UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 20182019
OR
¨ oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
COMMISSION FILE NUMBER: 000-16509
|
|
CITIZENS, INC. |
(Exact name of registrant as specified in its charter) |
|
| |
Colorado | 84-0755371 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
2900 Esperanza Crossing,14231 Tandem Blvd, 2nd Floor | |
Austin, Texas | 7875878728 |
(Address of principal executive offices) | (Zip Code) |
| |
| 2900 Esperanza Crossing, 2nd Floor |
(512) 837-7100 | Austin, Texas 78758 |
(Registrant's telephone number, including area code:) | (Former name, former address and former fiscal year, if changed since last report:) |
|
| | |
Securities registered pursuant to Section 12(b) of the Act | (Registrant's telephone number, including area code:) (512) 837-7100
|
|
Class A Common Stock | CIA | NYSE |
(Title of Each Class) |
(Former name, former address and former fiscal year, if changed since last report:Trading Symbol(s)) N/A | (Name of Each Exchange on Which Registered) |
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| | | | | |
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. xYes o No |
|
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). xYes o No |
|
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",filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act: |
| Large accelerated filer ¨o | Accelerated filer x | Non-accelerated filer ¨o | Smaller reporting company ¨o | Emerging growth company ¨o |
| | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period forcomplying with anyneworrevisedfinancialaccountingstandardsprovidedpursuanttoSection13(a)oftheExchangeAct. ¨o |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨o Yes x No |
As of November 2, 2018,1, 2019, the Registrant had 49,080,11452,364,993 shares of Class A common stock, no par value, outstanding and 1,001,714 shares of Class B common stock, no par value, outstanding.
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TABLE OF CONTENTS
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| | | Page Number |
Part I. FINANCIAL INFORMATION | Financial Information |
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| Item 1. | | |
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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Part II. | Other Information OTHER INFORMATION | |
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| Item 1. | | |
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| Item 1A. | | |
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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| Item 5. | | |
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| Item 6. | | |
September 30, 2019 Form | 10-Q 1
PART I. FINANCIAL INFORMATION
Item 11.. FINANCIAL STATEMENTS
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Financial Position (In thousands) |
| | | | | | |
| | | |
| | | |
| September 30, 2018 | | December 31, 2017 |
Assets | (Unaudited) | | |
Investments: | | | |
Fixed maturities available-for-sale, at fair value (cost: $1,193,211 and $935,977 in 2018 and 2017, respectively) | $ | 1,200,154 |
| | 974,609 |
|
Fixed maturities held-to-maturity, at amortized cost (fair value: $241,377 in 2017) | — |
| | 233,961 |
|
Equity securities, at fair value (cost: $15,289 in 2017) | 15,529 |
| | 16,164 |
|
Mortgage loans on real estate | 188 |
| | 195 |
|
Policy loans | 79,012 |
| | 73,735 |
|
Real estate held for investment (less $1,258 and $5,479 accumulated depreciation in 2018 and 2017, respectively) | 5,743 |
| | 7,416 |
|
Real estate held for sale (less $4,411 accumulated depreciation in 2018) | 1,483 |
| | — |
|
Other long-term investments | 22 |
| | 36 |
|
Total investments | 1,302,131 |
| | 1,306,116 |
|
Cash and cash equivalents | 68,753 |
| | 46,064 |
|
Accrued investment income | 18,389 |
| | 19,062 |
|
Reinsurance recoverable | 3,626 |
| | 3,715 |
|
Deferred policy acquisition costs | 158,253 |
| | 167,063 |
|
Cost of customer relationships acquired | 16,163 |
| | 17,499 |
|
Goodwill | 12,624 |
| | 12,624 |
|
Other intangible assets | 958 |
| | 961 |
|
Deferred tax asset | — |
| | 50,797 |
|
Property and equipment, net | 6,329 |
| | 6,624 |
|
Due premiums, net (less $1,564 and $1,611 allowance for doubtful accounts in 2018 and 2017, respectively) | 12,338 |
| | 12,765 |
|
Prepaid expenses | 1,134 |
| | 251 |
|
Other assets | 1,214 |
| | 912 |
|
Total assets | $ | 1,601,912 |
| | 1,644,453 |
|
(Continued)CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Financial Position |
| | | | | | |
| | | |
| | | |
(In thousands) | September 30, 2019 | | December 31, 2018 |
Assets | (Unaudited) | | |
Investments: | | | |
Fixed maturities available-for-sale, at fair value (cost: $1,278,293 and $1,223,747 in 2019 and 2018, respectively) | $ | 1,369,648 |
| | 1,231,039 |
|
Equity securities, at fair value | 15,845 |
| | 15,068 |
|
Mortgage loans on real estate | 180 |
| | 186 |
|
Policy loans | 81,964 |
| | 80,825 |
|
Real estate held for investment (less $1,284 accumulated depreciation in 2018) | — |
| | 5,718 |
|
Real estate held-for-sale (less $1,325 and $4,411 accumulated depreciation in 2019 and 2018, respectively) | 2,571 |
| | 1,483 |
|
Other long-term investments | 22 |
| | 22 |
|
Short-term investments | 2,453 |
| | 7,865 |
|
Total investments | 1,472,683 |
| | 1,342,206 |
|
Cash and cash equivalents | 47,147 |
| | 45,492 |
|
Accrued investment income | 17,648 |
| | 18,467 |
|
Reinsurance recoverable | 3,596 |
| | 3,664 |
|
Deferred policy acquisition costs | 150,289 |
| | 155,747 |
|
Cost of customer relationships acquired | 13,741 |
| | 15,225 |
|
Goodwill | 12,624 |
| | 12,624 |
|
Other intangible assets | 953 |
| | 956 |
|
Property and equipment, net | 6,639 |
| | 5,943 |
|
Due premiums, net (less $1,640 and $1,990 allowance for doubtful accounts in 2019 and 2018, respectively) | 10,737 |
| | 13,325 |
|
Prepaid expenses | 983 |
| | 284 |
|
Other assets | 1,319 |
| | 1,628 |
|
Total assets | $ | 1,738,359 |
| | 1,615,561 |
|
See accompanying notesNotes to consolidated financial statements.Consolidated Financial Statements.
September 30, 2019 Form | 10-Q 2
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Financial Position (In thousands, except share amounts) | |
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Financial Position, Continued
| | CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Financial Position, Continued
|
| | | | | | | |
| | | | |
| September 30, 2018 | | December 31, 2017 | |
(In thousands, except share amounts) | | September 30, 2019 | | December 31, 2018 |
Liabilities and Stockholders' Equity | (Unaudited) | | | (Unaudited) | | |
Liabilities: | | | | | | |
Policy liabilities: | | | | | | |
Future policy benefit reserves: | | | | | | |
Life insurance | $ | 1,165,443 |
| | 1,133,875 |
| $ | 1,206,042 |
| | 1,179,946 |
|
Annuities | 75,803 |
| | 73,688 |
| 76,427 |
| | 76,377 |
|
Accident and health | 923 |
| | 990 |
| 997 |
| | 944 |
|
Dividend accumulations | 25,513 |
| | 23,713 |
| 28,400 |
| | 26,250 |
|
Premiums paid in advance | 50,651 |
| | 51,431 |
| 42,591 |
| | 48,553 |
|
Policy claims payable | 7,327 |
| | 8,610 |
| 8,095 |
| | 7,614 |
|
Other policyholders' funds | 10,159 |
| | 8,483 |
| 16,400 |
| | 10,760 |
|
Total policy liabilities | 1,335,819 |
| | 1,300,790 |
| 1,378,952 |
| | 1,350,444 |
|
Commissions payable | 1,947 |
| | 2,430 |
| 2,096 |
| | 1,901 |
|
Federal income tax payable | 47,637 |
| | 93,365 |
| |
Deferred federal income tax liability | 10,374 |
| | — |
| |
Current federal income tax payable | | 47,861 |
| | 41,281 |
|
Deferred federal income tax payable | | 12,081 |
| | 5,709 |
|
Payable for securities in process of settlement | | 6,030 |
| | — |
|
Other liabilities | 25,396 |
| | 24,355 |
| 29,997 |
| | 28,493 |
|
Total liabilities | 1,421,173 |
| | 1,420,940 |
| 1,477,017 |
| | 1,427,828 |
|
Commitments and contingencies (Note 8) |
|
| |
|
| |
Commitments and contingencies (Note 7) | |
|
| |
|
|
Stockholders' equity: | |
| | |
| |
| | |
|
Class A, no par value, 100,000,000 shares authorized, 52,215,852 shares issued and outstanding in 2018 and 2017, including shares in treasury of 3,135,738 in 2018 and 2017 | 259,693 |
| | 259,383 |
| |
Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2018 and 2017 | 3,184 |
| | 3,184 |
| |
Class A, no par value, 100,000,000 shares authorized, 52,364,993 and 52,215,852 shares issued and outstanding in 2019 and 2018, respectively, including shares in treasury of 3,135,738 in 2019 and 2018 | | 261,346 |
| | 259,793 |
|
Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2019 and 2018 | | 3,184 |
| | 3,184 |
|
Accumulated deficit | (75,812 | ) | | (54,375 | ) | (75,920 | ) | | (69,599 | ) |
Accumulated other comprehensive income: | |
| | |
| |
| | |
|
Unrealized gains on securities, net of tax | 4,685 |
| | 26,332 |
| |
Net unrealized gains on securities, net of tax | | 83,743 |
| | 5,366 |
|
Treasury stock, at cost | (11,011 | ) | | (11,011 | ) | (11,011 | ) | | (11,011 | ) |
Total stockholders' equity | 180,739 |
| | 223,513 |
| 261,342 |
| | 187,733 |
|
Total liabilities and stockholders' equity | $ | 1,601,912 |
| | 1,644,453 |
| $ | 1,738,359 |
| | 1,615,561 |
|
See accompanying notesNotes to consolidated financial statements.
Consolidated Financial Statements.
September 30, 2019 Form | 10-Q 3
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Comprehensive Income Three Months Ended September 30, (In thousands, except per share amounts) (Unaudited)
| |
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Comprehensive Income (Unaudited)
| | CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Comprehensive Income (Unaudited)
|
| | 2018 | | 2017 | |
Three Months Ended September 30, (In thousands, except per share amounts) | | 2019 | | 2018 (As Restated*) |
Revenues: | | | | | | | | |
Premiums: | | | | | | | | | | |
Life insurance | | | $ | 45,898 |
| | | | 48,644 |
| $ | 44,502 |
| | 45,898 |
|
Accident and health insurance | | | 323 |
| | | | 360 |
| 350 |
| | 323 |
|
Property insurance | | | 1,208 |
| | | | 1,243 |
| 1,157 |
| | 1,208 |
|
Net investment income | | | 13,587 |
| | | | 13,828 |
| 15,039 |
| | 13,587 |
|
Realized investment losses, net | | | (498 | ) | | | | (404 | ) | |
Realized investment gains (losses), net | | 72 |
| | (498 | ) |
Other income | | | 643 |
| | | | 660 |
| 347 |
| | 643 |
|
Total revenues | | | 61,161 |
| | | | 64,331 |
| 61,467 |
| | 61,161 |
|
Benefits and expenses: | | | |
| | | | |
| |
Benefits and Expenses: | | |
| | |
|
Insurance benefits paid or provided: | | | |
| | | | |
| |
| | |
|
Claims and surrenders | | | 25,076 |
| | | | 21,454 |
| 28,751 |
| | 25,076 |
|
Increase in future policy benefit reserves | | | 1,653 |
| | | | 19,597 |
| 6,409 |
| | 1,653 |
|
Policyholders' dividends | | | 1,595 |
| | | | 1,613 |
| 1,560 |
| | 1,595 |
|
Total insurance benefits paid or provided | | | 28,324 |
| | | | 42,664 |
| 36,720 |
| | 28,324 |
|
Commissions | | | 8,656 |
| | | | 10,801 |
| 8,879 |
| | 8,656 |
|
Other general expenses | | | 12,402 |
| | | | 7,254 |
| 11,530 |
| | 12,402 |
|
Capitalization of deferred policy acquisition costs | | | (5,561 | ) | | | | (7,756 | ) | (5,984 | ) | | (5,561 | ) |
Amortization of deferred policy acquisition costs | | | 11,412 |
| | | | 7,623 |
| 7,835 |
| | 11,412 |
|
Amortization of cost of customer relationships acquired | | | 366 |
| | | | 635 |
| 355 |
| | 366 |
|
Total benefits and expenses | | | 55,599 |
| | | | 61,221 |
| 59,335 |
| | 55,599 |
|
Income before federal income tax | | | 5,562 |
| | | | 3,110 |
| 2,132 |
| | 5,562 |
|
Federal income tax expense (benefit) | | | 20,316 |
| | | | (339 | ) | |
Federal income tax expense | | 86 |
| | 12,671 |
|
Net income (loss) | | | (14,754 | ) | | | | 3,449 |
| 2,046 |
| | (7,109 | ) |
Per Share Amounts: | | | |
| | |
| | |
| |
| | |
|
Basic and diluted earnings (losses) per share of Class A common stock | $ | (0.30 | ) | | |
| | 0.07 |
| | |
| 0.04 |
| | (0.14 | ) |
Basic and diluted earnings (losses) per share of Class B common stock | (0.14 | ) | | |
| | 0.03 |
| | |
| 0.02 |
| | (0.07 | ) |
Other comprehensive income (loss): | |
| | |
| | | | |
| |
Other Comprehensive Income (Loss): | | |
| | |
|
Unrealized gains (losses) on available-for-sale debt securities: | |
| | |
| | |
| | |
| |
| | |
|
Unrealized holding gains (losses) arising during period | |
| | (2,236 | ) | | |
| | 3,875 |
| 24,201 |
| | (2,236 | ) |
Reclassification adjustment for losses included in net income | |
| | 656 |
| | |
| | 370 |
| |
Reclassification adjustment for losses (gains) included in net income | | (53 | ) | | 656 |
|
Unrealized gains (losses) on available-for-sale debt securities, net | |
| | (1,580 | ) | | |
| | 4,245 |
| 24,148 |
| | (1,580 | ) |
Income tax expense on unrealized gains (losses) on available-for-sale debt securities | |
| | 454 |
| | |
| | 1,486 |
| 1,627 |
| | 454 |
|
Other comprehensive income (loss) | |
| | (2,034 | ) | | |
| | 2,759 |
| 22,521 |
| | (2,034 | ) |
Total comprehensive income (loss) | |
| | $ | (16,788 | ) | | |
| | 6,208 |
| $ | 24,567 |
| | (9,143 | ) |
* See Note 1 in the Notes to Consolidated Financial Statements
See accompanying Notes to Consolidated Financial Statements.
September 30, 2019 Form | 10-Q 4
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Comprehensive Income Nine Months Ended September 30, (In thousands, except per share amounts) (Unaudited)
| |
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Comprehensive Income (Unaudited)
| | CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Comprehensive Income (Unaudited)
|
| | 2018 | | 2017 | |
Nine Months Ended September 30, (In thousands, except per share amounts) | | 2019 | | 2018 (As Restated*) |
Revenues: | | | | | | | | |
Premiums: | | | | �� | | | | | | |
Life insurance | | | $ | 133,058 |
| | | | 138,603 |
| $ | 127,795 |
| | 133,058 |
|
Accident and health insurance | | | 915 |
| | | | 1,033 |
| 1,018 |
| | 915 |
|
Property insurance | | | 3,615 |
| | | | 3,731 |
| 3,464 |
| | 3,615 |
|
Net investment income | | | 41,169 |
| | | | 39,640 |
| 44,150 |
| | 41,169 |
|
Realized investment gains (losses), net | | | (1,251 | ) | | | | 742 |
| 3,164 |
| | (1,251 | ) |
Other income | | | 930 |
| | | | 1,015 |
| 1,148 |
| | 930 |
|
Total revenues | | | 178,436 |
| | | | 184,764 |
| 180,739 |
| | 178,436 |
|
Benefits and expenses: | | | |
| | | | |
| |
Benefits and Expenses: | | |
| | |
|
Insurance benefits paid or provided: | | | |
| | | | |
| |
| | |
|
Claims and surrenders | | | 66,844 |
| | | | 62,130 |
| 78,808 |
| | 66,844 |
|
Increase in future policy benefit reserves | | | 32,816 |
| | | | 51,953 |
| 28,180 |
| | 32,816 |
|
Policyholders' dividends | | | 4,516 |
| | | | 4,418 |
| 4,165 |
| | 4,516 |
|
Total insurance benefits paid or provided | | | 104,176 |
| | | | 118,501 |
| 111,153 |
| | 104,176 |
|
Commissions | | | 26,284 |
| | | | 30,620 |
| 25,147 |
| | 26,284 |
|
Other general expenses | | | 33,375 |
| | | | 26,765 |
| 37,611 |
| | 33,375 |
|
Capitalization of deferred policy acquisition costs | | | (17,164 | ) | | | | (21,540 | ) | (16,224 | ) | | (17,164 | ) |
Amortization of deferred policy acquisition costs | | | 26,218 |
| | | | 22,640 |
| 21,043 |
| | 26,218 |
|
Amortization of cost of customer relationships acquired | | | 1,517 |
| | | | 1,629 |
| 1,192 |
| | 1,517 |
|
Total benefits and expenses | | | 174,406 |
| | | | 178,615 |
| 179,922 |
| | 174,406 |
|
Income before federal income tax | | | 4,030 |
| | | | 6,149 |
| 817 |
| | 4,030 |
|
Federal income tax expense | | | 21,305 |
| | | | 72 |
| 7,138 |
| | 13,660 |
|
Net income (loss) | | | (17,275 | ) | | | | 6,077 |
| |
Net loss | | (6,321 | ) | | (9,630 | ) |
Per Share Amounts: | | | |
| | |
| | |
| |
| | |
|
Basic and diluted earnings (losses) per share of Class A common stock | $ | (0.35 | ) | | |
| | 0.12 |
| | |
| |
Basic and diluted earnings (losses) per share of Class B common stock | (0.17 | ) | | |
| | 0.06 |
| | |
| |
Other comprehensive income (loss): | |
| | |
| | | | |
| |
Basic and diluted losses per share of Class A common stock | | (0.13 | ) | | (0.19 | ) |
Basic and diluted losses per share of Class B common stock | | (0.06 | ) | | (0.10 | ) |
Other Comprehensive Income (Loss): | | |
| | |
|
Unrealized gains (losses) on available-for-sale debt securities: | |
| | |
| | |
| | |
| |
| | |
|
Unrealized holding gains (losses) arising during period | |
| | (32,663 | ) | | |
| | 13,585 |
| 84,222 |
| | (32,663 | ) |
Reclassification adjustment for losses included in net income | |
| | 1,002 |
| |
|
| | 329 |
| |
Reclassification adjustment for losses (gains) included in net income | | (30 | ) | | 1,002 |
|
Unrealized gains (losses) on available-for-sale debt securities, net | |
| | (31,661 | ) | | |
| | 13,914 |
| 84,192 |
| | (31,661 | ) |
Income tax expense (benefit) on unrealized gains (losses) on available-for-sale debt securities | |
| | (5,852 | ) | | |
| | 4,870 |
| 5,815 |
| | (5,852 | ) |
Other comprehensive income (loss) | |
| | (25,809 | ) | | |
| | 9,044 |
| 78,377 |
| | (25,809 | ) |
Total comprehensive income (loss) | |
| | $ | (43,084 | ) | | |
| | 15,121 |
| $ | 72,056 |
| | (35,439 | ) |
* See Note 1 in the Notes to Consolidated Financial Statements
See accompanying notesNotes to consolidated financial statements.Consolidated Financial Statements.
September 30, 2019 Form | 10-Q 5
|
| | | | | | | | | | | | | | | | | | |
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES |
Consolidated Statements of Stockholders' Equity |
Nine Months Ended September 30, 2018 and 2017 |
(In thousands) |
(Unaudited) |
| | | | | | | | | | | |
| Common Stock | | Accumulated deficit | | Accumulated other comprehensive income (loss) | | Treasury stock | | Total Stockholders' equity |
| Class A | | Class B | | | | |
Balance at December 31, 2016 | $ | 259,383 |
| | 3,184 |
| | (16,248 | ) | | 13,792 |
| | (11,011 | ) | | 249,100 |
|
Comprehensive income: | |
| | |
| | |
| | |
| | |
| | |
|
Net income | — |
| | — |
| | 6,077 |
| | — |
| | — |
| | 6,077 |
|
Unrealized investment gains, net | — |
| | — |
| | — |
| | 9,044 |
| | — |
| | 9,044 |
|
Total comprehensive income | — |
| | — |
| | 6,077 |
| | 9,044 |
| | — |
| | 15,121 |
|
Balance at September 30, 2017 | 259,383 |
| | 3,184 |
| | (10,171 | ) | | 22,836 |
| | (11,011 | ) | | 264,221 |
|
| | | | | | | | | | | |
Balance at December 31, 2017 | 259,383 |
| | 3,184 |
| | (54,375 | ) | | 26,332 |
| | (11,011 | ) | | 223,513 |
|
Accounting standards adopted January 1, 2018 | — |
| | — |
| | (4,162 | ) | | 4,162 |
| | — |
| | — |
|
Balance at January 1, 2018 | 259,383 |
| | 3,184 |
| | (58,537 | ) | | 30,494 |
| | (11,011 | ) | | 223,513 |
|
Comprehensive loss: | |
| | |
| | |
| | |
| | |
| | |
|
Net loss | — |
| | — |
| | (17,275 | ) | | — |
| | — |
| | (17,275 | ) |
Unrealized investment losses, net | — |
| | — |
| | — |
| | (26,629 | ) | | — |
| | (26,629 | ) |
Unrealized gain from held-to-maturity securities transferred to available-for-sale, net | — |
| | — |
| | — |
| | 820 |
| | — |
| | 820 |
|
Total comprehensive loss | — |
| | — |
| | (17,275 | ) | | (25,809 | ) | | — |
| | (43,084 | ) |
Stock-based compensation | 310 |
| | — |
| | — |
| | — |
| | — |
| | 310 |
|
Balance at September 30, 2018 | $ | 259,693 |
| | 3,184 |
| | (75,812 | ) | | 4,685 |
| | (11,011 | ) | | 180,739 |
|
|
| | | | | | | | | | | | | | | | | | |
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES |
Consolidated Statements of Stockholders' Equity |
(Unaudited) |
| | | | | | | | | | | |
| Common Stock | | Accumulated deficit | | Accumulated other comprehensive income | | Treasury stock | | Total Stock-holders' equity |
(In thousands) | Class A | | Class B | | | | |
| | | | | | | | | | |
Balance at December 31, 2018 | $ | 259,793 |
| | 3,184 |
| | (69,599 | ) | | 5,366 |
| | (11,011 | ) | | 187,733 |
|
Comprehensive income: | | | | | | | | | | | |
Net loss | — |
| | — |
| | (3,802 | ) | | — |
| | — |
| | (3,802 | ) |
Unrealized investment gains, net | — |
| | — |
| | — |
| | 26,880 |
| | — |
| | 26,880 |
|
Total comprehensive income | — |
| | — |
| | (3,802 | ) | | 26,880 |
| | — |
| | 23,078 |
|
Stock-based compensation | 1,083 |
| | — |
| | — |
| | — |
| | — |
| | 1,083 |
|
Balance at March 31, 2019 | 260,876 |
| | 3,184 |
| | (73,401 | ) | | 32,246 |
| | (11,011 | ) | | 211,894 |
|
Comprehensive income: | |
| | |
| | |
| | |
| | |
| | |
|
Net loss | — |
| | — |
| | (4,565 | ) | | — |
| | — |
| | (4,565 | ) |
Unrealized investment gains, net | — |
| | — |
| | — |
| | 28,976 |
| | — |
| | 28,976 |
|
Total comprehensive income | — |
| | — |
| | (4,565 | ) | | 28,976 |
| | — |
| | 24,411 |
|
Stock-based compensation | 127 |
| | — |
| | — |
| | — |
| | — |
| | 127 |
|
Balance at June 30, 2019 | 261,003 |
| | 3,184 |
| | (77,966 | ) | | 61,222 |
| | (11,011 | ) | | 236,432 |
|
Comprehensive income: | |
| | |
| | |
| | |
| | |
| | |
|
Net income | — |
| | — |
| | 2,046 |
| | — |
| | — |
| | 2,046 |
|
Unrealized investment gains, net | — |
| | — |
| | — |
| | 22,521 |
| | — |
| | 22,521 |
|
Total comprehensive income | — |
| | — |
| | 2,046 |
| | 22,521 |
| | — |
| | 24,567 |
|
Stock-based compensation | 343 |
| | — |
| | — |
| | — |
| | — |
| | 343 |
|
Balance at September 30, 2019 | $ | 261,346 |
| | 3,184 |
| | (75,920 | ) | | 83,743 |
| | (11,011 | ) | | 261,342 |
|
See accompanying notesNotes to consolidated financial statements.Consolidated Financial Statements.
September 30, 2019 Form | 10-Q 6
|
| | | | | | | | | | | | | | | | | | |
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES |
Consolidated Statements of Stockholders' Equity, Continued |
(Unaudited) |
| | | | | | | | | | | |
| Common Stock | | Accumulated deficit | | Accumulated other comprehensive income (loss) | | Treasury stock | | Total Stock-holders' equity |
(In thousands) | Class A | | Class B | | | | |
| | | | | | | | | | |
Balance at December 31, 2017 | $ | 259,383 |
| | 3,184 |
| | (54,375 | ) | | 26,332 |
| | (11,011 | ) | | 223,513 |
|
Accounting standards adopted January 1, 2018 | — |
| | — |
| | (4,162 | ) | | 4,162 |
| | — |
| | — |
|
Balance at January 1, 2018 | 259,383 |
| | 3,184 |
| | (58,537 | ) | | 30,494 |
| | (11,011 | ) | | 223,513 |
|
Comprehensive loss: | | | | | | | | | | | |
Net income | — |
| | — |
| | 37 |
| | — |
| | — |
| | 37 |
|
Unrealized investment losses, net | — |
| | — |
| | — |
| | (14,104 | ) | | — |
| | (14,104 | ) |
Total comprehensive loss | — |
| | — |
| | 37 |
| | (14,104 | ) | | — |
| | (14,067 | ) |
Balance at March 31, 2018 | 259,383 |
| | 3,184 |
| | (58,500 | ) |
| 16,390 |
| | (11,011 | ) | | 209,446 |
|
Comprehensive loss: | |
| | |
| | |
| | |
| | |
| | |
|
Net loss | — |
| | — |
| | (2,558 | ) | | — |
| | — |
| | (2,558 | ) |
Unrealized investment losses, net | — |
| | — |
| | — |
| | (9,671 | ) | | — |
| | (9,671 | ) |
Total comprehensive loss | — |
| | — |
| | (2,558 | ) | | (9,671 | ) | | — |
| | (12,229 | ) |
Stock-based compensation | 213 |
| | — |
| | — |
| | — |
| | — |
| | 213 |
|
Balance at June 30, 2018 | 259,596 |
| | 3,184 |
| | (61,058 | ) | | 6,719 |
| | (11,011 | ) | | 197,430 |
|
Comprehensive loss: | |
| | |
| | |
| | |
| | |
| | |
|
Net loss (as restated*) | — |
| | — |
| | (7,109 | ) | | — |
| | — |
| | (7,109 | ) |
Unrealized investment losses, net | — |
| | — |
| | — |
| | (2,854 | ) | | — |
| | (2,854 | ) |
Unrealized gain from held-to-maturity securities transferred to available-for-sale | — |
| | — |
| | — |
| | 820 |
| | — |
| | 820 |
|
Total comprehensive loss (as restated*) | — |
| | — |
| | (7,109 | ) | | (2,034 | ) | | — |
| | (9,143 | ) |
Stock-based compensation | 97 |
| | — |
| | — |
| | — |
| | — |
| | 97 |
|
Balance at September 30, 2018 (as restated*) | $ | 259,693 |
| | 3,184 |
| | (68,167 | ) | | 4,685 |
| | (11,011 | ) | | 188,384 |
|
* See Note 1 in the Notes to Consolidated Financial Statements
See accompanying Notes to Consolidated Financial Statements.
September 30, 2019 Form | 10-Q 7
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows Nine Months Ended September 30, (In thousands) (Unaudited) | |
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited)
| | CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited)
|
| | 2018 | | 2017 | |
Nine Months Ended September 30, (In thousands) | | 2019 | | 2018 (As Restated*) |
Cash flows from operating activities: | | | | | | |
Net income (loss) | $ | (17,275 | ) | | 6,077 |
| $ | (6,321 | ) | | (9,630 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| | |
| |
| | |
|
Realized (gains) losses on sale of investments and other assets | 1,251 |
| | (742 | ) | (3,164 | ) | | 1,251 |
|
Net deferred policy acquisition costs | 9,054 |
| | 1,100 |
| 4,819 |
| | 9,054 |
|
Amortization of cost of customer relationships acquired | 1,517 |
| | 1,629 |
| 1,192 |
| | 1,517 |
|
Depreciation | 921 |
| | 763 |
| 1,269 |
| | 921 |
|
Amortization of premiums and discounts on investments | 12,781 |
| | 12,398 |
| 10,422 |
| | 12,781 |
|
Stock-based compensation | 310 |
| | — |
| 1,930 |
| | 310 |
|
Deferred federal income tax benefit | 67,040 |
| | (2,975 | ) | 560 |
| | 59,329 |
|
Change in: | |
| | |
| |
| | |
|
Accrued investment income | 673 |
| | (340 | ) | 819 |
| | 673 |
|
Reinsurance recoverable | 89 |
| | (55 | ) | 68 |
| | 89 |
|
Due premiums | 427 |
| | 1,947 |
| 2,588 |
| | 427 |
|
Future policy benefit reserves | 33,425 |
| | 51,876 |
| 27,994 |
| | 33,425 |
|
Other policyholders' liabilities | 1,413 |
| | 5,619 |
| 2,309 |
| | 1,413 |
|
Federal income tax payable | (45,744 | ) | | 2,532 |
| 6,580 |
| | (45,678 | ) |
Commissions payable and other liabilities | 558 |
| | (10,307 | ) | 1,699 |
| | 558 |
|
Other, net | (1,205 | ) | | (663 | ) | (1,851 | ) | | (1,205 | ) |
Net cash provided by operating activities | 65,235 |
| | 68,859 |
| 50,913 |
| | 65,235 |
|
Cash flows from investing activities: | |
| | |
| |
| | |
|
Purchase of fixed maturities, available-for-sale | (109,642 | ) | | (135,538 | ) | (210,445 | ) | | (109,642 | ) |
Sale of fixed maturities, available-for-sale | 1,084 |
| | 508 |
| 39,708 |
| | 1,084 |
|
Maturities and calls of fixed maturities, available-for-sale | 51,190 |
| | 65,456 |
| 111,757 |
| | 51,190 |
|
Maturities and calls of fixed maturities, held-to-maturity | 20,699 |
| | 7,685 |
| — |
| | 20,699 |
|
Sale of equity securities, available-for-sale | — |
| | 1,940 |
| |
Calls of equity securities, available-for-sale | — |
| | 450 |
| |
Purchase of equity securities, available-for-sale | (9 | ) | | — |
| |
Purchase of equity securities | | — |
| | (9 | ) |
Principal payments on mortgage loans | 7 |
| | 35 |
| 6 |
| | 7 |
|
Increase in policy loans, net | (5,277 | ) | | (4,543 | ) | (1,141 | ) | | (5,277 | ) |
Sale of other long-term investments and real estate | 14 |
| | 3,040 |
| 6,981 |
| | 14 |
|
Sale of property and equipment | — |
| | 41 |
| 15 |
| | — |
|
Purchase of property and equipment | (437 | ) | | (1,223 | ) | (509 | ) | | (437 | ) |
Maturity of short-term investments | — |
| | 500 |
| 7,940 |
| | — |
|
Purchase of short-term investments | | (2,456 | ) | | — |
|
Net cash used in investing activities | (42,371 | ) | | (61,649 | ) | (48,144 | ) | | (42,371 | ) |
| | | | |
| | | | |
* See Note 1 in the Notes to Consolidated Financial Statements | | | | |
See accompanying Notes to Consolidated Financial Statements. | |
See accompanying Notes to Consolidated Financial Statements. | |
7
September 30, 2019 Form | 10-Q 8
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows, Continued Nine Months Ended September 30, (In thousands) (Unaudited) | |
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows, Continued (Unaudited)
| | CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows, Continued (Unaudited)
|
| | 2018 | | 2017 | |
Nine Months Ended September 30, (In thousands) | | 2019 | | 2018 (As Restated*) |
Cash flows from financing activities: | | | | |
| | |
|
Annuity deposits | $ | 5,222 |
| | 7,240 |
| $ | 4,948 |
| | 5,222 |
|
Annuity withdrawals | (5,397 | ) | | (4,960 | ) | (5,685 | ) | | (5,397 | ) |
Net cash provided by (used in) financing activities | (175 | ) | | 2,280 |
| |
Other | | (377 | ) | | — |
|
Net cash used in financing activities | | (1,114 | ) | | (175 | ) |
Net increase in cash and cash equivalents | 22,689 |
| | 9,490 |
| 1,655 |
| | 22,689 |
|
Cash and cash equivalents at beginning of year | 46,064 |
| | 35,510 |
| 45,492 |
| | 46,064 |
|
Cash and cash equivalents at end of period | $ | 68,753 |
| | 45,000 |
| $ | 47,147 |
| | 68,753 |
|
Supplemental disclosures of operating activities: | |
| | |
| |
Cash paid (received) during the period for income taxes, net | $ | — |
| | 515 |
| |
* See Note 1 in the Notes to Consolidated Financial Statements | | | | |
Supplemental disclosures of noncash investing and financing activities:SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 2018the nine months ended September 30, 2019 and 2017,2018, various fixed maturity issuers exchanged securities with book values of $2.5$12.2 million and $4.8$2.5 million, respectively, for securities of equal value.
