UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2022March 31, 2023
OR
☐ TRANSITION 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
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CITIZENS, INC. |
(Exact name of registrant as specified in its charter) |
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Colorado | 84-0755371 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
11815 Alterra Pkwy, Floor 15, Austin, TX 78758
(Current Address)
Registrant's telephone number, including area code: (512) 837-7100
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Securities registered pursuant to Section 12(b) of the Act |
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Class A Common Stock | CIA | NYSE |
(Title of each class) | (Trading symbol(s)) | (Name of each exchange on which registered) |
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. x Yes 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). x Yes 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," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act:
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Large accelerated filer | ☐ | | Accelerated filer | ☒ | | Emerging growth company | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐☒ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes x No
As of August 1, 2022,May 3, 2023, the Registrant had 50,152,14549,856,895 shares of Class A common stock outstanding and 0 shares of Class B common stock outstanding.
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TABLE OF CONTENTS | | | | | | | | | | | |
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Part I. 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 | |
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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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June 30, 2022March 31, 2023 | 10-Q 1
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Balance Sheets | | | | | | | | | | | |
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(In thousands) | June 30, 2022 | | December 31, 2021 |
Assets | (Unaudited) | | |
Investments: | | | |
Fixed maturity securities available-for-sale, at fair value (amortized cost: $1,362,404 and $1,343,755 in 2022 and 2021, respectively) | $ | 1,237,004 | | | 1,470,617 | |
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Equity securities, at fair value | 12,711 | | | 14,844 | |
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Policy loans | 78,586 | | | 80,307 | |
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Other long-term investments (portion measured at fair value $64,732 and $56,038 in 2022 and 2021, respectively) | 66,002 | | | 57,399 | |
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Total investments | 1,394,303 | | | 1,623,167 | |
Cash and cash equivalents | 22,407 | | | 27,294 | |
Accrued investment income | 16,497 | | | 16,197 | |
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Reinsurance recoverable | 3,426 | | | 5,539 | |
Deferred policy acquisition costs | 140,713 | | | 140,380 | |
Cost of insurance acquired | 10,555 | | | 10,611 | |
Current federal income tax receivable | 1,016 | | | 762 | |
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Property and equipment, net | 13,689 | | | 14,074 | |
Due premiums | 9,538 | | | 10,748 | |
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Other assets (less allowance for losses of $338 and $111 in 2022 and 2021, respectively) | 6,801 | | | 5,739 | |
Total assets | $ | 1,618,945 | | | 1,854,511 | |
(Unaudited)
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(In thousands) | March 31, 2023 | | December 31, 2022 |
Assets | | | |
Investments: | | | |
Fixed maturity securities available-for-sale, at fair value (amortized cost: $1,387,919 and $1,381,318 in 2023 and 2022, respectively) | $ | 1,229,691 | | | 1,179,619 | |
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Equity securities, at fair value | 11,899 | | | 11,590 | |
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Policy loans | 78,659 | | | 78,773 | |
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Other long-term investments (portion measured at fair value $71,990 and $66,846 in 2023 and 2022, respectively) | 72,254 | | | 69,558 | |
Short-term investments | 1,244 | | | 1,241 | |
Total investments | 1,393,747 | | | 1,340,781 | |
Cash and cash equivalents | 18,924 | | | 22,973 | |
Accrued investment income | 16,958 | | | 17,131 | |
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Reinsurance recoverable | 4,323 | | | 4,560 | |
Deferred policy acquisition costs | 165,471 | | | 162,927 | |
Cost of insurance acquired | 10,486 | | | 10,647 | |
Current federal income tax receivable | — | | | 601 | |
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Property and equipment, net | 12,592 | | | 12,926 | |
Due premiums | 9,181 | | | 11,829 | |
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Other assets (less allowance for losses of $359 and $347 in 2023 and 2022, respectively) | 6,799 | | | 6,328 | |
Total assets | $ | 1,638,481 | | | 1,590,703 | |
See accompanying Notes to Consolidated Financial Statements.
June 30, 2022March 31, 2023 | 10-Q 2
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Balance Sheets, Continued
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(In thousands, except share amounts) | June 30, 2022 | | December 31, 2021 |
Liabilities and Stockholders' Equity | (Unaudited) | | |
Liabilities: | | | |
Policy liabilities: | | | |
Future policy benefit reserves: | | | |
Life insurance | $ | 1,293,464 | | | 1,278,987 | |
Annuities | 88,760 | | | 83,918 | |
Accident and health | 745 | | | 784 | |
Dividend accumulations | 39,622 | | | 37,760 | |
Premiums paid in advance | 39,636 | | | 40,690 | |
Policy claims payable | 8,475 | | | 14,590 | |
Other policyholders' funds | 35,426 | | | 30,690 | |
Total policy liabilities | 1,506,128 | | | 1,487,419 | |
Commissions payable | 1,917 | | | 2,285 | |
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Deferred federal income tax payable | 1,893 | | | 15,456 | |
Payable for securities in process of settlement | 3,291 | | | — | |
Other liabilities | 29,477 | | | 28,780 | |
Total liabilities | 1,542,706 | | | 1,533,940 | |
Commitments and contingencies (Note 7) | 0 | | 0 |
Stockholders' Equity: | | | |
Common stock: | | | |
Class A, no par value, 100,000,000 shares authorized, 53,742,067 and 53,170,413 shares issued and outstanding in 2022 and 2021, respectively, including shares in treasury of 3,527,821 in 2022 and 3,135,738 in 2021 | 267,850 | | | 265,561 | |
Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2022 and 2021, including shares in treasury of 1,001,714 in 2022 and 2021 | 3,184 | | | 3,184 | |
Accumulated deficit | (50,446) | | | (45,565) | |
Accumulated other comprehensive income (loss): | | | |
Net unrealized gains (losses) on fixed maturity securities, net of tax | (122,948) | | | 117,492 | |
Treasury stock, at cost | (21,401) | | | (20,101) | |
Total stockholders' equity | 76,239 | | | 320,571 | |
Total liabilities and stockholders' equity | $ | 1,618,945 | | | 1,854,511 | |
(Unaudited) | | | | | | | | | | | |
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(In thousands, except share amounts) | March 31, 2023 | | December 31, 2022 |
Liabilities and Stockholders' Equity (Deficit) | | | |
Liabilities: | | | |
Policy liabilities: | | | |
Future policy benefit reserves: | | | |
Life insurance | $ | 1,218,295 | | | 1,198,647 | |
Accident and health | 848 | | | 767 | |
Total future policy benefit reserves | 1,219,143 | | | 1,199,414 | |
Policyholders' funds: | | | |
Annuities | 124,528 | | | 121,422 | |
Dividend accumulations | 42,668 | | | 41,663 | |
Premiums paid in advance | 36,697 | | | 36,384 | |
Policy claims payable | 7,485 | | | 9,884 | |
Other policyholders' funds | 7,325 | | | 7,501 | |
Total policyholders' funds | 218,703 | | | 216,854 | |
Total policy liabilities | 1,437,846 | | | 1,416,268 | |
Commissions payable | 1,948 | | | 1,967 | |
Current federal income tax payable | 537 | | | — | |
Deferred federal income tax liability | 5,775 | | | 3,653 | |
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Other liabilities | 38,084 | | | 41,025 | |
Total liabilities | 1,484,190 | | | 1,462,913 | |
Commitments and contingencies (Note 7) | | | |
Stockholders' Equity: | | | |
Common stock: | | | |
Class A, no par value, 100,000,000 shares authorized, 53,792,476 and 53,758,176 shares issued and outstanding in 2023 and 2022, respectively, including shares in treasury of 3,935,581 in 2023 and 2022 | 268,197 | | | 268,147 | |
Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2023 and 2022, including shares in treasury of 1,001,714 in 2023 and 2022 | 3,184 | | | 3,184 | |
Retained earnings | 21,181 | | | 16,309 | |
Accumulated other comprehensive income (loss) | (115,465) | | | (137,044) | |
Treasury stock, at cost | (22,806) | | | (22,806) | |
Total stockholders' equity | 154,291 | | | 127,790 | |
Total liabilities and stockholders' equity | $ | 1,638,481 | | | 1,590,703 | |
See accompanying Notes to Consolidated Financial Statements.
June 30, 2022March 31, 2023 | 10-Q 3
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | | | Three Months Ended March 31, |
(In thousands, except per share amounts) | (In thousands, except per share amounts) | 2022 | | 2021 | | 2022 | | 2021 | (In thousands, except per share amounts) | | | 2023 | | 2022 |
Revenues: | Revenues: | | | | Revenues: | | | | |
Premiums: | Premiums: | | | | | Premiums: | | | | | |
Life insurance | Life insurance | $ | 40,761 | | | 41,438 | | | 78,507 | | | 79,080 | | Life insurance | | | $ | 36,934 | | | 37,746 | |
Accident and health insurance | Accident and health insurance | 280 | | | 291 | | | 566 | | | 634 | | Accident and health insurance | | | 358 | | | 286 | |
Property insurance | Property insurance | 1,183 | | | 1,097 | | | 2,515 | | | 2,144 | | Property insurance | | | 957 | | | 1,332 | |
Net investment income | Net investment income | 15,892 | | | 15,320 | | | 31,379 | | | 30,564 | | Net investment income | | | 17,074 | | | 15,487 | |
Investment related gains (losses), net | Investment related gains (losses), net | (5,016) | | | 4,859 | | | (5,598) | | | 5,151 | | Investment related gains (losses), net | | | (288) | | | (582) | |
Other income | Other income | 634 | | | 553 | | | 1,722 | | | 1,468 | | Other income | | | 879 | | | 1,088 | |
Total revenues | Total revenues | 53,734 | | | 63,558 | | | 109,091 | | | 119,041 | | Total revenues | | | 55,914 | | | 55,357 | |
Benefits and Expenses: | Benefits and Expenses: | | | | | | Benefits and Expenses: | | | | | |
Insurance benefits paid or provided: | Insurance benefits paid or provided: | | | | | Insurance benefits paid or provided: | | | | | |
Claims and surrenders | Claims and surrenders | 27,097 | | | 29,296 | | | 55,531 | | | 59,885 | | Claims and surrenders | | | 30,299 | | | 28,434 | |
Increase in future policy benefit reserves | 9,378 | | | 6,287 | | | 15,947 | | | 11,519 | | |
Increase (decrease) in future policy benefit reserves | | Increase (decrease) in future policy benefit reserves | | | (978) | | | 114 | |
Policyholder liability remeasurement (gain) loss | | Policyholder liability remeasurement (gain) loss | | | 880 | | | 668 | |
Policyholders' dividends | Policyholders' dividends | 1,515 | | | 1,475 | | | 2,868 | | | 2,781 | | Policyholders' dividends | | | 1,108 | | | 1,353 | |
Total insurance benefits paid or provided | Total insurance benefits paid or provided | 37,990 | | | 37,058 | | | 74,346 | | | 74,185 | | Total insurance benefits paid or provided | | | 31,309 | | | 30,569 | |
| Commissions | Commissions | 8,924 | | | 8,801 | | | 16,597 | | | 16,958 | | Commissions | | | 9,013 | | | 7,673 | |
Other general expenses | Other general expenses | 10,400 | | | 11,503 | | | 21,430 | | | 22,885 | | Other general expenses | | | 11,260 | | | 11,030 | |
Capitalization of deferred policy acquisition costs | Capitalization of deferred policy acquisition costs | (6,184) | | | (5,787) | | | (10,965) | | | (10,772) | | Capitalization of deferred policy acquisition costs | | | (6,358) | | | (4,781) | |
Amortization of deferred policy acquisition costs | Amortization of deferred policy acquisition costs | 5,970 | | | 6,074 | | | 11,787 | | | 12,257 | | Amortization of deferred policy acquisition costs | | | 3,814 | | | 3,559 | |
Amortization of cost of insurance acquired | Amortization of cost of insurance acquired | 263 | | | 309 | | | 499 | | | 676 | | Amortization of cost of insurance acquired | | | 161 | | | 129 | |
Total benefits and expenses | Total benefits and expenses | 57,363 | | | 57,958 | | | 113,694 | | | 116,189 | | Total benefits and expenses | | | 49,199 | | | 48,179 | |
Income (loss) before federal income tax | Income (loss) before federal income tax | (3,629) | | | 5,600 | | | (4,603) | | | 2,852 | | Income (loss) before federal income tax | | | 6,715 | | | 7,178 | |
Federal income tax expense (benefit) | Federal income tax expense (benefit) | (81) | | | 578 | | | 278 | | | 1,403 | | Federal income tax expense (benefit) | | | 1,843 | | | 729 | |
Net income (loss) | Net income (loss) | (3,548) | | | 5,022 | | | (4,881) | | | 1,449 | | Net income (loss) | | | 4,872 | | | 6,449 | |
Per Share Amounts: | Per Share Amounts: | | | | | | Per Share Amounts: | | | | | |
Basic and diluted earnings (losses) per share of Class A common stock | Basic and diluted earnings (losses) per share of Class A common stock | (0.07) | | | 0.10 | | | (0.10) | | | 0.03 | | Basic and diluted earnings (losses) per share of Class A common stock | | | 0.10 | | | 0.13 | |
Basic and diluted earnings (losses) per share of Class B common stock | — | | | 0.05 | | | — | | | 0.01 | | |
| Other Comprehensive Income (Loss): | Other Comprehensive Income (Loss): | | | | | Other Comprehensive Income (Loss): | | | | | |
| Unrealized gains (losses) on fixed maturity securities: | Unrealized gains (losses) on fixed maturity securities: | | | | | Unrealized gains (losses) on fixed maturity securities: | | | | | |
Unrealized holding gains (losses) arising during period | Unrealized holding gains (losses) arising during period | (120,934) | | | 31,756 | | | (254,276) | | | (24,142) | | Unrealized holding gains (losses) arising during period | | | 43,436 | | | (132,765) | |
Reclassification adjustment for losses (gains) included in net income (loss) | Reclassification adjustment for losses (gains) included in net income (loss) | (24) | | | 46 | | | 35 | | | 11 | | Reclassification adjustment for losses (gains) included in net income (loss) | | | 38 | | | 59 | |
Unrealized gains (losses) on fixed maturity securities, net | Unrealized gains (losses) on fixed maturity securities, net | (120,958) | | | 31,802 | | | (254,241) | | | (24,131) | | Unrealized gains (losses) on fixed maturity securities, net | | | 43,474 | | | (132,706) | |
Income tax expense (benefit) on unrealized gains (losses) on fixed maturity securities | (4,735) | | | (346) | | | (13,801) | | | 239 | | |
Change in current discount rate for liability for future policy benefits | | Change in current discount rate for liability for future policy benefits | | | (20,480) | | | 151,607 | |
Income tax expense (benefit) on other comprehensive income items | | Income tax expense (benefit) on other comprehensive income items | | | 1,415 | | | 1,712 | |
Other comprehensive income (loss) | Other comprehensive income (loss) | (116,223) | | | 32,148 | | | (240,440) | | | (24,370) | | Other comprehensive income (loss) | | | 21,579 | | | 17,189 | |
Total comprehensive income (loss) | Total comprehensive income (loss) | $ | (119,771) | | | 37,170 | | | (245,321) | | | (22,921) | | Total comprehensive income (loss) | | | $ | 26,451 | | | 23,638 | |
See accompanying Notes to Consolidated Financial Statements.
