837 | ) |
| Net cash provided by operating activities | 87,153 |
| | — |
| | 87,153 |
|
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Financial Schedules
Schedule II Condensed Financial Information of Registrant CITIZENS, INC. (Parent Company) Balance Sheets |
| | | | | | |
| | At December 31, |
| | 2017 | | 2016 |
| | (In thousands) |
| Assets | | | |
Investment in subsidiaries (1) | $ | 158,453 |
| | 173,877 |
|
| Fixed maturities available-for-sale, at fair value | 39,521 |
| | 51,028 |
|
| Fixed maturities held-to-maturity, at amortized cost | 350 |
| | 357 |
|
| Equity securities available-for-sale, at fair value | 1,133 |
| | 1,030 |
|
| Real estate and other long-term investments | 5,832 |
| | 5,920 |
|
| Short-term investments | — |
| | 508 |
|
| Cash | 23,850 |
| | 14,673 |
|
| Accrued investment income | 576 |
| | 757 |
|
Accounts receivable from subsidiaries (1) | 5,489 |
| | 2,658 |
|
| Property and equipment | 789 |
| | 746 |
|
| Other assets | 290 |
| | 237 |
|
| Total assets | $ | 236,283 |
| | 251,791 |
|
| Liabilities and Stockholders' Equity | |
| | |
|
| Liabilities: | |
| | |
|
| Accrued expense and other liabilities | $ | 12,770 |
| | 2,691 |
|
| Total liabilities | $ | 12,770 |
| | 2,691 |
|
| Stockholders' equity: | |
| | |
|
| Common stock: | |
| | |
|
| Class A | $ | 259,383 |
| | 259,383 |
|
| Class B | 3,184 |
| | 3,184 |
|
| Accumulated retained deficit | (54,375 | ) | | (16,248 | ) |
| Unrealized investment gains on securities held by parent and subsidiaries, net of tax | 26,332 |
| | 13,792 |
|
| Treasury stock | (11,011 | ) | | (11,011 | ) |
| Total stockholders' equity | 223,513 |
| | 249,100 |
|
| Total liabilities and stockholders' equity | $ | 236,283 |
| | 251,791 |
|
(1) Eliminated in consolidation.
Note to Schedule II:
Citizens, Inc.'s investments in consolidated subsidiaries are stated at cost plus equity in undistributed income of consolidated subsidiaries and unrealized gains (losses) on investments held by consolidated subsidiaries. The Company includes in its Statementstatements of Operationsoperations and comprehensive income (loss) dividends from its subsidiaries and equity in undistributed income (loss) of consolidated subsidiaries, which represents the net income (loss) of each of its wholly-owned subsidiaries.
110December 31, 2023 | 10-K 115
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Financial Schedules | | | | | |
| CITIZENS, INC. | FINANCIAL SCHEDULES |
| |
| |
| | | | | | | | | | | | | | | | | |
Schedule II, Continued
Condensed Financial Information of Registrant
CITIZENS, INC. (Parent Company)
Statements of Operations and Comprehensive Income (Loss) |
Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Comprehensive Income (Loss): | | | | | |
| Revenues: | | | | | |
Management service fees (1) | $ | 42,394 | | | 35,413 | | | 33,311 | |
| Investment income | 1,083 | | | 6,124 | | | 1,063 | |
| Other | 6 | | | 6 | | | (37) | |
| Investment related gains (losses), net | (63) | | | (188) | | | 1,197 | |
| Total revenues | 43,420 | | | 41,355 | | | 35,534 | |
| Expenses: | | | | | |
| General expenses | 44,642 | | | 38,926 | | | 37,977 | |
| Taxes, licenses and fees | 158 | | | 149 | | | 198 | |
| Total expenses | 44,800 | | | 39,075 | | | 38,175 | |
| Income (loss) before federal income tax expense (benefit) and equity in income (loss) of consolidated subsidiaries | (1,380) | | | 2,280 | | | (2,641) | |
| Federal income tax expense (benefit) | 1,798 | | | (571) | | | (1,661) | |
| Income (loss) before equity in income (loss) of consolidated subsidiaries | (3,178) | | | 2,851 | | | (980) | |
| Equity in income (loss) of consolidated subsidiaries | 27,615 | | | 23,156 | | | 73,686 | |