The Company had net unsettled security trades of $6.0 million at September 30, 2019 and none at September 30, 2018.
See accompanying notesNotes to consolidated financial statements.Consolidated Financial Statements.
8
September 30, 2019 Form | 10-Q 9
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements |
| | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | |
September 30, 2018
(Unaudited)
(1) Financial StatementsFINANCIAL STATEMENTS
Basis of Presentation and ConsolidationBASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts and operations of Citizens, Inc. ("Citizens"), a Colorado corporation, and its wholly-owned subsidiaries, CICA Life Insurance Company of America ("CICA"), Citizens National Life Insurance Company ("CNLIC"), CICA Life Ltd. ("CICA Ltd."), Security Plan Life Insurance Company ("SPLIC"), Security Plan Fire Insurance Company ("SPFIC"), Citizens National Life Insurance Company ("CNLIC"), Magnolia Guaranty Life Insurance Company ("MGLIC"), and Computing Technology,, Inc. ("CTI"),. All significant inter-company accounts and Insurance Investors, Inc. ("III").interactions have been eliminated. Citizens and its wholly-owned subsidiaries are collectively referred to as "the Company," "we,"the "Company", "we", "us" or "our.""our".
The consolidated statements of financial position as of September 30, 2018,2019, the consolidated statements of comprehensive income and stockholders' equity for the three and nine-monthsnine months ended September 30, 20182019 and September 30, 20172018 and the consolidated statements of stockholders' equity and cash flows for the nine-month periods months ended September 30, 20182019 and September 30, 2017,2018 have been prepared by the Company without audit. In the opinion of management, all normal and recurring adjustments to present fairly the financial position, results of operations, and changes in cash flows at September 30, 20182019 and for comparative periods have been made. The consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”("SEC"). Accordingly, the consolidated financial statements do not include all the information and footnotes required for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017.2018. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.
We provide primarily life insurance and a small amount of health insurance policies through our insurance subsidiaries:subsidiaries - CICA, CNLIC, CICA Ltd., SPLIC MGLIC and CNLIC. Until the end of 2016,MGLIC. CICA and CNLIC issued ordinary whole-life policies, credit life and disability, burial insurance, pre-need policies, and accident and health related policies, throughout the Midwest and southern United States. BeginningU.S. until they ceased most domestic sales beginning January 1, 2017,2017. CICA and CNLIC ceased selling life products domestically. Prior to July 1, 2018, CICALtd. primarily issuedissues endowment and ordinary whole-life and endowment policies to non-U.S. residents. From and after July 1, 2018, CICA Ltd. will issue such policies. Effective on July 1, 2018, the Company effected a novation of all of the international policies issued by CICA to CICA Ltd., a newly established Bermuda entity that began operations in July 2018. While this novation transaction has been eliminated in consolidation of affiliated entities, there are tax effects reflected in the consolidated financial statements as a result of the transaction being executed between our subsidiaries that reside in different tax jurisdictions. The tax accounting implications of the novation transaction are further described in Note 9 - Income Taxes in these notes to the consolidated financial statements. SPLIC offers final expense and home service life insurance in Louisiana, Arkansas and Mississippi, andMississippi. SPFIC, a wholly-owned subsidiary of SPLIC, writes a limited amount of property insurance in Louisiana. MGLIC provides industrial life policies through independent funeral homes in Mississippi.
CTI provides data processing systems and services as well as furniture and equipment, to the Company. III is currently not active. We plan to dissolve III and merge it into Citizens.
9
September 30, 2019 Form | 10-Q 10
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued |
| | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | |
September 30, 2018
(Unaudited)
As of July 1, 2018, we implementedWe converted to a new actuarial valuation software solution impacting both the life segment that providesHome Service Insurance and Life Insurance segments, providing enhanced modeling capabilities for the ordinary whole life policies of SPLIC as of July 1, 2019 and the ordinary whole life and endowment policies of CICA and CICA Ltd., which are included in the life insurance segment. The impact as of this system conversion resulted in changes in estimates due to refinements reflected as a decrease in reserves of $10.2 million and a decrease in DAC of $4.3 million, before tax.July 1, 2018. The total impact of thisthese system conversionconversions reflected in the accompanying consolidated financial statements as of and for the three and nine months ended September 30, 2019 and 2018 isare summarized in the table below.
| | Impact on financial balances: | | Increase (Decrease) | |
(In thousands) | | | September 30, 2019 | | September 30, 2018 |
Increase (Decrease) | | | | | |
Consolidated Statements of Financial Position | | (In thousands) | | | | |
Deferred policy acquisition costs | | $ | (4,339 | ) | | $ | (1,396 | ) | | (4,339 | ) |
Future policy benefit reserves: | | | | | | |
Life insurance | | (10,197 | ) | | (2,299 | ) | | (10,197 | ) |
| | | | | | |
Consolidated Statements of Comprehensive Income | | | |
Consolidated Statement of Comprehensive Income | | | | | |
Decrease in future policy benefit reserves | | (10,197 | ) | | (2,299 | ) | | (10,197 | ) |
Amortization of deferred policy acquisition costs | | 4,339 |
| | 1,396 |
| | 4,339 |
|
Income (loss) before federal income tax | | 5,858 |
| |
Income before federal income tax | | | 903 |
| | 5,858 |
|
Federal income tax expense | | 1,230 |
| | 190 |
| | 1,230 |
|
Net income (loss) | | $ | 4,628 |
| |
Net income | | | $ | 713 |
| | 4,628 |
|
We are continuing to convert other information to the new valuation system and will report those items as information becomes available and in accordance with applicable accounting guidance. It is our expectation that we will convert SPLIC's insurance products to the new valuation system during 2019.
Use of EstimatesUSE 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 the 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 from those estimates.
The most significantSignificant estimates include those used in the evaluation of other-than-temporary impairments on debt and equity securities, actuarially determined assets and liabilities and assumptions, tests of goodwill impairment, valuation allowance on deferred tax assets, valuation of uncertain tax positions and contingencies relating to litigation and regulatory matters. Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the consolidated financial statements.
Significant Accounting PoliciesRESTATEMENT
For a description of significant accounting policies, seeAs disclosed in Note 1 of14. Quarterly Financial Information (Unaudited) in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017,2018, the Company has restated its unaudited consolidated financial information as of and for the three and nine month periods ended September 30, 2018 to correct an immaterial error related to the accounting for the income tax effects of the novation of international insurance policies to our Bermuda-based subsidiary on July 1, 2018.
September 30, 2019 Form | 10-Q 11
|
| | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | |
Federal income tax expense and net income (loss) have been restated herein to properly reflect the reduction in federal income tax expense as compared to originally reported amounts. Basic & diluted earnings (losses) per share of Class A common stock and Class B common stock were also restated. The table below reflects the line items adjusted as a result of the restatement as of September 30, 2018 and for the three and nine months ended September 30, 2018.
|
| | | | | | | | | | |
(In thousands, except per share amounts) | | As Previously Reported | | Adjustments | | As Restated |
For the Three Months Ended September 30, 2018 | | | | | | |
Consolidated Statement of Comprehensive Income | | | | | | |
Federal income expense (benefit) | | $ | 20,316 |
| | (7,645 | ) | | 12,671 |
|
Net income (loss) | | (14,754 | ) | | 7,645 |
| | (7,109 | ) |
Basic and diluted earnings (losses) per share of Class A common stock | | (0.30 | ) | | 0.16 |
| | (0.14 | ) |
Basic and diluted earnings (losses) per share of Class B common stock | | (0.14 | ) | | 0.07 |
| | (0.07 | ) |
Total comprehensive income (loss) | | (16,788 | ) | | 7,645 |
| | (9,143 | ) |
|
| | | | | | | | | | |
For the Nine Months Ended September 30, 2018 | | | | | | |
Consolidated Statement of Comprehensive Income | | | | | | |
Federal income expense (benefit) | | $ | 21,305 |
| | (7,645 | ) | | 13,660 |
|
Net income (loss) | | (17,275 | ) | | 7,645 |
| | (9,630 | ) |
Basic and diluted earnings (losses) per share of Class A common stock | | (0.35 | ) | | 0.16 |
| | (0.19 | ) |
Basic and diluted earnings (losses) per share of Class B common stock | | (0.17 | ) | | 0.07 |
| | (0.10 | ) |
Total comprehensive income (loss) | | (43,084 | ) | | 7,645 |
| | (35,439 | ) |
|
| | | | | | | | | | |
As of September 30, 2018 | | | | | | |
Consolidated Statements of Stockholders' Equity | | | | | | |
Balance at June 30, 2018 | | $ | 197,430 |
| | — |
| | 197,430 |
|
Net income (loss) | | (14,754 | ) | | 7,645 |
| | (7,109 | ) |
Total comprehensive income (loss) | | (16,788 | ) | | 7,645 |
| | (9,143 | ) |
Accumulated deficit | | (75,812 | ) | | 7,645 |
| | (68,167 | ) |
Balance at September 30, 2018 | | 180,739 |
| | 7,645 |
| | 188,384 |
|
|
| | | | | | | | | | |
For the Nine Months Ended September 30, 2018 | | | | | | |
Consolidated Statements of Cash Flows | | | | | | |
Net income (loss) | | $ | (17,275 | ) | | 7,645 |
| | (9,630 | ) |
Deferred federal income tax (expense) benefit | | 67,040 |
| | (7,711 | ) | | 59,329 |
|
Federal income tax payable | | (45,744 | ) | | 66 |
| | (45,678 | ) |
Net cash provided by operating activities | | 65,235 |
| | — |
| | 65,235 |
|
SIGNIFICANT ACCOUNTING POLICIES
For a description of our significant accounting policies, see Note 1. Summary of Significant Accounting Policies in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, which should be read in conjunction with these accompanying consolidated financial statements.
10
September 30, 2019 Form | 10-Q 12
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued |
| | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | |
September 30, 2018
(Unaudited)
(2) Accounting PronouncementsACCOUNTING PRONOUNCEMENTS
Accounting Standards Recently AdoptedACCOUNTING STANDARDS RECENTLY ADOPTED
OnIn February 14, 2018,2016, the Financial Accounting Standards Board ("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 ("AOCI") to retained earnings of the stranded tax effects that occurred due to the enactment of the Tax Cuts and Jobs Act of 2017 (the "New Tax Act"). The updated guidance is effective for reporting periods beginning after December 15, 2018 and is to be applied retrospectively to each period in which there are items impacted by the New Tax Act remaining in AOCI or at the beginning of the period of adoption. Early adoption is permitted. The Company adopted the updated guidance effective January 1, 2018 and elected to reclassify the income tax effects of the New Tax Act from AOCI to accumulated deficit as of January 1, 2018. This reclassification resulted in an increase in accumulated deficit of $4.7 million as of January 1, 2018 and an increase in AOCI by the same amount.
In January 2016, the FASB released ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The updated guidance requires equity investments, except those accounted for under the equity method of accounting, that have readily determinable fair values to be measured at fair value with any changes in fair value recognized in net income. Equity securities that do not have readily determinable fair values may be measured at estimated fair value or cost less impairment, if any, adjusted for subsequent observable price changes, with changes in the carrying value recognized in net income. A qualitative assessment for impairment is required for equity investments without readily determinable fair values. The updated guidance also eliminates the requirement to disclose the method and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet. The updated guidance was effective for the first quarter ended March 31, 2018. The adoption of this guidance resulted in the recognition of $560,000 of net after-tax unrealized gains on equity investments as a cumulative effect adjustment that decreased retained deficit as of January 1, 2018 and decreased AOCI by the same amount. The Company elected to report changes in the fair value of equity investments in realized investment gains (losses), net. At December 31, 2017, equity investments were classified as available-for-sale on the Company's balance sheet. However, upon adoption, the updated guidance eliminated the available-for-sale balance sheet classification for equity investments.
Accounting Standards Not Yet Adopted
The FASB’s new lease accounting standard, ASU 2016-02, Leases (Topic 842), was issued on February 25, 2016.. The ASU will requirerequires organizations that lease assets, referred to as “lessees”,"lessees," to recognize on the consolidated statement of financial position the rights and obligations created by those leases on the balance sheet.leases. The ASU also will require additionalrequires disclosures soto 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 amounts recorded in the consolidated 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 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 effectbecame effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.
The Company has several lease agreements, such as district office locations related to our Home Service segment, which are currently considered operating leases, and therefore, not recognized on the Company’s balance sheet.Insurance segment. The Company intends to adoptadopted this standard effective January 1, 2019 and expects the new guidance will requirerecognizes these lease agreements to be recognized on the balance sheetconsolidated statements of financial position as a right-of-use asset and a corresponding lease liability. See Note 9. Leases for further discussion.
In March 2017, the FASB issued ASU No. 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20). 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 is nearing completionhas a large portfolio of its effortcallable debt securities purchased at a premium. As such, the Company had already been amortizing the premium to compile a complete inventorythe earliest call date (yield to worst), thus adoption of arrangements containing a lease and accumulating the lease data necessary to apply the amended guidance. The Company is evaluating the impact this guidance willas of January 1, 2019 did not have a material impact on our consolidated financial statements. For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.
In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share-based compensation. This ASU is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted. We adopted the provisions of this ASU as of January 1, 2019. This guidance did not have a material impact on our consolidated financial statements.
ACCOUNTING STANDARDS NOT YET ADOPTED
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), with the main objective to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The ASU requires a financial asset (or a group of
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)
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 basis of the financial asset(s) to present 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 losses 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 than as a write-down. This approach is an improvement to current U.S. GAAP because an entity will be able to record reversals 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, the amendments in this ASU arewill be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
September 30, 2019 Form | 10-Q 13
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CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
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The Company is evaluatinghas evaluated the impact this guidance will have on our consolidated financial statements but it is not expected to have a materialand expects the impact on the Company's consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20). 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.
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share-based compensation. ASU 2018-07 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted but no earlier than an entity’s adoption date of Topic 606. We will adopt the provisions of this ASU in the first quarter of 2019. The Company is evaluating the impact this guidance will have on our consolidated financial statements.
In September 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU requires an entity in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. Capitalized implementation costs should be presented in the same line item on the balance sheet as amounts prepaid for the hosted service, if any (generally as an “other asset”). The capitalized costs will be amortized over the term of the hosting arrangement, with the amortization expense being presented in the same income statement line item as the fees paid for the hosted service. ASU 2018-15 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. We are evaluating the impact of this guidance on our limited cloud computing arrangements and our consolidated financial statements.
In July 2018, the FASB issued ASU No. 2018-11, Leases - Targeted Improvements to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for the Company). The Company expects to elect both transition options. ASU 2018-11 is not expected to have a material impact on the Company’s consolidated financial statements.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)
immaterial.
In August 2018, the FASB issued ASU No. 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. This ASU amends four key areas of the accounting and impacts disclosures for long-duration insurance and investment contracts:
Requires updated assumptions for liability measurement. Assumptions used to measure the liability for traditional insurance contracts, which are typically determined at contract inception, will now be reviewed at least annually, and, if there is a change, updated, with the effect recorded in net income;
Standardizes the liability discount rate. The liability discount rate will be a market-observable discount rate (upper-medium grade fixed-income instrument yield), with the effect of rate changes recorded in other comprehensive income;
Provides greater consistency in measurement of market risk benefits. The two previous measurement models have been reduced to one measurement model (fair value), resulting in greater uniformity across similar market-based benefits and better alignment with the fair value measurement of derivatives used to hedge capital market risk;
Simplifies amortization of deferred acquisition costs. Previous earnings-based amortization methods have been replaced with a more level amortization basis; and
Requires enhanced disclosures. The new disclosures include rollforwards and information about significant assumptions and the effects of changes in those assumptions.
For calendar-year public companies, the changes will be effective in 2021.on January 1, 2022. The Company is evaluating the impact this guidance will have on our consolidated financial statements and will begin planning for adoption in 2019.statements. This new guidance is expected to have a material impact on our consolidated financial statements as we consider this to be one of the most substantial changes in the insurance industry guidance in the last 40 years.statements.
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - ChangesFramework-Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. This ASU No. 2018-13 iswill be effective for interim and annual reporting periods beginning after December 15, 2019; however, early adoption is permitted. Entities are also allowed to elect early adoption of the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As this ASU No. 2018-13 only revises disclosure requirements, it willis not expected to have a material impact on the Company’s consolidated financial statements.
In September 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU requires an entity in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. Capitalized implementation costs should be presented in the same line item on the balance sheet as amounts prepaid for the hosted service, if any (generally as an "other asset"). The capitalized costs will be amortized over the term of the hosting arrangement, with the amortization expense being presented in the same income statement line item as the fees paid for the hosted service. This ASU will be effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. We are evaluating the impact of this guidance on our limited cloud computing arrangements and our consolidated financial statements.
No other new accounting pronouncement issued or effective during the fiscal year had, or is expected to have, a material impact on our consolidated financial statements.
(3) Segment InformationSEGMENT INFORMATION
The Company has two reportable segments: Life Insurance and Home Service Insurance. The Life Insurance and
September 30, 2019 Form | 10-Q 14
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CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
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Home Service Insurance portions of the Company constitute separate businesses. CICA, CICA Ltd. and CNLIC constitute the Life Insurance segment, and SPLIC, SPFIC and MGLIC constitute the Home Service Insurance segment. In addition to the Life Insurance and Home Service Insurance business, the Company also operates other non-insurance ("Other Non-Insurance Enterprises") portions of the Company, which primarily include the Company's IT and Corporate-support functions, whichand are included in the tables presented below to properly reconcile the segment information with the consolidated financial statements of the Company.
The accounting policies of the reportable segments and other non-insurance enterprisesOther Non-Insurance Enterprises are presented in accordance with U.S. GAAP and are the same as those used in the preparation of the consolidated financial statements. The Company evaluates profit and loss performance based on U.S. GAAP income before federal income taxes for its two reportable segments.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)
The Company's Other Non-Insurance Enterprises are the only reportable difference between segments and consolidated operations.
| | | Three Months Ended | Life Insurance | | Home Service Insurance | | Other Non-Insurance Enterprises | | Consolidated |
| September 30, 2018 | |
| Life Insurance | | Home Service Insurance | | Other Non-Insurance Enterprises | | Consolidated | |
Three Months Ended September 30, 2019 | | Life Insurance | | Home Service Insurance | | Other Non-Insurance Enterprises | | Consolidated |
(In thousands) | | |
| (In thousands) | |
Revenues: | | | | | | | | | | | | | | |
Premiums | $ | 35,784 |
| | 11,645 |
| | — |
| | 47,429 |
| $ | 34,385 |
| | 11,624 |
| | — |
| | 46,009 |
|
Net investment income | 10,062 |
| | 3,276 |
| | 249 |
| | 13,587 |
| 11,340 |
| | 3,309 |
| | 390 |
| | 15,039 |
|
Realized investment gains (losses), net | (475 | ) | | (32 | ) | | 9 |
| | (498 | ) | |
Other income | 643 |
| | — |
| | — |
| | 643 |
| |
Realized investment gains, net | | 61 |
| | 3 |
| | 8 |
| | 72 |
|
Other income (loss) | | 349 |
| | (2 | ) | | — |
| | 347 |
|
Total revenue | 46,014 |
| | 14,889 |
| | 258 |
| | 61,161 |
| 46,135 |
| | 14,934 |
| | 398 |
| | 61,467 |
|
Benefits and expenses: | | | |
| | |
| | |
| | | |
| | |
| | |
|
Insurance benefits paid or provided: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Claims and surrenders | 19,212 |
| | 5,864 |
| | — |
| | 25,076 |
| 22,533 |
| | 6,218 |
| | — |
| | 28,751 |
|
Increase in future policy benefit reserves | 544 |
| | 1,109 |
| | — |
| | 1,653 |
| 7,667 |
| | (1,258 | ) | | — |
| | 6,409 |
|
Policyholders' dividends | 1,581 |
| | 14 |
| | — |
| | 1,595 |
| 1,551 |
| | 9 |
| | — |
| | 1,560 |
|
Total insurance benefits paid or provided | 21,337 |
| | 6,987 |
| | — |
| | 28,324 |
| 31,751 |
| | 4,969 |
| | — |
| | 36,720 |
|
Commissions | 4,712 |
| | 3,944 |
| | — |
| | 8,656 |
| 5,386 |
| | 3,493 |
| | — |
| | 8,879 |
|
Other general expenses | 6,583 |
| | 4,502 |
| | 1,317 |
| | 12,402 |
| 5,358 |
| | 4,669 |
| | 1,503 |
| | 11,530 |
|
Capitalization of deferred policy acquisition costs | (3,873 | ) | | (1,688 | ) | | — |
| | (5,561 | ) | (4,743 | ) | | (1,241 | ) | | — |
| | (5,984 | ) |
Amortization of deferred policy acquisition costs | 10,132 |
| | 1,280 |
| | — |
| | 11,412 |
| 5,960 |
| | 1,875 |
| | — |
| | 7,835 |
|
Amortization of cost of customer relationships acquired | 150 |
| | 216 |
| | — |
| | 366 |
| 113 |
| | 242 |
| | — |
| | 355 |
|
Total benefits and expenses | 39,041 |
| | 15,241 |
| | 1,317 |
| | 55,599 |
| 43,825 |
| | 14,007 |
| | 1,503 |
| | 59,335 |
|
Income (loss) before income tax expense | $ | 6,973 |
| | (352 | ) | | (1,059 | ) | | 5,562 |
| $ | 2,310 |
| | 927 |
| | (1,105 | ) | | 2,132 |
|
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)
|
| | | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2018 |
| Life Insurance | | Home Service Insurance | | Other Non-Insurance Enterprises | | Consolidated |
| (In thousands) |
Revenues: | | | | | | | |
Premiums | $ | 102,537 |
| | 35,051 |
| | — |
| | 137,588 |
|
Net investment income | 30,331 |
| | 9,894 |
| | 944 |
| | 41,169 |
|
Realized investment losses, net | (684 | ) | | (535 | ) | | (32 | ) | | (1,251 | ) |
Other income (loss) | 931 |
| | (1 | ) | | — |
| | 930 |
|
Total revenue | 133,115 |
| | 44,409 |
| | 912 |
| | 178,436 |
|
Benefits and expenses: | | | |
| | |
| | |
|
Insurance benefits paid or provided: | |
| | |
| | |
| | |
|
Claims and surrenders | 49,522 |
| | 17,322 |
| | — |
| | 66,844 |
|
Increase in future policy benefit reserves | 29,509 |
| | 3,307 |
| | — |
| | 32,816 |
|
Policyholders' dividends | 4,483 |
| | 33 |
| | — |
| | 4,516 |
|
Total insurance benefits paid or provided | 83,514 |
| | 20,662 |
| | — |
| | 104,176 |
|
Commissions | 14,717 |
| | 11,567 |
| | — |
| | 26,284 |
|
Other general expenses | 12,607 |
| | 15,438 |
| | 5,330 |
| | 33,375 |
|
Capitalization of deferred policy acquisition costs | (12,663 | ) | | (4,501 | ) | | — |
| | (17,164 | ) |
Amortization of deferred policy acquisition costs | 22,912 |
| | 3,306 |
| | — |
| | 26,218 |
|
Amortization of cost of customer relationships acquired | 434 |
| | 1,083 |
| | — |
| | 1,517 |
|
Total benefits and expenses | 121,521 |
| | 47,555 |
| | 5,330 |
| | 174,406 |
|
Income (loss) before income tax expense | $ | 11,594 |
| | (3,146 | ) | | (4,418 | ) | | 4,030 |
|
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued |
| | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | |
September 30, 2018
(Unaudited)
| | | Three Months Ended | Life Insurance | | Home Service Insurance | | Other Non-Insurance Enterprises | | Consolidated |
| September 30, 2017 | |
| Life Insurance | | Home Service Insurance | | Other Non-Insurance Enterprises | | Consolidated | |
Nine Months Ended September 30, 2019 | | Life Insurance | | Home Service Insurance | | Other Non-Insurance Enterprises | | Consolidated |
(In thousands) | | |
| (In thousands) | |
Revenues: | | | | | | | | | | | | | | |
Premiums | $ | 38,472 |
| | 11,775 |
| | — |
| | 50,247 |
| $ | 97,439 |
| | 34,838 |
| | — |
| | 132,277 |
|
Net investment income | 10,051 |
| | 3,355 |
| | 422 |
| | 13,828 |
| 33,121 |
| | 9,720 |
| | 1,309 |
| | 44,150 |
|
Realized investment losses, net | (355 | ) | | (49 | ) | | — |
| | (404 | ) | |
Realized investment gains (losses), net | | 5,586 |
| | 639 |
| | (3,061 | ) | | 3,164 |
|
Other income | 561 |
| | — |
| | 99 |
| | 660 |
| 1,146 |
| | — |
| | 2 |
| | 1,148 |
|
Total revenue | 48,729 |
| | 15,081 |
| | 521 |
| | 64,331 |
| 137,292 |
| | 45,197 |
| | (1,750 | ) | | 180,739 |
|
Benefits and expenses: | |
| | |
| | |
| | |
| | | |
| | |
| | |
|
Insurance benefits paid or provided: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Claims and surrenders | 15,700 |
| | 5,754 |
| | — |
| | 21,454 |
| 61,011 |
| | 17,797 |
| | — |
| | 78,808 |
|
Increase in future policy benefit reserves | 18,045 |
| | 1,552 |
| | — |
| | 19,597 |
| 27,499 |
| | 681 |
| | — |
| | 28,180 |
|
Policyholders' dividends | 1,602 |
| | 11 |
| | — |
| | 1,613 |
| 4,136 |
| | 29 |
| | — |
| | 4,165 |
|
Total insurance benefits paid or provided | 35,347 |
| | 7,317 |
| | — |
| | 42,664 |
| 92,646 |
| | 18,507 |
| | — |
| | 111,153 |
|
Commissions | 6,892 |
| | 3,909 |
| | — |
| | 10,801 |
| 14,435 |
| | 10,712 |
| | — |
| | 25,147 |
|
Other general expenses | 2,200 |
| | 4,025 |
| | 1,029 |
| | 7,254 |
| 18,021 |
| | 15,071 |
| | 4,519 |
| | 37,611 |
|
Capitalization of deferred policy acquisition costs | (6,242 | ) | | (1,514 | ) | | — |
| | (7,756 | ) | (12,465 | ) | | (3,759 | ) | | — |
| | (16,224 | ) |
Amortization of deferred policy acquisition costs | 6,431 |
| | 1,192 |
| | — |
| | 7,623 |
| 17,454 |
| | 3,589 |
| | — |
| | 21,043 |
|
Amortization of cost of customer relationships acquired | 118 |
| | 517 |
| | — |
| | 635 |
| 373 |
| | 819 |
| | — |
| | 1,192 |
|
Total benefits and expenses | 44,746 |
| | 15,446 |
| | 1,029 |
| | 61,221 |
| 130,464 |
| | 44,939 |
| | 4,519 |
| | 179,922 |
|
Income (loss) before income tax expense | $ | 3,983 |
| | (365 | ) | | (508 | ) | | 3,110 |
| |
Income (loss) before federal income tax expense | | $ | 6,828 |
| | 258 |
| | (6,269 | ) | | 817 |
|
September 30, 2019 Form | 10-Q 16
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued |
| | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | |
September 30, 2018
(Unaudited)
| | | Nine Months Ended | Life Insurance | | Home Service Insurance | | Other Non-Insurance Enterprises | | Consolidated |
| September 30, 2017 | |
| Life Insurance | | Home Service Insurance | | Other Non-Insurance Enterprises | | Consolidated | |
Three Months Ended September 30, 2018 | | Life Insurance | | Home Service Insurance | | Other Non-Insurance Enterprises | | Consolidated |
(In thousands) | | |
| (In thousands) | |
Revenues: | | | | | | | | | | | | | | |
Premiums | $ | 107,995 |
| | 35,372 |
| | — |
| | 143,367 |
| $ | 35,784 |
| | 11,645 |
| | — |
| | 47,429 |
|
Net investment income | 28,678 |
| | 9,864 |
| | 1,098 |
| | 39,640 |
| 10,062 |
| | 3,276 |
| | 249 |
| | 13,587 |
|
Realized investment gains (losses), net | (419 | ) | | 1,161 |
| | — |
| | 742 |
| (475 | ) | | (32 | ) | | 9 |
| | (498 | ) |
Other income | 856 |
| | 2 |
| | 157 |
| | 1,015 |
| 643 |
| | — |
| | — |
| | 643 |
|
Total revenue | 137,110 |
| | 46,399 |
| | 1,255 |
| | 184,764 |
| 46,014 |
| | 14,889 |
| | 258 |
| | 61,161 |
|
Benefits and expenses: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Insurance benefits paid or provided: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Claims and surrenders | 45,218 |
| | 16,912 |
| | — |
| | 62,130 |
| 19,212 |
| | 5,864 |
| | — |
| | 25,076 |
|
Increase in future policy benefit reserves | 47,818 |
| | 4,135 |
| | — |
| | 51,953 |
| 544 |
| | 1,109 |
| | — |
| | 1,653 |
|
Policyholders' dividends | 4,387 |
| | 31 |
| | — |
| | 4,418 |
| 1,581 |
| | 14 |
| | — |
| | 1,595 |
|
Total insurance benefits paid or provided | 97,423 |
| | 21,078 |
| | — |
| | 118,501 |
| 21,337 |
| | 6,987 |
| | — |
| | 28,324 |
|
Commissions | 18,765 |
| | 11,855 |
| | — |
| | 30,620 |
| 4,712 |
| | 3,944 |
| | — |
| | 8,656 |
|
Other general expenses | 10,399 |
| | 13,182 |
| | 3,184 |
| | 26,765 |
| 6,583 |
| | 4,502 |
| | 1,317 |
| | 12,402 |
|
Capitalization of deferred policy acquisition costs | (16,843 | ) | | (4,697 | ) | | — |
| | (21,540 | ) | (3,873 | ) | | (1,688 | ) | | — |
| | (5,561 | ) |
Amortization of deferred policy acquisition costs | 19,350 |
| | 3,290 |
| | — |
| | 22,640 |
| 10,132 |
| | 1,280 |
| | — |
| | 11,412 |
|
Amortization of cost of customer relationships acquired | 434 |
| | 1,195 |
| | — |
| | 1,629 |
| 150 |
| | 216 |
| | — |
| | 366 |
|
Total benefits and expenses | 129,528 |
| | 45,903 |
| | 3,184 |
| | 178,615 |
| 39,041 |
| | 15,241 |
| | 1,317 |
| | 55,599 |
|
Income (loss) before income tax expense | $ | 7,582 |
| | 496 |
| | (1,929 | ) | | 6,149 |
| $ | 6,973 |
| | (352 | ) | | (1,059 | ) | | 5,562 |
|
September 30, 2019 Form | 10-Q 17
|
| | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | |
|
| | | | | | | | | | | | |
| Life Insurance | | Home Service Insurance | | Other Non-Insurance Enterprises | | Consolidated |
Nine Months Ended September 30, 2018 | | | |
(In thousands) | | | |
| | | | | | | |
Revenues: | | | | | | | |
Premiums | $ | 102,537 |
| | 35,051 |
| | — |
| | 137,588 |
|
Net investment income | 30,331 |
| | 9,894 |
| | 944 |
| | 41,169 |
|
Realized investment losses, net | (684 | ) | | (535 | ) | | (32 | ) | | (1,251 | ) |
Other income (loss) | 931 |
| | (1 | ) | | — |
| | 930 |
|
Total revenue | 133,115 |
| | 44,409 |
| | 912 |
| | 178,436 |
|
Benefits and expenses: | |
| | |
| | |
| | |
|
Insurance benefits paid or provided: | |
| | |
| | |
| | |
|
Claims and surrenders | 49,522 |
| | 17,322 |
| | — |
| | 66,844 |
|
Increase in future policy benefit reserves | 29,509 |
| | 3,307 |
| | — |
| | 32,816 |
|
Policyholders' dividends | 4,483 |
| | 33 |
| | — |
| | 4,516 |
|
Total insurance benefits paid or provided | 83,514 |
| | 20,662 |
| | — |
| | 104,176 |
|
Commissions | 14,717 |
| | 11,567 |
| | — |
| | 26,284 |
|
Other general expenses | 12,607 |
| | 15,438 |
| | 5,330 |
| | 33,375 |
|
Capitalization of deferred policy acquisition costs | (12,663 | ) | | (4,501 | ) | | — |
| | (17,164 | ) |
Amortization of deferred policy acquisition costs | 22,912 |
| | 3,306 |
| | — |
| | 26,218 |
|
Amortization of cost of customer relationships acquired | 434 |
| | 1,083 |
| | — |
| | 1,517 |
|
Total benefits and expenses | 121,521 |
| | 47,555 |
| | 5,330 |
| | 174,406 |
|
Income (loss) before federal income tax expense | $ | 11,594 |
| | (3,146 | ) | | (4,418 | ) | | 4,030 |
|
September 30, 2019 Form | 10-Q 18
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued |
| | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | |
September 30, 2018
(Unaudited)
(4) Earnings Per ShareEARNINGS PER SHARE
The following tables set forth the computation of basic and diluted earnings per share.