June 30, 2022March 31, 2023 | 10-Q 4
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
(Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| Common Stock | | Accumulated deficit | | Accumulated other comprehensive income (loss) | | Treasury stock | | Total Stock- holders' equity |
(In thousands) | Class A | | Class B | | | | |
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Balance at December 31, 2021 | $ | 265,561 | | | 3,184 | | | (45,565) | | | 117,492 | | | (20,101) | | | 320,571 | |
Comprehensive income (loss): | | | | | | | | | | | |
Net income (loss) | — | | | — | | | (1,333) | | | — | | | — | | | (1,333) | |
Unrealized investment gains (losses), net | — | | | — | | | — | | | (124,217) | | | — | | | (124,217) | |
Total comprehensive income (loss) | — | | | — | | | (1,333) | | | (124,217) | | | — | | | (125,550) | |
Common stock issuance | 1,788 | | | — | | | — | | | — | | | — | | | 1,788 | |
Stock-based compensation | 93 | | | — | | | — | | | — | | | — | | | 93 | |
Balance at March 31, 2022 | 267,442 | | | 3,184 | | | (46,898) | | | (6,725) | | | (20,101) | | | 196,902 | |
Comprehensive income (loss): | | | | | | | | | | | |
Net income (loss) | — | | | — | | | (3,548) | | | — | | | — | | | (3,548) | |
Unrealized investment gains (losses), net | — | | | — | | | — | | | (116,223) | | | — | | | (116,223) | |
Total comprehensive income (loss) | — | | | — | | | (3,548) | | | (116,223) | | | — | | | (119,771) | |
Common stock issuance | 455 | | | — | | | — | | | — | | | — | | | 455 | |
Acquisition of treasury stock | — | | | — | | | — | | | — | | | (1,300) | | | (1,300) | |
Stock-based compensation | (47) | | | — | | | — | | | — | | | — | | | (47) | |
Balance at June 30, 2022 | $ | 267,850 | | | 3,184 | | | (50,446) | | | (122,948) | | | (21,401) | | | 76,239 | |
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| Common Stock | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Stockholders' Equity (Deficit) |
(In thousands) | Class A | Class B |
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Balance at December 31, 2022 | $ | 268,147 | | | 3,184 | | | 16,309 | | | (137,044) | | | (22,806) | | | 127,790 | |
Comprehensive income (loss): | | | | | | | | | | | |
Net income (loss) | — | | | — | | | 4,872 | | | — | | | — | | | 4,872 | |
Other comprehensive income (loss) | — | | | — | | | — | | | 21,579 | | | — | | | 21,579 | |
Total comprehensive income (loss) | — | | | — | | | 4,872 | | | 21,579 | | | — | | | 26,451 | |
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Stock-based compensation | 50 | | | — | | | — | | | — | | | — | | | 50 | |
Balance at March 31, 2023 | $ | 268,197 | | | 3,184 | | | 21,181 | | | (115,465) | | | (22,806) | | | 154,291 | |
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| | | | | | | Balance at December 31, 2020 | $ | 262,869 | | | 3,184 | | | (82,352) | | | 128,255 | | | (11,011) | | | 300,945 | | |
Balance at December 31, 2021 | | Balance at December 31, 2021 | $ | 265,561 | | | 3,184 | | | (9,698) | | | (138,989) | | | (20,101) | | | 99,957 | |
Comprehensive income (loss): | Comprehensive income (loss): | | Comprehensive income (loss): | |
Net income (loss) | Net income (loss) | — | | | — | | | (3,573) | | | — | | | — | | | (3,573) | | Net income (loss) | — | | | — | | | 6,449 | | | — | | | — | | | 6,449 | |
Unrealized investment gains (losses), net | — | | | — | | | — | | | (56,518) | | | — | | | (56,518) | | |
Other comprehensive income (loss) | | Other comprehensive income (loss) | — | | | — | | | — | | | 17,189 | | | — | | | 17,189 | |
Total comprehensive income (loss) | Total comprehensive income (loss) | — | | | — | | | (3,573) | | | (56,518) | | | — | | | (60,091) | | Total comprehensive income (loss) | — | | | — | | | 6,449 | | | 17,189 | | | — | | | 23,638 | |
Issuance of common stock | | Issuance of common stock | 1,788 | | | — | | | — | | | — | | | — | | | 1,788 | |
Stock-based compensation | Stock-based compensation | (14) | | | — | | | — | | | — | | | — | | | (14) | | Stock-based compensation | 93 | | | — | | | — | | | — | | | — | | | 93 | |
Balance at March 31, 2021 | 262,855 | | | 3,184 | | | (85,925) | | | 71,737 | | | (11,011) | | | 240,840 | | |
Comprehensive income (loss): | | | | | | | | | | | | |
Net income (loss) | — | | | — | | | 5,022 | | | — | | | — | | | 5,022 | | |
Unrealized investment gains (losses), net | — | | | — | | | — | | | 32,148 | | | — | | | 32,148 | | |
Total comprehensive income (loss) | — | | | — | | | 5,022 | | | 32,148 | | | — | | | 37,170 | | |
Acquisition of treasury stock | — | | | — | | | — | | | — | | | (9,090) | | | (9,090) | | |
Stock-based compensation | 205 | | | — | | | — | | | — | | | — | | | 205 | | |
Balance at June 30, 2021 | $ | 263,060 | | | 3,184 | | | (80,903) | | | 103,885 | | | (20,101) | | | 269,125 | | |
Balance at March 31, 2022 | | Balance at March 31, 2022 | $ | 267,442 | | | 3,184 | | | (3,249) | | | (121,800) | | | (20,101) | | | 125,476 | |
| |
See accompanying Notes to Consolidated Financial Statements.
June 30, 2022March 31, 2023 | 10-Q 5
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
| Six Months Ended June 30, (In thousands) | 2022 | | 2021 | |
Three Months Ended March 31, (In thousands) | | Three Months Ended March 31, (In thousands) | 2023 | | 2022 |
Cash flows from operating activities: | Cash flows from operating activities: | | | Cash flows from operating activities: | | |
Net income (loss) | Net income (loss) | $ | (4,881) | | | 1,449 | | Net income (loss) | $ | 4,872 | | | 6,449 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Investment related (gains) losses on sale of investments and other assets | Investment related (gains) losses on sale of investments and other assets | 5,598 | | | (5,151) | | Investment related (gains) losses on sale of investments and other assets | 288 | | | 582 | |
Net deferred policy acquisition costs | Net deferred policy acquisition costs | 822 | | | 1,485 | | Net deferred policy acquisition costs | (2,544) | | | (1,222) | |
Amortization of cost of insurance acquired | Amortization of cost of insurance acquired | 499 | | | 676 | | Amortization of cost of insurance acquired | 161 | | | 129 | |
Depreciation | Depreciation | 288 | | | 761 | | Depreciation | 122 | | | 153 | |
Amortization of premiums and discounts on investments | Amortization of premiums and discounts on investments | 2,658 | | | 2,715 | | Amortization of premiums and discounts on investments | 1,203 | | | 1,386 | |
Stock-based compensation | Stock-based compensation | 150 | | | 306 | | Stock-based compensation | 70 | | | 132 | |
Deferred federal income tax expense (benefit) | Deferred federal income tax expense (benefit) | 238 | | | (141) | | Deferred federal income tax expense (benefit) | 706 | | | 896 | |
Change in: | Change in: | | | | Change in: | | | |
Accrued investment income | Accrued investment income | (300) | | | (164) | | Accrued investment income | 173 | | | 442 | |
Reinsurance recoverable | Reinsurance recoverable | 2,113 | | | 931 | | Reinsurance recoverable | 237 | | | 1,965 | |
Due premiums | Due premiums | 1,210 | | | 1,973 | | Due premiums | 2,648 | | | 1,777 | |
Future policy benefit reserves | Future policy benefit reserves | 15,861 | | | 11,432 | | Future policy benefit reserves | (125) | | | 706 | |
Other policyholders' liabilities | Other policyholders' liabilities | (571) | | | 6,891 | | Other policyholders' liabilities | 1,582 | | | (2,406) | |
Federal income tax payable | Federal income tax payable | (255) | | | 1,555 | | Federal income tax payable | 1,138 | | | (166) | |
Commissions payable and other liabilities | Commissions payable and other liabilities | 246 | | | (14,494) | | Commissions payable and other liabilities | (2,673) | | | 1,489 | |
Other, net | Other, net | (1,329) | | | (1,246) | | Other, net | (504) | | | (172) | |
Net cash provided by (used in) operating activities | Net cash provided by (used in) operating activities | 22,347 | | | 8,978 | | Net cash provided by (used in) operating activities | 7,354 | | | 12,140 | |
Cash flows from investing activities: | Cash flows from investing activities: | | | | Cash flows from investing activities: | | | |
Purchases of fixed maturity securities, available-for-sale | Purchases of fixed maturity securities, available-for-sale | (64,689) | | | (48,106) | | Purchases of fixed maturity securities, available-for-sale | (25,114) | | | (26,050) | |
Sales of fixed maturity securities, available-for-sale | Sales of fixed maturity securities, available-for-sale | 28,828 | | | 7,254 | | Sales of fixed maturity securities, available-for-sale | 2,865 | | | 1,100 | |
Maturities and calls of fixed maturity securities, available-for-sale | Maturities and calls of fixed maturity securities, available-for-sale | 18,234 | | | 29,574 | | Maturities and calls of fixed maturity securities, available-for-sale | 14,426 | | | 10,435 | |
| Principal payments on mortgage loans | Principal payments on mortgage loans | 95 | | | 5 | | Principal payments on mortgage loans | 2 | | | 2 | |
| (Increase) decrease in policy loans, net | (Increase) decrease in policy loans, net | 1,721 | | | 2,697 | | (Increase) decrease in policy loans, net | 114 | | | 962 | |
Sales of other long-term investments | Sales of other long-term investments | 2,699 | | | 17,341 | | Sales of other long-term investments | 249 | | | 1,681 | |
Purchases of other long-term investments | Purchases of other long-term investments | (14,746) | | | (12,203) | | Purchases of other long-term investments | (3,495) | | | (7,940) | |
| Purchases of property and equipment | Purchases of property and equipment | (51) | | | (773) | | Purchases of property and equipment | (73) | | | (34) | |
| Purchases of short-term investments | Purchases of short-term investments | (5) | | | — | | Purchases of short-term investments | — | | | (5) | |
| Net cash provided by (used in) investing activities | Net cash provided by (used in) investing activities | (27,914) | | | (4,211) | | Net cash provided by (used in) investing activities | (11,026) | | | (19,849) | |
| See accompanying Notes to Consolidated Financial Statements. | See accompanying Notes to Consolidated Financial Statements. | See accompanying Notes to Consolidated Financial Statements. |
|
June 30, 2022March 31, 2023 | 10-Q 6
| CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES | CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES | CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES |
Consolidated Statements of Cash Flows, Continued | Consolidated Statements of Cash Flows, Continued | Consolidated Statements of Cash Flows, Continued |
(Unaudited) | (Unaudited) | (Unaudited) |
| Six Months Ended June 30, (In thousands) | 2022 | | 2021 | |
Three Months Ended March 31, (In thousands) | | Three Months Ended March 31, (In thousands) | 2023 | | 2022 |
Cash flows from financing activities: | Cash flows from financing activities: | | | | Cash flows from financing activities: | | | |
Annuity deposits | Annuity deposits | $ | 4,160 | | | 4,793 | | Annuity deposits | $ | 2,008 | | | 2,227 | |
Annuity withdrawals | Annuity withdrawals | (4,319) | | | (4,113) | | Annuity withdrawals | (2,365) | | | (2,263) | |
Acquisition of treasury stock | (1,300) | | | (9,090) | | |
| Issuance of common stock | Issuance of common stock | 2,244 | | | — | | Issuance of common stock | — | | | 1,788 | |
Other | Other | (105) | | | (363) | | Other | (20) | | | (39) | |
Net cash provided by (used in) financing activities | Net cash provided by (used in) financing activities | 680 | | | (8,773) | | Net cash provided by (used in) financing activities | (377) | | | 1,713 | |
Net increase (decrease) in cash and cash equivalents | Net increase (decrease) in cash and cash equivalents | (4,887) | | | (4,006) | | Net increase (decrease) in cash and cash equivalents | (4,049) | | | (5,996) | |
Cash and cash equivalents at beginning of year | Cash and cash equivalents at beginning of year | 27,294 | | | 34,131 | | Cash and cash equivalents at beginning of year | 22,973 | | | 27,294 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 22,407 | | | 30,125 | | Cash and cash equivalents at end of period | $ | 18,924 | | | 21,298 | |
| |
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the sixthree months ended June 30,March 31, 2023 and 2022, and 2021, various fixed maturity issuers exchanged securities with book values of $6.1$2.1 million and $6.4$0.6 million, respectively, for securities of equal value.
The Company had $3.3 millionno net unsettled security trades at June 30, 2022during the three months ended March 31, 2023 and $0.9$3.8 million at June 30, 2021.during the three months ended March 31, 2022.
The Company recognized no right-of-use assets of $0.4 million in exchange for new operating lease liabilities during the sixthree months ended June 30, 2022March 31, 2023 and none$0.4 million during the sixthree months ended June 30, 2021.March 31, 2022.
See accompanying Notes to Consolidated Financial Statements.
June 30, 2022March 31, 2023 | 10-Q 7
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
(1) FINANCIAL STATEMENTS
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts and operations of Citizens, Inc. ("Citizens" or the "Company"), a Colorado corporation, and its wholly-owned subsidiaries, CICA Life Insurance Company of America ("CICA"), CICA Life Ltd. ("CICA International"), CICA Life A.I., a Puerto Rico company ("CICA PR"), Citizens National Life Insurance Company ("CNLIC"), Security Plan Life Insurance Company ("SPLIC"), Security Plan Fire Insurance Company ("SPFIC"), Magnolia Guaranty Life Insurance Company ("MGLIC") and, Computing Technology, Inc. ("CTI"), and Nexo Global Services, LLC ("Nexo"). All significant inter-company accounts and transactions have been eliminated. Citizens and its wholly-owned subsidiaries are collectively referred to as the "Company", "it", "we", "us" or "our".
The consolidated balance sheet as of June 30, 2022,March 31, 2023, the consolidated statements of operations and comprehensive income (loss) and stockholders' equity (deficit) for the three and six months ended June 30,March 31, 2023 and March 31, 2022 and June 30, 2021 and the consolidated statements of cash flows for the sixthree months ended June 30,March 31, 2023 and March 31, 2022 and June 30, 2021 have been prepared by the Company without audit and are not subject to 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 June 30, 2022March 31, 2023 and for comparative periods have been made. The consolidated financial statements have been prepared in accordance with U.S. 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"). 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, 20212022 ("Form 10-K"). 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.
Our Life Insurance segment operates through CICA International, CICA PR, CICA and CNLIC. OurUntil December 31, 2022, our international life insurance business, which operatesoperated through CICA International, issuesInternational. Beginning January 1, 2023, all new international policies are issued by CICA PR. These companies provide U.S. dollar-denominated endowment contracts internationally, which are principally accumulation contracts that incorporate an element of life insurance protection and ordinary whole life insurance in U.S. dollar-denominated amounts sold to non-U.S. residents. These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and may utilize rider benefits to provide additional increasing or decreasing coverage and annuity benefits to enhance accumulations. Our domestic life insurance business operates through CICA and CNLIC. CICA issues ordinary whole life, credit life and disability policies and CNLIC issues ordinary whole life and critical illness policies mainly in Texas and Florida and bothFlorida. Both companies service whole life and accident and health policies primarily in the Southern U.S., Midwest and Mountain West.
Our Home Service Insurance segment operates through our subsidiaries SPLIC, MGLIC and SPFIC, and focuses on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas. Our products in this segment consist primarily of small face amount ordinary whole life, industrial life and pre-need policies, which are designed to fund final expenses for the insured, primarily consisting of funeral and burial costs as well as critical illness and property insurance policies, which cover dwelling and contents.
CTI provides data processing systems and services to the Company.
We converted the small block of ordinary whole life policies of CNLIC from a legacy platform to our new actuarial valuation software solution which provides enhanced modeling capabilities as of April 1, 2021. The impact of this system conversion reflected in the accompanying consolidated financial statements as of and for the three and six months ended June 30, 2021 was an increase to pretax income of $0.7 million consisting of a reduced increase in future policy benefit reserves of $0.8 million and increased amortization of deferred policy acquisition costs of $0.1 million.
| | | | | | | | |
CITIZENS, INC.
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited)
|
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates include those used in the evaluation of credit allowances on fixed maturity securities, actuarially determined assets and liabilities and assumptions and valuation allowance on deferred tax assets. 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 POLICIES
For a description of ourall significant accounting policies, see Part IV, Item 15, Note 1. Summary of Significant Accounting Policies in the notes to our consolidated financial statements included in our Form 10-K, which should be read in conjunction with these accompanying consolidated financial statements.
DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs (“DAC”) are costs that are incremental and directly related to the successful acquisition of new or renewal insurance contracts. Such costs include the incremental direct costs of contract acquisition, such as sales commissions; the portion of employees’ total compensation and payroll-related fringe benefits related directly to time spent performing acquisition activities, such as underwriting, issuing, and processing policies for contracts that have actually been acquired; and other costs related directly to acquisition activities that would not have been incurred if the contract had not been acquired.
Contracts are grouped by contract type and issue year into cohorts consistent with the grouping used in estimating the associated liability. DAC is amortized on a constant level basis for the grouped contracts over the expected term of the related contracts to approximate straight-line amortization. For the Life Insurance Segment, the constant level basis used is policy count in force. For the Home Service Insurance Segment, the constant level basis used is face amount in force. The constant level bases used for amortization are projected using mortality and lapse assumptions that are based on the Company’s experience, industry data, and other factors at the end of each reporting period and are consistent with those used for the liability for future policy benefit life reserves. Annually, the Company completes experience studies with respect to mortality and lapse. If those assumptions are updated, the DAC amortization basis is recalculated and the effect of the assumption change will be reflected in the cohort level amortization in future periods.