| Net income (loss) | 24,437 | | | 26,007 | | | 72,706 | |
| Other comprehensive income (loss) | 18,889 | | | 1,945 | | | 49,581 | |
| Total comprehensive income (loss) | $ | 43,326 | | | 27,952 | | | 122,287 | |
Schedule II, Continued Condensed Financial Information of Registrant CITIZENS, INC. (Parent Company) Statements of Operations |
| | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Revenues: | | | | | |
Management service fees (1) | $ | 42,367 |
| | 33,748 |
| | 31,328 |
|
| Investment income | 1,282 |
| | 1,491 |
| | 1,499 |
|
| Other | 80 |
| | 49 |
| | 58 |
|
| Total revenues | 43,729 |
| | 35,288 |
| | 32,885 |
|
| Expenses: | |
| | |
| | |
|
| General expenses | 41,680 |
| | 33,807 |
| | 29,609 |
|
| Taxes, licenses and fees | 1,203 |
| | 996 |
| | 918 |
|
| Federal income tax expense (benefit) | 228 |
| | (196 | ) | | 523 |
|
| Total expenses | 43,111 |
| | 34,607 |
| | 31,050 |
|
| Income before equity in income of consolidated subsidiaries | 618 |
| | 681 |
| | 1,835 |
|
| Equity in income (loss) of consolidated subsidiaries | (38,745 | ) | | 1,288 |
| | (4,978 | ) |
| Net income (loss) | $ | (38,127 | ) | | 1,969 |
| | (3,143 | ) |
(1) Eliminated in consolidation.
Note to Schedule II:
Citizens, Inc.'s investments in consolidated subsidiaries are stated at cost plus equity in undistributed income of consolidated subsidiaries and unrealized gains (losses) on investments held by consolidated subsidiaries. The Company includes in its Statementstatements of Operationsoperations and comprehensive income (loss) dividends from its subsidiaries and equity in undistributed income (loss) of consolidated subsidiaries, which represents the net income (loss) of each of its wholly-owned subsidiaries.
111December 31, 2023 | 10-K 116
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Financial Schedules | | | | | |
| CITIZENS, INC. | FINANCIAL SCHEDULES |
| |
| |
| | | | | | | | | | | | | | | | | |
Schedule II, Continued
Condensed Financial Information of Registrant
CITIZENS, INC. (Parent Company)
Statements of Cash Flows |
Years ended December 31,
(In thousands) | 2023 | | 2022 | | 2021 |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | 24,437 | | | 26,007 | | | 72,706 | |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | |
| Investment related gains (losses), net | 63 | | | 188 | | | (1,197) | |
| Equity in loss (income) of consolidated subsidiaries | (27,615) | | | (23,156) | | | (73,686) | |
| Change in accrued expenses and other liabilities | (1,398) | | | 643 | | | (11,458) | |
| Change in federal income tax payable | — | | | (9,318) | | | (2,683) | |
| Deferred federal income tax expense (benefit) | — | | | — | | | 227 | |
| Amortization of premiums and discounts on investments | 107 | | | 281 | | | 473 | |
| Depreciation | 228 | | | 224 | | | 239 | |
| Change in accrued investment income | 112 | | | 97 | | | 32 | |
| Stock-based compensation | 588 | | | 461 | | | 646 | |
| Decrease (increase) in receivable from subsidiaries and other assets | 795 | | | 705 | | | (921) | |
| Other, net | 481 | | | 188 | | | 151 | |
| Net cash provided by (used in) operating activities | (2,202) | | | (3,680) | | | (15,471) | |
| Cash flows from investing activities: | | | | | |
| | | | | |
| | | | | |
| Purchases of fixed maturity securities, available-for-sale | (723) | | | (11,232) | | | (2,678) | |
| Maturities and calls of fixed maturity securities, available-for-sale | 6,027 | | | 9,721 | | | 7,548 | |
| | | | | |
| Sales of fixed maturity securities, available-for-sale | 2,580 | | | 4,314 | | | 6,952 | |
| Sales of property and equipment | — | | | 2 | | | 14 | |
| Sale of equity securities | 770 | | | 500 | | | — | |
| Sale of other long-term investments | — | | | — | | | 8,790 | |