| | | Three Months Ended | |
| September 30, 2018 | | September 30, 2017 | |
Three Months Ended September 30, | | 2019 | | 2018 (As Restated*) |
(In thousands, except per share amounts) | | |
| (In thousands, except per share amounts) | | | |
Basic and diluted earnings per share: | | | | | | |
Numerator: | | | | | | |
Net income (loss) | $ | (14,754 | ) | | 3,449 |
| $ | 2,046 |
| | (7,109 | ) |
Net income (loss) allocated to Class A common stock | $ | (14,605 | ) | | 3,415 |
| $ | 2,026 |
| | (7,036 | ) |
Net income (loss) allocated to Class B common stock | (149 | ) | | 34 |
| 20 |
| | (73 | ) |
Net income (loss) | $ | (14,754 | ) | | 3,449 |
| $ | 2,046 |
| | (7,109 | ) |
| | | | |
Denominator: | | | | | | |
Weighted average shares of Class A outstanding - basic | 49,080 |
| | 49,080 |
| 49,229 |
| | 49,080 |
|
Weighted average shares of Class A outstanding - diluted | 49,127 |
| | 49,080 |
| 49,327 |
| | 49,127 |
|
Weighted average shares of Class B outstanding - basic and diluted | 1,002 |
| | 1,002 |
| 1,002 |
| | 1,002 |
|
Basic and diluted earnings (loss) per share of Class A common stock | $ | (0.30 | ) | | 0.07 |
| $ | 0.04 |
| | (0.14 | ) |
Basic and diluted earnings (loss) per share of Class B common stock | (0.14 | ) | | 0.03 |
| 0.02 |
| | (0.07 | ) |
* See Note 1 in the Notes to Consolidated Financial Statements
| | | Nine Months Ended | |
| September 30, 2018 | | September 30, 2017 | |
Nine Months Ended September 30, | | 2019 | | 2018 (As Restated*) |
(In thousands, except per share amounts) | | |
| (In thousands, except per share amounts) | | | |
Basic and diluted earnings per share: | | | | | | |
Numerator: | | | | | | |
Net income (loss) | $ | (17,275 | ) | | 6,077 |
| |
Net income (loss) allocated to Class A common stock | $ | (17,101 | ) | | 6,016 |
| |
Net income (loss) allocated to Class B common stock | (174 | ) | | 61 |
| |
Net income (loss) | $ | (17,275 | ) | | 6,077 |
| |
Net loss | | $ | (6,321 | ) | | (9,630 | ) |
Net loss allocated to Class A common stock | | $ | (6,257 | ) | | (9,533 | ) |
Net loss allocated to Class B common stock | | (64 | ) | | (97 | ) |
Net loss | | $ | (6,321 | ) | | (9,630 | ) |
| | | | |
Denominator: | | | | | | |
Weighted average shares of Class A outstanding - basic | 49,080 |
| | 49,080 |
| 49,229 |
| | 49,080 |
|
Weighted average shares of Class A outstanding - diluted | 49,127 |
| | 49,080 |
| 49,327 |
| | 49,127 |
|
Weighted average shares of Class B outstanding - basic and diluted | 1,002 |
| | 1,002 |
| 1,002 |
| | 1,002 |
|
Basic and diluted earnings (loss) per share of Class A common stock | $ | (0.35 | ) | | 0.12 |
| |
Basic and diluted earnings (loss) per share of Class B common stock | (0.17 | ) | | 0.06 |
| |
Basic and diluted loss per share of Class A common stock | | $ | (0.13 | ) | | (0.19 | ) |
Basic and diluted loss per share of Class B common stock | | (0.06 | ) | | (0.10 | ) |
* See Note 1 in the Notes to Consolidated Financial Statements
18
September 30, 2019 Form | 10-Q 19
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued |
| | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | |
September 30, 2018
(Unaudited)
(5) InvestmentsINVESTMENTS
The Company invests primarily in fixed maturity securities, which totaled 87.6%90.1% of total cash, cash equivalents and investments at September 30, 2018.2019. The Company's cash, cash equivalents and investments are listed below.
|
| | | | | | | | | | | | | |
| September 30, 2018 | | December 31, 2017 |
| Carrying Value | | % of Total Carrying Value | | Carrying Value | | % of Total Carrying Value |
| (In thousands) | | | | (In thousands) | | |
Fixed maturity securities | $ | 1,200,154 |
| | 87.6 |
| | $ | 1,208,570 |
| | 89.3 |
|
Equity securities | 15,529 |
| | 1.1 |
| | 16,164 |
| | 1.2 |
|
Mortgage loans | 188 |
| | — |
| | 195 |
| | — |
|
Policy loans | 79,012 |
| | 5.8 |
| | 73,735 |
| | 5.5 |
|
Real estate and other long-term investments | 7,248 |
| | 0.5 |
| | 7,452 |
| | 0.6 |
|
Cash and cash equivalents | 68,753 |
| | 5.0 |
| | 46,064 |
| | 3.4 |
|
Total cash, cash equivalents and investments | $ | 1,370,884 |
| | 100.0 |
| | $ | 1,352,180 |
| | 100.0 |
|
Cash and cash equivalents increased during the current quarter ended September 30, 2018 as we held cash in anticipation of the novation transaction accounting settlement and those funds had not yet been reinvested into fixed maturities as of the end of the current reporting period. |
| | | | | | | | | | | | | |
Carrying Value (In thousands, except for %) | September 30, 2019 | | December 31, 2018 |
Amount | | % | | Amount | | % |
| | | | | | | |
Fixed maturity securities | $ | 1,369,648 |
| | 90.1 | % | | $ | 1,231,039 |
| | 88.7 | % |
Equity securities | 15,845 |
| | 1.0 | % | | 15,068 |
| | 1.1 | % |
Mortgage loans | 180 |
| | — | % | | 186 |
| | — | % |
Policy loans | 81,964 |
| | 5.4 | % | | 80,825 |
| | 5.8 | % |
Real estate and other long-term investments | 2,593 |
| | 0.2 | % | | 7,223 |
| | 0.5 | % |
Short-term investments | 2,453 |
| | 0.2 | % | | 7,865 |
| | 0.6 | % |
Cash and cash equivalents | 47,147 |
| | 3.1 | % | | 45,492 |
| | 3.3 | % |
Total cash, cash equivalents and investments | $ | 1,519,830 |
| | 100.0 | % | | $ | 1,387,698 |
| | 100.0 | % |
The following tables represent the cost or amortized cost, gross unrealized gains and losses and fair value forof fixed maturities as of the periodsdates indicated.
| | | September 30, 2018 | Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | |
September 30, 2019 | | |
(In thousands) | | Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| (In thousands) | |
Fixed maturities: | | | | | | | | |
Available-for-sale: | | | | | | | | | | | | | | |
U.S. Treasury securities | $ | 9,887 |
| | 1,250 |
| | 6 |
| | 11,131 |
| $ | 9,729 |
| | 1,775 |
| | — |
| | 11,504 |
|
U.S. Government-sponsored enterprises | 3,546 |
| | 662 |
| | — |
| | 4,208 |
| 3,522 |
| | 1,124 |
| | — |
| | 4,646 |
|
States and political subdivisions | 740,333 |
| | 4,973 |
| | 4,376 |
| | 740,930 |
| 567,551 |
| | 29,392 |
| | 125 |
| | 596,818 |
|
Foreign governments | 118 |
| | — |
| | 1 |
| | 117 |
| |
Corporate | 404,183 |
| | 9,655 |
| | 4,706 |
| | 409,132 |
| 560,701 |
| | 45,148 |
| | 1,741 |
| | 604,108 |
|
Commercial mortgage-backed | 3,662 |
| | 13 |
| | 49 |
| | 3,626 |
| 1,107 |
| | — |
| | — |
| | 1,107 |
|
Residential mortgage-backed | 31,482 |
| | 105 |
| | 577 |
| | 31,010 |
| 118,101 |
| | 15,787 |
| | 23 |
| | 133,865 |
|
Asset-backed | | 17,480 |
| | 11 |
| | 11 |
| | 17,480 |
|
Foreign governments | | 102 |
| | 18 |
| | — |
| | 120 |
|
Total fixed maturities | $ | 1,193,211 |
| | 16,658 |
| | 9,715 |
| | 1,200,154 |
| $ | 1,278,293 |
| | 93,255 |
| | 1,900 |
| | 1,369,648 |
|
We reclassified all of our fixed maturity holdings that were previously classified as held-to-maturity to available-for-sale based upon our intent and investment strategy as of September 30, 2018. The net carrying value of the fixed maturities held-to-maturity reclassified as available-for-sale amounted to $209.7 million and resulted in a net unrealized gain of $0.5 million being recorded in other comprehensive income before tax.
19
September 30, 2019 Form | 10-Q 20
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued |
| | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | |
September 30, 2018
(Unaudited)
| | | December 31, 2017 | Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | |
December 31, 2018 | | |
(In thousands) | | 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 |
| $ | 9,864 |
| | 1,410 |
| | — |
| | 11,274 |
|
U.S. Government-sponsored enterprises | 3,570 |
| | 926 |
| | — |
| | 4,496 |
| 3,540 |
| | 740 |
| | — |
| | 4,280 |
|
States and political subdivisions | 550,536 |
| | 18,507 |
| | 1,540 |
| | 567,503 |
| 713,991 |
| | 7,614 |
| | 1,490 |
| | 720,115 |
|
Corporate | | 384,817 |
| | 6,725 |
| | 9,746 |
| | 381,796 |
|
Commercial mortgage-backed | | 39,694 |
| | 386 |
| | 66 |
| | 40,014 |
|
Residential mortgage-backed | | 66,960 |
| | 1,726 |
| | 2 |
| | 68,684 |
|
Asset-backed | | 4,764 |
|
| 1 |
|
| 8 |
|
| 4,757 |
|
Foreign governments | 103 |
| | 18 |
| | — |
| | 121 |
| 117 |
| | 2 |
| | — |
| | 119 |
|
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 |
| |
Total fixed maturities | | $ | 1,223,747 |
| | 18,604 |
| | 11,312 |
| | 1,231,039 |
|
The majorityMost of the Company's equity securities are diversified stock and bond mutual funds.
| | | September 30, 2018 | | December 31, 2017 | |
| Fair Value | | Fair Value | |
Fair Value (In thousands) | | September 30, 2019 | | December 31, 2018 |
| (In thousands) | | | |
Equity securities: | | | | | | |
Stock mutual funds | $ | 3,196 |
| | 3,217 |
| $ | 3,166 |
| | 2,906 |
|
Bond mutual funds | 12,096 |
| | 12,367 |
| 12,242 |
| | 11,774 |
|
Common stock | 96 |
| | 24 |
| 127 |
| | 94 |
|
Preferred stock | 141 |
| | 556 |
| |
Non-redeemable preferred stock | | 310 |
| | 294 |
|
Total equity securities | $ | 15,529 |
| | 16,164 |
| $ | 15,845 |
| | 15,068 |
|
The Company recognized net realized gain of $156,000 and net realized losses of $232,000 on equity securities held for the three and nine months ended September 30, 2018, respectively.VALUATION OF INVESTMENTS
Valuation of Investments in Fixed Maturity and Equity Securities
Held-to-maturityAvailable-for-sale securities are reported in the consolidated financial statements at amortized cost and available-for-sale securities are reported at fair value. Equity securities are measured at fair value with the change in fair value recorded through net income pursuantincome. The Company recognized net realized gains of $18 thousand and $0.8 million on equity securities held for the three and nine months ended September 30, 2019 and gains of $0.2 million and losses of $0.2 million for the same periods ended September 30, 2018, respectively. An impairment loss of $3.1 million was recorded during the second quarter of 2019 related to our Citizens Academy training facility property located near Austin, Texas. It was determined during the second quarter that the property met the held-for-sale criteria. As a result, this investment was reclassified from real estate held for investment to real estate held-for-sale. This resulted in an impairment loss of $3.1 million as the carrying amount of the property was written down to the adoption of ASU 2016-01 as describednet realizable value. This investment is considered a Level 3 asset in Note 2.the fair value hierarchy.
The Company monitors all debt 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 other-than-temporary impairments ("OTTI") 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 impairmentOTTI by reviewing relevant evidence related to the specific security issuer as
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)
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.
September 30, 2019 Form | 10-Q 21
|
| | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | |
When an other-than-temporary impairmentOTTI has occurred, the amount of the other-than-temporary impairmentOTTI 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 it is more likely that the Company will be required to sell the security before recovery of its amortized cost basis, the other-than-temporary impairmentOTTI is recognized in earnings equal to the entire difference between the investment's amortized cost and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security before recovery of its amortized cost basis, the other-than-temporary impairmentOTTI is 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 other-than-temporary impairmentOTTI related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairmentOTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the other-than-temporary impairmentOTTI recognized in earnings becomes the new amortized cost basis of the investment. The new amortized cost basis is not adjusted for subsequent recoveries in fair value.
The 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; (d) the length of time to which the fair value has been less than the amortized cost of the security; and (e) 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 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 and overall judgment related to estimates and industry factors.
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 judgment 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 debt security cash flows may change based upon new information regarding the performance of the issuer.
ThereNo fixed maturity investment impairments were other-than-temporary impairments recordedrecognized for the three and nine months ended September 30, 2019. OTTI of $0.6 million and $0.8 million was recognized on several bond issuersfixed maturity security issuer for the three and nine months ended September 30, 2018, of $551,000 and $776,000, respectively. No impairments were recognized on equity securities for the three and nine months ended September 30, 2018.
No other-than-temporary impairments were recorded for the three months ended September 30, 2017 but one equity security totaling $17,000 was impaired during the nine months ended September 30, 2017.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)
The following tables present the fair values and gross unrealized losses of fixed maturity securities that have remained in a continuous unrealized loss position for the periods indicated.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2018 |
| 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: | | | | | | | | | | | | | | | | | |
U.S. Treasury securities | $ | 757 |
| | 6 |
| | 2 |
| | — |
| | — |
| | — |
| | 757 |
| | 6 |
| | 2 |
|
States and political subdivisions | 494,116 |
| | 3,659 |
| | 479 |
| | 31,452 |
| | 717 |
| | 42 |
| | 525,568 |
| | 4,376 |
| | 521 |
|
Corporate | 206,965 |
| | 4,193 |
| | 160 |
| | 6,366 |
| | 513 |
| | 6 |
| | 213,331 |
| | 4,706 |
| | 166 |
|
Commercial mortgage-backed | 2,725 |
| | 49 |
| | 4 |
| | — |
| | — |
| | — |
| | 2,725 |
| | 49 |
| | 4 |
|
Residential mortgage-backed | 27,048 |
| | 574 |
| | 21 |
| | 101 |
| | 3 |
| | 3 |
| | 27,149 |
| | 577 |
| | 24 |
|
Foreign | 117 |
| | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | 117 |
| | 1 |
| | 1 |
|
Total available-for-sale securities | $ | 731,728 |
| | 8,482 |
| | 667 |
| | 37,919 |
| | 1,233 |
| | 51 |
| | 769,647 |
| | 9,715 |
| | 718 |
|
As of September 30, 2018, the Company had 51 available-for-sale fixed maturity securities that were in an unrealized loss position for greater than 12 months.
| | | 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 | |
September 30, 2019 | | 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 |
| (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 |
| $ | 11,307 |
| 54 |
| 14 |
| $ | 3,435 |
| 71 |
| 7 |
| $ | 14,742 |
| 125 |
| 21 |
|
Corporate | 61,071 |
| | 732 |
| | 39 |
| | 7,651 |
| | 820 |
| | 10 |
| | 68,722 |
| | 1,552 |
| | 49 |
| 53,407 |
| 1,331 |
| 51 |
| 6,310 |
| 410 |
| 4 |
| 59,717 |
| 1,741 |
| 55 |
|
Commercial mortgage-backed | | 882 |
| — |
| 1 |
| — |
| — |
| — |
| 882 |
| — |
| 1 |
|
Residential mortgage-backed | 132 |
| | 3 |
| | 4 |
| | 157 |
| | 2 |
| | 4 |
| | 289 |
| | 5 |
| | 8 |
| 1,701 |
| 21 |
| 9 |
| 93 |
| 2 |
| 3 |
| 1,794 |
| 23 |
| 12 |
|
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 |
| |
Asset-backed | | 7,736 |
| 11 |
| 10 |
| — |
| — |
| — |
| 7,736 |
| 11 |
| 10 |
|
Total fixed maturities | $ | 124,789 |
| | 1,092 |
| | 104 |
| | 64,670 |
| | 3,292 |
| | 76 |
| | 189,459 |
| | 4,384 |
| | 180 |
| $ | 75,033 |
| 1,417 |
| 85 |
| $ | 9,838 |
| 483 |
| 14 |
| $ | 84,871 |
| 1,900 |
| 99 |
|
Equity securities: | | | | | | | | | | | | | | | | | | |
Redeemable preferred stock | 95 |
| | 6 |
| | 1 |
| | — |
| | — |
| | — |
| | 95 |
| | 6 |
| | 1 |
| |
Total equity securities | $ | 95 |
| | 6 |
| | 1 |
| | — |
| | — |
| | — |
| | 95 |
| | 6 |
| | 1 |
| |
September 30, 2019 Form | 10-Q 22
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued |
| | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | |
September 30, 2018
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | |
December 31, 2018 | 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 maturities: | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | |
States and political subdivisions | $ | 227,132 |
| 883 |
| 233 |
| $ | 33,891 |
| 607 |
| 46 |
| $ | 261,023 |
| 1,490 |
| 279 |
|
Corporate | 230,030 |
| 8,770 |
| 191 |
| 9,936 |
| 976 |
| 8 |
| 239,966 |
| 9,746 |
| 199 |
|
Commercial mortgage-backed | 14,992 |
| 66 |
| 11 |
| — |
| — |
| — |
| 14,992 |
| 66 |
| 11 |
|
Residential mortgage-backed | 18 |
| — |
| 3 |
| 98 |
| 2 |
| 4 |
| 116 |
| 2 |
| 7 |
|
Asset-backed | 3,747 |
| 8 |
| 4 |
| — |
| — |
| — |
| 3,747 |
| 8 |
| 4 |
|
Total fixed maturities | $ | 475,919 |
| 9,727 |
| 442 |
| $ | 43,925 |
| 1,585 |
| 58 |
| $ | 519,844 |
| 11,312 |
| 500 |
|
We have reviewed thesethe securities in an unrealized loss position for the periods ended September 30, 20182019 and December 31, 20172018 and determined that no other-than-temporary impairmentOTTI exists that have not been recognized based on our evaluation of the credit worthiness of the issuers and the fact that we do not intend to sell the investments nor is it likely that we will be required to sell the securities before recovery of their amortized cost bases which may be maturity. We continue to monitor all securities on an on-going basis and future information may become available which could result in other-than-temporary impairments being recorded.
The amortized cost and fair value of fixed maturity securities at September 30, 20182019 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 final stated maturity.
| | | September 30, 2018 | |
| Amortized Cost | | Fair Value | |
| (In thousands) | |
September 30, 2019 | | Amortized Cost | | Fair Value |
(In thousands) | | |
Fixed maturity securities: | | | | | | |
Due in one year or less | $ | 43,088 |
| | 43,190 |
| $ | 111,775 |
| | 112,511 |
|
Due after one year through five years | 142,943 |
| | 146,280 |
| 118,968 |
| | 124,385 |
|
Due after five years through ten years | 230,995 |
| | 232,627 |
| 198,215 |
| | 212,237 |
|
Due after ten years | 776,185 |
| | 778,057 |
| 849,335 |
| | 920,515 |
|
Total fixed maturity securities | $ | 1,193,211 |
| | 1,200,154 |
| $ | 1,278,293 |
| | 1,369,648 |
|
The Company uses the specific identification method of the individual security to determine the cost basis used in the calculation of realized gains and losses related to security sales.
| | | Fixed Maturities, Available-for-Sale | | Equity Securities | Fixed Maturity Securities, Available-for-Sale |
| Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, | | September 30, | | September 30, | September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | |
| (In thousands) | |
(In thousands) | | 2019 | 2018 | | 2019 | 2018 |
| | | | | | | | | | | | | | | | | | | |
Proceeds | $ | 1,084 |
| | — |
| | 1,084 |
| | 508 |
| | — |
| | — |
| | — |
| | 1,940 |
| $ | 29,294 |
| 1,084 |
| | 39,708 |
| 1,084 |
|
Gross realized gains | $ | 54 |
| | — |
| | 53 |
| | 6 |
| | — |
| | — |
| | — |
| | — |
| $ | 125 |
| 54 |
| | 234 |
| 54 |
|
Gross realized losses | $ | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 30 |
| $ | 22 |
| — |
| | 387 |
| — |
|
September 30, 2019 Form | 10-Q 23
|
| | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | |
There was one salewere sales of twenty-three and forty-one available-for-sale fixed maturity securities for the three and nine months ended September 30, 2018. No available-for-sale fixed maturity securities were sold during the three months ended September 30, 2017.2019, respectively. One available-for-sale fixed maturity security was sold during the three and nine months ended September 30, 2017.2018. No equity securities or held-to-maturity securities were sold during the three and nine months ended September 30, 20182019 and 2017.2018.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)
(6) Fair Value MeasurementsFAIR 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 available-for-sale fixed maturity securities, which are carried at fair value. We also report our equity securities at fair value with changes in fair value reported through the consolidated statements of comprehensive income.
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 and actively traded mutual fund and stock investments.
Level 2 includes those financial instruments that are valued by independent pricing services or broker quotes. These 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 securities, U.S. Government-sponsored enterprise securities, municipal securities 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. There were no securities in this category at September 30, 2018.2019.
September 30, 2019 Form | 10-Q 24
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued |
| | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | |
September 30, 2018
(Unaudited)
The following tables set forth our assets that are measured at fair value on a recurring basis as of the dates indicated.
| | | September 30, 2018 | |
September 30, 2019 | | Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
(In thousands) | | |
Financial Assets | Level 1 | | Level 2 | | Level 3 | | Total Fair Value | | | | | | | |
| (In thousands) | |
Available-for-sale investments | | | | | | | | |
Fixed maturities: | | | | | | | | |
Fixed maturities available-for-sale | | | | | | | | |
U.S. Treasury and U.S. Government-sponsored enterprises | $ | 11,131 |
| | 4,208 |
| | — |
| | 15,339 |
| $ | 11,504 |
| | 4,646 |
| | — |
| | 16,150 |
|
States and political subdivisions | — |
| | 740,930 |
| | — |
| | 740,930 |
| — |
| | 596,818 |
| | — |
| | 596,818 |
|
Corporate | 211 |
| | 408,921 |
| | — |
| | 409,132 |
| 52 |
| | 604,056 |
| | — |
| | 604,108 |
|
Commercial mortgage-backed | — |
| | 3,626 |
| | — |
| | 3,626 |
| — |
| | 1,107 |
| | — |
| | 1,107 |
|
Residential mortgage-backed | — |
| | 31,010 |
| | — |
| | 31,010 |
| — |
| | 133,865 |
| | — |
| | 133,865 |
|
Asset-backed | | — |
| | 17,480 |
| | — |
| | 17,480 |
|
Foreign governments | — |
| | 117 |
| | — |
| | 117 |
| — |
| | 120 |
| | — |
| | 120 |
|
Total fixed maturities available-for-sale | 11,342 |
| | 1,188,812 |
| | — |
| | 1,200,154 |
| 11,556 |
| | 1,358,092 |
| | — |
| | 1,369,648 |
|
| | | | | | | | | | | | | | |
Equity securities | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Stock mutual funds | 3,196 |
| | — |
| | — |
| | 3,196 |
| 3,166 |
| | — |
| | — |
| | 3,166 |
|
Bond mutual funds | 12,096 |
| | — |
| | — |
| | 12,096 |
| 12,242 |
| | — |
| | — |
| | 12,242 |
|
Common stock | 96 |
| | — |
| | — |
| | 96 |
| 127 |
| | — |
| | — |
| | 127 |
|
Non-redeemable preferred stock | 141 |
| | — |
| | — |
| | 141 |
| 310 |
| | — |
| | — |
| | 310 |
|
Total equity securities | 15,529 |
| | — |
| | — |
| | 15,529 |
| 15,845 |
| | — |
| | — |
| | 15,845 |
|
Total financial assets | $ | 26,871 |
| | 1,188,812 |
| | — |
| | 1,215,683 |
| $ | 27,401 |
| | 1,358,092 |
| | — |
| | 1,385,493 |
|
September 30, 2019 Form | 10-Q 25
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued |
| | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | |
September 30, 2018
(Unaudited)
| | | December 31, 2017 | |
December 31, 2018 | | Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
(In thousands) | | |
Financial Assets | Level 1 | | Level 2 | | Level 3 | | Total Fair Value | | | | | | | |
| (In thousands) | |
Available-for-sale investments | | | | | | | | |
Fixed maturities: | | | | | | | | |
Fixed maturities available-for-sale | | | | | | | | |
U.S. Treasury and U.S. Government-sponsored enterprises | $ | 11,808 |
| | 4,496 |
| | — |
| | 16,304 |
| $ | 11,274 |
| | 4,280 |
| | — |
| | 15,554 |
|
States and political subdivisions | — |
| | 567,503 |
| | — |
| | 567,503 |
| — |
| | 720,115 |
| | — |
| | 720,115 |
|
Corporate | — |
| | 388,703 |
| | — |
| | 388,703 |
| 47 |
| | 381,749 |
| | — |
| | 381,796 |
|
Commercial mortgage-backed | | — |
| | 40,014 |
| | — |
| | 40,014 |
|
Residential mortgage-backed | — |
| | 1,978 |
| | — |
| | 1,978 |
| — |
| | 68,684 |
| | — |
| | 68,684 |
|
Asset-backed | | — |
| | 4,757 |
| | — |
| | 4,757 |
|
Foreign governments | — |
| | 121 |
| | — |
| | 121 |
| — |
| | 119 |
| | — |
| | 119 |
|
Total fixed maturities available-for-sale | 11,808 |
| | 962,801 |
| | — |
| | 974,609 |
| 11,321 |
| | 1,219,718 |
| | — |
| | 1,231,039 |
|
| | | | | | | | | | | | | | |
Equity securities | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Stock mutual funds | 3,217 |
| | — |
| | — |
| | 3,217 |
| 2,906 |
| | — |
| | — |
| | 2,906 |
|
Bond mutual funds | 12,367 |
| | — |
| | — |
| | 12,367 |
| 11,774 |
| | — |
| | — |
| | 11,774 |
|
Common stock | 24 |
| | — |
| | — |
| | 24 |
| 94 |
| | — |
| | — |
| | 94 |
|
Preferred stock | 556 |
| | — |
| | — |
| | 556 |
| |
Non-redeemable preferred stock | | 294 |
| | — |
| | — |
| | 294 |
|
Total equity securities | 16,164 |
| | — |
| | — |
| | 16,164 |
| 15,068 |
| | — |
| | — |
| | 15,068 |
|
Total financial assets | $ | 27,972 |
| | 962,801 |
| | — |
| | 990,773 |
| $ | 26,389 |
| | 1,219,718 |
| | — |
| | 1,246,107 |
|
Financial Instruments ValuationFINANCIAL INSTRUMENTS VALUATION
FINANCIAL INSTRUMENTS CARRIED AT FAIR VALUE
Fixed maturity securities, available-for-saleavailable-for-sale.. At September 30, 2018,2019, our fixed maturity securities, valued using a third-party pricing source, totaled $1,188.8 million$1.4 billion for Level 2 assets and comprised 97.8%98.0% of total reported fair value of our financial assets. The Level 1 and Level 2 valuations are reviewed and updated quarterly through random testing by comparisons to separate pricing models, other third-party pricing services, and back tested to recent trades. In addition, we obtain information annually relative to the third-party pricing models and review model parameters for reasonableness. There were no Level 3 assets at September 30, 2018.2019. For the nine months ended September 30, 2018,2019, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third-party prices were changed from the values received. There were no transfers between Levels 1 and 2 securities during the nine months ended September 30, 2019.