Amortization of DAC is included in the consolidated statements of comprehensive income or loss. The DAC balance on the consolidated balance sheet is reduced for actual experience in excess of expected experience. Changes in future estimates are recognized prospectively over the remaining expected contract term.
COST OF INSURANCE ACQUIRED
The Company recognizes an intangible asset that arises in the application of GAAP purchase accounting as the difference between the reported value and the fair value of insurance contract liabilities, or comparable amounts determined in purchased insurance business combinations. This intangible asset is referred to as the Cost of Insurance Acquired (“COIA”), which is amortized on a basis consistent with DAC, such that it is amortized in proportion to policies in force for the Life Insurance Segment and face amount in force for the Home Service Insurance Segment to approximate straight-line amortization.
FUTURE POLICY BENEFITS AND EXPENSES
As premium revenue is recognized, a liability for future policy benefits, which is the present value of estimated future policy benefits to be paid to or on behalf of policyholders less the present value of estimated future net premiums to be collected from policyholders, is accrued. The liability is estimated using current assumptions that include discount rate, mortality and lapses. These current assumptions are based on judgements that consider the Company’s historical experience, industry data, and other factors.
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
For traditional and limited-payment contracts, contracts are grouped into cohorts by contract type and issue year. Our reporting cohorts are (i) Permanent, which summarizes insurance policies with premiums payable over the lifetime of the policy, and (ii) Permanent Limited Pay, which summarizes insurance policies with premiums payable for a limited time after which the policy is fully paid up. Both reporting cohorts include whole life and endowment policies. The liability is adjusted for differences between actual and expected experience. The Company reviews its historical cash flow assumptions quarterly and in the third quarter of the year, the Company reviews its future cash flow assumptions. The net premium ratio used to calculate the liability is updated each quarter based on the current period's actual experience relative to expected experience. The revised net premium ratio is used to derive an updated liability for future policy benefits as of the beginning of the current reporting period, discounted at the locked-in discount rate. This amount is then compared to the carrying amount of the liability as of that same date, before the updating of cash flow assumptions, to determine the current period change in liability estimate. The current period change in the liability is the policyholder liability remeasurement gain or loss and is presented as a separate component of total insurance benefits paid or provided in the consolidated statements of comprehensive income or loss. In subsequent periods, the revised net premiums are used to measure the liability for future policy benefits, subject to future revisions.
For traditional and limited-payment contracts, the current discount rate assumption is a yield curve that equals the yield of an upper-medium grade fixed income instrument, based on an A-quality corporate bonds. The Company selects fixed-income instruments that have been A rated by one of the major credit rating agencies, such as Moody’s, Standard & Poor’s, or Fitch. The current discount rate assumption is updated quarterly and used to remeasure the liability at the reporting date, with the resulting change reflected in other comprehensive income. For liability cash flows that are projected beyond the duration of market-observable A credit-rated fixed-income instruments, the Company uses the last market-observable yield level and uses linear interpolation to determine yield assumptions for durations that do not have market observable yields. The locked-in discount rate for policies issued prior to transition equals the rate set at contract issuance. For current year issues, the locked-in discount rate is the average of the current year quarterly discount rates and will change throughout the year as new discount rates are calculated, with the change reflected in net income.
DEFERRED PROFIT LIABILITY
For limited-payment products, gross premiums received in excess of net premiums are deferred at initial recognition as a deferred profit liability (“DPL”). Gross premiums are measured using assumptions consistent with those used in the measurement of the liability for future policy benefit life reserves, including discount rate, mortality and lapses.
The DPL is amortized and recognized in net income within the increase in future policy benefit reserves. The amortization basis for the DPL is the present value of insurance in force for life insurance contracts. Interest is accreted on the balance of the DPL using the locked-in discount rate. The Company reviews and updates its estimates of cash flows for the DPL at the same time as the estimates of cash flows for the liability for future policy benefit life reserves. The DPL is updated each quarter based on the current period's actual experience relative to expected experience with the changes recorded within the increase in future policy benefit reserves in the consolidated statements of comprehensive income or loss. On the consolidated balance sheets, DPL is recorded as a component of the liability for future policy benefits.
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
(2) ACCOUNTING PRONOUNCEMENTS
ACCOUNTING STANDARDS RECENTLY ADOPTED
Impacts at Transition Date
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. The Company adopted ASU 2018-12 for the liability for future policy benefits, DAC and COIA on a modified retrospective basis such that those balances were adjusted to conform to ASU 2018-12 effective January 1, 2021. The following table summarizes the balance of and changes in the liability for future policy benefits, annuity reserves, DAC and COIA due to the adoption of ASU 2018-12.
| | | | | | | | | | | | | |
(In thousands) | Life Insurance Segment | Home Services Insurance Segment | | | Consolidated |
Liability for Future Policy Benefits | | | | | |
Pre-adoption liability as of 12/31/2020 | $ | 987,373 | | 255,513 | | | | 1,242,886 | |
| | | | | |
Change in discount rate assumptions | 261,823 | | 108,468 | | | | 370,291 | |
Effect of reserve changes | 6 | | 96 | | | | 102 | |
Post-adoption liability as of 1/1/2021 | $ | 1,249,202 | | 364,077 | | | | 1,613,279 | |
| | | | | |
Fixed Annuity Liability | | | | | |
Pre-adoption liability as of 12/31/2020 | $ | 60,027 | | 18,277 | | | | 78,304 | |
Adjustments for the removal of shadow adjustments | — | | 3,426 | | | | 3,426 | |
Post-adoption liability as of 1/1/2021 | $ | 60,027 | | 21,703 | | | | 81,730 | |
| | | | | |
Deferred Acquisition Costs | | | | | |
Pre-adoption balance as of 12/31/2020 | $ | 94,771 | | 10,142 | | | | 104,913 | |
Adjustments for the removal of shadow adjustments | 8,270 | | 29,905 | | | | 38,175 | |
Impact of flooring cohorts at zero | 23 | | 12 | | | | 35 | |
Post adoption balance as of 1/1/2021 | $ | 103,064 | | 40,059 | | | | 143,123 | |
| | | | | |
Cost of Insurance Acquired | | | | | |
Pre-adoption balance as of 12/31/2020 | $ | 1,734 | | 9,807 | | | | 11,541 | |
Adjustments for the removal of shadow adjustments | — | | 484 | | | | 484 | |
Post adoption balance as of 1/1/2021 | $ | 1,734 | | 10,291 | | | | 12,025 | |
| | | | | |
At transition, the Company recorded a charge of $0.1 million to retained earnings, net of tax, primarily from capping net premium ratios for certain policyholder benefit cohorts at 100%, increasing reserves for certain non-premium paying cohorts and flooring certain DAC cohorts at zero. Other comprehensive income ("OCI") was reduced by $316.8 million primarily due to the difference in the discount rate used prior to transition and the discount rate at January 1, 2021. The Company also removed shadow adjustments previously recorded in OCI for the impact of unrealized gains and losses on annuity products that previously amortized unearned revenue, DAC and COIA over expected future gross profits.
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
Impacts to Previously Reported Results
Adoption of the standard impacted our previously reported consolidated financial results are as follows:
| | | | | | | | | | | |
(in thousands, except per share amounts) | As Previously Reported | Adoption of New Standard | Post Adoption |
As of December 31, 2022 | | | |
Consolidated Balance Sheet | | | |
Deferred policy acquisition costs | $ | 140,167 | | 22,760 | | 162,927 | |
Cost of insurance acquired | 10,260 | | 387 | | 10,647 | |
Deferred tax asset, net | 2,414 | | (2,414) | | — | |
| | | |
Future policy benefit reserves: | | | |
Life insurance | 1,305,506 | | (106,859) | | 1,198,647 | |
Annuities | 91,234 | | (91,234) | | — | |
Policyholders' funds: | | | |
Annuities | — | | 121,422 | | 121,422 | |
Other policyholders' funds | 40,497 | | (32,996) | | 7,501 | |
Deferred federal income tax liability | — | | 3,653 | | 3,653 | |
Retained earnings (accumulated deficit) | (52,203) | | 68,512 | | 16,309 | |
Accumulated other comprehensive income (loss) | (195,279) | | 58,235 | | (137,044) | |
| | | |
For the Three Months Ended March 31, 2022 | | | |
Consolidated Statement of Operations | | | |
Increase (decrease) in future policy benefit reserves | $ | 6,569 | | (6,455) | | 114 | |
Policyholder liability remeasurement (gain) loss | — | | 668 | | 668 | |
Amortization of deferred policy acquisition costs | 5,817 | | (2,258) | | 3,559 | |
Amortization of cost of insurance acquired | 236 | | (107) | | 129 | |
Federal income tax expense (benefit) | 359 | | 370 | | 729 | |
Basic and diluted earnings (losses) per share of Class A common stock | (0.03) | | 0.16 | | 0.13 | |
| | | |
Consolidated Statement of Comprehensive Income (Loss) | | |
Unrealized holding gains (losses) arising during period | $ | (133,342) | | 577 | | (132,765) | |
Change in current discount rate for liability for future policy benefits | — | | 151,607 | | 151,607 | |
Income tax expense (benefit) on other comprehensive income items | (9,066) | | 10,778 | | 1,712 | |
ACCOUNTING STANDARDS NOT YET ADOPTED
In August 2018,On June 30, 2022, the Financial Accounting Standards Board ("FASB")FASB issued Accounting Standards Update ("ASU")ASU No. 2018-12,2022-03, Financial Services-InsuranceFair Value Measurement (Topic 944): Targeted Improvements820: Fair Value Measurement of Equity Securities Subject to the Accounting for Long-Duration Contracts.Contractual Sale Restrictions. This ASU amends four key areasstandard clarifies that contractual restrictions on equity security sales are not considered part of the accountingsecurity unit of account and, impacts disclosures for long-duration insurancetherefore, are not considered in measuring fair value. In addition, the amendments clarify that an entity cannot, as a separate unit of account, recognize and investment contracts:
•Requires updated assumptions for liability measurement. Assumptions used to measure the liability for traditional insurance contracts, whicha contractual sale restriction. Disclosures on such restrictions 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;also required.
•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 ("DAC"). 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 on January 1, 2023, however, early adoption is permitted. We will adopt this ASU effective January 1, 2023 with a transition date of January 1, 2021 using a modified retrospective approach. We continue to make progress in our implementation process that includes, but is not limited to, making significant accounting policy decisions, employing appropriate internal controls, building and updating actuarial models and systems, revising reporting processes and developing informative qualitative and quantitative disclosures. In 2022, we have begun the process of calculating our transition adjustments and preparing for the restatement of applicable periods. We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations and will be able to better assess the effects as we progress with our implementation efforts. While it is not possible to estimate the expected impact of adoption at this
June 30, 2022March 31, 2023 | 10-Q 912
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CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
time,The amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and are required to be applied prospectively, with any adjustments from the Company believes thereadoption recognized in earnings and disclosed. Early adoption is a reasonable possibility that implementingavailable. Adoption of this ASU may result in a materialstandard will have no impact to accumulated other comprehensive income and future earnings patterns.on our consolidated financial statements.
No other new accounting pronouncements issued or effective during the year had, or is expected to have, a material impact on our consolidated financial statements.
(3) SEGMENT INFORMATIONINVESTMENTS
The Company has 2 reportable segments: Life Insuranceinvests primarily in fixed maturity securities, which totaled 87.0% of total cash and Home Service Insurance. Our Life Insurance segment primarily issues endowment contracts, which are principally accumulation contracts that incorporate an element of life insurance protection and ordinary whole life insurance, to non-U.S. residents through CICA International. These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and may utilize rider benefits to provide additional coverage and annuity benefits to enhance accumulations. CICA issues credit life, credit disability and accident and health related policies throughout the Midwest and southern U.S. CNLIC issues ordinary whole life and critical illness products in Florida and Texas.invested assets at March 31, 2023, as shown below.
Our Home Service Insurance segment operates through our subsidiaries SPLIC, MGLIC and SPFIC, and focuses on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas. Our policies are sold and serviced through funeral homes and independent agents who sell policies, collect premiums and service policyholders. Our Home Service Insurance segment also sells property insurance policies in Louisiana and Arkansas. | | | | | | | | | | | | | | | | | | | | | | | |
Carrying Value (In thousands, except for %) | March 31, 2023 | | December 31, 2022 |
Amount | | % | | Amount | | % |
| | | | | | | |
Cash and invested assets: | | | | | | | |
Fixed maturity securities | $ | 1,229,691 | | | 87.0 | % | | 1,179,619 | | | 86.5 | % |
Equity securities | 11,899 | | | 0.8 | % | | 11,590 | | | 0.8 | % |
Policy loans | 78,659 | | | 5.6 | % | | 78,773 | | | 5.8 | % |
Other long-term investments | 72,254 | | | 5.1 | % | | 69,558 | | | 5.1 | % |
Short-term investments | 1,244 | | | 0.1 | % | | 1,241 | | | 0.1 | % |
Cash and cash equivalents | 18,924 | | | 1.4 | % | | 22,973 | | | 1.7 | % |
| | | | | | | |
Total cash and invested assets | $ | 1,412,671 | | | 100.0 | % | | 1,363,754 | | | 100.0 | % |
The Life Insurancefollowing tables represent the amortized cost, gross unrealized gains and Home Service Insurance portionslosses and fair value of fixed maturity securities as of the company constitute separate businesses. The Company also operates other non-insurance portions of the Company ("Other Non-Insurance Enterprises"), which primarily include the Company’s IT and corporate-support functions that are included in the tables presented below to properly reconcile the segment information with the consolidated financial statements of the Company. The Company's Other Non-Insurance Enterprises is the only reportable difference between segments and consolidated operations.dates indicated.
The accounting policies of the reportable segments and Other Non-Insurance Enterprises are presented in accordance with U.S. GAAP and are the same as those used in the preparation of the consolidated financial statements. The Company evaluates profit and loss performance based on U.S. GAAP income or loss before federal income taxes for its 2 reportable segments. | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
March 31, 2023 | | | |
(In thousands) | | | |
| | | | | | | |
Fixed maturity securities: | | | | | | | |
Available-for-sale: | | | | | | | |
U.S. Treasury securities | $ | 5,720 | | | 215 | | | 10 | | | 5,925 | |
U.S. Government-sponsored enterprises | 3,427 | | | 337 | | | 1 | | | 3,763 | |
States and political subdivisions | 334,887 | | | 2,311 | | | 28,618 | | | 308,580 | |
Corporate: | | | | | | | |
Financial | 249,030 | | | 790 | | | 36,119 | | | 213,701 | |
Consumer | 250,189 | | | 1,634 | | | 38,514 | | | 213,309 | |
Utilities | 121,236 | | | 269 | | | 20,204 | | | 101,301 | |
Energy | 74,564 | | | 42 | | | 8,840 | | | 65,766 | |
All other | 186,640 | | | 813 | | | 22,556 | | | 164,897 | |
Commercial mortgage-backed | 171 | | | — | | | 3 | | | 168 | |
Residential mortgage-backed | 110,579 | | | 10 | | | 7,686 | | | 102,903 | |
Asset-backed | 51,376 | | | 333 | | | 2,432 | | | 49,277 | |
Foreign governments | 100 | | | 1 | | | — | | | 101 | |
Total fixed maturity securities | $ | 1,387,919 | | | 6,755 | | | 164,983 | | | 1,229,691 | |
| | | | | | | | |
CITIZENS, INC.
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Life Insurance | | Home Service Insurance | | Other Non-Insurance Enterprises | | Consolidated |
Three Months Ended June 30, 2022 | | | |
(In thousands) | | | |
| | | | | | | |
Revenues: | | | | | | | |
Premiums | $ | 29,834 | | | 12,390 | | | — | | | 42,224 | |
Net investment income | 12,347 | | | 3,283 | | | 262 | | | 15,892 | |
Investment related gains (losses), net | (3,984) | | | (925) | | | (107) | | | (5,016) | |
Other income | 633 | | | 1 | | | — | | | 634 | |
Total revenues | 38,830 | | | 14,749 | | | 155 | | | 53,734 | |
Benefits and expenses: | | | | | | | |
Insurance benefits paid or provided: | | | | | | | |
Claims and surrenders | 21,568 | | | 5,529 | | | — | | | 27,097 | |
Increase in future policy benefit reserves | 7,576 | | | 1,802 | | | — | | | 9,378 | |
Policyholders' dividends | 1,509 | | | 6 | | | — | | | 1,515 | |
Total insurance benefits paid or provided | 30,653 | | | 7,337 | | | — | | | 37,990 | |
Commissions | 4,792 | | | 4,132 | | | — | | | 8,924 | |
Other general expenses | 5,358 | | | 3,515 | | | 1,527 | | | 10,400 | |
Capitalization of deferred policy acquisition costs | (4,307) | | | (1,877) | | | — | | | (6,184) | |
Amortization of deferred policy acquisition costs | 4,613 | | | 1,357 | | | — | | | 5,970 | |
Amortization of cost of insurance acquired | 84 | | | 179 | | | — | | | 263 | |
Total benefits and expenses | 41,193 | | | 14,643 | | | 1,527 | | | 57,363 | |
Income (loss) before federal income tax expense | $ | (2,363) | | | 106 | | | (1,372) | | | (3,629) | |
| | | | | | | | |
CITIZENS, INC.