| Sale of real estate | — | | | — | | | 3,552 | |
| Funding of mortgage loans | — | | | — | | | (1,000) | |
| Principal payments on mortgage loans | — | | | 1,000 | | | — | |
| | | | | |
| Purchases of property and equipment | (130) | | | (32) | | | (119) | |
| Purchases of short-term investments | — | | | (1,250) | | | — | |
| Maturities of short-term investments | 750 | | | — | | | — | |
| Sales of short-term investments | 499 | | | — | | | — | |
| Net cash provided by (used in) investing activities | 9,773 | | | 3,023 | | | 23,059 | |
| Cash flows from financing activities: | | | | | |
| | | | | |
| Issuance of common stock | — | | | 2,244 | | | 2,255 | |
| Acquisition of treasury stock | (919) | | | (2,705) | | | (9,090) | |
| Capital contribution to subsidiary | (4,850) | | | — | | | — | |
| Other | (60) | | | (118) | | | (456) | |
| Net cash provided by (used in) financing activities | (5,829) | | | (579) | | | (7,291) | |
| Net increase (decrease) in cash | 1,742 | | | (1,236) | | | 297 | |
| Cash at beginning of year | 2,163 | | | 3,399 | | | 3,102 | |
| Cash at end of year | $ | 3,905 | | | 2,163 | | | 3,399 | |
Schedule II, Continued Condensed Financial Information of Registrant CITIZENS, INC. (Parent Company) Statements of Cash Flows |
| | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | (38,127 | ) | | 1,969 |
| | (3,143 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| | |
| | |
|
| Equity in loss (income) of consolidated subsidiaries | 38,745 |
| | (1,288 | ) | | 4,978 |
|
| Accrued expenses and other liabilities | 4,370 |
| | (3,018 | ) | | 483 |
|
| Amortization of premiums and discounts on investments | 714 |
| | 911 |
| | 984 |
|
| Depreciation | 319 |
| | 162 |
| | 155 |
|
| Accrued investment income | 181 |
| | 35 |
| | (14 | ) |
| Decrease (increase) in receivable from subsidiaries and other assets | (2,901 | ) | | 300 |
| | (627 | ) |
| Other, net | (102 | ) | | 149 |
| | 110 |
|
| Net cash provided by (used in) operating activities | 3,199 |
| | (780 | ) | | 2,926 |
|
| Cash flows from investing activities: | |
| | |
| | |
|
| Purchase of fixed maturities, available-for-sale | — |
| | (6,615 | ) | | (4,559 | ) |
| Maturities of fixed maturities, available-for-sale | 10,986 |
| | 8,015 |
| | 2,645 |
|
| Sale of other long-term investments and property and equipment | 3 |
| | 371 |
| | 16 |
|
| Purchase of other long-term investments and property and equipment | (261 | ) | | (740 | ) | | (88 | ) |
| Purchase of short-term investments | — |
| | (522 | ) | | — |
|
| Maturity of short-term investments | 500 |
| | — |
| | — |
|
| Capital contribution to subsidiary | (5,250 | ) | | — |
| | — |
|
| Net cash provided by (used in) investment activities | 5,978 |
| | 509 |
| | (1,986 | ) |
| Cash flows from financing activities: | |
| | |
| | |
|
| Purchase of the Company's stock from affiliates | — |
| | (812 | ) | | — |
|
| Net cash used in financing activities | — |
| | (812 | ) | | — |
|
| Net increase (decrease) in cash | 9,177 |
| | (1,083 | ) | | 940 |
|
| Cash at beginning of year | 14,673 |
| | 15,756 |
| | 14,816 |
|
| Cash at end of year | $ | 23,850 |
| | 14,673 |
| | 15,756 |
|
Note to Schedule II:
Citizens, Inc.'s investments in consolidated subsidiaries are stated at cost plus equity in undistributed income of consolidated subsidiaries and unrealized gains (losses) on investments held by consolidated subsidiaries. The Company includes in its Statementstatements of Operationsoperations and comprehensive income (loss) dividends from its subsidiaries and equity in undistributed income (loss) of consolidated subsidiaries, which represents the net income (loss) of each of its wholly-owned subsidiaries.