Equity securitiessecurities.. Our equity securities are classified as Level 1 assets as their fair values are based upon quoted market prices.
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 are reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur. There were no transfers in or out of Level 3.3 during the nine months ended September 30, 2019.
Financial Instruments not Carried at Fair Value
September 30, 2019 Form | 10-Q 26
|
| | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | |
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 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.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)
The carrying amount and fair value for the financial assets and liabilities on the consolidated balance sheets not otherwise disclosed for the periods indicated are as follows:
| | | September 30, 2018 | | December 31, 2017 | September 30, 2019 | | December 31, 2018 |
(In thousands) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | | | | | | |
| (In thousands) | |
Financial assets: | | | | | | | | |
Fixed maturities, held-to-maturity | $ | — |
| | — |
| | 233,961 |
| | 241,377 |
| |
Financial Assets: | | | | | | | | |
Mortgage loans | 188 |
| | 224 |
| | 195 |
| | 228 |
| $ | 180 |
| | 219 |
| | 186 |
| | 222 |
|
Policy loans | 79,012 |
| | 79,012 |
| | 73,735 |
| | 73,735 |
| 81,964 |
| | 81,964 |
| | 80,825 |
| | 80,825 |
|
Short-term investments | | 2,453 |
| | 2,453 |
| | 7,865 |
| | 7,865 |
|
Cash and cash equivalents | 68,753 |
| | 68,753 |
| | 46,064 |
| | 46,064 |
| 47,147 |
| | 47,147 |
| | 45,492 |
| | 45,492 |
|
Financial liabilities: | |
| | |
| | |
| | |
| |
Financial Liabilities: | | |
| | |
| | |
| | |
|
Annuity - investment contracts | 56,085 |
| | 53,247 |
| | 55,035 |
| | 57,575 |
| 57,306 |
| | 62,653 |
| | 56,658 |
| | 55,977 |
|
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 a discount rate and estimates of future cash flows.
Mortgage loans.Mortgage loans are secured principally by residential properties. Weighted average interest rates for these loans were approximately 6.56%6.6% at September 30, 20182019 and 6.60% at December 31, 2017.2018. At September 30, 2018,2019, maturities ranged from 2018 to 2423 years. Management estimated the fair value using an annual interest rate of 6.25% at September 30, 2018.2019. Our mortgage loans are considered Level 3 assets in the fair value hierarchy.
Policy loans.Policy loans had a weighted average annual interest rate of 7.7% as ofat September 30, 20182019 and December 31, 2017,2018, and no specified maturity dates. The aggregate fair value of policy loans approximates the carrying value reflected on the consolidated balance sheets. These loans typically carry an interest rate that is tiedcorresponds to the crediting rate applied to the related policy and contract reserves. Policy loans are an integral part of the life insurance policies we have inforce, cannot be valued separately and are not marketable. Therefore, the fair value of policy loans approximates the carrying value and policy loans are considered Level 3 assets in the fair value hierarchy.
Other.The fair value of short-term investments and 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, which are considered Level 3 assets, was estimated at September 30, 20182019 using discounted cash flows based upon spot rates ranging from 2.56%1.84% to 4.32% based upon swap rates2.96% adjusted for various risk adjustments. 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.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)
(7) Short Duration Contracts
The Company's short duration contracts consist of credit life and credit disability in the Life segment and property insurance in the Home Service segment. The following table presents information on changes in the liability for credit life, credit disability, and property policy and contract claims for the periods ended September 30, 2018 and September 30, 2017.
|
| | | | | | |
| September 30, |
| 2018 | | 2017 |
| (In thousands) |
Policy claims payable at January 1, | $ | 570 |
| | 543 |
|
Less: reinsurance recoverable | — |
| | — |
|
Net balance at January 1, | 570 |
| | 543 |
|
Add claims incurred, related to: | |
| | |
|
Current year | 1,441 |
| | 1,435 |
|
Prior years | (176 | ) | | (11 | ) |
| 1,265 |
| | 1,424 |
|
Deduct claims paid, related to: | |
| | |
|
Current year | 1,163 |
| | 1,106 |
|
Prior years | 310 |
| | 407 |
|
| 1,473 |
| | 1,513 |
|
Net balance September 30, | 362 |
| | 454 |
|
Plus: reinsurance recoverable | — |
| | — |
|
Policy claims payable, September 30, | $ | 362 |
| | 454 |
|
Prior year development is due to normal claim settlements and actuarial changes in claims payable estimates.
(8)(7) Commitments and ContingenciesCOMMITMENTS AND CONTINGENCIES
Qualification of Life ProductsQUALIFICATION OF LIFE PRODUCTS
As of December 31, 2014, we determinedWe have previously 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 being 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,Further, we have determined that we will not remediatethe structure of our endowments and life products under IRC Section 7702 that we havepolicies sold to non-U.S. citizens, but will propose an offerwhich were novated to CICA Ltd. effective July 1, 2018, may have inadvertently generated U.S. source income over time. We completed the remediation of domestic life and annuity policies to U.S. citizens to comply with the IRC. For the
September 30, 2019 Form | 10-Q 27
|
| | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | |
novated policies sold to non-U.S. citizens, we expect to settle any past liabilities with the Internal Revenue Service ("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 endorsed the majority of the affected domestic annuity contracts to comply with the IRC in December 2017 and we have initiated discussions with the IRS to address past non-compliance.. The Company has continued to refine the understandingits estimate of the exposure and expenses related to these tax failuresissues, as previously reported by preparing an individual policy calculation and has reflected the related exposuredescribed below 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.period. The products have been and continue to be appropriately reported as life insurance under U.S. GAAP for financial reporting.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)
The failure of these policies to qualify under Sections 7702 and 72(s) resultsThese tax issues result in an estimated liability as of September 30, 20182019 of $8.9$9.9 million, comprised ofafter tax, related to projected IRS toll charges and fees reported in other general expensessettlement amounts of $7.8$9.0 million and reserve increases totaling $0.9 million to bring policies into compliance totaling $1.1 million.compliance. The range of financial estimates relative to this issue is $4.5 million to $52.5 million. At December 31, 2017, the best estimate liability was $12.5 million and the probability weighted range of financial estimates relative to this issue was $5.9is $6.0 million to $48.2 million. Our liability and range disclosures are evaluated each reporting period and reflect our continued refinement of estimates and considerations as we prepare to submit settlement offers to the IRS related to these matters.
The$52.5 million, after tax. This estimated range includes projected toll chargestaxes and feesinterest and penalties payable to the IRS, as well as any other costs attributedestimated increased payout obligations to remediationcurrent 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 chargestax liabilities 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 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 liabilityliabilities and expenses, or if our estimates of those liabilities and expenses change in the future, our financial condition and results of operationoperations may be materially adversely affected. Management believes that based upon current information we have recorded the best estimate liability to date.
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 involveinvolved management’s judgment based upon a variety of factors known at the time. We expect to incur additional costs in 2018 associated with these issues. We believe these costs could be an additional $0.5ranging from $0.2 million to $1.5 million. Due$0.9 million related to performing this analysis, but due to the uncertainty of actions, there may be additionalwe cannot reasonably estimate these costs but they cannot be estimated with any reliability. Actual amounts incurred may exceed this estimate and will be recorded as they become probable and can be reasonably estimated.
Unclaimed Property Contingencies
The CompanyOn May 17, 2017, we submitted an offer to enter into Closing Agreements with the IRS covering certain CICA and CNLIC domestic life insurance policies (the "Closing Agreements"), which was informed in 2012accepted by the Louisiana Department of Treasury, Arkansas Auditor of StateIRS on June 7, 2019. Pursuant to the Closing Agreements, CICA and CNLIC agreed to pay the Texas State Comptroller,IRS $123,779 and $4,118, respectively, by August 6, 2019, and follow the corrective steps for the policies outlined in the Closing Agreements by September 5, 2019. These payments were made to the IRS on July 12, 2019. For certain life insurance policies that they authorized an audit of Citizens, Inc. and its affiliates for compliance with unclaimed property laws. This audit is being conducted by Verus Financial LLC on behalffailed to satisfy the requirements of the states. This audit is not active and there has been no activity relatedcash value accumulation test of Section 7702 ("CVAT") of the IRC, we agreed to this audit for several years.
Ifamend such policies retroactively to their original dates of issue by adding an endorsement (which provides that the external audit was performed, it could result in additional payments to beneficiaries, additional escheatmentdeath benefit of funds deemed abandoned under state laws, administrative penalties, interest, and changes to the Company's procedures for the identification and escheatment of abandoned property. The Company believes additional escheatment of funds in Arkansas or Texassuch policies will not be materialless than the amount of life insurance necessary to its financial condition or results of operations. However, additional escheatment of funds in Louisiana, which may subsequently be deemed abandoned undermaintain CVAT compliance). For the Louisiana Department of Treasury’s audit, could be substantial for SPLIC iflife insurance policies that failed to satisfy the Louisiana Department of Treasury chooses to disregard recent court decisions regarding unclaimed property litigation in favorpremium requirements of the insurance industry. At this time,guideline premium test of Section 7702 of the Company is not ableIRC, we agreed as needed to reasonably estimate anyrefund each policyholder the amount of premiums paid that exceeded the guideline premium limitation plus interest thereon. We completed these possible amounts.corrective steps prior to September 5, 2019, the deadline set forth in the Closing Agreements.
LitigationLITIGATION AND REGULATORY ACTIONS
From time to time we are subject to legal and regulatory actions relating to our business. We defend all claims vigorously. As a result, wemay incur defense costs, including attorneys' fees, and other direct litigation costs and the expenditure of management time that otherwise would be devoted to our business.associated with defending claims. If we suffer an adverse judgment as a result of litigation claims, it could have a material adverse effect on our business, results of operations and financial condition.
(9) Income Taxes
Beginning in 2018, the statutory tax rate is 21%. In accordance with the SEC's Staff Accounting Bulletin No. 118 ("SAB 118"), the Company recorded provisional amounts related to the impacts of the New Tax Act as of December 31, 2017, including but not
29
September 30, 2019 Form | 10-Q 28
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued |
| | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | |
September 30, 2018
(Unaudited)
limited to the change in corporate tax rate and immediate expensing of certain capital assets. During the current quarter, the Company has recorded provisional amounts related to the impacts of measuring tax reserves under IRC Section 807, as revised by the New Tax Act. As of September 30, 2018, the impacts recorded related to the New Tax Act continue to be considered provisional estimates due to complexities and ambiguities in the 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. We will continue our analysis of the New Tax Act and will record an update to our provisional amount if needed during the measurement period allowed by SAB 118.(8) INCOME TAXES
Our provision for income taxes may not have the customary relationship of taxes to income. CICA Ltd., a wholly owned subsidiary of Citizens, is considered a controlled foreign corporation for federal tax purposes. As a result, the insurance activity of CICA Ltd. is subject to Subpart F of the IRC and is included in Citizens’ taxable income. As ofFor the three and nine months ended September 30, 2018, the Subpart F income inclusion generated $18.7$18.7 million of federal income tax expense and this amount was largely driven by the impact of the novation transaction. The novation transaction also resulted in somewhat offsetting adjustments to the current tax liability for CICA, notably an increased amortization of DAC under Section 848 of the IRC, a reduction of premium income and a release of the $52.1 million uncertain tax position related to tax reserves on product qualification issues.
Our provision for income taxes may not have the customary relationship of taxes to income. A reconciliation between the U.S. corporate income tax rate and the effective income tax rate is as follows:
| | | Nine Months Ended September 30, | |
| 2018 | | 2017 | |
| Amount | | % | | Amount | | % | |
| (In thousands, except for %) | |
Three Months Ended September 30, 2019 | | 2019 | | 2018 (As Restated*) |
(In thousands, except for %) | | Amount | | % | | Amount | | % |
Federal income tax expense: | | | | | | | | |
Expected tax expense (benefit) | $ | 846 |
| | 21.0 | % | | $ | 2,152 |
| | 35.0 | % | $ | 448 |
| | 21.0 | % | | $ | 1,168 |
| | 21.0 | % |
Tax-exempt interest and dividends-received deduction | (126 | ) | | (3.1 | )% | | (336 | ) | | (5.5 | )% | |
Effect of graduated rates | — |
| | — | % | | (35 | ) | | (0.6 | )% | |
Foreign income tax rate differential | | (521 | ) | | (24.4 | )% | | (7,967 | ) | | (143.2 | )% |
Annualized effective tax rate adjustment | | (1,796 | ) | | (84.2 | )% | | (743 | ) | | (13.4 | )% |
Adjustment of prior year taxes | | 1,923 |
| | 90.2 | % | | — |
| | — | % |
Effect of uncertain tax position | 2,688 |
| | 66.7 | % | | (1,011 | ) | | (16.4 | )% | (2,284 | ) | | (107.1 | )% | | 1,024 |
| | 18.4 | % |
Nondeductible costs to remediate tax compliance issue | (735 | ) | | (18.2 | )% | | (997 | ) | | (16.2 | )% | (27 | ) | | (1.3 | )% | | 469 |
| | 8.4 | % |
CICA Ltd. Subpart F income | 18,657 |
| | 462.9 | % | | — |
| | — | % | 2,253 |
| | 105.7 | % | | 18,657 |
| | 335.4 | % |
Other | (25 | ) | | (0.6 | )% | | 299 |
| | 4.9 | % | 90 |
| | 4.2 | % | | 63 |
| | 1.1 | % |
Total income tax expense | $ | 21,305 |
| | 528.7 | % | | $ | 72 |
| | 1.2 | % | |
Total federal income tax expense | | $ | 86 |
| | 4.1 | % | | $ | 12,671 |
| | 227.7 | % |
* See Note 1 in the Notes to Consolidated Financial Statements
|
| | | | | | | | | | | | | |
Nine Months Ended September 30, | 2019 | | 2018 (As Restated*) |
(In thousands, except for %) | Amount | | % | | Amount | | % |
Federal income tax expense: | | | | | | | |
Expected tax expense (benefit) | $ | 172 |
| | 21.0 | % | | $ | 846 |
| | 21.0 | % |
Foreign income tax rate differential | (632 | ) | | (77.4 | )% | | (7,967 | ) | | (197.7 | )% |
Annualized effective tax rate adjustment | 1,468 |
| | 179.7 | % | | 231 |
| | 5.7 | % |
Adjustment of prior year taxes | 1,923 |
| | 235.4 | % | | — |
| | — | % |
Effect of uncertain tax position | 132 |
| | 16.2 | % | | 2,688 |
| | 66.7 | % |
Nondeductible costs to remediate tax compliance issue | (27 | ) | | (3.3 | )% | | (735 | ) | | (18.2 | )% |
CICA Ltd. Subpart F income | 3,848 |
| | 471.0 | % | | 18,657 |
| | 463.0 | % |
Other | 254 |
| | 31.1 | % | | (60 | ) | | (1.5 | )% |
Total federal income tax expense | $ | 7,138 |
| | 873.7 | % | | $ | 13,660 |
| | 339.0 | % |
* See Note 1 in the Notes to Consolidated Financial Statements
A reconciliation of federal income tax expense above is computed by applying the federal income tax rate of 21% in 20182019 and 35.0% in 20172018 to income before federal income tax expense.
September 30, 2019 Form | 10-Q 29
|
| | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | |
Income tax expense consists of:
|
| | | | | | |
Nine Months Ended September 30, | 2019 | | 2018 (As Restated*) |
(In thousands) | |
Federal income tax expense: | | | |
Current | $ | 6,580 |
| | (45,669 | ) |
Deferred | 558 |
| | 59,329 |
|
Total federal income tax expense | $ | 7,138 |
| | 13,660 |
|
|
| | | | | | |
| Nine Months Ended |
| September 30, |
| 2018 | | 2017 |
| (In thousands) |
Current | $ | (45,736 | ) | | 3,047 |
|
Deferred | 67,041 |
| | (2,975 | ) |
Total income tax expense | $ | 21,305 |
| | 72 |
|
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
* See Note 1 in the Notes to Consolidated Financial Statements Continued
September 30, 2018
(Unaudited)
The components of deferred federal income taxes are as follows:
| | | September 30, 2018 | | December 31, 2017 | |
| (In thousands) | |
Net Deferred Tax Asset (Liability) (In thousands) | | September 30, 2019 | | December 31, 2018 |
Deferred tax assets: | | | | | | |
Future policy benefit reserves | $ | 20,307 |
| | 78,372 |
| $ | 2,359 |
| | 2,795 |
|
Net operating and capital loss carryforwards | 249 |
| | 485 |
| 188 |
| | 191 |
|
Accrued expenses | 68 |
| | 65 |
| 6 |
| | 30 |
|
Investments | 8,941 |
| | 6,002 |
| 1,650 |
| | 1,841 |
|
Deferred intercompany loss | | 4,456 |
| | 5,190 |
|
Other | 347 |
| | 276 |
| 801 |
| | 309 |
|
Total gross deferred tax assets | $ | 29,912 |
| | 85,200 |
| 9,460 |
| | 10,356 |
|
Deferred tax liabilities: | | | | | | |
Deferred policy acquisition costs, cost of customer relationships acquired and intangible assets | $ | (33,859 | ) | | (25,518 | ) | (8,479 | ) | | (8,745 | ) |
Unrealized gains on investments available-for-sale | (2,366 | ) | | (8,297 | ) | (7,919 | ) | | (1,968 | ) |
Accrued policyholder dividends | (2 | ) | | (441 | ) | |
Tax reserves transition liability | (3,883 | ) | | — |
| (4,671 | ) | | (4,864 | ) |
Other | (176 | ) | | (147 | ) | (472 | ) | | (488 | ) |
Total gross deferred tax liabilities | (40,286 | ) | | (34,403 | ) | (21,541 | ) | | (16,065 | ) |
Net deferred tax asset (liability) | $ | (10,374 | ) | | 50,797 |
| |
Net deferred tax liability | | $ | (12,081 | ) | | (5,709 | ) |
(9) LEASES
Effective January 1, 2019, the Company adopted the new lease accounting guidance in Accounting Standards Update No. 2016-02, Leases (Topic 842) ("ASC No. 842"). We also elected the package of practical expedients, which among other things, does not require reassessment of lease classification. As a result of the adoption of the new lease accounting guidance, the Company recognized on January 1, 2019 a lease liability of $1.8 million discounted using an incremental borrowing rate of 4.76% and a right-of-use asset of $1.8 million. There was $1.5 million of undiscounted lease liability remaining as of September 30, 2019. The Company uses its estimated incremental borrowing rate, which is derived from information available at lease commencement date, in determining present value of lease payments.
The Company leases home office space in Austin, Texas for Citizens and in Bermuda for CICA Ltd. 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 certain that we will exercise such
31
September 30, 2019 Form | 10-Q 30
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued |
| | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | |
September 30, 2018
(Unaudited)
(10) optionStock Compensation. Leases with an initial term of 12 months or less are immaterial to the 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 sheet.
The table below summarizes the number of weighted-average years remaining in our lease liabilities.
|
| | |
Lease Term | | September 30, 2019 |
| | |
Weighted-average remaining lease term (years) | | |
Operating leases | | 1.4 |
Maturities of our remaining lease liabilities as of September 30, 2019 are as follows.
|
| | | | |
(In thousands) | | Operating Lease Payments (a) |
Maturity of Lease Liabilities | | |
2019 | | $ | 340 |
|
2020 | | 968 |
|
2021 | | 174 |
|
2022 | | 32 |
|
2023 | | — |
|
After 2023 | | — |
|
Total lease payments | | 1,514 |
|
Interest expense | | (50 | ) |
Present value of lease liabilities | | $ | 1,464 |
|
(a)Operating lease payments exclude $13.5 million of legally binding minimum lease payments for leases signed but not yet commenced.
We recorded the lease right-of-use asset in Other Assets and the lease liability in Other Liabilities. Cash payments related to lease liabilities were $0.2 million and $1.3 million for the three and nine months ended September 30, 2019, respectively, and were reported in operating cash flows.
In January 2018,2019, the Company's BoardCompany entered into a long-term lease agreement with an unrelated party for its new home office in Austin, Texas. The building in which we have leased office space is under construction and is expected to be completed in 2020. The long-term lease will commence after construction of Directors approved awards of restricted stock unitsthe building is complete and has a 121-month term, and therefore is not included in the tables above. Payments under the Citizens, Inc. Omnibus Incentive Plan for non-employee directors and the executive management team, with grant date fair values totaling $10,500new long-term lease agreement will average approximately $112,340 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. Vesting of the units is subject to the recipient’s continued employment with the Company through the applicable vesting date. 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.
|
| | | | | | | |
| | Restricted Stock Units |
| | Units | | Aggregate Fair Value (1) |
| | | | |
Outstanding at January 1, 2018 | | — |
| | $ | — |
|
Granted | | 148,883 |
| | 1,070,500 |
|
Less: | | | | |
Vested | | — |
| | — |
|
Forfeited | | 22,322 |
| | 160,495 |
|
Outstanding at September 30, 2018 | | 126,561 |
| | $ | 910,005 |
|
(1) Fair value per share of restricted stock units on September 30, 2018 was equal to Grant Date fair value per share.month.
Restricted stock awards give the participant the right to receive common stockThe Company does not engage in the future, subject to certain restrictions and a risk of forfeiture. Compensation expense of $310,000 was recognized as of September 30, 2018lease agreements among related to these awards.parties.
(11)(10) Related Party TransactionsRELATED PARTY TRANSACTIONS
The Company has various routine related party transactions in conjunction with our holding company structure, such as a management service agreement related to costs incurred, a tax sharing agreement between entities, and inter-company dividends and capital contributions. A reinsurance assumption and novation transaction was completed effective July 1, 2018 between CICA and CICA Ltd. to transfer the international policies to the Bermuda entity. As part of this transaction, the Company has agreed to infuse capital into CICA as required by the Colorado Department of Insurance to keep CICA's risk-based capital above 350% in any future calendar year-end periods. There were no other changes related to these relationships during the nine months ended September 30, 2018.2019. See our Annual Report on Form 10-K for the year ended December 31, 20172018 for a comprehensive discussion of related party transactions.
In the first nine months of 2018,September 2019, CICA made acontributed $0.5 million in capital contribution to CNLIC of $450,000 and SPLIC made a capital contribution of $450,000 to MGLIC.
CNLIC.
32
September 30, 2019 Form | 10-Q 31
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018 |
| | |
CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
| | |
Item 22.. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report are not statements of historical fact and constitute forward-looking statements within the meaning of the federal securities laws, including, without limitation, statements specifically identified as forward-looking statements within 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 ("SEC"), in press releases, and in oral and written statements made by us or with the approval of the Company, which are not statements of historical fact, constitute forward-looking statements. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure, and other financial items, (ii) statements of our plans 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 identify forward-looking statements, but are not the exclusive means of identifying such statements.
Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by 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 substantial 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 agreementsintended proposals for settlement with the IRS related to address these matters;tax withholding and product compliance matters for international policies issued by CICA Ltd.;
The transition of our international business to a new Bermuda-based entity, the adoptionregulatory oversight 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 our ability to sell our products and retain business;
The timely development of and acceptance of our new products and the 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 our 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, our products or services;
Our concentration of business from persons residing in Latin America and the Pacific Rim;
Changes in tax laws;
EffectsOur ability to maintain effective information systems;
September 30, 2019 Form | 10-Q 32
|
| | |
CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
| | |
Changes in statutory, or U.S.United States Generally Accepted Accounting Principles ("U.S. GAAP") or Bermuda Monetary Authority ("BMA"), 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 II-Item 1A-Risk Factors" of this report.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018
Such forward-looking statements speak only as of the date on which such statements are made, and we undertakethe Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.
The 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 (www.citizensinc.com)(http://www.citizensinc.com), our Annual Report 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. We are not including any of the information contained on our website as part of, or incorporating it by reference into, this report.
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 StatesU.S. since 1969 and internationally since 1975. Through our insurance subsidiaries, we pursue a strategy of offering traditional insurance products in niche markets where we believe we can achieve competitive advantages. As of September 30, 2018,2019, we had approximately $1.6$1.7 billion of total assets and approximately $4.4$4.7 billion of insurance inforce. Our core insurance operations include issuing and servicing:
U.S. Dollar-denominateddollar-denominated ordinary whole life insurance and endowment policies predominantly sold to foreign residents, located principally in Latin America and the Pacific Rim through independent marketing consultants;
Ordinaryordinary whole life insurance policies to middle income households concentrated in the Midwest, Mountain West and southern United StatesU.S. through independent marketing consultants; and
Finalfinal expense and limited liability property policies to middle and lower income households in Louisiana, Arkansas and Mississippi through employee and independent agents in our home service distribution channel and funeral homes.
We were formed in 1969 and historically, our Company has experienced growth through acquisitions in the domestic market and through organic market expansion in the international market. We strive to generate bottom line returns using knowledge of our niche markets and our well-established distribution channels.
Strategic InitiativesSTRATEGIC INITIATIVES
The Company remains committed to cultivating enduring value for its key stakeholders through the execution of a customer-centric growth strategy.
In 2017, the Company's executive management team, in cooperation with its 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. Ourbegan a strategic realignment of the Company's international business model is ongoing under the leadership of our CEO, Chief Legal Officerits Life and Chief Marketing Officer.Home Service Insurance segments. Specifically, we are focused on (1) new productsproduct enhancements and increasing our profitability in both the domestic and international marketsproduct profitability; (2) modernization of our Life Segment as well as our Homes Service Segment; (2) a potential restructuring of our international business and operations which may include withdrawals from certain markets; (3) a strategic modernization and upgrade from our legacy technology systems and IT operations with a focusan emphasis on digitization, our future business needs and cyber risk; (4)(3) effectively operating our international life insurance business offshore in Bermuda through CICA Ltd.; and (5)(4) assessing and optimizing our investment portfolio strategy.
As a result of the Company’s strategic review of its international business model, the Company announced in April 2018 that it had decided to discontinue accepting life insurance applications from Brazilian residents or citizens. Although the financial impact of this change is uncertain, the Company does not currently anticipate the impact of withdrawal in this single market to be material since less than 6% of premiums and less than 1% of the Company’s inforce policies stem from applications underwritten on Brazilian residents or citizens as of December 31, 2017. The Company is continuing to assess the financial impacts of this change and has no further update as of September 30, 2018. The Company intends to continue fulfilling commitments under existing policies and to refocus its resources on other more attractive potential markets, products and opportunities.
In another step forward to executeportfolio. To date, our strategic initiatives, the Company recently completed a novation of all of the international policies issued by CICA to CICA Ltd., effective July 1, 2018. As previously disclosed, 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 businessrealignment within
34
September 30, 2019 Form | 10-Q 33
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018 |
| | |
CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
| | |
exclusively from this entity going forward. As the Company continues itsCompany's Life Insurance segment is largely complete, and a leadership transition within the Company’s Home Service Insurance segment is underway.
Carrying that momentum forward, in 2019, we identified three areas of strategic review, it may make further changes to its business model in the future.focus for cultivating value:
| |
1. | We are focused on building a foundation of operational excellence, as our high impact and values-based culture takes root. |
| |
2. | We are focused on growth initiatives within the markets in which we operate, as we set targets for growing premium revenues and implementing growth strategies. |
| |
3. | We are focused on new capabilities that will create business opportunities aligned with our essential purpose. |
As expected,we seek to optimize value for the implementation of these international business model changes, while necessary for complianceCompany, its customers and strategic reasons, is disruptingits collaborators, we believe our international markets, resulting in declining initial policy applications and corresponding premiums in certain countries. The pace, extent and ultimate impact of these disruptions are not yet clear. The markets may stabilize over the long term after a period of transition, or the Company’s legacy business model may be undergoing a fundamental shift. We are actively monitoring quantitative changes in sales patterns as well as qualitative feedback from our independent sales consultants and policyholders to identify and analyze longer term business trends, while simultaneously exploring opportunities to mitigate negative impacts andefforts will put the Company on a path to profitablestronger financial footing and drive sustainable growth.
As a result of the Company’s strategic review of its technology systems, the Company has implemented technology improvements to support its ongoing operations and initiatives. During the third quarter of 2018, the Company completed the implementation of a new Oracle Enterprise Resource Planning ("ERP") application, which replaced several of the Company's back office legacy systems, such as the general ledger, accounts payable, cash management, and fixed asset systems. The introduction of this new ERP application and the related workflow changes resulted in certain changes to the Company’s financial reporting controls and procedures. These system changes were undertaken to standardize accounting systems, improve management reporting and consolidate accounting functions for the Company and its subsidiaries. In addition, the Company also implemented a new actuarial valuation and modeling system, GGY AXIS, as of July 1, 2018 for CICA and CICA Ltd. actuarial reporting to provide enhanced modeling capabilities. This implementation also resulted in changes to our financial reporting controls and procedures during the current period.CURRENT FINANCIAL HIGHLIGHTS
The following pages describe the operations of our two business segments: Life Insurance and Home Service. Revenues derived from any single customer did not exceed 10% of consolidated revenues in any of the last three years.
Current Financial Highlights
Financial highlights for the threethird quarter and nine month periods months ended September 30, 2018,2019 compared to the same periods in 20172018 were:
Insurance premiums declined 3.0% for the third quarter of 2019 compared to the same period in 2018, totaling $46.0 million and $47.4 million, and $137.6 million for the three and nine month periods ended September 30, 2018, respectively, were down from $50.2 million and $143.4 million for the corresponding periods in 2017, a decrease of 5.6% and 4.0%, respectively,respectively. The decline was driven by declines in first year andfewer renewal premiums in our Life Insurance segment.