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Life Insurance | | Home Service Insurance | | Other Non-Insurance Enterprises | | Consolidated |
Six Months Ended June 30, 2022 | | | |
(In thousands) | | | |
| | | | | | | |
Revenues: | | | | | | | |
Premiums | $ | 56,765 | | | 24,823 | | | — | | | 81,588 | |
Net investment income | 24,318 | | | 6,527 | | | 534 | | | 31,379 | |
Investment related gains (losses), net | (4,277) | | | (1,167) | | | (154) | | | (5,598) | |
Other income | 1,721 | | | 1 | | | — | | | 1,722 | |
Total revenues | 78,527 | | | 30,184 | | | 380 | | | 109,091 | |
Benefits and expenses: | | | | | | | |
Insurance benefits paid or provided: | | | | | | | |
Claims and surrenders | 43,026 | | | 12,505 | | | — | | | 55,531 | |
Increase in future policy benefit reserves | 12,706 | | | 3,241 | | | — | | | 15,947 | |
Policyholders' dividends | 2,859 | | | 9 | | | — | | | 2,868 | |
Total insurance benefits paid or provided | 58,591 | | | 15,755 | | | — | | | 74,346 | |
Commissions | 8,598 | | | 7,999 | | | — | | | 16,597 | |
Other general expenses | 11,049 | | | 7,865 | | | 2,516 | | | 21,430 | |
Capitalization of deferred policy acquisition costs | (7,613) | | | (3,352) | | | — | | | (10,965) | |
Amortization of deferred policy acquisition costs | 9,095 | | | 2,692 | | | — | | | 11,787 | |
Amortization of cost of insurance acquired | 140 | | | 359 | | | — | | | 499 | |
Total benefits and expenses | 79,860 | | | 31,318 | | | 2,516 | | | 113,694 | |
Income (loss) before federal income tax expense | $ | (1,333) | | | (1,134) | | | (2,136) | | | (4,603) | |
| | | | | | | | |
CITIZENS, INC.
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Life Insurance | | Home Service Insurance | | Other Non-Insurance Enterprises | | Consolidated |
Three Months Ended June 30, 2021 | | | |
(In thousands) | | | |
| | | | | | | |
Revenues: | | | | | | | |
Premiums | $ | 30,138 | | | 12,688 | | | — | | | 42,826 | |
Net investment income | 11,879 | | | 3,243 | | | 198 | | | 15,320 | |
Investment related gains (losses), net | 4,644 | | | 206 | | | 9 | | | 4,859 | |
Other income | 553 | | | — | | | — | | | 553 | |
Total revenues | 47,214 | | | 16,137 | | | 207 | | | 63,558 | |
Benefits and expenses: | | | | | | | |
Insurance benefits paid or provided: | | | | | | | |
Claims and surrenders | 23,531 | | | 5,765 | | | — | | | 29,296 | |
Increase in future policy benefit reserves | 4,054 | | | 2,233 | | | — | | | 6,287 | |
Policyholders' dividends | 1,466 | | | 9 | | | — | | | 1,475 | |
Total insurance benefits paid or provided | 29,051 | | | 8,007 | | | — | | | 37,058 | |
Commissions | 4,398 | | | 4,403 | | | — | | | 8,801 | |
Other general expenses | 5,147 | | | 4,084 | | | 2,272 | | | 11,503 | |
Capitalization of deferred policy acquisition costs | (3,816) | | | (1,971) | | | — | | | (5,787) | |
Amortization of deferred policy acquisition costs | 5,200 | | | 874 | | | — | | | 6,074 | |
Amortization of cost of insurance acquired | 107 | | | 202 | | | — | | | 309 | |
Total benefits and expenses | 40,087 | | | 15,599 | | | 2,272 | | | 57,958 | |
Income (loss) before federal income tax expense | $ | 7,127 | | | 538 | | | (2,065) | | | 5,600 | |
June 30, 2022March 31, 2023 | 10-Q 13
| | | | | | | | |
CITIZENS, INC.
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Life Insurance | | Home Service Insurance | | Other Non-Insurance Enterprises | | Consolidated |
Six Months Ended June 30, 2021 | | | |
(In thousands) | | | |
| | | | | | | |
Revenues: | | | | | | | |
Premiums | $ | 57,201 | | | 24,657 | | | — | | | 81,858 | |
Net investment income | 23,477 | | | 6,588 | | | 499 | | | 30,564 | |
Investment related gains (losses), net | 4,536 | | | 429 | | | 186 | | | 5,151 | |
Other income | 1,466 | | | 2 | | | — | | | 1,468 | |
Total revenues | 86,680 | | | 31,676 | | | 685 | | | 119,041 | |
Benefits and expenses: | | | | | | | |
Insurance benefits paid or provided: | | | | | | | |
Claims and surrenders | 46,801 | | | 13,084 | | | — | | | 59,885 | |
Increase in future policy benefit reserves | 7,712 | | | 3,807 | | | — | | | 11,519 | |
Policyholders' dividends | 2,762 | | | 19 | | | — | | | 2,781 | |
Total insurance benefits paid or provided | 57,275 | | | 16,910 | | | — | | | 74,185 | |
Commissions | 8,629 | | | 8,329 | | | — | | | 16,958 | |
Other general expenses | 10,373 | | | 7,878 | | | 4,634 | | | 22,885 | |
Capitalization of deferred policy acquisition costs | (7,377) | | | (3,395) | | | — | | | (10,772) | |
Amortization of deferred policy acquisition costs | 10,548 | | | 1,709 | | | — | | | 12,257 | |
Amortization of cost of insurance acquired | 211 | | | 465 | | | — | | | 676 | |
Total benefits and expenses | 79,659 | | | 31,896 | | | 4,634 | | | 116,189 | |
Income (loss) before federal income tax expense | $ | 7,021 | | | (220) | | | (3,949) | | | 2,852 | |
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
(4) STOCKHOLDERS' EQUITY AND RESTRICTIONS
STOCK
Our Restated and Amended Articles of Incorporation authorize the issuance of 127,000,000 shares, of which 100,000,000 shares shall be Class A common stock, 2,000,000 shares shall be Class B common stock, and 25,000,000 shall be preferred stock. The 2 authorized classes of common stock are equal in all respects, except (a) each share of Class A common stock is entitled to receive twice the cash dividends paid on a per share basis to the Class B common stock, if any; and (b) the holders of the Class B common stock have the exclusive right to elect a simple majority of the board of Directors of Citizens. In April 2021, we repurchased all of the outstanding Class B common stock, which is now classified as treasury stock. As a result, all of the directors are elected by the holders of the Class A common stock. Citizens has never issued any preferred stock.
A summary of the change in gross number of shares of Class A and Class B common stock and treasury stock is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
(In thousands) | Common Stock | | Treasury | | Common Stock | | Treasury |
Class A | | Class B | | Stock | | Class A | | Class B | | Stock |
Balance at beginning of year | 53,170 | | | 1,002 | | | 4,138 | | | 52,654 | | | 1,002 | | | 3,136 | |
Stock issued under stock investment plan | 475 | | | — | | | — | | | — | | | — | | | — | |
Stock issued for compensation | 81 | | | — | | | — | | | 112 | | | — | | | — | |
Acquisition of Class A shares | — | | | — | | | 392 | | | — | | | — | | | — | |
Acquisition of Class B shares | — | | | — | | | — | | | — | | | — | | | 1,002 | |
Other share issuance | 16 | | | — | | | — | | | — | | | — | | | — | |
Balance at end of period | 53,742 | | | 1,002 | | | 4,530 | | | 52,766 | | | 1,002 | | | 4,138 | |
| | | | | | | | |
CITIZENS, INC.
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited)
|
EARNINGS PER SHARE
The following tables set forth the computation of basic and diluted earnings (loss) per share.
| | | | | | | | | | | |
| | | |
Three Months Ended June 30, | 2022 | | 2021 |
(In thousands, except per share amounts) | |
| | | |
Basic and diluted earnings (loss) per share: | | | |
Numerator: | | | |
Net income (loss) | $ | (3,548) | | | 5,022 | |
Net income (loss) allocated to Class A common stock | $ | (3,548) | | | 5,010 | |
Net income (loss) allocated to Class B common stock | — | | | 12 | |
Net income (loss) | $ | (3,548) | | | 5,022 | |
| | | |
Denominator: | | | |
Weighted average shares of Class A outstanding - basic | 50,373 | | | 49,602 | |
Weighted average shares of Class A outstanding - diluted | 51,065 | | | 50,192 | |
Weighted average shares of Class B outstanding - basic and diluted | — | | | 250 | |
Basic and diluted earnings (loss) per share of Class A common stock | $ | (0.07) | | | 0.10 | |
Basic and diluted earnings (loss) per share of Class B common stock | — | | | 0.05 | |
| | | | | | | | | | | |
Six Months Ended June 30, | 2022 | | 2021 |
(In thousands, except per share amounts) | |
Basic and diluted earnings (loss) per share: | | | |
Numerator: | | | |
Net income (loss) | $ | (4,881) | | | 1,449 | |
Net income (loss) allocated to Class A common stock | $ | (4,881) | | | 1,441 | |
Net income (loss) allocated to Class B common stock | — | | | 8 | |
Net income (loss) | $ | (4,881) | | | 1,449 | |
| | | |
Denominator: | | | |
Weighted average shares of Class A outstanding - basic | 50,278 | | | 49,578 | |
Weighted average shares of Class A outstanding - diluted | 50,970 | | | 50,145 | |
Weighted average shares of Class B outstanding - basic and diluted | — | | | 572 | |
Basic and diluted earnings (loss) per share of Class A common stock | $ | (0.10) | | | 0.03 | |
Basic and diluted earnings (loss) per share of Class B common stock | — | | | 0.01 | |
CAPITAL AND SURPLUS
Each of our regulated insurance subsidiaries is required to meet stipulated regulatory capital requirements. These include capital requirements imposed by the U.S. National Association of Insurance Commissioners ("NAIC") and the Bermuda Monetary Authority ("BMA"). All insurance subsidiaries exceeded the minimum capital requirements at June 30, 2022.
In order to minimize the risk of a shortfall in capital arising from an unexpected adverse deviation or excess risk, the BMA has established a threshold capital level (termed the Target Capital Level ("TCL")), which is set at 120% of a
| | | | | | | | |
CITIZENS, INC.
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited)
|
company’s enhanced capital requirement. The TCL serves as an early warning tool for the BMA. As of June 30, 2022, CICA International was above the TCL threshold. At the request of the BMA, on April 15, 2021, Citizens and CICA International entered into a Keep Well Agreement. The Keep Well Agreement requires Citizens to contribute up to $10 million in capital to CICA International as necessary to ensure that CICA International has a minimum capital level of 120% (equal to the TCL). Since CICA International’s capital level currently exceeds 120%, Citizens is not currently required to make a capital contribution.
(5) INVESTMENTS
The Company invests primarily in fixed maturity securities, which totaled 87.4% of total cash and invested assets at June 30, 2022, as shown below.
| | | | | | | | | | | | | | | | | | | | | | | |
Carrying Value (In thousands, except for %) | June 30, 2022 | | December 31, 2021 |
Amount | | % | | Amount | | % |
| | | | | | | |
Cash and invested assets: | | | | | | | |
Fixed maturity securities | $ | 1,237,004 | | | 87.4 | % | | 1,470,617 | | | 89.0 | % |
Equity securities | 12,711 | | | 0.9 | % | | 14,844 | | | 0.9 | % |
Policy loans | 78,586 | | | 5.5 | % | | 80,307 | | | 4.9 | % |
Other long-term investments | 66,002 | | | 4.7 | % | | 57,399 | | | 3.5 | % |
| | | | | | | |
Cash and cash equivalents | 22,407 | | | 1.5 | % | | 27,294 | | | 1.7 | % |
| | | | | | | |
Total cash and invested assets | $ | 1,416,710 | | | 100.0 | % | | 1,650,461 | | | 100.0 | % |
The following tables represent the amortized cost, gross unrealized gains and losses and fair value of fixed maturity securities as of the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
June 30, 2022 | | | |
(In thousands) | | | |
| | | | | | | |
Fixed maturity securities: | | | | | | | |
Available-for-sale: | | | | | | | |
U.S. Treasury securities | $ | 9,471 | | | 458 | | | 7 | | | 9,922 | |
U.S. Government-sponsored enterprises | 3,449 | | | 485 | | | — | | | 3,934 | |
States and political subdivisions | 359,199 | | | 5,913 | | | 21,723 | | | 343,389 | |
Corporate: | | | | | | | |
Financial | 229,937 | | | 675 | | | 29,961 | | | 200,651 | |
Consumer | 238,842 | | | 1,781 | | | 31,996 | | | 208,627 | |
Utilities | 110,093 | | | 191 | | | 17,654 | | | 92,630 | |
Energy | 75,292 | | | 21 | | | 8,884 | | | 66,429 | |
All other | 187,706 | | | 869 | | | 22,150 | | | 166,425 | |
| | | | | | | |
Residential mortgage-backed | 111,950 | | | 197 | | | 2,133 | | | 110,014 | |
Asset-backed | 36,364 | | | 28 | | | 1,513 | | | 34,879 | |
Foreign governments | 101 | | | 3 | | | — | | | 104 | |
Total fixed maturity securities | $ | 1,362,404 | | | 10,621 | | | 136,021 | | | 1,237,004 | |
| | | | | | | | |
CITIZENS, INC.
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited)
|
| | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
December 31, 2021 | | |
December 31, 2022 | | December 31, 2022 | |
(In thousands) | (In thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | (In thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Fixed maturity securities: | Fixed maturity securities: | | Fixed maturity securities: | |
Available-for-sale: | Available-for-sale: | | | | | | | | Available-for-sale: | | | | | | | |
U.S. Treasury securities | U.S. Treasury securities | $ | 9,515 | | | 1,097 | | | 1 | | | 10,611 | | U.S. Treasury securities | $ | 9,425 | | | 152 | | | 9 | | | 9,568 | |
U.S. Government-sponsored enterprises | U.S. Government-sponsored enterprises | 3,463 | | | 996 | | | — | | | 4,459 | | U.S. Government-sponsored enterprises | 3,434 | | | 277 | | | 1 | | | 3,710 | |
States and political subdivisions | States and political subdivisions | 356,594 | | | 28,056 | | | 692 | | | 383,958 | | States and political subdivisions | 344,208 | | | 1,114 | | | 37,964 | | | 307,358 | |
Corporate: | Corporate: | | Corporate: | |
Financial | Financial | 213,652 | | | 22,477 | | | 172 | | | 235,957 | | Financial | 243,758 | | | 512 | | | 42,383 | | | 201,887 | |
Consumer | Consumer | 219,223 | | | 23,658 | | | 900 | | | 241,981 | | Consumer | 247,824 | | | 758 | | | 47,138 | | | 201,444 | |
Utilities | Utilities | 105,738 | | | 7,358 | | | 801 | | | 112,295 | | Utilities | 115,738 | | | 39 | | | 23,790 | | | 91,987 | |
Energy | Energy | 76,989 | | | 7,334 | | | 68 | | | 84,255 | | Energy | 76,065 | | | — | | | 11,395 | | | 64,670 | |
All other | All other | 196,403 | | | 22,497 | | | 380 | | | 218,520 | | All other | 184,022 | | | 683 | | | 29,048 | | | 155,657 | |
| Commercial mortgage-backed | | Commercial mortgage-backed | 171 | | | — | | | 2 | | | 169 | |
Residential mortgage-backed | Residential mortgage-backed | 117,755 | | | 16,046 | | | 6 | | | 133,795 | | Residential mortgage-backed | 110,582 | | | 9 | | | 10,765 | | | 99,826 | |
Asset-backed | Asset-backed | 44,322 | | | 368 | | | 14 | | | 44,676 | | Asset-backed | 45,991 | | | 18 | | | 2,767 | | | 43,242 | |
Foreign governments | Foreign governments | 101 | | | 9 | | | — | | | 110 | | Foreign governments | 100 | | | 1 | | | — | | | 101 | |
Total fixed maturity securities | Total fixed maturity securities | $ | 1,343,755 | | | 129,896 | | | 3,034 | | | 1,470,617 | | Total fixed maturity securities | $ | 1,381,318 | | | 3,563 | | | 205,262 | | | 1,179,619 | |
Most of the Company's equity securities are diversified stock and bond mutual funds.
| | | | | | | | | | | |
Fair Value (In thousands) | June 30, 2022 | | December 31, 2021 |
| | | |
Equity securities: | | | |
Stock mutual funds | $ | 3,148 | | | 3,571 | |
Bond mutual funds | 4,407 | | | 5,060 | |
Common stock | 981 | | | 990 | |
Non-redeemable preferred stock | 11 | | | 161 | |
Non-redeemable preferred stock fund | 4,164 | | | 5,062 | |
Total equity securities | $ | 12,711 | | | 14,844 | |
| | | | | | | | | | | |
Fair Value (In thousands) | March 31, 2023 | | December 31, 2022 |
| | | |
Equity securities: | | | |
Stock mutual funds | $ | 2,683 | | | 2,615 | |
Bond mutual funds | 4,409 | | | 4,337 | |
Common stock | 924 | | | 857 | |
Non-redeemable preferred stock | 9 | | | 8 | |
Non-redeemable preferred stock fund | 3,874 | | | 3,773 | |
Total equity securities | $ | 11,899 | | | 11,590 | |
VALUATION OF INVESTMENTS
Available-for-sale ("AFS") fixed maturity securities are reported in the consolidated financial statements at fair value. Equity securities are measured at fair value with the change in fair value recorded through net income.income (loss). The Company recognized net investment related lossesgains of $1.2 million and $2.0$0.3 million on equity securities held for the three and six months ended June 30, 2022March 31, 2023 and gainslosses of $0.3 million and $0.6$0.8 million for the same periodsperiod ended June 30, 2021,March 31, 2022, respectively.