December 31, 2023 | 10-K 117
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Financial Schedules | | | | | |
| CITIZENS, INC. | FINANCIAL SCHEDULES |
| |
| |
| | | | | | | | | | | |
Schedule III
Consolidated Supplementary Insurance Information |
Years ended December 31,
(In thousands) | 2023 | | 2022 |
| Deferred policy acquisition costs: | | | |
| Life Insurance | $ | 120,840 | | | 113,484 | |
| Home Service Insurance | 54,928 | | | 49,443 | |
| Total consolidated deferred policy acquisition costs | $ | 175,768 | | | 162,927 | |
| Future policy benefit reserves and policy claims payable: | | | |
| Life Insurance | $ | 970,327 | | | 955,157 | |
| Home Service Insurance | 266,452 | | | 254,140 | |
| Total consolidated future policy benefit reserves and policy claims payable | $ | 1,236,779 | | | 1,209,297 | |
| Unearned premiums: | | | |
| Life Insurance | $ | 1,356 | | | 1,501 | |
| Home Service Insurance | 38 | | | 267 | |
| Total consolidated unearned premiums | $ | 1,394 | | | 1,768 | |
| Other policy claims and benefits payable: | | | |
| Life Insurance | $ | 192,953 | | | 181,242 | |
| Home Service Insurance | 23,638 | | | 23,961 | |
| Total consolidated other policy claims and benefits payable | $ | 216,591 | | | 205,203 | |
December 31, 2023 | 10-K 118
Schedule III Supplementary Insurance Information |
| | | | | | |
| | At December 31, |
| | 2017 | | 2016 |
| | (In thousands) |
| Deferred policy acquisition cost: | | | |
| Life Insurance | $ | 130,566 |
| | 132,704 |
|
| Home Service Insurance | 36,497 |
| | 35,086 |
|
| Other Non-Insurance Enterprises | — |
| | — |
|
| Total consolidated deferred policy acquisition costs | $ | 167,063 |
| | 167,790 |
|
| Future policy benefit reserves and policy claims payable: | |
| | |
|
| Life Insurance | $ | 943,907 |
| | 871,136 |
|
| Home Service Insurance | 273,256 |
| | 268,724 |
|
| Other Non-Insurance Enterprises | — |
| | — |
|
| Total consolidated future policy benefit reserves and policy claims payable | $ | 1,217,163 |
| | 1,139,860 |
|
| Unearned premiums: | |
| | |
|
| Life Insurance | $ | 1,090 |
| | 915 |
|
| Home Service Insurance | 239 |
| | 239 |
|
| Other Non-Insurance Enterprises | — |
| | — |
|
| Total consolidated unearned premiums | $ | 1,329 |
| | 1,154 |
|
| Other policy claims and benefits payable: | |
| | |
|
| Life Insurance | $ | 80,503 |
| | 73,860 |
|
| Home Service Insurance | 1,795 |
| | 1,825 |
|
| Other Non-Insurance Enterprises | — |
| | — |
|
| Total consolidated other policy claims and benefits payable | $ | 82,298 |
| | 75,685 |
|
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Financial Schedules | | | | | |
| CITIZENS, INC. | FINANCIAL SCHEDULES |
| |
| |
For the Company's short duration premiumscontracts (property), written premium is not materially different from earned premium, therefore only earned premiums are detailed in Schedule IV.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Schedule IV
Consolidated Statement of Reinsurance |
| (In thousands) | Direct
Amount | | Ceded to
Other
Companies | | Assumed
From Other
Companies | | Net Amount | | % of
Amount
Assumed to
Net |
| Year ended December 31, 2023: | | | | | | | | | |
| Life insurance in force | $ | 4,922,254 | | | 619,597 | | | 3,772 | | | 4,306,429 | | | 0.1 | % |
| Premiums: | | | | | | | | | |
| Life insurance | $ | 166,336 | | | 1,795 | | | 68 | | | 164,609 | | | |
| Accident and health insurance | 1,641 | | | 4 | | | — | | | 1,637 | | | |
| Property insurance | 2,580 | | | 1,787 | | | — | | | 793 | | | |
| Total premiums | $ | 170,557 | | | 3,586 | | | 68 | | | 167,039 | | | — | % |
| Year ended December 31, 2022: | | | | | | | | | |