Net investment income decreased 1.7% and However, first year premiums in our Life Insurance segment increased 3.9%31.0% for the three and nine month periods ended September 30, 2018, respectively,third quarter of 2019 compared to the corresponding periodssame period in 2017. The decrease for the three months ended September 30, 2018 is due to a decline in make-whole calls in the three months ended September 30, 2018 than we experienced in 2017 (which resulted in less net incomeand increased 25.7% from the make-whole premiumssecond quarter of 2019 as we invested heavily in 2018) while the increase forour sales and marketing activities. For the nine months ended September 30, 2019, insurance premiums declined 3.9%, totaling $132.3 million, compared to $137.6 million for the same period in 2018. The decline was driven by fewer renewal premiums in our Life Insurance segment throughout the nine months and lower first year premiums during the first quarter of 2019.
Net investment income increased 10.7% for the third quarter of 2019 compared to the same period of 2018, is due tototaling $15.0 million and $13.6 million, respectively. The increase was driven by a growing asset base derived from cash flows from our insurance operations.operations, improvements in cash management, and a strategic focus on achieving greater yields while maintaining a prudent risk profile for our investment portfolio. We were able to achieve strong portfolio returns despite facing a difficult investment environment during the quarter. Net investment income was lower during the third quarter of 2018 due in part to the need to maintain sufficient cash balances to fund our Bermuda novation that occurred in July 2018. As these funds were not available for investment, we experienced lower overall portfolio yields and net investment income. The average yield on the consolidated portfolio as of the nine months ended September 30, 20182019 was an annualized rate of 4.29%4.34% compared to 4.31%4.29% for the same period in 2017.
2018.An impairment loss of $3.1 million was recorded during the second quarter of 2019 in our Other Non-Insurance enterprises related to our Citizens Academy training facility located near Austin, Texas. This investment was reclassified from real estate held for investment to held-for-sale. A realized gain of $5.5 million was recorded in the first quarter of 2019 related to the sale of our former corporate headquarters in Austin, Texas. We also recorded realized gains of $156,000 and$0.8 million during the first nine months of 2019 related to fair value changes in our equity securities owned at September 30, 2019. Realized losses of $232,000$0.8 million were recorded for the three and nine months periods ended September 30, 2018 related to our fixed maturities portfolio and we recorded equity losses of $0.2 million during the same period.
Claims and surrenders expense increased 14.7% for the third quarter of 2019 and 17.9% for the nine months ended September 30, 2019 compared to the same periods in 2018. The increase was driven primarily by an increase in surrender benefits and matured endowments in the Life Insurance segment, which were within expected levels.
General expenses decreased 7.0% for the third quarter of 2019 and increased 12.7% for the nine months ended September 30, 2019 compared to the same periods in 2018. For both the third quarter
September 30, 2019 Form | 10-Q 34
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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and the nine months ended in September 30, 2019, we had reduced audit fees, partially offset by increased costs relating to higher executive compensation, compared to the same periods in 2018. In addition, due to a change in our 7702/72(s) tax compliance best estimate liability from the estimate at year end 2017, general expenses increased by $1.8 million for the third quarter of 2018 and decreased by $3.6 million for the nine months ended September 30, 2018.
OUR OPERATING SEGMENTS
Our business is comprised of two operating business segments, as detailed below.
Life Insurance
Home Service Insurance
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 of ordinary life policies issued during the periods indicated are shown below. |
| | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, | 2019 | | 2018 |
| 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 | $ | 166,580,870 |
| | 2,519 |
| | $ | 66,130 |
| | $ | 169,392,236 |
| | 2,797 |
| | $ | 60,562 |
|
Home Service Insurance | 124,529,689 |
| | 17,288 |
| | 7,203 |
| | 134,494,004 |
| | 19,054 |
| | 7,059 |
|
The number of policies issued decreased 9.9% and 9.3% for the Life Insurance and Home Service Insurance segments, respectively, for the nine months ended September 30, 2019 compared to the same period in 2018. The decline in new business applications in our Life Insurance segment is driven by ceasing sales in Brazil and terminating agreements with several independent consultants in Latin America who did not align with our vision, values and culture. Excluding these two factors, the number of policies issued by our international business increased during the period as we invested heavily in our sales and marketing activities and achieved better alignment with our sales collaborators on vision, value and strategy. While the number of policies issued has declined in the Life Insurance and Home Service Insurance segments during 2019, the average face amount issued has increased, resulting in overall premium income not declining at the same rate as policy issuances.
September 30, 2019 Form | 10-Q 35
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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CONSOLIDATED RESULTS OF OPERATIONS
A discussion of consolidated results is presented below, followed by a discussion of segment operations and financial results by segment.
REVENUES
Revenues are generated primarily by insurance premiums and investment income on invested assets.
|
| | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(In thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | |
Revenues: | | | | | | | |
Premiums: | | | | | | | |
Life insurance | $ | 44,502 |
| | 45,898 |
| | 127,795 |
| | 133,058 |
|
Accident and health insurance | 350 |
| | 323 |
| | 1,018 |
| | 915 |
|
Property insurance | 1,157 |
| | 1,208 |
| | 3,464 |
| | 3,615 |
|
Net investment income | 15,039 |
| | 13,587 |
| | 44,150 |
| | 41,169 |
|
Realized investment gains (losses), net | 72 |
| | (498 | ) | | 3,164 |
| | (1,251 | ) |
Other income | 347 |
| | 643 |
| | 1,148 |
| | 930 |
|
Total revenues | $ | 61,467 |
| | 61,161 |
| | 180,739 |
| | 178,436 |
|
Premium Income. Premium income derived from life, accident and health, and property insurance sales decreased 3.0% for the third quarter of 2019 and 3.9% for nine months ended September 30, 2019 compared to the same periods in 2018. The decrease is driven primarily by a decline in renewal premiums in our Life Insurance segment and slightly offset by an increase in first year premiums in the third quarter of 2019. See the detail distribution of premiums within Segment Operations discussed below.
Net Investment Income. Net investment income performance is summarized as follows.
|
| | | | | | | | | |
| September 30, | | December 31, | | September 30, |
(In thousands, except for %) | 2019 | | 2018 | | 2018 |
|
| | | | |
Net investment income, annualized | $ | 58,867 |
| | 54,205 |
| | 54,892 |
|
Average invested assets, at amortized cost | 1,357,720 |
| | 1,300,755 |
| | 1,280,592 |
|
Annualized yield on average invested assets | 4.34 | % | | 4.17 | % | | 4.29 | % |
The annualized yield increased during the first nine months of 2019 compared to the same period in 2018, despite a decline in overall market yields. We have been successful in achieving higher yields while maintaining a prudent risk profile for our portfolio despite facing an increasingly challenging investment environment. In addition, during the fourth quarter of 2018, we repositioned our portfolio into more diversified holdings and maturities as part of our investment management strategy. We increased our purchases of AA rated mortgage backed securities while reducing our municipal holdings. While these securities generally have a higher rating than our municipal holdings, average yields are lower. As part of the ongoing process of managing our portfolio and optimizing performance, we are continuing to identify and consider new asset classes.
September 30, 2019 Form | 10-Q 36
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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Investment income from debt securities accounted for approximately 87.7% of total investment income for the nine months ended September 30, 2019.
|
| | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(In thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | |
Gross investment income: | | | | | | | |
Fixed maturity securities | $ | 13,637 |
| | 11,792 |
| | 39,898 |
| | 36,773 |
|
Equity securities | 154 |
| | 143 |
| | 479 |
| | 471 |
|
Mortgage loans | 2 |
| | 3 |
| | 8 |
| | 9 |
|
Policy loans | 1,619 |
| | 1,544 |
| | 4,820 |
| | 4,600 |
|
Long-term investments | — |
| | 3 |
| | 1 |
| | 3 |
|
Other investment income | 96 |
| | 380 |
| | 279 |
| | 470 |
|
Total investment income | 15,508 |
| | 13,865 |
| | 45,485 |
| | 42,326 |
|
Investment expenses | (469 | ) | | (278 | ) | | (1,335 | ) | | (1,157 | ) |
Net investment income | $ | 15,039 |
| | 13,587 |
| | 44,150 |
| | 41,169 |
|
Fixed maturity securities income increased 15.6% for the third quarter of 2019 and 8.5% for nine months ended September 30, 2019, compared to the same periods in 2018. We continue to adjust our investment management strategy to increase our investment yields while maintaining a prudent risk profile. In addition, the increase in policy loans, which represents policyholders utilizing their accumulated policy cash value to pay for premiums, contributed to the increase in investment income.
Realized Investment Gains (Losses), Net. An impairment loss of $3.1 million was recorded for the second quarter of 2019 in connection with classifying the Citizens Academy training facility near Austin, Texas as real estate held-for-sale. We also recorded a realized gain of $5.5 million in the first quarter of 2019 relating to the sale of our former corporate headquarters. Finally, we recorded realized gains of $0.8 million due to fair value changes related to equity securities still owned at September 30, 2018. In addition, we recorded realized losses of $551,000 and $776,000 for the three and nine month periods ended September 30, 2018 related to securities in an unrealized loss position which we do not intend to hold until recovery of value and a write-down on a single issuer. The Company recorded a gain of $1.1 million in the first quarter of 2017 on the sale of an office building in Little Rock, Arkansas.2019.
Claims and surrenders expense increased 16.9% and 7.6% for the three and nine month periods ended September 30, 2018, respectively, compared to corresponding periods in 2017 due primarily to an increase in matured endowments in the life segment.
General expenses increased 71.0% and 24.7% for the three and nine month period ended September 30, 2018, respectively, compared to the corresponding periods in 2017, due primarily to increased audit related costs and $1.8 million of additional costs added to the 7702 tax liability in the three months ended September 30, 2018. We reported a decrease of expenses in the nine months ended September 30, 2018 totaling $3.6 million related to our 7702/72(s) tax compliance best estimate
35
September 30, 2019 Form | 10-Q 37
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018 |
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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liability fromBENEFITS AND EXPENSES
|
| | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(In thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | |
Benefits and expenses: | | | | | | | |
Insurance benefits paid or provided: | | | | | | | |
Claims and surrenders | $ | 28,751 |
| | 25,076 |
| | 78,808 |
| | 66,844 |
|
Increase in future policy benefit reserves | 6,409 |
| | 1,653 |
| | 28,180 |
| | 32,816 |
|
Policyholders' dividends | 1,560 |
| | 1,595 |
| | 4,165 |
| | 4,516 |
|
Total insurance benefits paid or provided | 36,720 |
| | 28,324 |
| | 111,153 |
| | 104,176 |
|
Commissions | 8,879 |
| | 8,656 |
| | 25,147 |
| | 26,284 |
|
Other general expenses | 11,530 |
| | 12,402 |
| | 37,611 |
| | 33,375 |
|
Capitalization of deferred policy acquisition costs | (5,984 | ) | | (5,561 | ) | | (16,224 | ) | | (17,164 | ) |
Amortization of deferred policy acquisition costs | 7,835 |
| | 11,412 |
| | 21,043 |
| | 26,218 |
|
Amortization of cost of customer relationships acquired | 355 |
| | 366 |
| | 1,192 |
| | 1,517 |
|
Total benefits and expenses | $ | 59,335 |
| | 55,599 |
| | 179,922 |
| | 174,406 |
|
Claims and Surrenders. A detail of claims and surrender benefits is provided below.
|
| | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(In thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | |
Claims and Surrenders: | | | | | | | |
Death claims | $ | 5,797 |
| | 6,031 |
| | 18,227 |
| | 17,742 |
|
Surrender benefits | 13,959 |
| | 11,078 |
| | 37,124 |
| | 29,612 |
|
Endowments | 3,012 |
| | 3,313 |
| | 9,079 |
| | 9,819 |
|
Matured endowments | 4,232 |
| | 3,251 |
| | 10,597 |
| | 5,881 |
|
Property claims | 625 |
| | 482 |
| | 1,115 |
| | 1,296 |
|
Accident and health benefits | 92 |
| | 140 |
| | 208 |
| | 254 |
|
Other policy benefits | 1,034 |
| | 781 |
| | 2,458 |
| | 2,240 |
|
Total claims and surrenders | $ | 28,751 |
| | 25,076 |
| | 78,808 |
| | 66,844 |
|
Death claims decreased 3.9% for the estimate at year end 2017 amount as we continue to refine our estimatesthird quarter of 2019 and prepare to submit offers to enter into closing agreements with the IRS related to these matters. We also have additional costs reported in the nine months ended September 30, 2018 from internal and external audit fees and higher permanent salaries related to executive officers hired in 2017. These higher expenses are offset partially by the 7702/72(s) items as noted.
Tax expense increased as our effective tax rate was 528.7% and 1.2%2.7% for the nine months ended September 30, 2019 compared to the same periods in 2018. Mortality experience is closely monitored by the Company and the activity is within expected levels.
Surrenders increased 26.0% for the third quarter of 2019 and 25.4% for the nine months ended September 30, 2019 compared to the same periods in 2018. Surrenders represented less than 1.0% of total direct ordinary whole life insurance in force of $4.7 billion as of September 30, 2019. The increase in surrender expense is primarily related to our international business and was within expected levels. A significant portion of surrenders relate to policies that have been in force over fifteen years and no longer have associated surrender charges.
Matured endowments increased 30.2% for the third quarter of 2019 and 80.2% for the nine months ended September 30, 2019 compared to the same periods in 2018. We anticipated this increase based
September 30, 2019 Form | 10-Q 38
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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upon the dates of when our policy endowment contracts were sold and their expected maturities as set forth in the contracts.
Increase in Future Policy Benefit Reserves. The change in future policy benefit reserves increased 287.7% for the third quarter of 2019 and decreased 14.1% for the nine months ended September 30, 2019 compared to the same periods in 2018. The conversion resulted in a decrease in future policy benefit reserves of $11.9 million for the three and nine months ended September 30, 2018 relating to our international business. For the three and nine months ended September 30, 2019, the conversion resulted in a decrease in future policy benefit reserves of $2.4 million in our Home Service Insurance segment when compared to the same periods in 2018. Changes in surrender and maturity activity between periods also impacts this line item.
Commissions. Commission expense for the third quarter and the nine months ended September 30, 2019 fluctuated directly in relation to the decrease in first year and renewal premiums compared to premium levels for the same periods in 2018.
Other General Expenses. Expenses declined 7.0% in the third quarter of 2019 compared to the same period in 2018 due to a decrease in audit fees and our 7702/72(s) tax compliance best estimate liability. We recognized $1.8 million in expense related to our 7702/72(s) liability during the third quarter of 2018. We have continued to refine our estimated liability related to this matter. These declines were partially offset by additional costs relating to higher executive compensation. Expenses for the nine months ended September 30, 2019 increased 12.7% compared to the same period in 2018 as expenses during the 2018 period were reduced by $3.6 million from the reduction in our 7702/72(s) liability estimate. We also had additional costs related to salaries, bonuses and other compensation paid to executive officers, partially offset by lower audit fees, during the nine months ended September 30, 2019 compared to the same period in 2018.
Capitalization and Amortization of Deferred Policy Acquisition Costs. Costs capitalized include certain commissions, policy issuance costs, and underwriting and agency expenses that relate to successful sales efforts for insurance contracts. Capitalized costs increased during the third quarter of 2019 compared to the same period in 2018 as we experienced an increase in first year premium production. For the nine months ended September 30, 2019, capitalized costs decreased compared to the same period last year as first year premium production declined slightly. Commissions paid on renewal premiums are significantly lower than those paid on first year business. The decline in production for the entire period also resulted in lower amortization during the nine months ended September 30, 2019 compared to the same period in 2018. Amortization of deferred policy acquisition costs is also impacted by persistency and may fluctuate from quarter to quarter. In addition, the conversion to a new actuarial valuation system impacted amortization in both periods. The conversion resulted in an increase in amortization of $3.7 million for the three and nine months ended September 30, 2018 and 2017, respectively.$0.9 million for the three and nine months ended September 30, 2019.
Federal Income Tax. Tax expense decreased for the three and nine months ended September 30, 2019 compared to the same period in 2018. The Company's tax rate was impacted by differences between our effective tax rate and the statutory tax rate resulting from income and expense items that are treated differently for financial reporting and tax purposes as well as impacts from our uncertain tax position. In addition, CICA Ltd., a wholly owned subsidiary of Citizens, is considered a controlled foreign corporation for federal tax purposes and CICA Ltd.'s activity gives rise to taxable income in the U.S. as Sub Part F Income. As of September 30, 2018, the Subpart F income inclusion generated $18.7 million of federal incomeIncome, which is treated as a permanent tax expense, which impacteddifference and therefore included in the current tax rate. Differences between ourCompany's effective tax rate and the statutory tax rate result from income and expense items that are treated differently for financial reporting and tax purposes, as well as impacts from our tax compliance issues and uncertain tax positions.calculation. See Note 9 -8. Income Taxes in the notes to our consolidated financial statements for further discussion.statements.
Our Operating Segments
Our business is comprised of two operating business segments, as detailed below.
Life Insurance
Home Service Insurance
Our insurance operations are the primary focus of the Company, as those operations generate the majority of our income. See the discussion under Segment Operations for detailed analysis. The amount of insurance, number of policies, and average face amounts of ordinary life policies issued during the periods indicated are shown below.
|
| | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2018 | | 2017 |
| 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 | $ | 169,392,236 |
| | 2,797 |
| | $ | 60,562 |
| | $ | 219,592,550 |
| | 3,988 |
| | $ | 55,063 |
|
Home Service | 134,494,004 |
| | 19,054 |
| | 7,059 |
| | 141,400,866 |
| | 20,795 |
| | 6,800 |
|
The number of policies issued has decreased 29.9% and 8.4% for the life and home service segments for the nine months ended September 30, 2018, respectively, compared to the same periods in 2017. We believe that the decline in new business applications in our life segment is driven by several factors but primarily the political instability in Venezuela, uncertainty around the novation to Bermuda, ceasing sales in Brazil, and slower acceptance of the new product set that was repriced and submitted to the market beginning in 2017. While the number of policies issued has declined in the home service segment during 2018, the average face amount issued has increased, which results in overall premium income not declining at the same rate as policy issuances.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018
Note: All discussions below compare or state results for the three and nine month periods ended September 30, 2018 compared to the three and nine month periods ended September 30, 2017.
Consolidated Results of Operations
A discussion of consolidated results is presented below, followed by a discussion of segment operations and financial results by segment.
Revenues
Revenues are generated primarily by insurance premiums and investment income on invested assets.
|
| | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (In thousands) |
Revenues: | | | | | | | |
Premiums: | | | | | | | |
Life insurance | $ | 45,898 |
| | 48,644 |
| | 133,058 |
| | 138,603 |
|
Accident and health insurance | 323 |
| | 360 |
| | 915 |
| | 1,033 |
|
Property insurance | 1,208 |
| | 1,243 |
| | 3,615 |
| | 3,731 |
|
Net investment income | 13,587 |
| | 13,828 |
| | 41,169 |
| | 39,640 |
|
Realized investment gains (losses), net | (498 | ) | | (404 | ) | | (1,251 | ) | | 742 |
|
Other income | 643 |
| | 660 |
| | 930 |
| | 1,015 |
|
Total revenues | $ | 61,161 |
| | 64,331 |
| | 178,436 |
| | 184,764 |
|
Premium Income. Premium income derived from life, accident and health, and property insurance sales decreased 5.6% and 4.0% for the three and nine month periods ended September 30, 2018, respectively. compared to the same periods in 2017. The decrease is driven primarily by a decrease in first year and renewal premiums in our Life Segment. See the detail distribution of premiums within Segment Operations discussion below.
Net Investment Income. Net investment income performance is summarized as follows.
|
| | | | | | | | | |
| September 30, | | December 31, | | September 30, |
| 2018 | | 2017 | | 2017 |
| (In thousands, except for %) |
Net investment income, annualized | $ | 54,892 |
| | 53,146 |
| | 52,853 |
|
Average invested assets, at amortized cost | 1,280,592 |
| | 1,233,580 |
| | 1,225,187 |
|
Annualized yield on average invested assets | 4.29 | % | | 4.31 | % | | 4.31 | % |
The annualized yield has decreased during the third quarter of 2018 compared to the same periods in 2017 due to the decrease in investment income as make-whole calls declined compared to prior year. These calls resulted in $427,000 of additional net income in 2017 compared to $141,000 in 2018. A make-whole call provision in the bond instruments allows the borrower to pay off the debt early and this option was elected by borrowers on some of our bond issues as noted.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018
Investment income from debt securities accounted for approximately 86.9% of total investment income for the nine months ended September 30, 2018.
|
| | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (In thousands) |
Gross investment income: | | | | | | | |
Fixed maturity securities | $ | 11,792 |
| | 12,466 |
| | 36,773 |
| | 35,879 |
|
Equity securities | 143 |
| | 154 |
| | 471 |
| | 521 |
|
Mortgage loans | 3 |
| | 3 |
| | 9 |
| | 8 |
|
Policy loans | 1,544 |
| | 1,454 |
| | 4,600 |
| | 4,242 |
|
Long-term investments | 3 |
| | — |
| | 3 |
| | 66 |
|
Other investment income | 380 |
| | 20 |
| | 470 |
| | 44 |
|
Total investment income | 13,865 |
| | 14,097 |
| | 42,326 |
| | 40,760 |
|
Investment expenses | (278 | ) | | (269 | ) | | (1,157 | ) | | (1,120 | ) |
Net investment income | $ | 13,587 |
| | 13,828 |
| | 41,169 |
| | 39,640 |
|
Fixed maturity securities accounted for the majority of the increase in investment income and the decrease in consolidated investment yield from 4.31% at December 31, 2017 to 4.29% at September 30, 2018. We noted a decrease in income from our fixed maturity securities which was mainly due to the decline in the level of make-whole calls we had experienced in 2017. This decreased investment income by approximately $400,000 and $300,000 for the three and nine months ended September 30, 2018, respectively, compared to the corresponding periods in 2017. During the quarter, we held a higher amount of assets in cash equivalents as part of the novation settlement accounting for approximately $20.0 million which decreased the investment income for the current quarter related to fixed maturity securities. These funds have been reinvested into fixed maturities subsequent to September 30, 2018. In addition, the increase in policy loans, which represents policyholders utilizing their accumulated policy cash value, contributed to the increase in investment income.
Realized Investment Gains (Losses), Net. Realized net losses in the three and nine months ended September 30, 2018 were related to realized losses on equity securities adjustments to fair value of $231,000 for the nine months ended September 30, 2018. Losses were recorded totaling $551,000 and $776,000 in the three and nine months ended September 30, 2018 due to recording losses on securities that we do not intend to hold until recovery in value and one bond issuer impairment due to credit concerns. A realized gain was recorded for the nine month period ended September 30, 2017 resulting from a $1.1 million gain on the sale of an office building in Little Rock, Arkansas. One other-than-temporary impairment was recorded on a common stock equity security in 2017 of $17,000.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018
Benefits and Expenses
|
| | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (In thousands) |
Benefits and expenses: | | | | | | | |
Insurance benefits paid or provided: | | | | | | | |
Claims and surrenders | $ | 25,076 |
| | 21,454 |
| | 66,844 |
| | 62,130 |
|
Increase in future policy benefit reserves | 1,653 |
| | 19,597 |
| | 32,816 |
| | 51,953 |
|
Policyholders' dividends | 1,595 |
| | 1,613 |
| | 4,516 |
| | 4,418 |
|
Total insurance benefits paid or provided | 28,324 |
| | 42,664 |
| | 104,176 |
| | 118,501 |
|
Commissions | 8,656 |
| | 10,801 |
| | 26,284 |
| | 30,620 |
|
Other general expenses | 12,402 |
| | 7,254 |
| | 33,375 |
| | 26,765 |
|
Capitalization of deferred policy acquisition costs | (5,561 | ) | | (7,756 | ) | | (17,164 | ) | | (21,540 | ) |
Amortization of deferred policy acquisition costs | 11,412 |
| | 7,623 |
| | 26,218 |
| | 22,640 |
|
Amortization of cost of customer relationships acquired | 366 |
| | 635 |
| | 1,517 |
| | 1,629 |
|
Total benefits and expenses | $ | 55,599 |
| | 61,221 |
| | 174,406 |
| | 178,615 |
|
Claims and Surrenders. A detail of claims and surrender benefits is provided below.
|
| | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (In thousands) |
Death claims | $ | 6,031 |
| | 6,128 |
| | 17,742 |
| | 17,441 |
|
Surrender benefits | 11,078 |
| | 9,448 |
| | 29,612 |
| | 27,933 |
|
Endowments | 3,313 |
| | 3,969 |
| | 9,819 |
| | 11,148 |
|
Matured endowments | 3,251 |
| | 654 |
| | 5,881 |
| | 1,888 |
|
Property claims | 482 |
| | 373 |
| | 1,296 |
| | 1,373 |
|
Accident and health benefits | 140 |
| | 108 |
| | 254 |
| | 196 |
|
Other policy benefits | 781 |
| | 774 |
| | 2,240 |
| | 2,151 |
|
Total claims and surrenders | $ | 25,076 |
| | 21,454 |
| | 66,844 |
| | 62,130 |
|
Death claims decreased 1.6% and increased 1.7% for the three and nine months ended September 30, 2018, respectively, compared to the same periods in 2017. Mortality experience is closely monitored by the Company and the activity is within expected levels.
Surrenders increased 17.3% and 6.0% for the three and nine months ended September 30, 2018, respectively, compared to the same periods in 2017 primarily due to activity in the life insurance segment. We noted increased surrender activity in Colombia and Taiwan for the quarter ended September 30, 2018, compared to 2017, and we continue to see high levels of surrenders in policies that have been in force for over fifteen years and no longer have surrender charges associated with them. The Company has historically noted a shock lapse after a policy has been inforce for fifteen years and is at its fifteenth year duration.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018
Matured endowments increased 397.1% and 211.5% for the three and nine months ended September 30, 2018, respectively, as a large portion of our endowment contracts reached maturity under those contracts in the current periods. This increase has been anticipated based upon the date of when our policy endowment contracts were sold and their expected endowment maturities as set forth in the contracts.
Increase in Future Policy Benefit Reserves. The change in future policy benefit reserves decreased 91.6% and 36.8% for the three and nine months ended September 30, 2018, respectively, compared to the same periods in 2017, primarily due to the conversion to the new actuarial valuation system, AXIS, in the current quarter that resulted in a decrease in reserves of $11.9 million for the three and nine months ended September 30, 2018.
Policyholders' Dividends. Policyholders' dividends decreased slightly for the three months ended September 30, 2018 and increased slightly for the nine months ended September 30, 2018, compared to prior periods.
Commissions. Commission expense for the three and nine months ended September 30, 2018 fluctuated directly in relation to the decrease in first year and renewal premiums compared to premium levels for the three and nine months ended September 30, 2017.
Other General Expenses. Expenses increased for the three and nine months ended September 30, 2018. We had additional costs from internal and external audit fees related to the 2017 audit that were incurred in 2018 and $0.8 million and $2.6 million of higher permanent salaries and bonuses related to executive officers for the three and nine months ended September 30, 2018, respectively, compared to the same periods in 2017. The Company also incurred additional expenses related to the ongoing technology improvements of $0.7 million and $1.3 million for the three and nine months ended September 30, 2018, respectively. We recorded a decrease of $3.6 million related to our 7702/72(s) tax compliance best estimate liability for the nine months ended September 30, 2018, as we continue to refine our calculations and prepare to submit offers to enter into closing agreements with the IRS related to these matters. These higher expenses are offset partially by the 7702/72(s) items as noted.
Capitalized and Amortized Deferred Policy Acquisition Costs. Costs capitalized include certain commissions, policy issuance costs, and underwriting and agency expenses that relate to successful sales efforts for insurance contracts. Capitalized costs decrease for the three and nine months ended September 30, 2018, compared to the same period in 2017 as we experienced a decline in first year premium production in the current period, which decreased capitalized amounts. Commissions paid on renewal premiums are significantly lower than those paid on first year business.
The significant increase in amortization resulted from the AXIS actuarial system conversion in the current quarter, which impacted amortization by $3.7 million for the three and nine months ended September 30, 2018, compared to the same period in 2017. Amortization of deferred policy acquisition costs is also impacted by persistency and may fluctuate from year to year.
Federal Income Tax. The effective tax rate was 528.7% and 1.2% for the nine months ended September 30, 2018 and 2017, respectively. Subsequent to the novation, the insurance activity of CICA Ltd. is subject to Subpart F of the IRC and is included in Citizens’ taxable income. As of September 30, 2018, the Subpart F income inclusion generated $18.7 million of federal income tax expense and this amount is largely driven by the impact of the novation transaction. Differences between 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, as well as impacts from our tax compliance issues and uncertain tax positions. See Note 9 - Income Taxes in the consolidated financial statements for further discussion.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018
Segment OperationsSEGMENT OPERATIONS
The Company has two reportable segments: Life Insurance and Home Service Insurance. These segments are reported in accordance with U.S. GAAP. The Company also operates other non-insurance portions of the Company, which primarily include the Company's 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
September 30, 2019 Form | 10-Q 39
|
| | |
CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
| | |
Company evaluates profit and loss performance of its segments based on net income (loss) before federal income taxes. The following table shows income (loss) before federal income taxes by segments during the periods indicated.
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, | September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 | |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Segments: | (In thousands) | | | | | | | |
Life Insurance | $ | 6,973 |
| | 3,983 |
| | 11,594 |
| | 7,582 |
| $ | 2,310 |
| | 6,973 |
| | 6,828 |
| | 11,594 |
|
Home Service Insurance | (352 | ) | | (365 | ) | | (3,146 | ) | | 496 |
| 927 |
| | (352 | ) | | 258 |
| | (3,146 | ) |
Total segments | 6,621 |
| | 3,618 |
| | 8,448 |
| | 8,078 |
| 3,237 |
| | 6,621 |
| | 7,086 |
| | 8,448 |
|
Other Non-Insurance enterprises | (1,059 | ) | | (508 | ) | | (4,418 | ) | | (1,929 | ) | (1,105 | ) | | (1,059 | ) | | (6,269 | ) | | (4,418 | ) |
Income before income tax expense | $ | 5,562 |
| | 3,110 |
| | 4,030 |
| | 6,149 |
| |
Income before federal income tax expense | | $ | 2,132 |
| | 5,562 |
| | 817 |
| | 4,030 |
|
Life Insurance
LIFE INSURANCE
Our Life Insurance segment issues ordinary whole life insurance in the U.S. and in U.S. Dollar-denominated amounts to foreign residents. These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and can utilize rider benefits to provide additional increasing or decreasing coverage and annuity benefits to enhance accumulations. Additionally, 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$0.1 million of risk on any one life, reinsuring the remainder of the risk. Historically, we have operated this segment through our CICA and CNLIC insurance subsidiaries. Since July 1, 2018, we have operated the novated international business in this segment through CICA Ltd.
International SalesINTERNATIONAL 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. 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 underwriting and administrative costs per unit of coverage;
premiums typically paid annually rather than monthly or quarterly, which reduces our administrative expenses, accelerates cash flow and results in lower policy lapse rates than premiums with more frequently scheduled payments; and
persistency experience and mortality rates that are comparable to U.S. policies.