The Company considers several factors in its review and evaluation of individual investments, using the process described in Part IV, Item 15, Note 2. Investments in the notes to the consolidated financial statements of our Form 10-K to determine whether a credit valuation loss exists. For the three and six months ended June 30,March 31, 2023 and 2022, and 2021, the Company recorded no credit valuation losses on fixed maturity securities.
June 30, 2022March 31, 2023 | 10-Q 1814
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
The following tables present the fair values and gross unrealized losses of fixed maturity securities that are not deemed to have credit losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position at June 30, 2022March 31, 2023 and December 31, 2021.2022.
| June 30, 2022 | Less than 12 months | Greater than 12 months | Total | |
March 31, 2023 | | March 31, 2023 | Less than 12 months | Greater than 12 months | Total |
(In thousands, except for # of securities) | (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) | Fair Value | Unrealized Losses | # of Securities | Fair Value | Unrealized Losses | # of Securities | Fair Value | Unrealized Losses | # of Securities |
| Fixed maturity securities: | Fixed maturity securities: | | Fixed maturity securities: | |
Available-for-sale securities: | Available-for-sale securities: | | Available-for-sale securities: | |
U.S. Treasury securities | U.S. Treasury securities | $ | 66 | | 7 | | 2 | | — | | — | | — | | 66 | | 7 | | 2 | | U.S. Treasury securities | $ | 514 | | 2 | | 2 | | 66 | | 8 | | 2 | | 580 | | 10 | | 4 | |
U.S. Government-sponsored enterprises | | U.S. Government-sponsored enterprises | 223 | | 1 | | 1 | | — | | — | | — | | 223 | | 1 | | 1 | |
States and political subdivisions | States and political subdivisions | 149,297 | | 21,429 | | 171 | | 720 | | 294 | | 2 | | 150,017 | | 21,723 | | 173 | | States and political subdivisions | 111,550 | | 5,674 | | 131 | | 80,193 | | 22,944 | | 100 | | 191,743 | | 28,618 | | 231 | |
Corporate: | Corporate: | | Corporate: | |
Financial | Financial | 181,314 | | 29,539 | | 218 | | 887 | | 422 | | 1 | | 182,201 | | 29,961 | | 219 | | Financial | 102,783 | | 9,440 | | 119 | | 89,543 | | 26,679 | | 130 | | 192,326 | | 36,119 | | 249 | |
Consumer | Consumer | 175,856 | | 30,776 | | 213 | | 2,842 | | 1,220 | | 7 | | 178,698 | | 31,996 | | 220 | | Consumer | 81,680 | | 5,352 | | 90 | | 108,995 | | 33,162 | | 153 | | 190,675 | | 38,514 | | 243 | |
Utilities | Utilities | 83,987 | | 15,311 | | 132 | | 4,986 | | 2,343 | | 5 | | 88,973 | | 17,654 | | 137 | | Utilities | 30,814 | | 2,271 | | 55 | | 61,557 | | 17,933 | | 104 | | 92,371 | | 20,204 | | 159 | |
Energy | Energy | 64,778 | | 8,884 | | 77 | | — | | — | | — | | 64,778 | | 8,884 | | 77 | | Energy | 36,270 | | 2,270 | | 41 | | 26,992 | | 6,570 | | 37 | | 63,262 | | 8,840 | | 78 | |
All Other | All Other | 146,713 | | 21,215 | | 171 | | 2,427 | | 935 | | 1 | | 149,140 | | 22,150 | | 172 | | All Other | 93,285 | | 6,463 | | 99 | | 57,461 | | 16,093 | | 80 | | 150,746 | | 22,556 | | 179 | |
| Commercial mortgage-backed | | Commercial mortgage-backed | 168 | | 3 | | 2 | | — | | — | | — | | 168 | | 3 | | 2 | |
Residential mortgage-backed | Residential mortgage-backed | 82,801 | | 2,133 | | 72 | | — | | — | | — | | 82,801 | | 2,133 | | 72 | | Residential mortgage-backed | 101,277 | | 7,354 | | 87 | | 1,296 | | 332 | | 12 | | 102,573 | | 7,686 | | 99 | |
Asset-backed | Asset-backed | 30,469 | | 1,436 | | 35 | | 1,643 | | 77 | | 2 | | 32,112 | | 1,513 | | 37 | | Asset-backed | 12,725 | | 692 | | 19 | | 23,609 | | 1,740 | | 28 | | 36,334 | | 2,432 | | 47 | |
| Total fixed maturity securities | Total fixed maturity securities | $ | 915,281 | | 130,730 | | 1,091 | | 13,505 | | 5,291 | | 18 | | 928,786 | | 136,021 | | 1,109 | | Total fixed maturity securities | $ | 571,289 | | 39,522 | | 646 | | 449,712 | | 125,461 | | 646 | | 1,021,001 | | 164,983 | | 1,292 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | Less than 12 months | Greater than 12 months | Total |
(In thousands, except for # of securities) | Fair Value | Unrealized Losses | # of Securities | Fair Value | Unrealized Losses | # of Securities | Fair Value | Unrealized Losses | # of Securities |
| | | | | | | | | |
Fixed maturity securities: | | | | | | | | |
Available-for-sale securities: | | | | | | | | | |
U.S. Treasury securities | $ | 72 | | 1 | | 2 | | — | | — | | — | | 72 | | 1 | | 2 | |
States and political subdivisions | 21,715 | | 692 | | 15 | | — | | — | | — | | 21,715 | | 692 | | 15 | |
Corporate: | | | | | | | | | |
Financial | 8,059 | | 86 | | 15 | | 1,227 | | 86 | | 1 | | 9,286 | | 172 | | 16 | |
Consumer | 29,494 | | 777 | | 28 | | 2,419 | | 123 | | 1 | | 31,913 | | 900 | | 29 | |
Utilities | 19,072 | | 401 | | 14 | | 4,523 | | 400 | | 4 | | 23,595 | | 801 | | 18 | |
Energy | 7,381 | | 68 | | 8 | | — | | — | | — | | 7,381 | | 68 | | 8 | |
All Other | 14,312 | | 380 | | 16 | | — | | — | | — | | 14,312 | | 380 | | 16 | |
| | | | | | | | | |
Residential mortgage-backed | 1,084 | | 6 | | 6 | | — | | — | | — | | 1,084 | | 6 | | 6 | |
Asset-backed | 9,078 | | 12 | | 11 | | 663 | | 2 | | 1 | | 9,741 | | 14 | | 12 | |
Total fixed maturity securities | $ | 110,267 | | 2,423 | | 115 | | 8,832 | | 611 | | 7 | | 119,099 | | 3,034 | | 122 | |
In each category of our fixed maturity securities described above, we do not intend to sell our investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases. These unrealized losses on fixed maturity securities are due to noncredit-related factors, including widening credit spreads and rising interest rates since purchase, which have little bearing on the recoverability of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | Less than 12 months | Greater than 12 months | Total |
(In thousands, except for # of securities) | Fair Value | Unrealized Losses | # of Securities | Fair Value | Unrealized Losses | # of Securities | Fair Value | Unrealized Losses | # of Securities |
| | | | | | | | | |
Fixed maturity securities: | | | | | | | | |
Available-for-sale securities: | | | | | | | | | |
U.S. Treasury securities | $ | — | | — | | — | | 64 | | 9 | | 2 | | 64 | | 9 | | 2 | |
U.S. Government-sponsored enterprises | 223 | | 1 | | 1 | | — | | — | | — | | 223 | | 1 | | 1 | |
States and political subdivisions | 189,084 | | 30,866 | | 242 | | 14,184 | | 7,098 | | 14 | | 203,268 | | 37,964 | | 256 | |
Corporate: | | | | | | | | | |
Financial | 182,447 | | 39,122 | | 237 | | 6,144 | | 3,261 | | 16 | | 188,591 | | 42,383 | | 253 | |
Consumer | 164,224 | | 34,823 | | 220 | | 23,417 | | 12,315 | | 30 | | 187,641 | | 47,138 | | 250 | |
Utilities | 73,483 | | 15,959 | | 152 | | 16,413 | | 7,831 | | 18 | | 89,896 | | 23,790 | | 170 | |
Energy | 59,053 | | 9,601 | | 75 | | 5,617 | | 1,794 | | 8 | | 64,670 | | 11,395 | | 83 | |
All Other | 140,955 | | 25,337 | | 171 | | 7,910 | | 3,711 | | 15 | | 148,865 | | 29,048 | | 186 | |
Commercial mortgage-backed | 168 | | 2 | | 2 | | — | | — | | — | | 168 | | 2 | | 2 | |
Residential mortgage-backed | 98,758 | | 10,514 | | 95 | | 759 | | 251 | | 5 | | 99,517 | | 10,765 | | 100 | |
Asset-backed | 37,067 | | 2,485 | | 41 | | 4,264 | | 282 | | 9 | | 41,331 | | 2,767 | | 50 | |
Total fixed maturity securities | $ | 945,462 | | 168,710 | | 1,236 | | 78,772 | | 36,552 | | 117 | | 1,024,234 | | 205,262 | | 1,353 | |
June 30, 2022March 31, 2023 | 10-Q 1915
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
In each category of our fixed maturity securities described above, we do not intend to sell our investments hence they areand it is not recognized as credit losses. The fair value is expectedmore likely than not that the Company will be required to recover assell the securities approach maturity or if market yields for such investments decline.before recovery of their amortized cost bases. As of June 30, 2022March 31, 2023 and December 31, 2021, 97.6% and 98.0%, respectively,2022, 98.7% of the fair value of our fixed maturity securities portfolio was rated investment grade. While the losses are currently unrealized, we continue to monitor all fixed maturity securities on an ongoingon-going basis as future information may become available which could result in an allowance being recorded. While we experience unrealized losses across several corporate sectors, the financial sector includes exposure to banks which have been impacted the most by recent economic and interest rate pressures. We have assessed our exposure in this sector and believe our investments have access to sufficient liquidity to meet their debt obligations.
These unrealized losses on fixed maturity securities are due to noncredit-related factors, including widening credit spreads and rising interest rates since purchase, which have little bearing on the recoverability of our investments, hence they are not recognized as credit losses. The fair value is expected to recover as the securities approach maturity or if market yields for such investments decline.
The amortized cost and fair value of fixed maturity securities at June 30, 2022March 31, 2023 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.
| June 30, 2022 | Amortized Cost | | Fair Value | |
March 31, 2023 | | March 31, 2023 | Amortized Cost | | Fair Value |
(In thousands) | (In thousands) | Amortized Cost | | Fair Value | (In thousands) | |
Fixed maturity securities: | Fixed maturity securities: | | Fixed maturity securities: | | | |
Due in one year or less | Due in one year or less | $ | 34,225 | | | 34,518 | | Due in one year or less | $ | 9,753 | | | 9,718 | |
Due after one year through five years | Due after one year through five years | 116,768 | | | 117,642 | | Due after one year through five years | 131,003 | | | 129,487 | |
Due after five years through ten years | Due after five years through ten years | 214,234 | | | 210,114 | | Due after five years through ten years | 248,095 | | | 240,207 | |
Due after ten years | Due after ten years | 997,177 | | | 874,730 | | Due after ten years | 999,068 | | | 850,279 | |
Total fixed maturity securities | Total fixed maturity securities | $ | 1,362,404 | | | 1,237,004 | | Total fixed maturity securities | $ | 1,387,919 | | | 1,229,691 | |
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.
| | | | Three Months Ended | | Six Months Ended | | | | | Three Months Ended | |
| | June 30, | | June 30, | | | | | March 31, | |
(In thousands) | (In thousands) | 2022 | 2021 | | 2022 | 2021 | | (In thousands) | | | 2023 | 2022 | |
Fixed maturity securities, available-for-sale: | Fixed maturity securities, available-for-sale: | | | Fixed maturity securities, available-for-sale: | | | |
Proceeds | Proceeds | $ | 27,728 | | — | | | 28,828 | | 7,254 | | | Proceeds | | | $ | 2,865 | | 1,100 | | |
Gross realized gains | Gross realized gains | $ | 101 | | — | | | 101 | | 100 | | | Gross realized gains | | | $ | 5 | | — | | |
Gross realized losses | Gross realized losses | $ | (102) | | — | | | (102) | | 1 | | | Gross realized losses | | | $ | 12 | | — | | |
The Company sold 16 and 174 AFS fixed maturity securities during the three and six months ended June 30, 2022March 31, 2023 and 0 and 181 during the three and six months ended June 30, 2021,March 31, 2022, respectively.
(6)(4) FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We hold AFS fixed maturity securities, which are carried at fair value with changes in fair value reported through other comprehensive income (loss). We also report our equity
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
securities and certain other long-term investments at fair value with changes in fair value reported through the consolidated statements of operations.
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
| | | | | | | | |
CITIZENS, INC.
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited)
|
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 pricing models are primarily industry-standard models that consider various inputs, such as interest rates, credit spreads and foreign exchange rates for the underlying financial instruments. All significant inputs are observable or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category primarily include corporate securities, U.S. Government-sponsored enterprise securities, securities issued by states and political subdivisions and certain mortgage and asset-backed securities.
Level 3 is comprised of financial instruments whose fair value is estimated based on non-binding broker prices utilizing significant inputs not based on or corroborated by readily available market information. We have no investments in this category.