| Life insurance in force | $ | 4,796,570 | | | 543,496 | | | 4,074 | | | 4,257,148 | | | 0.1 | % |
| Premiums: | | | | | | | | | |
| Life insurance | $ | 169,432 | | | 1,920 | | | 74 | | | 167,586 | | | |
| Accident and health insurance | 1,283 | | | 5 | | | — | | | 1,278 | | | |
| Property insurance | 6,258 | | | 1,408 | | | — | | | 4,850 | | | |
| Total premiums | $ | 176,973 | | | 3,333 | | | 74 | | | 173,714 | | | — | % |
| Year ended December 31, 2021: | | | | | | | | | |
| Life insurance in force | $ | 4,627,509 | | | 465,954 | | | 4,366 | | | 4,165,921 | | | 0.1 | % |
| Premiums: | | | | | | | | | |
| Life insurance | $ | 171,567 | | | 1,850 | | | 84 | | | 169,801 | | | |
| Accident and health insurance | 1,255 | | | 5 | | | — | | | 1,250 | | | |
| Property insurance | 5,984 | | | 2,307 | | | — | | | 3,677 | | | |
| Total premiums | $ | 178,806 | | | 4,162 | | | 84 | | | 174,728 | | | — | % |
December 31, 2023 | 10-K 119
Schedule IV Reinsurance |
| | | | | | | | | | | | | | | |
| | Direct Amount | | Ceded to Other Companies | | Assumed From Other Companies | | Net Amount | | % of Amount Assumed to Net |
| | (In thousands) |
| Year ended December 31, 2017 | | | | | | | | | |
| Life insurance in force | $ | 4,967,856 |
| | 503,685 |
| | 5,564 |
| | 4,469,735 |
| | 0.1 | % |
| Premiums: | |
| | |
| | |
| | |
| | |
|
| Life insurance | 193,534 |
| | 2,334 |
| | 142 |
| | 191,342 |
| | |
|
| Accident and health insurance | 1,410 |
| | 18 |
| | — |
| | 1,392 |
| | |
|
| Property insurance | 5,767 |
| | 781 |
| | — |
| | 4,986 |
| | |
|
| Total premiums | $ | 200,711 |
| | 3,133 |
| | 142 |
| | 197,720 |
| | 0.1 | % |
| Year ended December 31, 2016 | |
| | |
| | |
| | |
| | |
|
| Life insurance in force | $ | 4,997,641 |
| | 522,821 |
| | 22,915 |
| | 4,497,735 |
| | 0.5 | % |
| Premiums: | |
| | |
| | |
| | |
| | |
|
| Life insurance | 193,604 |
| | 2,501 |
| | 151 |
| | 191,254 |
| | |
|
| Accident and health insurance | 1,566 |
| | 20 |
| | — |
| | 1,546 |
| | |
|
| Property insurance | 5,904 |
| | 828 |
| | — |
| | 5,076 |
| | |
|
| Total premiums | $ | 201,074 |
| | 3,349 |
| | 151 |
| | 197,876 |
| | 0.1 | % |
| Year ended December 31, 2015 | |
| | |
| | |
| | |
| | |
|
| Life insurance in force | $ | 4,958,369 |
| | 516,933 |
| | 36,766 |
| | 4,478,202 |
| | 0.8 | % |
| Premiums: | |
| | |
| | |
| | |
| | |
|
| Life insurance | 189,644 |
| | 2,311 |
| | 353 |
| | 187,686 |
| | |
|
| Accident and health insurance | 1,625 |
| | 26 |
| | — |
| | 1,599 |
| | |
|
| Property insurance | 6,068 |
| | 873 |
| | — |
| | 5,195 |
| | |
|
| Total premiums | $ | 197,337 |
| | 3,210 |
| | 353 |
| | 194,480 |
| | 0.2 | % |
EXHIBITS
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| Exhibit No. | | The following exhibits are filed herewith: |
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| 11 | |
| | Statement re: Computation of per share earnings (see financial statements) |
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24 | | Power of Attorney (included on signature page enclosed herein) |
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December 31, 2023 | 10-K 120
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| 101.INS | | |
101.INS | | XBRL Instance Document |
| 101.SCH | | XBRL Taxonomy Extension Schema |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
| 104 | | Inline XBRL for the cover page of this Annual Report on Form 10-K for the year ended December 31, 2023, filed electronically herewith, included in the Exhibit 101 Inline XBRL Document Set. |
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| † | |
† | Indicates a management contract or compensatory plan or arrangement. |
| * | Filed herewith. |
Item 16.FORM 10-K SUMMARY
None.