41
September 30, 2019 Form | 10-Q 40
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018 |
| | |
CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
| | |
International ProductsINTERNATIONAL PRODUCTS
We offer several ordinary whole life insurance and endowment products designed to meet the needs of our non-U.S. policyowners.policyholders. These policies have been structured to provide:
U.S. Dollar-denominated cash values that accumulate, beginning in the first policy year, to a policyholder during his or her 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;
capital investment in a more secure economic environment (i.e., the U.S.); and
lifetime income guarantees for an insured or for surviving beneficiaries.
Our international products have living benefit features. Most policies contain guaranteed cash values and are participating (i.e., provides for cash dividends as apportioned by the board of directors). Once a policyownerpolicyholder pays the annual premium and the policy is issued, the owner becomes entitled to policy cash dividends as well as annual premium benefits, if the annual premium benefit was elected. According to the policy language, the policyownerpolicyholder has several options with regard to the policy dividends and annual premium benefits. Any annual policy cash dividend may, at the option of the policyownerpolicyholder 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) left 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; or (5) be assigned to a third party. If 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,policyholder 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 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"assigned to a third party”party" provision, the Company has historically allowed policyowners,policyholders, after receiving a copy of the Citizens, Inc. Stock Investment Plan (the “CISIP”"CISIP") prospectus and acknowledging their understanding of the risks of investing in Citizens Class A common stock, the right to assign policy values outside of the policy to the CISIP, which is administered in the United StatesU.S. by Computershare Trust Company, N.A., our plan administrator and an affiliate of Computershare Inc., our transfer agent. The CISIP is a direct stock purchase plan available to policyowners,policyholders, shareholders, our employees and 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 CISIP 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. Computershare administers the CISIP in accordance with the terms and conditions of the CISIP, which is available on the Computershare website and as part of the Company’s registration statement on file with the Securities and Exchange Commission.
42
September 30, 2019 Form | 10-Q 41
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018 |
| | |
CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
| | |
The following table sets forth, by country, our direct premiums from the top five premium producing countries in our international life insurance business for the periods indicated.nine months ended September 30, 2019 and 2018 as indicated below.
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, | September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 | |
| (In thousands) | |
Country | | | | | | | | |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Country: | | | | | | | | |
Colombia | $ | 6,990 |
| | 7,390 |
| | 20,016 |
| | 20,635 |
| $ | 6,465 |
| | 6,990 |
| | 18,567 |
| | 20,016 |
|
Venezuela | 6,420 |
| | 6,744 |
| | 18,574 |
| | 20,602 |
| 5,740 |
| | 6,420 |
| | 16,471 |
| | 18,574 |
|
Taiwan | 4,282 |
| | 4,408 |
| | 13,161 |
| | 13,673 |
| 4,393 |
| | 4,282 |
| | 13,504 |
| | 13,161 |
|
Ecuador | 3,770 |
| | 4,359 |
| | 11,232 |
| | 12,104 |
| 3,641 |
| | 3,770 |
| | 10,454 |
| | 11,232 |
|
Argentina | 2,556 |
| | 3,216 |
| | 7,135 |
| | 7,772 |
| 2,539 |
| | 2,556 |
| | 7,199 |
| | 7,135 |
|
Other Non-U.S. | 10,934 |
| | 11,222 |
| | 29,954 |
| | 29,988 |
| 10,485 |
| | 10,934 |
| | 28,660 |
| | 29,954 |
|
Total | $ | 34,952 |
| | 37,339 |
| | 100,072 |
| | 104,774 |
| $ | 33,263 |
| | 34,952 |
| | 94,855 |
| | 100,072 |
|
We reported declines in premiums during the threethird quarter and the nine months ended September 30, 2019 compared to the same periods in 2018 anddue primarily to a decrease in renewal premiums. We continue to monitor key indicators in these markets for signs of weakening sales.markets. This business is dependent on our clients having access to U.S. dollars. Our international business may also be affected by our ongoing strategic review of our business model and by economic or other events in foreign countries in which our policies are marketed. In April 2018, in connection with our review of our international business model, we discontinued accepting life insurance applications from Brazilian citizens or residents. Brazil had traditionally been one of our top 5five premium-producing countries in our international life insurance business for the past several years. In addition,We recorded premiums from the Brazilian portion of our business of $6.1 million, or 6.4% of total international premiums, as shown above, directof September 30, 2019 and $7.1 million, or 7.1% of total international premiums, as of September 30, 2018. We also terminated agreements with several independent consultants in Latin America who did not align with our vision, values, and culture.
Direct premiums from Venezuela have declined as Venezuela continues to experience widespread public demonstrations against crime, corruption, and soaring inflation and poor utility infrastructure, and we expect that overall premiums from Venezuela will continue to decline if the deteriorating political and economic environment continuesand infrastructure continue to adversely impact our ability to make sales and collect premiums. Our international business and premium collections also 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 asand by marketing or operational changes made by the Company to comply with those laws or regulations. See "Itemthe risk factors disclosed in Part II, Item 1A. Risk Factors" of this Form 10-Q and our Quarterly Reports on Form 10-Q for additional information.
the quarter ended March
43
September 30, 2019 Form | 10-Q 42
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018 |
| | |
CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
| | |
Domestic Sales31, 2019 and June 30, 2019, and in Part I. Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2018 for additional information.
The majorityDOMESTIC SALES
Most of our domestic inforce business results from blocks of business of insurance companies we have acquired over the past 20 years. We discontinued new sales of our non-home service domestic products beginning January 1, 2017.
The following table sets forth our direct premiums by state for the periods indicated.top five premium producing U.S. states for the nine months ended September 30, 2019 and 2018 as indicated below.
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, | September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 | |
| (In thousands) | |
State | | | | | | | | |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
State: | | | | | | | | |
Texas | $ | 399 |
| | 529 |
| | 1,217 |
| | 1,501 |
| $ | 503 |
| | 399 |
| | 1,432 |
| | 1,217 |
|
Indiana | 295 |
| | 289 |
| | 882 |
| | 923 |
| 255 |
| | 295 |
| | 773 |
| | 882 |
|
Florida | 186 |
| | 241 |
| | 504 |
| | 502 |
| 194 |
| | 186 |
| | 439 |
| | 504 |
|
Missouri | 80 |
| | 87 |
| | 288 |
| | 306 |
| 85 |
| | 80 |
| | 274 |
| | 288 |
|
Louisiana | 71 |
| | 63 |
| | 193 |
| | 192 |
| 84 |
| | 71 |
| | 199 |
| | 193 |
|
Other States | 422 |
| | 513 |
| | 1,377 |
| | 1,555 |
| 433 |
| | 441 |
| | 1,283 |
| | 1,377 |
|
Total | $ | 1,453 |
| | 1,722 |
| | 4,461 |
| | 4,979 |
| $ | 1,554 |
| | 1,472 |
| | 4,400 |
| | 4,461 |
|
We report premiums based upon the current residence of our policyholders and therefore the increase in premiums received from Florida are related to policyholders moving into that state and updating their state of residence.policyholders. A number of domestic life insurance companies we acquired had blocks of accident and health insurance policies, which we did not consider to be a core part of our business. We have ceded the majority of our accident and health insurance business to an unaffiliated insurance company under a coinsurance agreement.
44
September 30, 2019 Form | 10-Q 43
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018 |
| | |
CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
| | |
The results of operations for the life insuranceLife Insurance segment for the periods indicated are as follows.
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, | September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 | |
| (In thousands) | |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Revenue: | | | | | | | | | | | | | | |
Premiums | $ | 35,784 |
| | 38,472 |
| | 102,537 |
| | 107,995 |
| $ | 34,385 |
| | 35,784 |
| | 97,439 |
| | 102,537 |
|
Net investment income | 10,062 |
| | 10,051 |
| | 30,331 |
| | 28,678 |
| 11,340 |
| | 10,062 |
| | 33,121 |
| | 30,331 |
|
Realized investment losses, net | (475 | ) | | (355 | ) | | (684 | ) | | (419 | ) | |
Realized investment gains (losses), net | | 61 |
| | (475 | ) | | 5,586 |
| | (684 | ) |
Other income | 643 |
| | 561 |
| | 931 |
| | 856 |
| 349 |
| | 643 |
| | 1,146 |
| | 931 |
|
Total revenue | 46,014 |
| | 48,729 |
| | 133,115 |
| | 137,110 |
| 46,135 |
| | 46,014 |
| | 137,292 |
| | 133,115 |
|
Benefits and expenses: | | | | | | | | | | | | | | |
Insurance benefits paid or provided: | | | | | | | | | | | | | | |
Claims and surrenders | 19,212 |
| | 15,700 |
| | 49,522 |
| | 45,218 |
| 22,533 |
| | 19,212 |
| | 61,011 |
| | 49,522 |
|
Increase in future policy benefit reserves | 544 |
| | 18,045 |
| | 29,509 |
| | 47,818 |
| 7,667 |
| | 544 |
| | 27,499 |
| | 29,509 |
|
Policyholders' dividends | 1,581 |
| | 1,602 |
| | 4,483 |
| | 4,387 |
| 1,551 |
| | 1,581 |
| | 4,136 |
| | 4,483 |
|
Total insurance benefits paid or provided | 21,337 |
| | 35,347 |
| | 83,514 |
| | 97,423 |
| 31,751 |
| | 21,337 |
| | 92,646 |
| | 83,514 |
|
Commissions | 4,712 |
| | 6,892 |
| | 14,717 |
| | 18,765 |
| 5,386 |
| | 4,712 |
| | 14,435 |
| | 14,717 |
|
Other general expenses | 6,583 |
| | 2,200 |
| | 12,607 |
| | 10,399 |
| 5,358 |
| | 6,583 |
| | 18,021 |
| | 12,607 |
|
Capitalization of deferred policy acquisition costs | (3,873 | ) | | (6,242 | ) | | (12,663 | ) | | (16,843 | ) | (4,743 | ) | | (3,873 | ) | | (12,465 | ) | | (12,663 | ) |
Amortization of deferred policy acquisition costs | 10,132 |
| | 6,431 |
| | 22,912 |
| | 19,350 |
| 5,960 |
| | 10,132 |
| | 17,454 |
| | 22,912 |
|
Amortization of cost of customer relationships acquired | 150 |
| | 118 |
| | 434 |
| | 434 |
| 113 |
| | 150 |
| | 373 |
| | 434 |
|
Total benefits and expenses | 39,041 |
| | 44,746 |
| | 121,521 |
| | 129,528 |
| 43,825 |
| | 39,041 |
| | 130,464 |
| | 121,521 |
|
Income before income tax expense | $ | 6,973 |
| | 3,983 |
| | 11,594 |
| | 7,582 |
| |
Income before federal income tax expense | | $ | 2,310 |
| | 6,973 |
| | 6,828 |
| | 11,594 |
|
PremiumsPremiums.. Premium revenues decreased 7.0% and 5.1%3.9% for the three and nine months ended September 30, 2018,third quarter of 2019 compared to the same periodsperiod in 2018 due to a decrease in renewal business. However, first year premiums from our international business increased 31.0% during the third quarter of 2019 compared to the same period in 2018 as we invested heavily in our sales and marketing activities and achieved better alignment with our sales collaborators on vision, value and strategy. For the nine months ended September 30, 2019, premium revenues 2017declined 5.0% compared to the same period in 2018 due primarily to a decrease in bothrenewal business. Since the first year and renewal international business. First year premium revenuesquarter of 2019, we have declined for the three and nine months ended September 30, 2018, primarily as a result of the decreaseexperienced progressive improvement in applications received from Venezuela and several other countries to a lesser extent, as noted previously. We believe that our decline in new business is driven by several factors, including primarily the political instability in Venezuela, uncertainty around the novation to Bermuda, ceasing sales in Brazil, and slower acceptance of the new product set that was repriced and submitted to the market beginning in 2017. Sales internationally have continued to be driven byproduction for our endowment to age sixty-five and the twenty-year endowment products which have been the top performers in the last several years.international business.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018
Life insurance premium breakout is detailed below.
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, | September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 | |
| (In thousands) | |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Premiums: | | | | | | | | | | | | | | |
First year | $ | 2,566 |
| | 4,800 |
| | 8,340 |
| | 12,815 |
| $ | 3,361 |
| | 2,566 |
| | 8,308 |
| | 8,340 |
|
Renewal | 33,218 |
| | 33,672 |
| | 94,197 |
| | 95,180 |
| 31,024 |
| | 33,218 |
| | 89,131 |
| | 94,197 |
|
Total premiums | $ | 35,784 |
| | 38,472 |
| | 102,537 |
| | 107,995 |
| $ | 34,385 |
| | 35,784 |
| | 97,439 |
| | 102,537 |
|
September 30, 2019 Form | 10-Q 44
|
| | |
CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
| | |
Net Investment Income. Net investment income increased primarily due to the growth in average invested assets.assets and a strategic focus on increasing yields in a prudent manner.
| | | Nine Months Ended | | Year Ended | | Nine Months Ended | Nine Months Ended | | Year Ended | | Nine Months Ended |
| September 30, | | December 31, | | September 30, | September 30, | | December 31, | | September 30, |
| 2018 | | 2017 | | 2017 | |
| (In thousands, except for %) | |
(In thousands, except for %) | | 2019 | | 2018 | | 2018 |
Net investment income, annualized | $ | 40,439 |
| | 38,578 |
| | 38,228 |
| $ | 44,163 |
| | 39,985 |
| | 40,439 |
|
Average invested assets, at amortized cost | 945,241 |
| | 890,705 |
| | 882,034 |
| 1,010,578 |
| | 958,135 |
| | 945,241 |
|
Annualized yield on average invested assets | 4.28 | % | | 4.33 | % | | 4.33 | % | 4.37 | % | | 4.17 | % | | 4.28 | % |
The annualized yield has decreasedin the third quarter of 2019 increased compared to the third quarter of 2018. We are continually adjusting our investment management strategy to identify opportunities to improve our yields while maintaining risk discipline. This continues to be a challenge in the current period of 2018 due to the decrease in investment income as make-whole calls declined in 2018 compared to 2017. These calls resulted in $427,000 of additional net income in 2017 compared to $15,000 in 2018. A make-whole call provision in the bond instruments allows the borrower to pay off the debt early and this option was elected by borrowers on some of our bond issues as noted. low interest rate environment.
Realized Investment Losses, NetGains (Losses), Net.. Realized losses of $389,000 were recorded The realized gains for the threenine month period were primarily due to a $5.5 million realized gain from the sale of our former corporate headquarters in Austin, Texas. We recorded realized investment losses for the third quarter of 2018 of $0.4 million due to losses on securities we had not intended to hold until recovery. We also recorded realized investment losses for the nine months ended September 30, 2018 that were primarily due to recognition of losses on securities we do not intend to hold until recovery and an additional impairment of one single issuer recorded in the first nine months of 2018. Realized investment gains were recorded for the three and nine month period ended September 30, 2018 due to equity securities fair value adjustments for the three and nine months totaling $34,000 and $25,000, respectively.which totaled $0.2 million.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018
Claims and SurrendersSurrenders.. These amounts fluctuate from period to period but were within anticipated ranges based upon management's expectations. The following table represents the amount of claims and surrenders incurred within the Life Insurance segment for the nine months ended September 30, 2019 compared to the same period in 2018.
September 30, 2019 Form | 10-Q 45
|
| | |
CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
| | |
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, | September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 | |
| (In thousands) | |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Claims and Surrenders: | | | | | | | | |
Death claims | $ | 1,619 |
| | 1,755 |
| | 4,434 |
| | 4,576 |
| $ | 1,249 |
| | 1,619 |
| | 4,599 |
| | 4,434 |
|
Surrender benefits | 10,307 |
| | 8,611 |
| | 27,387 |
| | 25,721 |
| 13,104 |
| | 10,307 |
| | 34,591 |
| | 27,387 |
|
Endowment benefits | 3,309 |
| | 3,963 |
| | 9,809 |
| | 11,129 |
| 3,008 |
| | 3,309 |
| | 9,070 |
| | 9,809 |
|
Matured endowments | 3,114 |
| | 531 |
| | 5,481 |
| | 1,487 |
| 4,103 |
| | 3,114 |
| | 10,190 |
| | 5,481 |
|
Accident and health benefits | 86 |
| | 70 |
| | 183 |
| | 167 |
| 41 |
| | 86 |
| | 117 |
| | 183 |
|
Other policy benefits | 777 |
| | 770 |
| | 2,228 |
| | 2,138 |
| 1,028 |
| | 777 |
| | 2,444 |
| | 2,228 |
|
Total claims and surrenders | $ | 19,212 |
| | 15,700 |
| | 49,522 |
| | 45,218 |
| $ | 22,533 |
| | 19,212 |
| | 61,011 |
| | 49,522 |
|
Death claims expense was favorable for the threethird quarter and unfavorable for the nine months ended September 30, 20182019 compared with the same periods in 2017.2018. Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.
Surrenders increased 27.1% for the threethird quarter of 2019 and 26.3% for the nine month periodsmonths ended September 30, 2018 by19.7% and 6.5%, respectively,2019 compared to the same periods in 2017. The2018. As we have a mature book of business, the majority of policy surrender benefits paid is attributable to our international business and isare for policies in the later durations of their terms, after the surrender charges arehave been reduced or for periods in which the surrender charges have concluded. This is due to a maturing book of business.ended.
Endowment benefit expensebenefits primarily resultsresult from the election by policyholders of a product feature providing an annual guaranteed benefit. This is a fixed benefit over the life of the contract, thus this expense will vary with new sales and persistency of the business.
Matured endowments increased 486.4% and 268.6%31.8% for the threethird quarter of 2019 and 85.9% for the nine month periods months ended September 30, 2018, respectively,2019 compared to the same periods in 2017,2018, as a large number of our endowment contracts reached maturity in the current periods.period. We anticipate this trend will continue as endowments products sold reach their stated maturities.
Other policy benefits resulted primarily from interest paid on premium deposits and policy benefit accumulations.
Increase in Future Policy Benefit ReservesReserves.. The increase in policy benefit reserves for the third quarter of 2019 was due primarily to the impact of the new actuarial valuation system conversion in 2018. The conversion resulted in a decrease in reserves of $11.9 million for the third quarter of 2018 compared to 2017. In addition, change in reserves was impacted by the premium income and increases in surrender and maturity activity in the current period as described above. For the nine months ended September 30, 2019, change in policy benefit reserves decreased for the three and nine months ended September 30, 2018 comparedwas lower due to the same periods in 2017, primarily as a resultimpact of the AXISactuarial valuation reserve system conversion inoffsetting the current quarter which reduced reserves by $11.9 million and was also impacted by the new premium income decline andimpact of increased surrender and maturity activity noted above.and lower premiums compared to the same period in 2018.
Policyholders' Dividends. Policyholders' dividends were comparablelower for both the threethird quarter and the nine months ended September 30, 2018, and September 30, 2017, as we adjusted our dividend rates for later durations in our policies beginning in 2016.
Commissions. Commission expense decreased for the three and nine months ended September 30, 2018,2019 compared to the same periods in 2017. This2018. The decrease was due to changes in persistency and production.
Commissions. Commission expense fluctuates directly withincreased during the third quarter of 2019 as we experienced higher first year premiums compared to the same period last year. Commission expense decreased for the nine months ended September 30, 2019 compared to the same period in 2018 as we experienced fewer renewal premiums and lower first year premiums in the first quarter of 2019. Commission expense is driven primarily, but not exclusively, by new premium revenuesbusiness as commission rates paid are higher on first year premium sales, which were downsales.
September 30, 2019 Form | 10-Q 46
|
| | |
CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
| | |
Other General Expenses. Expenses are allocated by segment based upon an annual expense study performed by the Company. Expenses decreased for the threethird quarter of 2019 due to lower audit fees partially offset by additional costs related to salaries, bonuses and other compensation. Expenses for the nine months ended September 30, 2018,2019 increased compared to the same periodsperiod in 2017. Renewal premiums for the three and nine months, for which we pay commissions at lower rates, also decreased from the prior year.
Other General Expenses. Expenses increased for the three and nine months ended September 30, 2018 comparedprimarily due to the same periodsreduction in 2017. The increase for the three months ended September 30, 2018 primarily relates to increased costs related to the novation transaction support plus an additional $1.9 million of 7702 tax compliance estimated costs while we recorded a decreasein the first quarter of $1.6 million of 7702 tax compliance costs for2018, which resulted in lower expenses during the same period in 2017.2018 period. We also reported a decreasehad lower audit fees somewhat offset by additional costs related to salaries, bonuses and other compensation in the nine months ended September 30, 2018 of $4.3 million related to our 7702/72(s) tax compliance best estimate liability from year-end 2017. Our best estimate liability is adjusted each quarter as we refine our calculations in preparation for submitting offers to enter into closing
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018
agreements with the IRS. In addition, we incurred higher costs from internal and external audit fees related2019 compared to the 2017 audit, higher permanent salaries and bonuses related to executive officers, and technology improvements for the three and nine months ended September 30,same period in 2018.
Capitalization of Deferred Policy Acquisition Costs ("DAC")Costs.. Capitalized costs fluctuate in direct relation to commissions, increasing for the third quarter and decreasing for the three and nine months ended September 30, 2018,2019, based upon first year and renewal premiums and commissions paid compared to the same periods in 2017.2018.
Amortization of Deferred Policy Acquisition Costs. The significant increase in amortization resulted from the AXIS actuarial system conversion in the current quarter impacting amortization by $3.7 million for the three and nine months ended September 30, 2018, compared to the same period in 2017. Amortization for the three and nineCosts. months ended September 30, 2018 also increased compared to the same periodsAmortization costs fluctuate with changes in 2017 as surrenderfirst year premium activity, was higher.surrenders, and persistency in general. As previously noted,described, persistency is monitored closely by the Company. In addition, the conversion to a new actuarial valuation system impacted amortization. The conversion resulted in an increase in amortization of $3.7 million for the third quarter and the nine months ended September 30, 2018.
Home Service InsuranceHOME SERVICE INSURANCE
We operate in the Home Service insurance market through our subsidiaries Security Plan Life Insurance Company ("SPLIC"), Magnolia Guaranty Life Insurance Company ("MGLIC") and Security Plan Fire Insurance Company ("SPFIC"), and focus 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 a home service marketing distribution system of employee-agents who work full time on a debit route system and through funeral homes that sell policies, collect premiums and service policyholders.
The following table sets forth our direct premiums by state for the periods indicated.
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, | September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 | |
| (In thousands) | |
State | | | | | | | | |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
State: | | | | | | | | |
Louisiana | $ | 10,679 |
| | 10,774 |
| | 32,098 |
| | 32,160 |
| $ | 10,688 |
| | 10,679 |
| | 31,997 |
| | 32,098 |
|
Mississippi | 527 |
| | 591 |
| | 1,618 |
| | 1,854 |
| 508 |
| | 527 |
| | 1,546 |
| | 1,618 |
|
Arkansas | 413 |
| | 387 |
| | 1,272 |
| | 1,299 |
| 398 |
| | 413 |
| | 1,222 |
| | 1,272 |
|
Other States | 230 |
| | 236 |
| | 684 |
| | 680 |
| 235 |
| | 230 |
| | 694 |
| | 684 |
|
Total | $ | 11,849 |
| | 11,988 |
| | 35,672 |
| | 35,993 |
| $ | 11,829 |
| | 11,849 |
| | 35,459 |
| | 35,672 |
|
Home Service Insurance ProductsHOME SERVICE INSURANCE PRODUCTS
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 funeral and burial costs. To a much lesser extent, our home service insuranceHome Service Insurance segment sells limited-liability, named-peril property policies covering dwellings and contents. We provide $30,000 maximum coverage on any one dwelling and contents, while content only coverage and dwelling only coverage is limited to $20,000, respectively.
We provide final expense ordinary life insurance and annuity products primarily to middle and lower income individuals in Louisiana, Mississippi and Arkansas.
48
September 30, 2019 Form | 10-Q 47
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018 |
| | |
CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
| | |
The results of operations for the home service insuranceHome Service Insurance segment for the periods indicated are as follows.
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, | September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 | |
| (In thousands) | |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Revenue: | | | | | | | | | | | | | | |
Premiums | $ | 11,645 |
| | 11,775 |
| | 35,051 |
| | 35,372 |
| $ | 11,624 |
| | 11,645 |
| | 34,838 |
| | 35,051 |
|
Net investment income | 3,276 |
| | 3,355 |
| | 9,894 |
| | 9,864 |
| 3,309 |
| | 3,276 |
| | 9,720 |
| | 9,894 |
|
Realized investment gains (losses), net | (32 | ) | | (49 | ) | | (535 | ) | | 1,161 |
| 3 |
| | (32 | ) | | 639 |
| | (535 | ) |
Other income (loss) | — |
| | — |
| | (1 | ) | | 2 |
| (2 | ) | | — |
| | — |
| | (1 | ) |
Total revenue | 14,889 |
| | 15,081 |
| | 44,409 |
| | 46,399 |
| 14,934 |
| | 14,889 |
| | 45,197 |
| | 44,409 |
|
Benefits and expenses: | | | | | | | | | | | | | | |
Insurance benefits paid or provided: | | | | | | | | | | | | | | |
Claims and surrenders | 5,864 |
| | 5,754 |
| | 17,322 |
| | 16,912 |
| 6,218 |
| | 5,864 |
| | 17,797 |
| | 17,322 |
|
Increase in future policy benefit reserves | 1,109 |
| | 1,552 |
| | 3,307 |
| | 4,135 |
| (1,258 | ) | | 1,109 |
| | 681 |
| | 3,307 |
|
Policyholders' dividends | 14 |
| | 11 |
| | 33 |
| | 31 |
| 9 |
| | 14 |
| | 29 |
| | 33 |
|
Total insurance benefits paid or provided | 6,987 |
| | 7,317 |
| | 20,662 |
| | 21,078 |
| 4,969 |
| | 6,987 |
| | 18,507 |
| | 20,662 |
|
Commissions | 3,944 |
| | 3,909 |
| | 11,567 |
| | 11,855 |
| 3,493 |
| | 3,944 |
| | 10,712 |
| | 11,567 |
|
Other general expenses | 4,502 |
| | 4,025 |
| | 15,438 |
| | 13,182 |
| 4,669 |
| | 4,502 |
| | 15,071 |
| | 15,438 |
|
Capitalization of deferred policy acquisition costs | (1,688 | ) | | (1,514 | ) | | (4,501 | ) | | (4,697 | ) | (1,241 | ) | | (1,688 | ) | | (3,759 | ) | | (4,501 | ) |
Amortization of deferred policy acquisition costs | 1,280 |
| | 1,192 |
| | 3,306 |
| | 3,290 |
| 1,875 |
| | 1,280 |
| | 3,589 |
| | 3,306 |
|
Amortization of cost of customer relationships acquired | 216 |
| | 517 |
| | 1,083 |
| | 1,195 |
| 242 |
| | 216 |
| | 819 |
| | 1,083 |
|
Total benefits and expenses | 15,241 |
| | 15,446 |
| | 47,555 |
| | 45,903 |
| 14,007 |
| | 15,241 |
| | 44,939 |
| | 47,555 |
|
Income (loss) before income tax expense | $ | (352 | ) | | (365 | ) | | (3,146 | ) | | 496 |
| |
Income (loss) before federal income tax expense | | $ | 927 |
| | (352 | ) | | 258 |
| | (3,146 | ) |
PremiumsPremiums.. Premiums were down slightly for the threethird quarter and the nine month periods months ended September 30, 2018,2019 compared to the same periods in 2017.2018.
Net Investment IncomeIncome.. Net investment income for our home service insuranceHome Service Insurance segment wasincreased slightly during the third quarter and declined the nine months ending September 30, 2019 compared to the same periods in 2018 as follows.a fall in yields and an increase in investment expenses offset a slight increase in average invested assets. As previously described, it has been challenging to find attractive yields in the current low interest rate environment. Net investment income yield for our Home Service segment is summarized below.
| | | Nine Months Ended | | Year Ended | | Nine Months Ended | Nine Months Ended | | Year Ended | | Nine Months Ended |
| September 30, | | December 31, | | September 30, | September 30, | | December 31, | | September 30, |
| 2018 | | 2017 | | 2017 | |
(In thousands, except for %) | | 2019 | | 2018 | | 2018 |
| (In thousands, except for %) | | | | | |
Net investment income, annualized | $ | 13,189 |
| | 13,132 |
| | 13,149 |
| $ | 13,098 |
| | 13,125 |
| | 13,189 |
|
Average invested assets, at amortized cost | 288,723 |
| | 289,634 |
| | 289,928 |
| 291,712 |
| | 290,443 |
| | 288,723 |
|
Annualized yield on average invested assets | 4.57 | % | | 4.53 | % | | 4.54 | % | 4.49 | % | | 4.52 | % | | 4.57 | % |
Realized Investment Gains (Losses), NetNet.. Realized net lossesgains for the three and nine month period months ended September 30, 20182019 were dueprimarily related to equity securities fair value adjustments forof $0.7 million, as financial markets performed well during the three andfirst nine months of gains totaling $91,000 and2019. We recorded losses totaling $249,000, respectively. In addition, losses were recorded of $138,000$0.2 million due to fair value changes related to equity securities that we do not intend to hold until a recovery in
49
September 30, 2019 Form | 10-Q 48
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018 |
| | |
CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
| | |
values and an additional impairment on one bondfixed maturity security issuer totaling $75,000 recorded in the first nine months of 2018. A realized gain was recorded$0.1 million for the nine month period in 2017 of $1.1 million related to the sale of an office building in Little Rock, Arkansas.months ended September 30, 2018.
Claims and SurrendersSurrenders.. These amounts fluctuate from period to period but were generally within anticipated ranges based upon management's expectations.
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, | September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 | |
| (In thousands) | |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Claims and Surrenders: | | | | | | | | |
Death claims | $ | 4,412 |
| | 4,373 |
| | 13,308 |
| | 12,865 |
| $ | 4,548 |
| | 4,412 |
| | 13,628 |
| | 13,308 |
|
Surrender benefits | 771 |
| | 837 |
| | 2,225 |
| | 2,212 |
| 855 |
| | 771 |
| | 2,533 |
| | 2,225 |
|
Endowment benefits | 4 |
| | 6 |
| | 10 |
| | 19 |
| 6 |
| | 4 |
| | 10 |
| | 10 |
|
Matured endowments | 137 |
| | 123 |
| | 400 |
| | 401 |
| 129 |
| | 137 |
| | 407 |
| | 400 |
|
Property claims | 482 |
| | 373 |
| | 1,296 |
| | 1,373 |
| 625 |
| | 482 |
| | 1,115 |
| | 1,296 |
|
Accident and health benefits | 54 |
| | 38 |
| | 71 |
| | 29 |
| 52 |
| | 54 |
| | 92 |
| | 71 |
|
Other policy benefits | 4 |
| | 4 |
| | 12 |
| | 13 |
| 3 |
| | 4 |
| | 12 |
| | 12 |
|
Total claims and surrenders | $ | 5,864 |
| | 5,754 |
| | 17,322 |
| | 16,912 |
| $ | 6,218 |
| | 5,864 |
| | 17,797 |
| | 17,322 |
|
Death claims expense fluctuates based upon reported claims. We experienced a small increase in reported claims in the threethird quarter and the nine months ended September 30, 20182019 compared to the same periods in 2017.2018. Mortality experience is closely monitored by the Company as a key performance indicator and amounts were within expected levels.