June 30, 2022March 31, 2023 | 10-Q 2117
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
The following tables set forth our assets that are measured at fair value on a recurring basis as of the dates indicated.
| June 30, 2022 | Level 1 | | Level 2 | | Level 3 | | Total Fair Value | |
March 31, 2023 | | March 31, 2023 | Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
(In thousands) | (In thousands) | Level 1 | | Level 2 | | Level 3 | | Total Fair Value | (In thousands) | |
Financial Assets | Financial Assets | | Financial Assets | |
Fixed maturity securities available-for-sale: | Fixed maturity securities available-for-sale: | | | | | | | | Fixed maturity securities available-for-sale: | | | | | | | |
U.S. Treasury and U.S. Government-sponsored enterprises | U.S. Treasury and U.S. Government-sponsored enterprises | $ | 9,922 | | | 3,934 | | | — | | | 13,856 | | U.S. Treasury and U.S. Government-sponsored enterprises | $ | 5,925 | | | 3,763 | | | — | | | 9,688 | |
States and political subdivisions | States and political subdivisions | — | | | 343,389 | | | — | | | 343,389 | | States and political subdivisions | — | | | 308,580 | | | — | | | 308,580 | |
Corporate | Corporate | 48 | | | 734,714 | | | — | | | 734,762 | | Corporate | 47 | | | 758,927 | | | — | | | 758,974 | |
| Commercial mortgage-backed | | Commercial mortgage-backed | — | | | 168 | | | — | | | 168 | |
Residential mortgage-backed | Residential mortgage-backed | — | | | 110,014 | | | — | | | 110,014 | | Residential mortgage-backed | — | | | 102,903 | | | — | | | 102,903 | |
Asset-backed | Asset-backed | — | | | 34,879 | | | — | | | 34,879 | | Asset-backed | — | | | 49,277 | | | — | | | 49,277 | |
Foreign governments | Foreign governments | — | | | 104 | | | — | | | 104 | | Foreign governments | — | | | 101 | | | — | | | 101 | |
Total fixed maturity securities available-for-sale | Total fixed maturity securities available-for-sale | 9,970 | | | 1,227,034 | | | — | | | 1,237,004 | | Total fixed maturity securities available-for-sale | 5,972 | | | 1,223,719 | | | — | | | 1,229,691 | |
| Equity securities: | Equity securities: | | | | | | | | Equity securities: | | | | | | | |
Stock mutual funds | Stock mutual funds | 3,148 | | | — | | | — | | | 3,148 | | Stock mutual funds | 2,683 | | | — | | | — | | | 2,683 | |
Bond mutual funds | Bond mutual funds | 4,407 | | | — | | | — | | | 4,407 | | Bond mutual funds | 4,409 | | | — | | | — | | | 4,409 | |
Common stock | Common stock | 981 | | | — | | | — | | | 981 | | Common stock | 924 | | | — | | | — | | | 924 | |
Non-redeemable preferred stock | Non-redeemable preferred stock | 11 | | | — | | | — | | | 11 | | Non-redeemable preferred stock | 9 | | | — | | | — | | | 9 | |
Non-redeemable preferred stock fund | Non-redeemable preferred stock fund | 4,164 | | | — | | | — | | | 4,164 | | Non-redeemable preferred stock fund | 3,874 | | | — | | | — | | | 3,874 | |
Total equity securities | Total equity securities | 12,711 | | | — | | | — | | | 12,711 | | Total equity securities | 11,899 | | | — | | | — | | | 11,899 | |
Other long-term investments (1) | Other long-term investments (1) | — | | | — | | | — | | | 64,732 | | Other long-term investments (1) | — | | | — | | | — | | | 71,990 | |
Total financial assets | Total financial assets | $ | 22,681 | | | 1,227,034 | | | — | | | 1,314,447 | | Total financial assets | $ | 17,871 | | | 1,223,719 | | | — | | | 1,313,580 | |
(1) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheet.sheets.
June 30, 2022March 31, 2023 | 10-Q 2218
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| December 31, 2021 | Level 1 | | Level 2 | | Level 3 | | Total Fair Value | |
December 31, 2022 | | December 31, 2022 | Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
(In thousands) | (In thousands) | Level 1 | | Level 2 | | Level 3 | | Total Fair Value | (In thousands) | |
Financial Assets | Financial Assets | | Financial Assets | |
Fixed maturity securities available-for-sale: | Fixed maturity securities available-for-sale: | | | | | | | | Fixed maturity securities available-for-sale: | | | | | | | |
U.S. Treasury and U.S. Government-sponsored enterprises | U.S. Treasury and U.S. Government-sponsored enterprises | $ | 10,611 | | | 4,459 | | | — | | | 15,070 | | U.S. Treasury and U.S. Government-sponsored enterprises | $ | 9,568 | | | 3,710 | | | — | | | 13,278 | |
States and political subdivisions | States and political subdivisions | — | | | 383,958 | | | — | | | 383,958 | | States and political subdivisions | — | | | 307,358 | | | — | | | 307,358 | |
Corporate | Corporate | 51 | | | 892,957 | | | — | | | 893,008 | | Corporate | 44 | | | 715,601 | | | — | | | 715,645 | |
| Commercial mortgage-backed | | Commercial mortgage-backed | — | | | 169 | | | — | | | 169 | |
Residential mortgage-backed | Residential mortgage-backed | — | | | 133,795 | | | — | | | 133,795 | | Residential mortgage-backed | — | | | 99,826 | | | — | | | 99,826 | |
Asset-backed | Asset-backed | — | | | 44,676 | | | — | | | 44,676 | | Asset-backed | — | | | 43,242 | | | — | | | 43,242 | |
Foreign governments | Foreign governments | — | | | 110 | | | — | | | 110 | | Foreign governments | — | | | 101 | | | — | | | 101 | |
Total fixed maturity securities available-for-sale | Total fixed maturity securities available-for-sale | 10,662 | | | 1,459,955 | | | — | | | 1,470,617 | | Total fixed maturity securities available-for-sale | 9,612 | | | 1,170,007 | | | — | | | 1,179,619 | |
| Equity securities: | Equity securities: | | | | | | | | Equity securities: | | | | | | | |
Stock mutual funds | Stock mutual funds | 3,571 | | | — | | | — | | | 3,571 | | Stock mutual funds | 2,615 | | | — | | | — | | | 2,615 | |
Bond mutual funds | Bond mutual funds | 5,060 | | | — | | | — | | | 5,060 | | Bond mutual funds | 4,337 | | | — | | | — | | | 4,337 | |
Common stock | Common stock | 990 | | | — | | | — | | | 990 | | Common stock | 857 | | | — | | | — | | | 857 | |
Non-redeemable preferred stock | Non-redeemable preferred stock | 161 | | | — | | | — | | | 161 | | Non-redeemable preferred stock | 8 | | | — | | | — | | | 8 | |
Non-redeemable preferred stock fund | Non-redeemable preferred stock fund | 5,062 | | | — | | | — | | | 5,062 | | Non-redeemable preferred stock fund | 3,773 | | | — | | | — | | | 3,773 | |
Total equity securities | Total equity securities | 14,844 | | | — | | | — | | | 14,844 | | Total equity securities | 11,590 | | | — | | | — | | | 11,590 | |
Other long-term investments (1) | Other long-term investments (1) | — | | | — | | | — | | | 56,038 | | Other long-term investments (1) | — | | | — | | | — | | | 66,846 | |
Total financial assets | Total financial assets | $ | 25,506 | | | 1,459,955 | | | — | | | 1,541,499 | | Total financial assets | $ | 21,202 | | | 1,170,007 | | | — | | | 1,258,055 | |
(1) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheet. | |
(1) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets. | | (1) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets. |
FINANCIAL INSTRUMENTS VALUATION
FINANCIAL INSTRUMENTS CARRIED AT FAIR VALUE
Fixed maturity securities, available-for-sale. At June 30, 2022,March 31, 2023, fixed maturity securities, valued using a third-party pricing source, totaled $1.2 billion for Level 2 assets and comprised 93.3%93.2% of total reported fair value of our financial assets. The Level 1 and Level 2 valuations are reviewed and updated quarterly through 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 June 30, 2022. For the six months ended June 30, 2022,March 31, 2023. As of March 31, 2023, 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.
Equity securities. Our equity securities are classified as Level 1 assets as their fair values are based upon quoted market prices.
Limited partnerships. The Company considers the net asset value ("NAV") to represent the value of the investment fund and is measured by the total value of assets minus the total value of liabilities. The following tables includetable includes information related to our investments in limited partnerships that calculate NAV per share. For these investments, which are measured at fair value on a recurring basis, we use the NAV per share to measure fair value. Changes in the NAV of our limited partnerships are recorded through net income. The Company recognized net investment related losses of $4.4$0.6 million and $5.2$0.8 million on limited partnerships held for the three and six months ended June 30, 2022 and net realized gains of $4.0 million and $4.5 million for the three and six months ended June 30,
June 30, 2022March 31, 2023 | 10-Q 2319
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
2021,the three months ended March 31, 2023 and March 31, 2022, respectively. These investments are included in other long-term investments on the consolidated balance sheets.
| | | June 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| Fair Value Using NAV Per Share | Unfunded Commit- ments | Range (in years) | | Fair Value Using NAV Per Share | Unfunded Commit- ments | Range (in years) | |
(In thousands, except years) | | (In thousands, except years) | | Fair Value Using NAV Per Share | Unfunded Commit- ments | Range (In years) | | Fair Value Using NAV Per Share | Unfunded Commit- ments | Range (In years) |
(In thousands, except years) | Fair Value Using NAV Per Share | Unfunded Commit- ments | Range (in years) | | Fair Value Using NAV Per Share | Unfunded Commit- ments | Range (in years) | Description | |
Limited partnerships | Limited partnerships | | Limited partnerships | |
Middle market | Middle market | Investments in privately-originated, performing senior secured debt primarily in North America-based companies | $ | 31,776 | | 8,326 | | 5 | | $ | 21,947 | | 18,712 | | 10 | Middle market | Investments in privately-originated, performing senior secured debt primarily in North America-based companies | $ | 33,643 | | 3,452 | | 4 | | $ | 33,234 | | 6,011 | | 5 |
Global equity fund | Global equity fund | Investments in common stocks of U.S., international developed and emerging markets with a focus on long-term capital growth | 8,707 | | — | | 0 | | 10,607 | | — | | 0 | Global equity fund | Investments in common stocks of U.S., international developed and emerging markets with a focus on long-term capital growth | 9,329 | | — | | 0 | | 9,037 | | — | | 0 |
| Late-stage growth | Late-stage growth | Investments in private late-stage, established companies seeking capital to accelerate growth prior to an IPO or sale | 19,314 | | 27,256 | | 5 to 7 | | 20,468 | | 4,459 | | 6 | Late-stage growth | Investments in private late-stage, established companies seeking capital to accelerate growth prior to an IPO or sale | 18,315 | | 17,172 | | 5 to 7 | | 16,892 | | 18,444 | | 5 to 7 |
Infrastructure | Infrastructure | Investments in climate infrastructure assets, focusing on renewable power generation in wind and solar energy | 4,935 | | 14,988 | | 11 | | 3,016 | | 16,653 | | 12 | Infrastructure | Investments in climate infrastructure assets, focusing on renewable power generation in wind and solar energy | 10,703 | | 14,926 | | 10 to 12 | | 7,683 | | 4,107 | | 11 |
Total limited partnerships | Total limited partnerships | $ | 64,732 | | 50,570 | | | $ | 56,038 | | 39,824 | | | Total limited partnerships | $ | 71,990 | | 35,550 | | | $ | 66,846 | | 28,562 | | |
The majority of our limited partnership investments are not redeemable because distributions from the funds will be received when the underlying investments of the partnershipsfunds are liquidated. The life spans indicated above may be shortened or extended at the fund manager's discretion, typically in one or two-year increments. The global equity fund is redeemable monthly.
We initially estimate the fair value of investments in limited partnerships by reference to the transaction price. Subsequently, we obtain the fair value of these investments from net asset value information provided by the general partner or manager of the investments, the financial statements of which are audited annually. We carried no limited partnership investments at cost at June 30, 2022 and December 31, 2021.
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 during the six months ended June 30, 2022 or 2021.
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.
The carrying amount and fair value for the financial assets and liabilities on the consolidated financial statements not otherwise disclosed for the periods indicated were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
(In thousands) | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| | | | | | | |
Financial Assets: | | | | | | | |
Policy loans | $ | 78,659 | | | 78,659 | | | 78,773 | | | 78,773 | |
| | | | | | | |
Residential mortgage loan | 47 | | | 48 | | | 49 | | | 50 | |
| | | | | | | |
Cash and cash equivalents | 18,924 | | | 18,924 | | | 22,973 | | | 22,973 | |
Financial Liabilities: | | | | | | | |
Annuity - investment contracts | 67,799 | | | 62,968 | | | 67,344 | | | 61,701 | |
June 30,March 31, 2023 | 10-Q 20
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
Policy loans. Policy loans had a weighted average annual interest rate of 7.7% at both March 31, 2023 and December 31, 2022 and no specified maturity dates. The aggregate fair value of policy loans approximates the carrying value reflected on the consolidated balance sheets. Policy loans are an integral part of the life insurance policies we have in force, cannot be valued separately and are not marketable. Therefore, the fair value of policy loans approximates the carrying value and policy loans are considered Level 3 assets in the fair value hierarchy.
Residential mortgage loan. The mortgage loan is secured principally by a residential property. The interest rate for this loan was approximately 7.0% at both March 31, 2023 and December 31, 2022. At March 31, 2023, the remaining loan matures in five years. Management estimated the fair value using an annual interest rate of 6.25% at March 31, 2023. Our mortgage loan is considered Level 3 assets in the fair value hierarchy and is included in other long-term investments on the consolidated balance sheet.
Cash and cash equivalents. The fair value of cash and cash equivalents approximates 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 liabilities, was estimated at March 31, 2023 and December 31, 2022 using discounted cash flows based upon spot rates adjusted for various risk adjustments ranging from 4.18% to 4.41% and 4.74% to 5.09%, respectively. The fair value of liabilities under all insurance contracts are taken into consideration in the overall management of interest rate risk, which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.
Other long-term investments. Financial instruments included in other long-term investments are classified in various levels of the fair value hierarchy. The following table summarizes the carrying amounts of these investments.
| | | | | | | | | | | |
Carrying Value (In thousands) | March 31, 2023 | | December 31, 2022 |
Other long-term investments: | | | |
Limited partnerships | $ | 71,990 | | | 69,294 | |
FHLB common stock | 195 | | | 193 | |
Mortgage loans | 47 | | | 49 | |
All other investments | 22 | | | 22 | |
Total other long-term investments | $ | 72,254 | | | 69,558 | |
We carried no limited partnership investments at cost at March 31, 2023 while $2.4 million were carried at cost at December 31, 2022.
We are a member of the Federal Home Loan Bank ("FHLB") of Dallas and such membership requires members to own stock in the FHLB. Our FHLB stock is carried at amortized cost, which approximates fair value.
(5) DEFERRED POLICY ACQUISITION COSTS AND COST OF INSURANCE ACQUIRED
DAC
The following tables roll forward the DAC asset for the three months ended March 31, 2023 and 2022 by reporting cohort. Our reporting cohorts are Permanent, which summarizes insurance policies with premiums payable over the lifetime of the policy, and Permanent Limited Pay, which summarizes insurance policies with premiums payable for a limited time after which the policy is fully paid up. Both reporting cohorts include whole life and endowment policies.
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
(In thousands) | Permanent | Permanent Limited Pay | | Other Business | Total |
Life Insurance: | | | | | |
Balance, beginning of year | $ | 100,926 | | 11,542 | | | 1,016 | | 113,484 | |
Capitalizations | 3,453 | | 822 | | | 85 | | 4,360 | |
Amortization expense | (2,918) | | (186) | | | (58) | | (3,162) | |
| | | | | |
Balance, end of period | $ | 101,461 | | 12,178 | | | 1,043 | | 114,682 | |
| | | | | |
Home Service Insurance: | | | | | |
Balance, beginning of year | $ | 38,793 | | 9,729 | | | 921 | | 49,443 | |
Capitalizations | 1,615 | | 331 | | | 52 | | 1,998 | |
Amortization expense | (492) | | (95) | | | (65) | | (652) | |
| | | | | |
Balance, end of period | $ | 39,916 | | 9,965 | | | 908 | | 50,789 | |
| | | | | |
Consolidated: | | | | | |
Balance, beginning of year | $ | 139,719 | | 21,271 | | | 1,937 | | 162,927 | |
Capitalizations | 5,068 | | 1,153 | | | 137 | | 6,358 | |
Amortization expense | (3,410) | | (281) | | | (123) | | (3,814) | |
| | | | | |
Balance, end of period | $ | 141,377 | | 22,143 | | | 1,951 | | 165,471 | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
(In thousands) | Permanent | Permanent Limited Pay | | Other Business | Total |
Life Insurance: | | | | | |
Balance, beginning of year | $ | 97,675 | | 9,001 | | | 1,026 | | 107,702 | |
Capitalizations | 2,439 | | 838 | | | 29 | | 3,306 | |
Amortization expense | (2,793) | | (150) | | | (77) | | (3,020) | |
| | | | | |
Balance, end of period | $ | 97,321 | | 9,689 | | | 978 | | 107,988 | |
| | | | | |
Home Service Insurance: | | | | | |
Balance, beginning of year | $ | 35,137 | | 8,723 | | | 856 | | 44,716 | |
Capitalizations | 1,149 | | 323 | | | 3 | | 1,475 | |
Amortization expense | (444) | | (89) | | | (6) | | (539) | |
| | | | | |
Balance, end of period | $ | 35,842 | | 8,957 | | | 853 | | 45,652 | |
| | | | | |
Consolidated: | | | | | |
Balance, beginning of year | $ | 132,812 | | 17,724 | | | 1,882 | | 152,418 | |
Capitalizations | 3,588 | | 1,161 | | | 32 | | 4,781 | |
Amortization expense | (3,237) | | (239) | | | (83) | | (3,559) | |
| | | | | |
Balance, end of period | $ | 133,163 | | 18,646 | | | 1,831 | | 153,640 | |
DAC capitalization increased for the three months ended March 31, 2023, compared to the same prior year period mainly from increased commissions from higher first year sales across our business segments.
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
COIA
The following tables provide rollforwards of the COIA balances for the three months ended March 31, 2023 and 2022 by reporting cohort. Our reporting cohorts are Permanent, which summarizes insurance policies with premiums payable over the lifetime of the policy, and Permanent Limited Pay, which summarizes insurance policies with premiums payable for a limited time after which the policy is fully paid up. Both reporting cohorts include whole life and endowment policies.