116December 31, 2023 | 10-K 121
SIGNATURES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
| | | | | | | | | | | | | | |
| | CITIZENS, INC. | |
| | | | | |
| Date: | March 14, 2024 | CITIZENS, INC.By: | /s/ Gerald W. Shields | |
| | | Gerald W. Shields, | | | |
| Date: | March 29, 2018 | By:/s/ Geoffrey M. Kolander | |
| | | Geoffrey M. Kolander,
President and Chief Executive Officer
and President | |
| | | (Principal Executive Officer) | | | | |
| | | | | | | |
| | By: | | By: | /s/ Kay E. OsbournJeffery P. Conklin | |
| | | Jeffery P. Conklin, | |
| | Kay E. Osbourn, Executive | Vice President, Chief Financial Officer, and Chief Investment Officer and Treasurer | |
| | | (Principal Financial and Accounting Officer) | | | |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gerald W. Shields and Jeffery P. Conklin jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrantregistrant and in the capacities indicated and on the dates indicated.March 14, 2024.
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Geoffrey M. Kolander, as his or her attorney-in-fact and agent, with full power of substitution, for him or her in any and all capacities, hereby giving and granting to said attorney-in-fact and agent full power and authority to do and perform all and every act and thing whatsoever requisite and necessary to be done in and about the premises as fully, to all intents and purposes, as he might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorney-in-fact and agent may or shall lawfully do, or cause to be done, in connection with the proposed filing by Citizens, Inc., with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, of an annual report on Form 10-K for the fiscal year ended December 31, 2017, including but not limited to, such full power and authority to do the following: (i) execute and file such annual report; (ii) execute and file any amendment or amendments thereto; (iii) receive and respond to comments from the Securities and Exchange Commission related in any way to such annual report or any amendment or amendments thereto; and (iv) execute and deliver any and all certificates, instruments or other documents related to the matters enumerated above, as the attorney-in-fact in his sole discretion deems appropriate.
Dated: March 29, 201814, 2024
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/s/ Robert B. Sloan Jr. | | /s/ E. Dean Gage |
Robert B. Sloan, Jr., Chairman | | Dr. E. Dean Gage, Director |
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/s/ Grant G. Teaff | | /s/ J.D.Jerry D. Davis, Jr. |
Grant G. Teaff, Director | | J.D. Davis, Jr., Director |
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/s/ Terry S. Maness | | /s/ Gerald W. Shields |
| Jerry D. Davis, Jr., Chairman of the Board and Director | | Gerald W. Shields, Vice Chairman of the Board and Director |
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| /s/ Christopher W. Claus | | /s/ Cynthia H. Davis |
| Christopher W. Claus, Director | | Cynthia H. Davis, Director |
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| /s/ Dr. Terry S. Maness | | /s/ Mary Taylor |
| Dr. Terry S. Maness, Director | | Gerald W. Shields,Mary Taylor, Director |
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/s/ Christopher W. ClausFrancis A. Keating II | | /s/ FrankJ. Keith Morgan |
| Francis A. Keating |
Christopher W. Claus, II, Director | | Frank A. Keating,J. Keith Morgan, Director |
| | |
/s/ Steven F. Shelton | | |
Steven F. Shelton, Director | | |
117December 31, 2023 | 10-K 122