Surrender benefits decreasedincreased for the three months ended September 30, 2018third quarter and increased slightly for the nine months ended September 30, 20182019, but were within anticipated ranges based on management expectations.
Property claims increased in the third quarter due to the impact of Tropical Storm Barry that affected Louisiana. For the nine months ended September 30, 2019, property claims decreased as we experienced favorable weather-related claim activity in 2019 compared to the same periodsperiod in 2017.
Property claims increased for the three months ended September 30, 2018, but decreased for the nine months ended September 30, 2018 as we experienced weather-related claims in 2018 but year to date experience was favorable for the nine months compared to the same periods in 2017.
2018.
Increase in Future Policy Benefit ReservesReserves.. The change in future policy benefit reserves for the third quarter and the nine months ended September 30, 2019 was lower due primarily to the impact of our actuarial valuation system conversion. For the three and nine months ended September 30, 20182019, the conversion resulted in a decrease in reserves of $2.3 million, was consistent with sales activity.
Commissions. Commission expense decreased for the third quarter and the nine months ended September 30, 2019 compared to the same periods in 2017.
Commissions. Commission expense increased for the three months ended September 30, 2018, and decreased for the nine months ended September 30, 2018, compared to the same periods in 2017, consistent with premium collections.collection levels. In addition, management initiated a change in commission policy in 2018 that has resulted in generally lower commission payouts.
Other General ExpensesExpenses.. Expenses are allocated by segment based upon an annual expense study performed by the Company. Expenses increasedwere relatively flat for the three and nine months ended September 30, 2018,2019 compared to the same periods in 2017, due to higher costs from internal and external audit fees related to the 2017 audit that were incurred in 2018, higher permanent salaries and bonuses related to executive officers, and technology improvements. For the nine months ended September 30, 2018, the Company also reported an increase of $0.7 million related to the 7702 tax compliance issue. Our best estimate liability is adjusted each quarter as we refine our calculations in preparation for submitting offers to enter into closing agreements with the IRS.2018.
Capitalization of Deferred Policy Acquisition Costs ("DAC").. Capitalized costs increaseddecreased for the three months ended September 30, 2018third quarter and decreased for the nine months ended September 30, 2018, based upon assumption refinements implemented for policies issued2019 compared to the same periods in 2018 resulting in an increase in capitalized amounts of $127,000.2018. DAC capitalization is directly correlated to fluctuations in new business and commissions.
Amortization of Deferred Policy Acquisition Costs. Amortization for the third quarter and the nine months ended September 30, 2019 increased of $0.9 million compared to the same periods in 2018 primarily due to the impact of the conversion to a new actuarial valuation system.
50
September 30, 2019 Form | 10-Q 49
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018
Amortization of Deferred Policy Acquisition Costs. Amortization for the three and nine months ended September 30, 2018 increased slightly compared to the corresponding periods in 2017 due to the assumption changes made in the current quarter related to 2018 business. |
| | |
CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
| | |
Amortization of Cost of Customer Relationships AcquiredAcquired.. Amortization decreased for the nine months ended September 30, 2019 compared to the same period in 2018, mainly due to an annual review and true up performed in the three months ended September 30, 2018 resulting in lowering amortization by approximately $100,000.first quarter of 2019.
Other Non-Insurance EnterprisesOTHER NON-INSURANCE ENTERPRISES
This represents the administrative support entities to the insurance operations whose revenues are primarily intercompany and have been eliminated in consolidation under GAAP. The lossGAAP, which typically results in a loss. Losses reported for the three and nine months ended September 30, 2019, respectively, are also impacted by the impairment of 2018 and 2017 is typical since the elimination of intercompany revenue is its primary source of revenue and increased as overall expense levels are higher.Citizens Academy training facility property.
InvestmentsINVESTMENTS
The administration of our investment portfolios is handled by our management and a third partythird-party investment manager pursuant to board-approved investment guidelines, with all trading activity approved by a committee of each entity's respective boards of directors. The guidelines used require that fixed maturities, both government and corporate, are investment grade and comprise a majority of the investment portfolio. State insurance statutes prescribe the quality and percentage of the various types of investments that may be made by insurance companies and generally permit investment in qualified state, municipal, federal and foreign government obligations, high quality corporate bonds, preferred and common stock, mortgage loans and real estate within certain specified percentages. The assetsinvestments are generally intended to mature in accordance with the average maturity of the insurance products and to provide the cash flow for our insurance company subsidiaries to meet their respective policyholder obligations.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018
The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested cash, cash equivalents and investments.
| | | September 30, 2018 | | December 31, 2017 | |
| Carrying Value | | % of Total Carrying Value | | Carrying Value | | % of Total Carrying Value | |
| (In thousands) | | (In thousands) | | |
Marketable debt securities: | | | | | | | | |
Carrying Value | | September 30, 2019 | | December 31, 2018 |
(In thousands, except for %) | | Amount | | % | | Amount | | % |
Fixed maturity securities: | | | | | | | | |
U.S. Treasury and U.S. Government-sponsored enterprises | $ | 15,339 |
| | 1.1 | | $ | 16,304 |
| | 1.2 | $ | 16,150 |
| | 1.1 | % | | $ | 15,554 |
| | 1.1 | % |
States and political subdivisions | 740,930 |
| | 54.1 | | 780,557 |
| | 57.7 | 596,818 |
| | 39.2 | % | | 720,115 |
| | 52.0 | % |
Corporate | 409,132 |
| | 29.8 | | 409,610 |
| | 30.3 | 604,108 |
| | 39.7 | % | | 381,796 |
| | 27.5 | % |
Mortgage-backed (1) | 34,636 |
| | 2.5 | | 1,978 |
| | 0.1 | 134,972 |
| | 8.9 | % | | 108,698 |
| | 7.8 | % |
Asset-backed | | 17,480 |
| | 1.2 | % | | 4,757 |
| | 0.3 | % |
Foreign governments | 117 |
| | — | | 121 |
| | — | 120 |
| | — | % | | 119 |
| | — | % |
Total fixed maturity securities | 1,200,154 |
| | 87.5 | | 1,208,570 |
| | 89.3 | 1,369,648 |
| | 90.1 | % | | 1,231,039 |
| | 88.7 | % |
Short-term investments | | 2,453 |
| | 0.2 | % | | 7,865 |
| | 0.6 | % |
Cash and cash equivalents | 68,753 |
| | 5.0 | | 46,064 |
| | 3.4 | 47,147 |
| | 3.1 | % | | 45,492 |
| | 3.3 | % |
Other investments: | |
| | | | |
| | | |
| | |
| | |
| | |
|
Policy loans | 79,012 |
| | 5.9 | | 73,735 |
| | 5.5 | 81,964 |
| | 5.4 | % | | 80,825 |
| | 5.8 | % |
Equity securities | 15,529 |
| | 1.1 | | 16,164 |
| | 1.2 | 15,845 |
| | 1.0 | % | | 15,068 |
| | 1.1 | % |
Mortgage loans | 188 |
| | — | | 195 |
| | — | 180 |
| | — | % | | 186 |
| | — | % |
Real estate held for investment | 5,743 |
| | 0.4 | | 7,416 |
| | 0.6 | |
Real estate held for sale | 1,483 |
| | 0.1 | | — |
| | — | |
Other long-term investments | 22 |
| | — | | 36 |
| | — | |
Real estate and other long-term investments | | 2,593 |
| | 0.2 | % | | 7,223 |
| | 0.5 | % |
Total cash, cash equivalents and investments | $ | 1,370,884 |
| | 100.0 | | $ | 1,352,180 |
| | 100.0 | $ | 1,519,830 |
| | 100.0 | % | | $ | 1,387,698 |
| | 100.0 | % |
(1) Includes $34.4$133.7 million and $1.8$108.5 million of U.S. Government-sponsored enterprises at September 30, 20182019 and December 31, 2017,2018, respectively.
September 30, 2019 Form | 10-Q 50
|
| | |
CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
| | |
Cash and cash equivalents increased as of September 30, 2018 as we held2019 due to timing of cash equivalents in anticipationinflows and investments of the novation transaction and cash true up between entities.into marketable securities.
As part of the novation transaction between CICA and CICA Ltd., we transferred approximately $746.5 million of fixed maturity securities and $20.3 million of cash. We have reclassified 100% of our fixed maturity holdings that were previously classified as held-to-maturity to available-for-sale based upon our intent and investment strategy as of September 30, 2018.
Held-to-maturity securities held are reported in the consolidated financial statements at amortized cost and available-for-sale securities are reported at fair value.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018
The following table sets forth the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of September 30, 20182019 and December 31, 2017.2018.
| | | September 30, 2018 | | December 31, 2017 | |
| Carrying Value | | % of Total Carrying Value | | Carrying Value | | % of Total Carrying Value | |
| (In thousands) | | (In thousands) | | |
Carrying Value | | September 30, 2019 | | December 31, 2018 |
(In thousands, except for %) | | Amount | | % | | Amount | | % |
AAA | $ | 90,245 |
| | 7.5 | | $ | 93,911 |
| | 7.8 | $ | 70,860 |
| | 5.5 | % | | $ | 96,333 |
| | 7.8 | % |
AA | 486,176 |
| | 40.5 | | 488,675 |
| | 40.4 | 485,716 |
| | 38.0 | % | | 551,978 |
| | 44.8 | % |
A | 301,646 |
| | 25.2 | | 325,476 |
| | 27.0 | 321,764 |
| | 25.2 | % | | 281,553 |
| | 22.9 | % |
BBB | 286,996 |
| | 23.9 | | 266,461 |
| | 22.0 | 378,468 |
| | 29.6 | % | | 277,584 |
| | 22.6 | % |
BB and other | 35,091 |
| | 2.9 | | 34,047 |
| | 2.8 | 21,485 |
| | 1.7 | % | | 23,591 |
| | 1.9 | % |
Totals | $ | 1,200,154 |
| | 100.0 | | $ | 1,208,570 |
| | 100.0 | $ | 1,278,293 |
| | 100.0 | % | | $ | 1,231,039 |
| | 100.0 | % |
Credit ratings reported for the periods indicated are assigned by a Nationally Recognized Statistical Rating Organization (“NRSRO”("NRSRO") such as Moody’s Investors Service, Standard & Poor’s or Fitch Ratings. A credit rating assigned by an NRSRO is a quality based rating, with AAA representing the highest quality and D the lowest, with BBB and above being considered investment grade. In addition, the Company may use credit ratings of the National Association of Insurance Commissioners (“NAIC”("NAIC") Securities Valuation Office (“SVO”("SVO") as assigned, if there is no NRSRO rating. Securities rated by the SVO are grouped in the equivalent NRSRO category as stated by the SVO and securities that are not rated by an NRSRO are included in the “other”"other" category.
The Company has no direct sovereign European debt exposure as of September 30, 2018. We do have indirect exposure in one bond mutual fund holding, but the amount is deemed immaterial to the current investment holdings and consolidated financials.2019.
As of September 30, 2018,2019, the Company held municipal securities that include third party guarantees. Detailed below is a presentation by NRSRO rating of our municipal holdings by funding type.
Municipal securities shown including third party guaranteestype as of September 30, 2019.
| | | September 30, 2018 | General Obligation | | Special Revenue | | Other | | Total | | % Based on Amortized Cost |
| General Obligation | | Special Revenue | | Other | | Total | | % Based on | |
| Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Amortized Cost | |
| (In thousands) | | | |
(In thousands, except for %) | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | % Based on Amortized Cost |
Municipal securities including third party guarantees | | Municipal securities including third party guarantees | | | | | | | | | |
AAA | $ | 57,538 |
| | 57,448 |
| | 30,451 |
| | 30,482 |
| | — |
| | — |
| | 87,989 |
| | 87,930 |
| | 11.9 | $ | 42,617 |
| | 41,626 |
| | 14,515 |
| | 14,050 |
| | — |
| | — |
| | 57,132 |
| | 55,676 |
| | 9.8 | % |
AA | 156,110 |
| | 156,032 |
| | 250,236 |
| | 250,129 |
| | 24,565 |
| | 24,492 |
| | 430,911 |
| | 430,653 |
| | 58.2 | 131,634 |
| | 126,823 |
| | 190,960 |
| | 183,750 |
| | 18,898 |
| | 17,432 |
| | 341,492 |
| | 328,005 |
| | 57.8 | % |
A | 29,587 |
| | 29,885 |
| | 147,653 |
| | 147,077 |
| | 10,775 |
| | 10,446 |
| | 188,015 |
| | 187,408 |
| | 25.3 | 21,942 |
| | 20,682 |
| | 133,469 |
| | 122,146 |
| | 7,820 |
| | 7,130 |
| | 163,231 |
| | 149,958 |
| | 26.4 | % |
BBB | 7,145 |
| | 7,289 |
| | 15,306 |
| | 15,251 |
| | 1,923 |
| | 1,939 |
| | 24,374 |
| | 24,479 |
| | 3.3 | 5,419 |
| | 5,273 |
| | 18,640 |
| | 18,032 |
| | 1,570 |
| | 1,450 |
| | 25,629 |
| | 24,755 |
| | 4.4 | % |
BB and other | 4,127 |
| | 4,227 |
| | 5,514 |
| | 5,636 |
| | — |
| | — |
| | 9,641 |
| | 9,863 |
| | 1.3 | 5,808 |
| | 5,696 |
| | 3,526 |
| | 3,461 |
| | — |
| | — |
| | 9,334 |
| | 9,157 |
| | 1.6 | % |
Total | $ | 254,507 |
| | 254,881 |
| | 449,160 |
| | 448,575 |
| | 37,263 |
| | 36,877 |
| | 740,930 |
| | 740,333 |
| | 100.0 | $ | 207,420 |
| | 200,100 |
| | 361,110 |
| | 341,439 |
| | 28,288 |
| | 26,012 |
| | 596,818 |
| | 567,551 |
| | 100.0 | % |
| | | | | | | | | | | | | | | | | | |
Municipal securities excluding third party guarantees | | Municipal securities excluding third party guarantees | | | | | | | | | | |
AAA | | $ | 17,390 |
| | 17,235 |
| | 1,032 |
| | 1,023 |
| | — |
| | — |
| | 18,422 |
| | 18,258 |
| | 3.2 | % |
AA | | 94,931 |
| | 92,780 |
| | 126,363 |
| | 122,714 |
| | 11,823 |
| | 10,704 |
| | 233,117 |
| | 226,198 |
| | 39.9 | % |
A | | 51,317 |
| | 49,182 |
| | 160,533 |
| | 147,546 |
| | 10,751 |
| | 9,857 |
| | 222,601 |
| | 206,585 |
| | 36.4 | % |
BBB | | 10,728 |
| | 10,123 |
| | 33,784 |
| | 32,611 |
| | — |
| | — |
| | 44,512 |
| | 42,734 |
| | 7.5 | % |
BB and other | | 33,054 |
| | 30,780 |
| | 39,398 |
| | 37,545 |
| | 5,714 |
| | 5,451 |
| | 78,166 |
| | 73,776 |
| | 13.0 | % |
Total | | $ | 207,420 |
| | 200,100 |
| | 361,110 |
| | 341,439 |
| | 28,288 |
| | 26,012 |
| | 596,818 |
| | 567,551 |
| | 100.0 | % |
53
September 30, 2019 Form | 10-Q 51
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018 |
| | |
CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
| | |
Municipal securities shown excluding third party guarantees
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2018 |
| General Obligation | | Special Revenue | | Other | | Total | | % Based on |
| Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Amortized Cost |
| (In thousands) | | |
AAA | $ | 23,337 |
| | 23,368 |
| | 10,260 |
| | 10,300 |
| | — |
| | — |
| | 33,597 |
| | 33,668 |
| | 4.5 |
AA | 130,520 |
| | 130,543 |
| | 173,527 |
| | 173,483 |
| | 16,100 |
| | 15,963 |
| | 320,147 |
| | 319,989 |
| | 43.3 |
A | 54,117 |
| | 54,346 |
| | 179,640 |
| | 179,025 |
| | 13,406 |
| | 13,137 |
| | 247,163 |
| | 246,508 |
| | 33.3 |
BBB | 12,482 |
| | 12,677 |
| | 36,473 |
| | 36,387 |
| | — |
| | — |
| | 48,955 |
| | 49,064 |
| | 6.6 |
BB and other | 34,051 |
| | 33,947 |
| | 49,260 |
| | 49,380 |
| | 7,757 |
| | 7,777 |
| | 91,068 |
| | 91,104 |
| | 12.3 |
Total | $ | 254,507 |
| | 254,881 |
| | 449,160 |
| | 448,575 |
| | 37,263 |
| | 36,877 |
| | 740,930 |
| | 740,333 |
| | 100.0 |
The Company held investments in special revenue bonds that had a greater than 10% exposure based upon activity as noted in the table below.below as of September 30, 2019.
| |
| Fair Value | | Amortized Cost | | % of Total Fair Value | |
(In thousands) | | Fair Value | | Amortized Cost | | % of Total Fair Value |
| (In thousands) | | | | | | | |
Utilities | $ | 154,206 |
| | 153,612 |
| | 20.8 | % | $ | 132,188 |
| | 124,107 |
| | 22.2 | % |
Education | 109,277 |
| | 108,875 |
| | 14.8 | % | 89,985 |
| | 84,497 |
| | 15.1 | % |
General Obligations | 78,550 |
| | 78,664 |
| | 10.6 | % | |
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018
The Company's exposure ofto municipal holdings is spread across many states, with Texas and Florida as the two states with the largest municipal holdings as of September 30, 2018.2019. The Company holds 22.0%21.4% of its municipal security holdings in Texas issuers and 12.3%11.0% in Florida issuers based on fair value. There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal portfolio as of September 30, 2018. 2019.
The tables below represent the exposure the Company holds in these two states.
| | | September 30, 2018 | |
| General Obligation | | Special Revenue | | Other | | Total | |
| Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | |
| (In thousands) | |
September 30, 2019 | | 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 | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Texas securities including third party guarantees | | |
| | |
| | |
| | |
|
AAA | $ | 55,551 |
| | 55,455 |
| | 14,509 |
| | 14,495 |
| | — |
| | — |
| | 70,060 |
| | 69,950 |
| $ | 41,111 |
| | 40,197 |
| | 11,068 |
| | 10,626 |
| | — |
| | — |
| | 52,179 |
| | 50,823 |
|
AA | 43,189 |
| | 43,218 |
| | 28,403 |
| | 28,326 |
| | — |
| | — |
| | 71,592 |
| | 71,544 |
| 35,434 |
| | 34,874 |
| | 25,436 |
| | 24,494 |
| | — |
| | — |
| | 60,870 |
| | 59,368 |
|
A | — |
| | — |
| | 12,642 |
| | 12,665 |
| | — |
| | — |
| | 12,642 |
| | 12,665 |
| — |
| | — |
| | 7,272 |
| | 6,538 |
| | — |
| | — |
| | 7,272 |
| | 6,538 |
|
BBB | — |
| | — |
| | 6,695 |
| | 6,607 |
| | — |
| | — |
| | 6,695 |
| | 6,607 |
| — |
| | — |
| | 6,393 |
| | 6,309 |
| | — |
| | — |
| | 6,393 |
| | 6,309 |
|
BB and other | 738 |
| | 741 |
| | 1,346 |
| | 1,455 |
| | — |
| | — |
| | 2,084 |
| | 2,196 |
| 718 |
| | 716 |
| | 511 |
| | 519 |
| | — |
| | — |
| | 1,229 |
| | 1,235 |
|
Total | $ | 99,478 |
| | 99,414 |
| | 63,595 |
| | 63,548 |
| | — |
| | — |
| | 163,073 |
| | 162,962 |
| $ | 77,263 |
| | 75,787 |
| | 50,680 |
| | 48,486 |
| | — |
| | — |
| | 127,943 |
| | 124,273 |
|
Texas securities excluding third party guarantees | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Texas securities excluding third party guarantees | | |
| | |
| | |
| | |
|
AAA | $ | 21,885 |
| | 21,918 |
| | 950 |
| | 956 |
| | — |
| | — |
| | 22,835 |
| | 22,874 |
| $ | 16,465 |
| | 16,317 |
| | — |
| | — |
| | — |
| | — |
| | 16,465 |
| | 16,317 |
|
AA | 60,947 |
| | 60,821 |
| | 26,592 |
| | 26,489 |
| | — |
| | — |
| | 87,539 |
| | 87,310 |
| 44,587 |
| | 43,634 |
| | 22,840 |
| | 22,296 |
| | — |
| | — |
| | 67,427 |
| | 65,930 |
|
A | 13,677 |
| | 13,738 |
| | 19,545 |
| | 19,548 |
| | — |
| | — |
| | 33,222 |
| | 33,286 |
| 13,221 |
| | 12,962 |
| | 15,060 |
| | 13,793 |
| | — |
| | — |
| | 28,281 |
| | 26,755 |
|
BBB | 1,184 |
| | 1,192 |
| | 9,819 |
| | 9,728 |
| | — |
| | — |
| | 11,003 |
| | 10,920 |
| 1,237 |
| | 1,156 |
| | 6,955 |
| | 6,843 |
| | — |
| | — |
| | 8,192 |
| | 7,999 |
|
BB and other | 1,785 |
| | 1,745 |
| | 6,689 |
| | 6,827 |
| | — |
| | — |
| | 8,474 |
| | 8,572 |
| 1,753 |
| | 1,718 |
| | 5,825 |
| | 5,554 |
| | — |
| | — |
| | 7,578 |
| | 7,272 |
|
Total | $ | 99,478 |
| | 99,414 |
| | 63,595 |
| | 63,548 |
| | — |
| | — |
| | 163,073 |
| | 162,962 |
| $ | 77,263 |
| | 75,787 |
| | 50,680 |
| | 48,486 |
| | — |
| | — |
| | 127,943 |
| | 124,273 |
|
55
September 30, 2019 Form | 10-Q 52
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018 |
| | |
CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
| | |
| | | September 30, 2018 | |
| General Obligation | | Special Revenue | | Other | | Total | |
| Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | |
| (In thousands) | |
September 30, 2019 | | General Obligation | | Special Revenue | | Other | | Total |
(In thousands) | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost |
Florida securities including third party guarantees | | | | | | | | | | | | | | | | Florida securities including third party guarantees | | | | | | | | |
AAA | $ | 509 |
| | 505 |
| | 3,541 |
| | 3,546 |
| | — |
| | — |
| | 4,050 |
| | 4,051 |
| |
AA | — |
| | — |
| | 57,617 |
| | 57,649 |
| | 5,114 |
| | 5,159 |
| | 62,731 |
| | 62,808 |
| $ | — |
| | — |
| | 45,841 |
| | 44,911 |
| | 2,153 |
| | 2,029 |
| | 47,994 |
| | 46,940 |
|
A | — |
| | — |
| | 13,548 |
| | 13,570 |
| | 10,555 |
| | 10,221 |
| | 24,103 |
| | 23,791 |
| — |
| | — |
| | 10,053 |
| | 9,840 |
| | 7,820 |
| | 7,131 |
| | 17,873 |
| | 16,971 |
|
BBB | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Total | | $ | — |
| | — |
| | 55,894 |
| | 54,751 |
| | 9,973 |
| | 9,160 |
| | 65,867 |
| | 63,911 |
|
Florida securities excluding third party guarantees | | Florida securities excluding third party guarantees | | | | | | | | |
AA | | $ | — |
| | — |
| | 34,550 |
| | 34,032 |
| | 513 |
| | 508 |
| | 35,063 |
| | 34,540 |
|
A | | — |
| | — |
| | 17,012 |
| | 16,694 |
| | 7,820 |
| | 7,131 |
| | 24,832 |
| | 23,825 |
|
BB and other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | 4,332 |
| | 4,025 |
| | 1,640 |
| | 1,521 |
| | 5,972 |
| | 5,546 |
|
Total | $ | 509 |
| | 505 |
| | 74,706 |
| | 74,765 |
| | 15,669 |
| | 15,380 |
| | 90,884 |
| | 90,650 |
| $ | — |
| | — |
| | 55,894 |
| | 54,751 |
| | 9,973 |
| | 9,160 |
| | 65,867 |
| | 63,911 |
|
| | | | | | | | | | | | | | | | |
Florida securities excluding third party guarantees | | | | | | | | | | | | | | | | |
AAA | $ | 509 |
| | 505 |
| | — |
| | — |
| | — |
| | — |
| | 509 |
| | 505 |
| |
AA | — |
| | — |
| | 45,054 |
| | 45,111 |
| | 3,600 |
| | 3,625 |
| | 48,654 |
| | 48,736 |
| |
A | — |
| | — |
| | 23,659 |
| | 23,630 |
| | 10,555 |
| | 10,221 |
| | 34,214 |
| | 33,851 |
| |
BBB | — |
| | — |
| | 1,739 |
| | 1,756 |
| | — |
| | — |
| | 1,739 |
| | 1,756 |
| |
BB and other | — |
| | — |
| | 4,254 |
| | 4,268 |
| | 1,514 |
| | 1,534 |
| | 5,768 |
| | 5,802 |
| |
Total | $ | 509 |
| | 505 |
| | 74,706 |
| | 74,765 |
| | 15,669 |
| | 15,380 |
| | 90,884 |
| | 90,650 |
| |
Valuation of InvestmentsVALUATION OF INVESTMENTS
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 other-than-temporary 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 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 other-than-temporary impairment has occurred, the amount of the other-than-temporary impairment 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, the other-than-temporary impairment 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 will be required to sell the security before recovery of its amortized cost basis, the other-than-temporary impairment is separated into the following: a)(a) the amount representing the credit loss; and b)(b) the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the other-than-temporary impairment recognized in earnings becomes the new amortized cost basis of the investment. The new amortized cost basis is not adjusted for subsequent recoveries in fair value.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018
There were $551,000no other-than-temporary impairments recorded for the three and nine months ended September 30, 2019 The Company recognized other-than-temporary impairments of $0.6 million during the three months ended September 30, 2018 related to securities that we dodid not intend to hold until recovery of value and no impairments recorded for the same period in 2017. In addition, the Company recognized other-than-temporary impairments of $776,000$0.8 million during the nine months ended September 30, 2018 and $17,000 for the nine months ended September 30, 2017.2018.
Liquidity and Capital ResourcesLIQUIDITY 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 on insurance operations to ensure stable and reliable sources of cash flows to meet obligations and is provided by a variety of sources.
Liquidity
September 30, 2019 Form | 10-Q 53
|
| | |
CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
| | |
Our liquidity requirements of the Company are met primarily by funds provided from operations. Premium deposits and revenues, investment income and investment maturities are the primary sources of funds, while investment purchases, policy benefits, and operating expenses are the primary uses of funds. We historically have not had to liquidate investments to provide cash flow, and did not do sothere were no liquidity issues during the first nine months of 2018.ended September 30, 2019. Our investments as of September 30, 2018, consist of 92.2%93.0% of marketable debt securities classified as available-for-sale and 1.1% of equity securities that could be readily converted to cash for liquidity needs.
A primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals. We include provisions in 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, have been largely consistent with our assumptions in asset liability management, our associated cash outflows historically have not had an adverse impact on our overall liquidity. Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur surrender charges and undergo a new underwriting process in order 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.
Our whole life and endowment products provide the policyholder with alternative election decisionsalternatives 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 endowment products representing approximately 50%41% of total inforceinsurance in force with older contracts sold historically that will begin reaching their maturities over the next several years and policyholder election behavior is not known. 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 policyholderpolicyholders 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. We currently anticipate that available liquidity sources and future cash flows will be adequate to meet our needs for funds, but we will monitor closely our policyholder behavior patterns.
A large portion of our debt security investment portfolio will mature in the next sevenseveral years and could be called sooner as wesooner. We were subject to significant call activity beginning in 2009 due to the declining interest rate environment, and we reinvested intowhich required us to reinvest in debt securities with 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. Thisrates which could also negatively impact our liquidity.
A primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals. We include provisions within 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, have been largely consistent with our assumptions in asset liability management, our associated cash outflows have, historically, not had an adverse impact on our overall liquidity. Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur surrender charges and undergo a new underwriting process 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. We currently anticipate that available liquidity sources and future cash flows will be adequate to meet our needs for funds.
Cash flows from our insurance operations historically have been sufficient to meet current needs. Cash flows from operating activities were $65.2$50.9 million and $68.9$65.2 million for the nine months ended September 30, 20182019 and September 30, 2017,2018, respectively. 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. Net cash outflows from investing activities totaled $42.4$48.1 million and $61.6$42.4 million for the nine months ended September 30, 2019 and 2018, and
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018
September 30, 2017, 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.
In 2015, we determined that a portionWe have established an estimated liability of the life insurance and annuity policies issued by our subsidiary insurance companies failed to qualify for the favorable U.S. federal income$9.9 million, net of tax, treatment afforded by Sections 7702 and 72(s) of the Internal Revenue Code ("IRC") of 1986. Asas of September 30, 2018, we have established a liability of $8.9 million2019 for probable liabilities and expenses associated with thisa tax compliance matter related to the qualification of certain of our policies as described in Note 7. Commitments and Contingencies, which represents management’s estimate and weestimate. We have disclosed an estimated range related to probable liabilities and expenses of $4.5$6.0 million to $52.5 million.million, net of tax. This estimate andestimated range includes projected toll charges, withholdingtaxes, interest and feespenalties payable to the IRS, as well as any other costs attributedestimated increased payout obligations to remediationcurrent holders of non-compliant domestic life insurance.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 taxable benefits under non-compliantthe tax liabilities for policies. Given the range of potential outcomes and the significant variables assumed in establishing our
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estimates, actual amounts incurred may exceed our reserve and could exceed the high end of our estimated range of liabilities and expenses.
In May 2017, we submitted an offer under Revenue Procedure 2008-40 to enter into closing agreements with the IRS covering certain CICA and CNLIC domestic life insurance contracts. A voluntary, taxpayer-initiated closing agreement under this IRS revenue procedure generally addresses situations where a taxpayer has inadvertently failed to meet the requirements in Section 7702 of the IRC, which defines life insurance for federal tax purposes. A voluntary closing agreement allows taxpayers to come forward to the IRS with self-identified violations or deficiencies and work with the IRS towards a mutual resolution to correct the violations or deficiencies. The consideration offered by CICA and CNLIC under the proposed closing agreements totaled approximately $124,000 and $4,000, respectively. The consideration that will be required under the final closing agreements could be different and will depend on how the IRS responds to the closing agreements offer. We expect to file other offers for additional closing agreements with the IRS for the SPLIC and MGLIC life insurance businesses in 2019. In addition, we have initiated discussions with the IRS to address potential liabilities regarding the CICA international life insurance business and our annuity business.
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.
Dividends are declared and paid from time to time from the insurance affiliates as determined by their respective boards.
The NAIC has established minimum capital requirements in the form of Risk-Based Capitalrisk-based capital ("RBC"). RBC factorsconsiders 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-based capital""Authorized Control Level Risk-Based Capital" and compares this level 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 RBC fall below 200%, a series of remedial actions by the affected company would be required. Capital balances could be impacted by this tax compliance issue for the insurance companies affected. The holding company would anticipate funding the life companies as neededWe have a parental guarantee between Citizens and CICA, Citizens' wholly-owned subsidiary domiciled in Colorado, to keep capital amounts within required levels.maintain a RBC level above 350%.