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
(In thousands) | Permanent | Permanent Limited Pay | | Other Business | Total |
Life Insurance: | | | | | |
Balance, beginning of year | $ | 267 | | 750 | | | 444 | | 1,461 | |
Amortization expense | (4) | | (15) | | | (13) | | (32) | |
| | | | | |
Balance, end of period | $ | 263 | | 735 | | | 431 | | 1,429 | |
| | | | | |
Home Service Insurance: | | | | | |
Balance, beginning of year | $ | 7,583 | | 176 | | | 1,427 | | 9,186 | |
Amortization expense | (99) | | (2) | | | (28) | | (129) | |
| | | | | |
Balance, end of period | $ | 7,484 | | 174 | | | 1,399 | | 9,057 | |
| | | | | |
Consolidated: | | | | | |
Balance, beginning of year | $ | 7,850 | | 926 | | | 1,871 | | 10,647 | |
Amortization expense | (103) | | (17) | | | (41) | | (161) | |
| | | | | |
Balance, end of period | $ | 7,747 | | 909 | | | 1,830 | | 10,486 | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
(In thousands) | Permanent | Permanent Limited Pay | | Other Business | Total |
Life Insurance: | | | | | |
Balance, beginning of year | $ | 287 | | 812 | | | 485 | | 1,584 | |
Amortization expense | (5) | | (16) | | | (3) | | (24) | |
| | | | | |
Balance, end of period | $ | 282 | | 796 | | | 482 | | 1,560 | |
| | | | | |
Home Service Insurance: | | | | | |
Balance, beginning of year | $ | 7,989 | | 184 | | | 1,511 | | 9,684 | |
Amortization expense | (103) | | (2) | | | — | | (105) | |
| | | | | |
Balance, end of period | $ | 7,886 | | 182 | | | 1,511 | | 9,579 | |
| | | | | |
Consolidated: | | | | | |
Balance, beginning of year | $ | 8,276 | | 996 | | | 1,996 | | 11,268 | |
Amortization expense | (108) | | (18) | | | (3) | | (129) | |
| | | | | |
Balance, end of period | $ | 8,168 | | 978 | | | 1,993 | | 11,139 | |
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
(6) POLICYHOLDERS’ LIABILITIES
LIABILITY FOR FUTURE POLICY BENEFITS
The following tables summarize balances of and changes in the liability for future policy benefits for our reporting cohorts: Permanent, which summarizes insurance policies with premiums payable over the lifetime of the policy, and Permanent Limited Pay, which summarizes insurance policies with premiums payable for a limited time after which the policy is fully paid up. Both reporting cohorts include whole life and endowment policies.
| | | | | | | | | | | | |
| Life Insurance Segment |
March 31, 2023 (In thousands) | Permanent | Permanent Limited Pay | | Total |
Present Value of Expected Net Premiums | | | | |
Balance, beginning of year | $ | 235,228 | | 10,209 | | | 245,437 | |
Beginning balance at original discount rate | 247,601 | | 10,682 | | | 258,283 | |
| | | | |
Effects of actual variances from expected experience | 1,742 | | 365 | | | 2,107 | |
Adjusted beginning of year balance | 249,343 | | 11,047 | | | 260,390 | |
Issuances | 6,236 | | 759 | | | 6,995 | |
Interest accrual | 2,272 | | 72 | | | 2,344 | |
Net premiums collected | (9,715) | | (751) | | | (10,466) | |
Derecognition and other | 153 | | 38 | | | 191 | |
Ending balance at original discount rate | 248,289 | | 11,165 | | | 259,454 | |
Effect of changes in discount rates | (8,766) | | (370) | | | (9,136) | |
Balance, end of period | $ | 239,523 | | 10,795 | | | 250,318 | |
| | | | |
Present Value of Expected Future Policy Benefits | | | | |
Balance, beginning of year | $ | 947,415 | | 195,612 | | | 1,143,027 | |
Beginning balance at original discount rate | 996,169 | | 208,051 | | | 1,204,220 | |
| | | | |
Effects of actual variances from expected experience | 2,538 | | 1,045 | | | 3,583 | |
Adjusted beginning of year balance | 998,707 | | 209,096 | | | 1,207,803 | |
Issuances | 6,375 | | 785 | | | 7,160 | |
Interest accrual | 10,842 | | 2,112 | | | 12,954 | |
Benefit payments | (19,153) | | (4,873) | | | (24,026) | |
Derecognition and other | 14 | | 12 | | | 26 | |
Ending balance at original discount rate | 996,785 | | 207,132 | | | 1,203,917 | |
Effect of changes in discount rates | (31,065) | | (9,459) | | | (40,524) | |
Balance, end of period | $ | 965,720 | | 197,673 | | | 1,163,393 | |
| | | | |
Net liability for future policy benefits | $ | 726,197 | | 186,878 | | | 913,075 | |
| | | | |
| | | | |
The Life Insurance segment impact of updating actual experience for the current period contributed to an increase in liabilities primarily due to higher benefits than expected.
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | | | | | | | | | | | |
| Home Service Insurance |
March 31, 2023 (In thousands) | Permanent | Permanent Limited Pay | | Total |
Present Value of Expected Net Premiums | | | | |
Balance, beginning of year | $ | 93,508 | | 13,255 | | | 106,763 | |
Beginning balance at original discount rate | 100,225 | | 14,394 | | | 114,619 | |
| | | | |
Effects of actual variances from expected experience | (1,371) | | (809) | | | (2,180) | |
Adjusted beginning of year balance | 98,854 | | 13,585 | | | 112,439 | |
Issuances | 4,789 | | 1,176 | | | 5,965 | |
Interest accrual | 986 | | 114 | | | 1,100 | |
Net premiums collected | (2,967) | | 467 | | | (2,500) | |
Derecognition and other | 132 | | 46 | | | 178 | |
Ending balance at original discount rate | 101,794 | | 15,388 | | | 117,182 | |
Effect of changes in discount rates | (4,925) | | (873) | | | (5,798) | |
Balance, end of period | $ | 96,869 | | 14,515 | | | 111,384 | |
| | | | |
Present Value of Expected Future Policy Benefits | | | | |
Balance, beginning of year | $ | 200,351 | | 116,356 | | | 316,707 | |
Beginning balance at original discount rate | 214,188 | | 121,908 | | | 336,096 | |
| | | | |
Effects of actual variances from expected experience | (1,299) | | 25 | | | (1,274) | |
Adjusted beginning of year balance | 212,889 | | 121,933 | | | 334,822 | |
Issuances | 4,789 | | 1,176 | | | 5,965 | |
Interest accrual | 2,310 | | 1,410 | | | 3,720 | |
Benefit payments | (4,178) | | (1,748) | | | (5,926) | |
Derecognition and other | 132 | | 45 | | | 177 | |
Ending balance at original discount rate | 215,942 | | 122,816 | | | 338,758 | |
Effect of changes in discount rates | (10,101) | | (3,712) | | | (13,813) | |
Balance, end of period | $ | 205,841 | | 119,104 | | | 324,945 | |
| | | | |
Net liability for future policy benefits | $ | 108,972 | | 104,589 | | | 213,561 | |
| | | | |
| | | | |
Net premiums collected are defined as the transactional gross premiums collected in the current period times the net premium ratio. Issuances are calculated as the present value, using the locked-in discount rate of the expected net premiums or the expected future policy benefits related to new policies issued during the three months ended March 31, 2023 and 2022. Interest accrual is the interest earned on the beginning present value of either the expected net premiums or the expected future policy benefits using the locked-in discount rate. Benefit payments are the transactional benefits (death, lapse, surrenders and maturities) paid in the current period. Derecognition refers to a subset of the issuances or the present value of future premiums released on new issues that lapsed during the three months ended March 31, 2023 and 2022 as well as other reconciling items. The effects of actual variances from expected experience lines are primarily impacted by the actual policy cash flows during the period compared to that which was expected in the reserve assumptions. If the net of the two lines is a positive number, the implication is an unfavorable result with policy cash flows less favorable than assumed while a negative number implies a favorable result compared to assumptions. Our policy experience will vary from actual experience in any one period, either favorably or unfavorably.
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
The carrying amount and fair valueHome Service Insurance segment impact of updating actual experience for the financial assets andcurrent period contributed to an increase in liabilities on the consolidated balance sheets not otherwise disclosed for the periods indicated are as follows:due to higher premiums collected than expected.
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
(In thousands) | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| | | | | | | |
Financial Assets: | | | | | | | |
Policy loans | $ | 78,586 | | | 78,586 | | | 80,307 | | | 80,307 | |
Commercial mortgage loan | 1,000 | | | 1,000 | | | 1,000 | | | 1,000 | |
Residential mortgage loans | 52 | | | 54 | | | 148 | | | 169 | |
| | | | | | | |
Cash and cash equivalents | 22,407 | | | 22,407 | | | 27,294 | | | 27,294 | |
Financial Liabilities: | | | | | | | |
Annuity - investment contracts | 65,616 | | | 62,181 | | | 64,384 | | | 72,352 | |
| | | | | | | | | | | | |
| Life Insurance |
March 31, 2022 (In thousands) | Permanent | Permanent Limited Pay | | Total |
Present Value of Expected Net Premiums | | | | |
Balance, beginning of year | $ | 269,528 | | 4,939 | | | 274,467 | |
Beginning balance at original discount rate | 246,386 | | 5,093 | | | 251,479 | |
| | | | |
Effects of actual variances from expected experience | 1,693 | | 422 | | | 2,115 | |
Adjusted beginning of year balance | 248,079 | | 5,515 | | | 253,594 | |
Issuances | 5,795 | | 1,121 | | | 6,916 | |
Interest accrual | 2,088 | | (2) | | | 2,086 | |
Net premiums collected | (9,166) | | 133 | | | (9,033) | |
Derecognition and other | 57 | | 24 | | | 81 | |
Ending balance at original discount rate | 246,853 | | 6,791 | | | 253,644 | |
Effect of changes in discount rates | 6,040 | | (291) | | | 5,749 | |
Balance, end of period | $ | 252,893 | | 6,500 | | | 259,393 | |
| | | | |
Present Value of Expected Future Policy Benefits | | | | |
Balance, beginning of year | $ | 1,168,282 | | 240,679 | | | 1,408,961 | |
Beginning balance at original discount rate | 990,921 | | 207,105 | | | 1,198,026 | |
| | | | |
Effects of actual variances from expected experience | 1,998 | | 1,407 | | | 3,405 | |
Adjusted beginning of year balance | 992,919 | | 208,512 | | | 1,201,431 | |
Issuances | 5,863 | | 1,141 | | | 7,004 | |
Interest accrual | 10,658 | | 2,125 | | | 12,783 | |
Benefit payments | (17,715) | | (3,918) | | | (21,633) | |
Derecognition and other | (10) | | 4 | | | (6) | |
Ending balance at original discount rate | 991,715 | | 207,864 | | | 1,199,579 | |
Effect of changes in discount rates | 72,720 | | 12,917 | | | 85,637 | |
Balance, end of period | $ | 1,064,435 | | 220,781 | | | 1,285,216 | |
| | | | |
Net liability for future policy benefits | $ | 811,542 | | 214,281 | | | 1,025,823 | |
| | | | |
| | | | |
Policy loans. Policy loans had a weighted average annual interest rateThe Life Insurance segment impact of 7.7% at June 30, 2022 and December 31, 2021 and no specified maturity dates. Policy loans areupdating actual experience for the current period contributed to an integral part of the life insurance policies we haveincrease in force, 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.
Commercial mortgage loan. We financed $1.0 million of the sale of our training facility at a 6.0% interest rate. The loan isliabilities primarily due in lessto higher benefits paid than 1 year. Due to the short-term nature of the loan, the carrying value approximates fair value and is considered a Level 3 asset in the fair value hierarchy.
Residential mortgage loans. Mortgage loans are secured principally by residential properties. Weighted average interest rates for these loans were approximately 7.0% at June 30, 2022 and 6.4% at December 31, 2021. At June 30, 2022, the remaining loan matures in 6 years. Management estimated the fair value using an annual interest rate of 6.25% at June 30, 2022. Our mortgage loans are considered Level 3 assets in the fair value hierarchy and are included in other long-term investments on the consolidated balance sheets.
Cash and cash equivalents. The fair value of cash and cash equivalents approximate carrying value and are characterized as Level 1 assets in the fair value hierarchy.
Annuity liabilities. The fair value of the Company's liabilities under annuity contract policies, which are considered Level 3 liabilities, was estimated at June 30, 2022 and December 31, 2021 using discounted cash flows based upon spot rates adjusted for various risk adjustments ranging from 2.60% to 3.99% and 0.50% to 2.63%, respectively. The fair value of liabilities under all insurance contracts are taken into consideration in the overall management of interest rate risk, which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.expected.
June 30, 2022March 31, 2023 | 10-Q 2526
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | | | | | | | | | | | |
| Home Service Insurance |
March 31, 2022 (In thousands) | Permanent | Permanent Limited Pay | | Total |
Present Value of Expected Net Premiums | | | | |
Balance, beginning of year | $ | 104,556 | | 10,196 | | | 114,752 | |
Beginning balance at original discount rate | 90,012 | | 9,532 | | | 99,544 | |
| | | | |
Effects of actual variances from expected experience | 876 | | (1,083) | | | (207) | |
Adjusted beginning of year balance | 90,888 | | 8,449 | | | 99,337 | |
Issuances | 4,349 | | 711 | | | 5,060 | |
Interest accrual | 822 | | 43 | | | 865 | |
Net premiums collected | (2,723) | | 1,610 | | | (1,113) | |
Derecognition and other | (1,113) | | 24 | | | (1,089) | |
Ending balance at original discount rate | 92,223 | | 10,837 | | | 103,060 | |
Effect of changes in discount rates | 5,130 | | (112) | | | 5,018 | |
Balance, end of period | $ | 97,353 | | 10,725 | | | 108,078 | |
| | | | |
Present Value of Expected Future Policy Benefits | | | | |
Balance, beginning of year | $ | 266,206 | | 161,715 | | | 427,921 | |
Beginning balance at original discount rate | 205,340 | | 117,425 | | | 322,765 | |
| | | | |
Effects of actual variances from expected experience | 1,090 | | 625 | | | 1,715 | |
Adjusted beginning of year balance | 206,430 | | 118,050 | | | 324,480 | |
Issuances | 4,350 | | 708 | | | 5,058 | |
Interest accrual | 2,164 | | 1,349 | | | 3,513 | |
Benefit payments | (5,832) | | (2,057) | | | (7,889) | |
Derecognition and other | (1,114) | | 24 | | | (1,090) | |
Ending balance at original discount rate | 205,998 | | 118,074 | | | 324,072 | |
Effect of changes in discount rates | 28,342 | | 23,076 | | | 51,418 | |
Balance, end of period | $ | 234,340 | | 141,150 | | | 375,490 | |
| | | | |
Net liability for future policy benefits | $ | 136,987 | | 130,425 | | | 267,412 | |
| | | | |
| | | | |
Other long-term investments.
The Home Service Insurance segment impact of updating actual experience for the current period contributed to an increase in liabilities due to higher premiums collected than expected.
Table of Contents Financial instruments included in other long-term investments are classified in various levels of the fair value hierarchy. The following table summarizes the carrying amounts of these investments.
| | | | | | | | | | | |
Carrying Value (In thousands) | June 30, 2022 | | December 31, 2021 |
Other long-term investments: | | | |
Limited partnerships | $ | 64,732 | | | 56,038 | |
FHLB common stock | 192 | | | 192 | |
Mortgage loans | 1,052 | | | 1,148 | |
All other investments | 26 | | | 21 | |
Total other long-term investments | $ | 66,002 | | | 57,399 | |
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
The following table reconciles the net liability for future policy benefits shown above to the liability for future policy benefits in the consolidated balance sheet.