CICA Ltd. is subject to theThe Bermuda Monetary Authority ("BMA") established risk-based regulatory capital adequacy and solvency margin requirements of the BMA. We may need to provide funding to CICA Ltd. to assist it to respond to,for Bermuda insurers that mandate that a Bermuda-domiciled subsidiary’s Enhanced Capital Requirement ("ECR") be calculated by either (a) Bermuda Solvency Capital Requirement ("BSCR"), or comply with, any changes in the(b) an internal capital requirementsmodel that the BMA may require. For risks relatedhas approved for use for this purpose. CICA Ltd., Citizens' wholly-owned subsidiary domiciled in Bermuda, uses the BSCR in calculating its solvency requirements. The Economic Balance Sheet ("EBS") framework is embedded as part of the BSCR and forms the basis of its ECR.
In order to regulation byminimize the risk of a shortfall in capital arising from an unexpected adverse deviation, the BMA see Part II, Item 1.A - Risk Factor - “CICA Ltd. is subject to extensive government regulation byhas established a threshold capital level (termed the Bermuda Monetary Authority (“BMA”Target Capital Level ("TCL")), set at 120 percent of ECR, which is a new regulatory regimeserves as an early warning tool for the Company. Regulation byBMA. Failure to maintain statutory capital at least equal to the TCL would likely result in increased BMA 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.”regulatory oversight.
All U.S. insurance subsidiaries were aboveexceeded the RBC minimums at September 30, 2018. 2019. CICA Ltd. held capital in excess of the BSCR requirements at September 30, 2019.
PARENT COMPANY LIQUIDITY AND CAPITAL RESOURCES
58Citizens 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 real estate held-for-sale. Our cash flows depend primarily upon the availability of statutorily permissible payments, primarily payments under management agreements from our life insurance subsidiaries. The ability to make payments is limited by applicable laws and regulations of Bermuda and U.S. states 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, our subsidiaries have made dividend payments of available funds from time to time in relation to business strategies.
CITIZENS, INC.CONTRACTUAL OBLIGATIONS AND CONSOLIDATED SUBSIDIARIES
September 30, 2018
Contractual Obligations and Off-balance Sheet ArrangementsOFF-BALANCE SHEET ARRANGEMENTS
There have been no material changes in contractual obligations from those reported in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.2018. The Company does not have off-balance sheet arrangements at September 30, 2018.2019. We do not utilize special purpose entities as investment vehicles, nor are there any such entities in which we have an investment that engage in speculative activities of any nature, and we do not use such investments to hedge our investment positions.
Parent Company Liquidity and Capital ResourcesCRITICAL ACCOUNTING POLICIES
Citizens is a holding company and has had minimal operations of its own. Its assets consist primarily of the capital stock of its subsidiaries, cash, fixed income securities, mutual funds and investment real estate. Accordingly, Citizens' cash flows depend upon the availability of statutorily permissible payments, primarily payments under management agreements from its primary life insurance subsidiaries - CICA Ltd., CICA and SPLIC. The ability to make payments is limited by applicable laws and regulations of Colorado, CICA's state of domicile, Bermuda, CICA Ltd.’s country 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. Citizens historically has not relied upon dividends from subsidiaries for its cash flow needs. However, CICA and SPLIC do dividend available funds from time to time in relation to new acquisition target strategies.
Critical Accounting Policies
We have prepared a current assessment of our critical accounting policies and estimates in connection with preparing our interim unaudited consolidated financial statements as of and for the three and nine months ended September 30, 20182019 and September 30, 2017.2018. We believe that the accounting policies set forth in the Notesnotes to our consolidated financial statements and “Critical"Critical Accounting Policies and Estimates”Estimates" in the Management’s Discussion and Analysis of Consolidated
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Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 20172018 continue to describe the significant judgments and estimates used in the preparation of our consolidated financial statements.
Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GeneralGENERAL
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 securities portfolio generally increases when interest rates decrease and decreases when interest rates increase. For additional information regarding market risks to which we are subject, see "ItemItem 1. Financial Statements - Note 5. Investments - Valuation of Investments in Fixed Maturity and Equity Securities" above.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018
the notes to our consolidated financial statements for further discussion.
The following table summarizes net unrealized gains and losses as of the dates indicated.
| | | September 30, 2018 | | December 31, 2017 | September 30, 2019 | | December 31, 2018 |
| Amortized Cost | | Fair Value | | Net Unrealized Gains | | Amortized Cost | | Fair Value | | Net Unrealized Gains | |
| (In thousands) | |
Fixed maturities, available-for-sale | $ | 1,193,211 |
| | 1,200,154 |
| | 6,943 |
| | 935,977 |
| | 974,609 |
| | 38,632 |
| |
Fixed maturities, held-to-maturity | — |
| | — |
| | — |
| | 233,961 |
| | 241,377 |
| | 7,416 |
| |
(In thousands) | | Amortized Cost | | Fair Value | | Net Unrealized Gains | | Amortized Cost | | Fair Value | | Net Unrealized Gains |
Total fixed maturities | $ | 1,193,211 |
| | 1,200,154 |
| | 6,943 |
| | 1,169,938 |
|
| 1,215,986 |
| | 46,048 |
| $ | 1,278,293 |
| | 1,369,648 |
| | 91,355 |
| | 1,223,747 |
|
| 1,231,039 |
| | 7,292 |
|
Total equity securities | $ | 14,916 |
| | 15,529 |
| | 613 |
| | 15,289 |
| | 16,164 |
| | 875 |
| $ | 15,055 |
| | 15,845 |
| | 790 |
| | 15,055 |
| | 15,068 |
| | 13 |
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Market Risk Related to Interest RatesMARKET RISK RELATED TO INTEREST RATES
Our exposure to interest rate changes results from our significant holdings of fixed maturity investments, which comprised 92.2%93.0% of our investment portfolio based on carrying value as of September 30, 2018.2019. These investments are mainly exposed to changes in U.S. Treasury rates. Our fixed maturity investments include U.S. Government-sponsored enterprises, U.S. Government bonds, securities issued by government agencies, municipal bonds and corporate bonds.
To manage interest rate 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 annually with respect to our available-for-sale fixed maturities investments using hypothetical test scenarios that assume either upward or downward shifts in the prevailing interest rates. The changes in fair values of our debt and equity securities as of September 30, 20182019 were within the expected range of this analysis.
Changes in interest rates typically have a sizable effect on the fair values of our debt and equity securities. The interest rate of the ten-year U.S. Treasury bond increaseddecreased to 3.05% during the nine months ended 1.68% at September 30, 2018,2019, from 2.40%2.69% at December 31, 2017.2018. Net unrealized gains on fixed maturity securities totaled $6.9$91.4 million at September 30, 2018,2019, compared to $46.0$7.3 million at December 31, 2017.2018.
The fixed maturity securities portfolio is exposed to call risk, as a significant portion of the current bond 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 classified as trading instruments. All of the Company's fixed maturities were held in available-for-sale at September 30, 2018.2019. At September 30, 20182019 and December 31, 2017,2018, we had no investments in derivative instruments, nor did we have any subprime or collateralized debt obligation risk.
Market Risk Related to Equity Prices
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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%1.1% of our total investments based upon carrying value at September 30, 2018,2019, with 98.5%97.2% invested in diversified equity and bond mutual funds. WeIn light of our minimal ownership of equity investments, we believe that significant decreases in the equity markets would not have a material adverse impact on our total investment portfolio.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018
Item 4.CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
DisclosureWe 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 SECthe 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 and principal financial officer, principal accounting officer and principal operating officer, evaluated the design and operationeffectiveness of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of September 30, 2018.2019. Based on such evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level due to the material weaknessesweakness in internal control over financial reporting that werewas reported in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 (“20172018 ("2018 Annual Report”Report"), which remainremains unremediated as of September 30, 2018.2019.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Except as discussed below, duringDuring the three months ended September 30, 2018,2019, there were no changes in the Company's internal controlscontrol over financial reporting (as defined in rules 13a-15(f) and 15d-15(f) under the Exchange Act) that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
During the three months ended September 30, 2018, we completed the implementation of a new Oracle Enterprise Resource Planning application, which has replaced severalREMEDIATION OF MATERIAL WEAKNESS
As previously described in Part II, Item 9A of our back office legacy systems, such as2018 Annual Report, we began implementing a remediation plan to address the general ledger, accounts payable, cash management, and fixed asset systems. In addition, we also implemented a new actuarial valuation and modeling system, GGY AXIS, for the life and annuity insurance products of CICA and CICA Ltd. As a result of these implementations, we have experienced certain changes to our processes and procedures which,material weakness in turn, resulted in changes to our internal control over financial reporting related to reportsineffectively designing and maintaining controls to analyze and account for significant and unusual transactions. The material weakness will not be considered remediated until management has designed and implemented internal controls to establish policies and procedures that clearly communicate expectations of personnel regarding significant and unusual transactions. We expect the newly designed and implemented controls to include, among other controls, the preparation and review of information used in our reporting from new sources. Management will continuesufficiently detailed analysis to evaluate the accounting treatment for all potentially significant impacts of significant and monitor our internal controlsunusual transactions on a timely basis, the engagement of relevant subject matter experts as processesnecessary and procedures in each of the affected areas evolve. For a discussion of risks relatedreview to the implementation of Oracle Enterprise Resource Planning application and GGY AXIS Valuation and Modeling system, see Part II, Item 1A-Risk Factors-“Our failure to maintain effective information systems could adversely affect our business” in this Form 10-Q.
STATUS OF REMEDIATION OF MATERIAL WEAKNESSES
While we have made progress on strengthening our internal controls relative to the previously identified material weaknesses, material weaknesses continue to exist. Management, with oversight from our principal executive officer and principal financial officer, has identified and initiated actions that, once fully implemented and operating for a sufficient period of time, are designed to remediate the material weaknesses in each of the five components of internal control (control environment, risk assessment, control activities, information and communication, and monitoring) as defined by the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO 2013") identifiedensure advice is appropriately considered in the Company’s 2017 Annual Report. Specifically,analysis and conclusions regarding the Company has performed or intends to undertakeaccounting treatment of significant and unusual transactions. We expect that the following actions to remediate the Company’s identifiedremediation of this material weaknesses:
For information technology, design and implement controls related to user access, privileged access and change management processes that operate effectively;
Perform user acceptance testing of system generated reports that are used in the operation of business process and management review controls to provide a baseline to support reliance on change management controls going forward;weakness will be completed by December 31, 2019.
61
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Implement an End User Control (“EUC”) Policy, which includes (i) an inventory and risk assessment of all financially relevant spreadsheets, and (ii) designing and implementing EUC controls over the accuracy and completeness of those spreadsheets;
Reevaluate the design of business process and management review controls with a focus on the precision of those controls;
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 relevant employees;
Conduct a comprehensive risk assessment which will include a focus on risks related to processing and reporting financial information 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 to demonstrate that our internal controls framework addresses relevant principles and points of focus of COSO 2013.
We will make further changes as appropriate. 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 compliance with the 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. We began this testing in the third quarter of 2018.
PART II. OTHER INFORMATION
Item 1.LEGAL PROCEEDINGS
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 was 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, (the “Investigation”). On August 22, 2018, the Company received a notice from the SEC (the “Notice”) stating that the SEC has concluded the Investigation and, based on the information that the SEC had as of the date of the Notice, the SEC has decided to not recommend an enforcement action against the Company relating to the Investigation. The Notice was provided under the guidelines set forth in the final paragraph of Securities Act Release No. 5310.
There are no material pending legal proceedings in which we or any of our subsidiaries is a party or in which any of our or their property is the subject. Insubject, except as set forth below.
On November 7, 2018, Citizens, CICA Ltd. and CICA filed a lawsuit in the normal courseDistrict Court of Travis County, Texas (the “District Court”) against (i) Randall Riley (“Riley”), a former Citizens executive and son of Citizens’ founder Harold E. Riley, (ii) Citizens American Life, LLC and Citizens American Life, Inc. (collectively, “CALI”), copycat companies formed by Riley and (iii) Alexis Enrique Delgado, Carlos Nalsen Landa, Enrique Pinzon Ruiz, Johan Emilio Mikuski Silva and Esperanza Peralta de Delgado (collectively, the “Los Raudales Defendants,” and together with Riley and CALI, collectively the “Defendants”), former independent consultants of Citizens, for unfair competition, misappropriation of Citizens’ trade secrets, tortious interference with Citizens’ existing contracts with its independent consultants and, with respect to the Los Raudales Defendants, breach of their independent consultant contracts with Citizens. The lawsuit sought (i) a declaration that Citizens had grounds to terminate the Los Raudales Defendants for cause under the independent consultant contracts and the Los Raudales Defendants are not entitled to future commissions under such contracts, (ii) injunctive relief, (iii) damages and (iv) attorneys’ fees and costs. Among other things, the suit alleges that Riley formed CALI and misappropriated trade secrets during the time he was employed by Citizens, in violation of his contractual and other duties to Citizens, and that the Los Raudales defendants breached their independent consultant contracts with Citizens by inducing or attempting to induce other independent consultants to terminate or reduce service to Citizens and disclosing confidential information.
On January 25, 2019, the Defendants filed a motion to dismiss certain claims alleged in the suit, and on April 11, 2019, the District Court denied the Defendants’ motion in its entirety. On May 29, 2019, Citizens, CICA Ltd. and CICA filed a motion for a preliminary injunction to bar the Defendants from continuing to engage in unfair competition and misappropriation of Citizens’ trade secrets and tortious interference with Citizens’ existing contracts with its independent consultants. A hearing for the preliminary injunction was held on August 12, 2019. On August 13, 2019, the District Court denied the application for a temporary injunction, and on August 19, 2019, Citizens, CICA Ltd. and CICA filed the notice of appeal in the Third Court of Appeals in Austin, Texas with respect to the District Court’s August 13, 2019 decision. The Defendants have until November 11, 2019 to respond.
On September 10, 2019, Citizens, CICA Ltd. and CICA filed an amended complaint and added additional defendants to the lawsuit, including (i) Michael P. Buchweitz, Jonathan M. Pollio, Jeffrey J. Wood and Steven A. Rekedal, former Citizens executives and employees and, in the case of Steven A. Rekedal, a former Citizens independent consultant, (ii) First Trinity Financial Corporation, and Trinity American, Inc. (collectively, “First Trinity”) and International Marketing Group S.A., LLC, entities that have founded a business on the Companyexploitation of Citizens’ trade secrets and goodwill, and (iii) Gregg E. Zahn, a First Trinity executive. The amended complaint asserted additional claims for breach of contract, conspiracy and unjust enrichment.
While it is not possible at this time to predict with any degree of certainty the ultimate outcome of the appeal of the District Court’s denial of the preliminary injunction or this litigation, Citizens believes it has a basis for an injunctive relief and intends to vigorously pursue its action against the Defendants and seek appropriate compensation and any other remedies to which it may be entitled.
From time to time, we may be subject to variousother legal and regulatory actions which are immaterial to the Company's consolidated 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 devoterelating to our business. We may incur defense costs, including attorneys' fees, and other direct litigation costs associated with defending any claims. If we suffer an adverse judgment as a result of litigation claims, it could have a material adverse effect on our business, results of operations and we are subject to risks related to litigation and regulatory matters.” in Item 1A. Risk Factors.financial condition.
September 30, 2019 Form | 10-Q 58
Item 1A. RISK FACTORS
Investing in our Company involves certain risks.Set forth below are certain risks with respectThere have been no material changes to our Company. Readers should carefully review these risks, together with the risk factors set forthincluded in the Company’sour Annual Report on Form 10-K for the year ended December 31, 20172018 and other information contained in this report. The risks and uncertainties we have described in 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. Any 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, operating results, prospects or financial condition. References in the risk factors below 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.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2018
Risks Relating to Our Business
A substantial majority of our sales derives from residents of foreign countries and is subject to risks associated with 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.
A substantial majority of our direct premiums, approximately 71% in 2018, are from foreign countries, primarily those in Latin America and the Pacific Rim. These sales are made through 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.
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 with the application of foreign laws to our sales of policies to residents in foreign countries. 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. We have never sought to qualify to do business in any foreign country and have never submitted the insurance policies that we issue to residents of foreign countries for approval by any foreign or domestic insurance regulatory agency. Traditionally, we have sought to mitigate risks associated with the potential application of foreign laws to our sales of insurance policies in our foreign markets 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 relyQuarterly Reports on our independent consultants to comply with laws applicable to them in marketing our insurance products in their respective countries. Even with the precautionary measures, practices and policies mentioned above, the Company may determine that the risks associated with a particular market and its regulatory environment outweigh the benefits of conducting further business in that market.
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 and lack of clarity in certain regulations. Our compliance review has confirmed the previously disclosed risks related to foreign insurance laws associated with our current business model, at least in certain foreign countries. As a result of this evaluation, on April 25, 2018 the Company announced its decision to discontinue accepting life insurance applications from Brazilian citizens. While the Company intends to continue fulfilling commitments under existing policies, the regulatory environment in Brazil does not afford substantial clarity or guidance as to the extent to which the Company will be able to continue to fulfill such commitments.
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 a foreign government will enact additional legislation that may render our existing insurance products either illegal or less attractive to potential customers. There is the further risk that regulators may become more aggressive in enforcing any perceived violations of their laws and seek to impose monetary fines, criminal penalties, 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 advisable to, comply with those requirements. Any determination by a foreign country that we or our policy sales are subject to regulation under their laws, or any actions by a
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foreign country to enforce such laws more aggressively, 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.
Effective on July 1, 2018, the Company effected a novation of all of the international policies issued by CICA to CICA Ltd. The novation may result in adverse consequences that are difficult to anticipate. For example, insurance policies issued or maintained by a Bermuda-domiciled company may be subject to more stringent regulation and scrutiny from foreign regulators compared to insurance policies issued or maintained by a United States-domiciled company. In addition, policies issued or maintained by a Bermuda-domiciled company may be subject to international financial reporting requirements that do not currently apply to United States-domiciled companies, which may render policies issued or maintained by CICA Ltd. less attractive. This change in turn could result in reduced sales of new policies, fewer renewals and/or a higher level of surrenders of existing policies which may, in the aggregate, have a material adverse effect on the Company’s financial performance.
Any disruption to the marketing and sale of our policies to residents of foreign countries, resulting from the actions of foreign regulatory authorities, the withdrawal from Brazil or other markets, the implementation of new Bermuda regulatory obligations or otherwise, could have a material adverse effect on our business, results of operations and financial condition.
Our operating results 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 qualifyForm 10-Q for the
favorable U.S. federal income tax treatment afforded by Sections 7702quarter ended March 31, 2019 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,June 30, 2019, except 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 liability of $8.9 million as of September 30, 2018 for probable liabilities and expenses. The probability weighted range of financial estimates relative to this issue is $4.5 million to $52.5 million. This estimated range includes projected toll charges and fees payable to the IRS, as well as any other costs attributed to remediation of non-compliant domestic life insurance. 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 and annuity 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 significant variables assumed in establishing our estimates, actual amounts incurred may exceed our reserve and 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 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 submit offers to enter into Closing Agreements with the IRS for the SPLIC and MGLIC life insurance business in 2018. We have initiated discussions with the IRS to address potential liabilities regarding the CICA international business and our annuity business.
CICA Ltd. is subject to extensive government regulation by the Bermuda Monetary Authority (“BMA”), which is a new regulatory regime for the Company. Regulation by the BMA, 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.
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. CICA Ltd. is now subject to extensive regulation and supervision by the BMA in jurisdictions where
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we do business, including global insurance regulations, tax, financial services, privacy, anti-money laundering, bank secrecy, anti-corruption and foreign asset control laws, and minimum capital requirements. 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 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 cannot predict with certainty how the international business model described above will be affected by the novation of our international policies to a foreign sovereign jurisdiction nor the regulatory burden on our capital requirements or other resources.
We face financial, liquidity and capital market risks in our operations.
As an insurance holding company with significant investment exposure, 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. As of December 31, 2017, the Company has a significant amount of endowment products representing approximately 45.9% of total inforce with older contracts sold historically that will begin reaching their maturities over the next several years and policyholder election behavior is not known. If 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.
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 as of December 31, 2017. 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 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.
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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 September 30, 2018, fixed maturities represented $1.2 billion or 92.2% of our total investments of $1.3 billion. 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 September 30, 2018, approximately 97.1% of our fixed maturities were investment grade with 73.2% 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.
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 September 30, 2018 were $9.7 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
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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 inforce 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, we could exhaust all other sources of liquidity and be forced to obtain additional financing or liquidate assets, perhaps on unfavorable terms. The availability of additional 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. If we are forced to dispose of assets on unfavorable terms, it could have an adverse effect on our liquidity, results of operations and financial condition.
Catastrophes may adversely impact liabilities for policyholder claims and reinsurance availability.
Our insurance operations are exposed to the risk of catastrophic events. The extent of losses from a catastrophe is a function of both the total amount of insured exposure 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 obligations 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.
Our life insurance operations are exposed to the risk of catastrophic mortality, such as 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 impact on the global economy or 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
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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 pandemic 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 September 30, 2018, we had $158.3 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 September 30, 2018, we had $16.2 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 value of our goodwill, which would increase our expenses and materially adversely affect our results of operations and financial condition.
Goodwill represents the excess of the amount paid by us to acquire various life insurance companies over the fair value of their net assets at 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 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 similar 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, which could have a material adverse effect on our results of operations and financial condition. In 2017, we recognized a goodwill impairment of $4.6 million on our Home Service Segment. Goodwill in our consolidated financial statements related to our Life segment was $12.6 million as of September 30, 2018.
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.
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Our conversion to a new actuarial valuation system is not yet complete and contains known uncertainties that could result in identification of additional errors in 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 has been completed for some of our individual company valuations but is on-going for others and is expected to be completed in the next one to two years.
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.
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 and financial condition.
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 the reinsurance protection we purchase. The high cost of reinsurance or lack of affordable coverage could adversely affect our results of operations and financial condition.
Our reinsurance facilities are generally subject to annual renewal. We may not be able to maintain 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, results of operations and financial condition.
In 2017, we reinsured $503.7 million 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 reinsurer may increase the rate it charges us for reinsurance. If our cost of reinsurance were to increase, we might not be able to recover these increased costs, and our results of operations and financial condition could be materially adversely affected.
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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 foreign 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, including a company recently formed by former employees and independent consultants.
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 country 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.
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.
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, independent consultants and our employee agents. These relationships are significant for both our revenues and our profits. In our life insurance segment, we depend almost exclusively on the services of independent marketing firms and independent consultants. In our home service insurance segment, we depend on employee agents whose role in our distribution process is integral to developing and maintaining relationships with policyholders. 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 and agents and broader arrays of products and have a greater diversity of distribution resources, better brand recognition, more competitive pricing, lower cost structures and greater financial strength or claims paying ratings than we do. We compete with other insurers for marketing firms, independent consultants and employee agents primarily on the basis of our compensation 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. Modifications in our international business model including, without limitation, our novation to a Bermuda-based entity and our withdrawal from certain markets may have an adverse impact on our ability to attract and retain effective sales representatives.
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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. Although 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 change or interpretation.
If there is a change in the manner in which our independent contractors are classified or an adverse determination with respect to some or all of our independent contractors by a court or governmental agency, we could incur significant costs in complying with such laws and regulations, including in respect of tax withholding, social security payments, government and private pension plan contributions and recordkeeping, or we may be required to modify our business model, any of which could have a 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.
We 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; mandating capital and surplus requirements; regulating trade and claims practices; approving policy forms; and restricting companies' ability to enter and exit markets.
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 state of domicile, is considered important by all state insurance regulatory authorities. Failure to maintain required levels of statutory surplus could result in increased regulatory scrutiny and enforcement action by regulatory authorities.
Most 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 regulations and their interpretations, including the USA Patriot Act, our revenues, results of operations and financial condition could be materially adversely affected.
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 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. We must also effectively consolidate our information systems to eliminate redundant or obsolete applications. 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.
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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.
Our success is also dependent on our ability to successfully implement new or upgraded systems and technology. For example, during the third quarter of 2018, we completed the implementation of a new Oracle Enterprise Resource Planning application, which has replaced several of our back office legacy systems, such as the general ledger, accounts payable, cash management, and fixed asset systems. We also implemented a new actuarial valuation and modeling system, GGY AXIS, related to CICA and CICA Ltd. actuarial valuations. There are inherent risks associated with the modifications to our general ledger system and actuarial valuation system, including the potential for inaccurately capturing data as well as system disruptions. Either of these problems, if not anticipated and appropriately mitigated, could have a negative impact on our ability to provide timely and accurate financial reporting and have a material adverse effect on our results of operations and financial condition.
Failures of disclosure controls and procedures and internal control over 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, are subject to human error. Controls that rely on models may be subject to inadequate design or inaccurate assumptions or estimates. Controls also can be circumvented 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 our Annual Report on Form 10-K as of for the year ended December 31, 2017,2018, we have identified control deficienciesa deficiency in our disclosure controls andinternal control over financial reporting process that constituteconstitutes a material weaknessesweakness and for which remediation is still in process as of September 30, 2018.2019. If we fail to design effective controls, fail to remediate control deficiencies or fail to otherwise maintain effective internal controlscontrol over financial reporting in the future, such failures could result in a material misstatement of our annual or quarterly consolidated financial statements that would not be prevented or detected on a timely basis and which could cause investors to lose confidence in our consolidated 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 with the SEC, subject us to litigation and regulatory scrutiny and cause us to incur substantial additional costs in future periods relating to the implementation of remedial measures.
Our failure to protect confidential information and privacy could result in the unauthorized disclosure of sensitive or confidential corporate or customer information, damage to our reputation, loss of customers, fines, penalties and adverse effects on our results of operations and financial condition.
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.
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 cyber security, administrative, technical and physical safeguards or
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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 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 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 the valuation allowance against our deferred tax assets.
We evaluate our deferred tax asset (“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, financial condition and capital position.
We face a greater risk of money laundering activity associated with sales derived from residents of certain foreign countries.
Some of our top international markets are in countries identified by the U.S. Department of State as jurisdictions 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, fraud and other criminal activity (“BSA Program”). We have an enhanced BSA Program with additional controls, such as list screening software beyond sanctions screening required by the Office of Foreign Assets Control (“OFAC”), enhanced payment due diligence and transaction controls. However, there can be no assurance that these enhanced controls will entirely mitigate money laundering risk associated with these jurisdictions.
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Risks Relating to Our Capital Stock
If our foreign policyholders reduced or ceased participation in our Stock Investment Plan (the “Plan”) or if a securities regulatory authority were to deem the CISIP's operation contrary to securities laws, the volume of Class A common stock purchased on the open market through the CISIP, and the price of our Class A common stock, could fall.
More than 96% of the shares of Class A common stock purchased under the CISIP in 2017 were purchased by foreign holders of life insurance policies (or related brokers); the remaining 4% of the shares of Class A common stock purchased under the CISIP in 2017 were purchased by approximately 1,864 participants resident in the United States. The CISIP is registered with the SEC pursuant to a 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 to applicable laws and regulations of its jurisdiction, such authority may issue or assert a fine, penalty or cease and desist order against us 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 participate in the Plan, or 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.
Due to required regulatory approval for acquisition of control of a regulated U.S. domestic insurance company, control of our Company, through the ownership of our Class B common stock, has not yet transferred from our founder's trust to a 501(c)(3) charitable foundation established by our founder, and we cannot determine whether or when any change in our management, operations, or operating strategies will occur.
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 stock 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 common stock. 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 will transfer from the Trust to the Harold E. Riley Foundation, a charitable organization established under 501(c)(3) of the Internal Revenue Code (the "Foundation").
To date, the estate process related to the Class B common stock is not complete and the required state insurance regulatory approvals for change of control to occur have not been received. The Foundation has not sought to acquire record ownership of the Class B common stock, exercise voting power with respect to such shares or otherwise seek to exercise control over the Company's management or operations, and the Trust currently remains the holder of record of the Class B common stock. The Foundation and the Estate of Harold E. Riley are proceeding independent of the Company to obtain regulatory approval from the Colorado Division of Insurance, the Texas Department of Insurance, the Louisiana Department of Insurance and the Mississippi Department of Insurance through the requisite Form A approval process. The Company does not know if or when regulatory approvals of the transfer ultimately will be granted. If such approvals are obtained from the states' department of insurances listed above, the Company will record the transfer of the controlling Class B common stock from the Trust to the Foundation in the Company's shareholder records.
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 eleven 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 may occur to our board, management, or corporate operating strategies as a result of different ownership of our Class B common stock.
If and when the Foundation becomes the record holder of the Class B common stock, 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, will be triggered. 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
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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.
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, “A substantial majority of our sales derives from residents of foreign countries and is 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, may discourage takeovers and business combinations that our shareholders might consider to be in their best interests.
Our articles of incorporation and bylaws, as well as various state insurance laws, may delay, deter, render more difficult or prevent a takeover attempt our shareholders might consider in their best interests. As a result, our shareholders will 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 replace or remove our directors and have other anti-takeover effects that may delay, deter 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 held by the Harold E. Riley Trust until such time that the Harold E. Riley Foundation receives regulatory approval for acquisition of the Class B common stock and becomes holder of record; and
our board of directors may issue one or more series of preferred stock without the approval of our shareholders.
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State insurance laws generally require prior approval of a change in control of an insurance company. Generally, such laws provide that control over an insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing 10% or more of the voting securities of the insurer. In considering an application to acquire control of an insurer, an insurance commissioner generally will consider such factors as the experience, competence and financial strength of the proposed acquirer, the integrity of the proposed acquirer's board of directors and executive officers, the proposed acquirer's plans for the management and operation of the insurer, and any anti-competitive results that may arise from the acquisition. In addition, a person seeking to acquire control of an insurance company is required in some states to make filings prior to completing an acquisition if the acquirer 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.
We have never paid any cash dividends on our Class A common stock and do not anticipate doing so in the foreseeable future.
We have never paid cash dividends on our Class A common stock, as it is our policy to retain earnings for use in the operation and expansion of our business. We do not expect to pay cash dividends on our Class A common stock for the foreseeable future.
Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.Not applicable.
Item 4.MINE SAFETY DISCLOSURES
Not applicable.
Item 5.OTHER INFORMATION
None.
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September 30, 2019 Form | 10-Q 59
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Item 6.EXHIBITS
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Exhibit Number | | The following exhibits are filed herewith: |
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101.INS | | XBRL Instance Document* |
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101.SCH | | XBRL Taxonomy Extension Schema* |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase* |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase* |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase* |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase* |
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* Filed herewith.
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September 30, 2019 Form | 10-Q 60
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | CITIZENS, INC. |
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| | By: | /s/ Geoffrey M. Kolander |
| | | Geoffrey M. Kolander |
| | | President and Chief Executive Officer |
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| | By: | /s/ Kay E. OsbournJeffery P. Conklin |
| | | Kay E. OsbournJeffery P. Conklin |
| | | Executive Vice President, Chief Financial Officer and Treasurer |
| | | and Chief Investment Officer |
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Date: | November 7, 20186, 2019 | | |
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September 30, 2019 Form | 10-Q 61