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | March 31, 2022 |
(In thousands) | Life Insurance | Home Service Insurance | Consolidated | | Life Insurance | Home Service Insurance | Consolidated |
Life Insurance | | | | | | | |
Permanent | $ | 726,197 | | 108,972 | | 835,169 | | | 811,542 | | 136,987 | | 948,529 | |
Permanent limited pay | 186,878 | | 104,589 | | 291,467 | | | 214,281 | | 130,425 | | 344,706 | |
Deferred profit liability | 26,347 | | 25,113 | | 51,460 | | | 23,042 | | 22,502 | | 45,544 | |
Other | 26,474 | | 13,725 | | 40,199 | | | 27,918 | | 13,403 | | 41,321 | |
Total life insurance | 965,896 | | 252,399 | | 1,218,295 | | | 1,076,783 | | 303,317 | | 1,380,100 | |
Accident & Health | | | | | | | |
| | | | | | | |
Other | 599 | | 249 | | 848 | | | 521 | | 245 | | 766 | |
| | | | | | | |
Total | $ | 966,495 | | 252,648 | | 1,219,143 | | | 1,077,304 | | 303,562 | | 1,380,866 | |
We are a memberThe following table provides the amount of undiscounted and discounted expected gross premiums and expected future benefit payments for long-term duration contracts.
| | | | | | | | | | | | | | | | | | | | | | | |
As of March 31, | 2023 | | 2022 |
(In thousands) | Life Insurance | | Home Service Insurance | | Life Insurance | | Home Service Insurance |
Undiscounted: | | | | | | | |
Permanent | | | | | | | |
Expected future gross premiums | 607,319 | | | 463,491 | | | 623,969 | | | 459,627 | |
Expected future benefit payments | $ | 1,478,777 | | | 478,978 | | | 1,468,066 | | | 453,855 | |
| | | | | | | |
Permanent Limited Pay | | | | | | | |
Expected future gross premiums | 46,845 | | | 77,743 | | | 47,904 | | | 65,371 | |
Expected future benefit payments | 321,985 | | | 319,390 | | | 322,955 | | | 304,278 | |
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| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Discounted: | | | | | | | |
Permanent | | | | | | | |
Expected future gross premiums | 474,777 | | | 277,098 | | | 523,290 | | | 308,271 | |
Expected future benefit payments | $ | 965,720 | | | 205,841 | | | 1,064,435 | | | 234,340 | |
| | | | | | | |
Permanent Limited Pay | | | | | | | |
Expected future gross premiums | 41,719 | | | 54,170 | | | 44,202 | | | 53,038 | |
Expected future benefit payments | 197,673 | | | 119,104 | | | 220,781 | | | 141,150 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
The following tables summarize the amount of revenue and interest related to long-term duration contracts recognized in the consolidated statement of operations:
| | | | | | | | | | | | | | | | | |
| Life Insurance | | Home Service Insurance |
Three Months Ended March 31, 2023 (In thousands) | Gross Premiums | Interest Expense | | Gross Premiums | Interest Expense |
Life Insurance | | | | | |
Permanent | $ | 22,458 | | 8,570 | | | 8,372 | | 1,324 | |
Permanent Limited Pay | 4,168 | | 2,336 | | | 2,154 | | 1,586 | |
Other | 77 | | — | | | 368 | | — | |
Reinsurance | (648) | | — | | | (15) | | — | |
Total, net of reinsurance | 26,055 | | 10,906 | | | 10,879 | | 2,910 | |
Accident & Health | | | | | |
| | | | | |
Other | 152 | | — | | | 206 | | — | |
Reinsurance | — | | — | | | — | | — | |
Total, net of reinsurance | 152 | | — | | | 206 | | — | |
Total | $ | 26,207 | | 10,906 | | | 11,085 | | 2,910 | |
| | | | | | | | | | | | | | | | | |
| Life Insurance | | Home Service Insurance |
Three Months Ended March 31, 2022 (In thousands) | Gross Premiums | Interest Expense | | Gross Premiums | Interest Expense |
Life Insurance | | | | | |
Permanent | $ | 22,257 | | 8,570 | | | 8,456 | | 1,342 | |
Permanent Limited Pay | 3,656 | | 2,350 | | | 2,041 | | 1,559 | |
Other | 1,425 | | — | | | — | | — | |
Reinsurance | (500) | | — | | | (14) | | — | |
Total, net of reinsurance | 26,838 | | 10,920 | | | 10,483 | | 2,901 | |
Accident & Health | | | | | |
| | | | | |
Other | 94 | | — | | | 193 | | — | |
Reinsurance | (1) | | — | | | — | | — | |
Total, net of reinsurance | 93 | | — | | | 193 | | — | |
Total | $ | 26,931 | | 10,920 | | | 10,676 | | 2,901 | |
The following table provides the weighted-average durations of the Federal Home Loan Bank ("FHLB")liability for future policy benefits.
| | | | | | | | | | | | | | | | | |
| March 31, 2023 | | March 31, 2022 |
(In years) | Life Insurance | Home Service Insurance | | Life Insurance | Home Service Insurance |
Permanent | | | | | |
Original duration | 8.1 | 15.9 | | 8.8 | 16.0 |
Current duration | 8.4 | 16.1 | | 9.1 | 16.3 |
Permanent Limited Pay | | | | | |
Original duration | 7.6 | 14.5 | | 8.0 | 15.2 |
Current duration | 7.6 | 15.2 | | 8.4 | 17.5 |
| | | | | |
| | | | | |
| | | | | |
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
The following table provides the weighted-average interest rates for the liability for future policy benefits.
| | | | | | | | | | | | | | | | | |
| March 31, 2023 | | March 31, 2022 |
(In thousands) | Life Insurance | Home Service Insurance | | Life Insurance | Home Service Insurance |
Permanent | | | | | |
Original discount rate | 4.92 | % | 4.99 | % | | 4.93 | % | 5.01 | % |
Current discount rate | 4.86 | % | 5.09 | % | | 3.43 | % | 3.68 | % |
Permanent Limited Pay | | | | | |
Original discount rate | 4.30 | % | 5.05 | % | | 4.33 | % | 5.06 | % |
Current discount rate | 4.85 | % | 5.08 | % | | 3.38 | % | 3.67 | % |
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| | | | | |
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
LIABILITY FOR POLICYHOLDERS’ ACCOUNT BALANCES
The following table presents the policyholders' account balances by range of guaranteed minimum crediting rates and such membership requires membersthe related range of the difference, in basis points, between rates being credited and the respective guaranteed minimums.
| | | | | | | | | | | | | | | | | | | | |
March 31, 2023 | At Guaranteed Minimum | 1 Basis Point-50 Basis Points Above | 51 Basis Points-150 Basis Points Above | Greater Than 150 Basis Points Above | Total |
(In thousands) | Range of Guaranteed Minimum Crediting Rate |
Life Insurance: | | | | | | |
SCWOLC (1) | 0.00% - 1.49% | $ | — | | — | | — | | — | | — | |
1.50% - 2.99% | 1,452 | | — | | — | | — | | 1,452 | |
3.00% - 4.49% | 33,940 | | — | | — | | — | | 33,940 | |
Greater or equal to 4.50% | 134 | | — | | — | | — | | 134 | |
Total | $ | 35,526 | | — | | — | | — | | 35,526 | |
| | | | | | |
Fixed annuity | 0.00% - 1.49% | $ | 197 | | — | | 1,144 | | — | | 1,341 | |
1.50% - 2.99% | 13,078 | | — | | 59 | | — | | 13,137 | |
3.00% - 4.49% | 21,568 | | 10 | | — | | — | | 21,578 | |
Greater or equal to 4.50% | 30,944 | | — | | — | | — | | 30,944 | |
Total | $ | 65,787 | | 10 | | 1,203 | | — | | 67,000 | |
| | | | | | |
Dividend accumulations | 0.00% - 1.49% | $ | 239 | | — | | — | | 3,499 | | 3,738 | |
1.50% - 2.99% | 11,144 | | 551 | | 7 | | — | | 11,702 | |
3.00% - 4.49% | 26,985 | | — | | — | | — | | 26,985 | |
Greater or equal to 4.50% | 3 | | — | | — | | — | | 3 | |
Total | $ | 38,371 | | 551 | | 7 | | 3,499 | | 42,428 | |
| | | | | | |
Premiums paid in advance | 0.00% - 1.49% | $ | — | | — | | — | | 34,122 | | 34,122 | |
1.50% - 2.99% | — | | — | | — | | — | | — | |
3.00% - 4.49% | — | | — | | — | | — | | — | |
Greater or equal to 4.50% | — | | — | | — | | — | | — | |
Total | $ | — | | — | | — | | 34,122 | | 34,122 | |
| | | | | | |
Home Service Insurance: | | | | | |
SCWOLC (1) | 0.00% - 1.49% | $ | 4 | | — | | — | | — | | 4 | |
1.50% - 2.99% | 250 | | — | | — | | — | | 250 | |
3.00% - 4.49% | 55 | | — | | — | | — | | 55 | |
Greater or equal to 4.50% | — | | — | | — | | — | | — | |
Total | $ | 309 | | — | | — | | — | | 309 | |
| | | | | | |
Fixed annuity | 0.00% - 1.49% | $ | 296 | | — | | — | | 392 | | 688 | |
1.50% - 2.99% | — | | — | | — | | — | | — | |
3.00% - 4.49% | 18,696 | | — | | — | | — | | 18,696 | |
Greater or equal to 4.50% | 777 | | — | | — | | — | | 777 | |
Total | $ | 19,769 | | — | | — | | 392 | | 20,161 | |
| | | | | | |
Dividend accumulations | 0.00% - 1.49% | $ | — | | — | | — | | 173 | | 173 | |
1.50% - 2.99% | 5 | | 42 | | — | | — | | 47 | |
3.00% - 4.49% | 20 | | — | | — | | — | | 20 | |
Greater or equal to 4.50% | — | | — | | — | | — | | — | |
Total | $ | 25 | | 42 | | — | | 173 | | 240 | |
| | | | | | |
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|
(1) Supplemental Contracts Without Life Contingencies |
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | | | | | | | | | | | | | | | | | | | |
March 31, 2022 | | At Guaranteed Minimum | 1 Basis Point-50 Basis Points Above | 51 Basis Points-150 Basis Points Above | Greater Than 150 Basis Points Above | Total |
(In thousands) | Range of Guaranteed Minimum Crediting Rate |
Life Insurance: | | | | | | |
SCWOLC (1) | 0.00% - 1.49% | $ | — | | — | | — | | — | | — | |
1.50% - 2.99% | 256 | | — | | — | | — | | 256 | |
3.00% - 4.49% | 24,862 | | — | | — | | — | | 24,862 | |
Greater or equal to 4.50% | 145 | | — | | — | | — | | 145 | |
Total | $ | 25,263 | | — | | — | | — | | 25,263 | |
| | | | | | |
Fixed annuity | 0.00% - 1.49% | $ | 203 | | — | | 813 | | — | | 1,016 | |
1.50% - 2.99% | 10,584 | | — | | 12 | | — | | 10,596 | |
3.00% - 4.49% | 21,976 | | 9 | | — | | — | | 21,985 | |
Greater or equal to 4.50% | 30,662 | | — | | — | | — | | 30,662 | |
Total | $ | 63,425 | | 9 | | 825 | | — | | 64,259 | |
| | | | | | |
Dividend accumulations | 0.00% - 1.49% | $ | 250 | | — | | — | | 3,529 | | 3,779 | |
1.50% - 2.99% | 8,501 | | 533 | | 11 | | — | | 9,045 | |
3.00% - 4.49% | 25,507 | | — | | — | | — | | 25,507 | |
Greater or equal to 4.50% | 3 | | — | | — | | — | | 3 | |
Total | $ | 34,261 | | 533 | | 11 | | 3,529 | | 38,334 | |
| | | | | | |
Premiums paid in advance | 0.00% - 1.49% | $ | — | | — | | — | | 37,922 | | 37,922 | |
1.50% - 2.99% | — | | — | | — | | — | | — | |
3.00% - 4.49% | — | | — | | — | | — | | — | |
Greater or equal to 4.50% | — | | — | | — | | — | | — | |
Total | $ | — | | — | | — | | 37,922 | | 37,922 | |
| | | | | | |
Home Service Insurance: | | | | | |
SCWOLC (1) | 0.00% - 1.49% | $ | 6 | | — | | — | | — | | 6 | |
1.50% - 2.99% | 249 | | — | | — | | — | | 249 | |
3.00% - 4.49% | 49 | | — | | — | | — | | 49 | |
Greater or equal to 4.50% | — | | — | | — | | — | | — | |
Total | $ | 304 | | — | | — | | — | | 304 | |
| | | | | | |
Fixed annuity | 0.00% - 1.49% | $ | 284 | | — | | — | | 408 | | 692 | |
1.50% - 2.99% | — | | — | | — | | — | | — | |
3.00% - 4.49% | 18,743 | | — | | — | | — | | 18,743 | |
Greater or equal to 4.50% | 903 | | — | | — | | — | | 903 | |
Total | $ | 19,930 | | — | | — | | 408 | | 20,338 | |
| | | | | | |
Dividend accumulations | 0.00% - 1.49% | $ | — | | — | | — | | 173 | | 173 | |
1.50% - 2.99% | 5 | | 44 | | — | | — | | 49 | |
3.00% - 4.49% | 19 | | — | | — | | — | | 19 | |
Greater or equal to 4.50% | — | | — | | — | | — | | — | |
Total | $ | 24 | | 44 | | — | | 173 | | 241 | |
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(1) Supplemental Contracts Without Life Contingencies |
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
The following tables summarize balances of and changes in policyholders' account balances.
| | | | | | | | | | | | | | |
March 31, 2023 (In thousands) | SCWOLC (1) | Fixed Annuity | Dividend Accumulations | Premiums Paid in Advance |
Life Insurance: | | | | |
Balance, beginning of year | $ | 32,667 | | 66,543 | | 41,424 | | 34,603 | |
Issuances | 4,788 | | 536 | | 147 | | 905 | |
Premiums received | 18 | | 1,025 | | 1,383 | | 145 | |
| | | | |
Interest credited | 341 | | 536 | | 322 | | 226 | |
| | | | |
Less: | | | | |
Surrenders and withdrawals | — | | 1,640 | | 848 | | 1,757 | |
Benefit payments | 2,288 | | — | | — | | — | |
Balance, end of period | $ | 35,526 | | 67,000 | | 42,428 | | 34,122 | |
Weighted-average crediting rates | 4.10 | % | 3.70 | % | 3.49 | % | 3.00 | % |
| | | | |
Cash surrender value | $ | 35,526 | | 67,000 | | 42,428 | | 34,122 | |
| | | | |
Home Service Insurance: | | | | |
Balance, beginning of year | $ | 328 | | 20,264 | | 239 | | — | |
Issuances | — | | 227 | | 1 | | — | |
Premiums received | — | | 145 | | 1 | | — | |
| | | | |
Interest credited | 2 | | 132 | | 2 | | — | |
| | | | |
Less: | | | | |
Surrenders and withdrawals | — | | 607 | | 3 | | — | |
Benefit payments | 21 | | — | | — | | — | |
Balance, end of period | $ | 309 | | 20,161 | | 240 | | — | |
Weighted-average crediting rates | 2.20 | % | 3.10 | % | 3.09 | % | 4.00 | % |
| | | | |
Cash surrender value | $ | 309 | | 20,161 | | 240 | | — | |
| | | | |
Consolidated: | | | | |
Balance, beginning of year | $ | 32,995 | | 86,807 | | 41,663 | | 34,603 | |
Issuances | 4,788 | | 763 | | 148 | | 905 | |
Premiums received | 18 | | 1,170 | | 1,384 | | 145 | |
| | | | |
Interest credited | 343 | | 668 | | 324 | | 226 | |
| | | | |
Less: | | | | |
Surrenders and withdrawals | — | | 2,247 | | 851 | | 1,757 | |
Benefit payments | 2,309 | | — | | — | | — | |
Balance, end of period | $ | 35,835 | | 87,161 | | 42,668 | | 34,122 | |
Weighted-average crediting rates | 4.05 | % | 3.57 | % | 3.05 | % | 2.98 | % |
| | | | |
Cash surrender value | $ | 35,835 | | 87,161 | | 42,668 | | 34,122 | |
| | | | |
(1) Supplemental Contracts Without Life Contingencies | | | | |
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
| | | | | | | | | | | | | | |
March 31, 2022 (In thousands) | SCWOLC (1) | Fixed Annuity | Dividend Accumulations | Premiums Paid in Advance |
Life Insurance: | | | | |
Balance, beginning of year | $ | 23,628 | | 63,591 | | 37,513 | | 38,875 | |
Issuances | 2,392 | | 604 | | 123 | | 469 | |
Premiums received | 12 | | 995 | | 1,264 | | 132 | |
| | | | |
Interest credited | 232 | | 517 | | 292 | | 275 | |
| | | | |
Less: | | | | |
Surrenders and withdrawals | — | | 1,448 | | 858 | | 1,829 | |
Benefit payments | 1,001 | | — | | — | | — | |
Balance, end of period | $ | 25,263 | | 64,259 | | 38,334 | | 37,922 | |
Weighted-average crediting rates | 4.11 | % | 3.76 | % | 3.50 | % | 3.09 | % |
| | | | |
Cash surrender value | $ | 25,263 | | 64,259 | | 38,334 | | 37,922 | |
| | | | |
Home Service Insurance: | | | | |
Balance, beginning of year | $ | 322 | | 20,326 | | 247 | | — | |
Issuances | 10 | | 213 | | 3 | | — | |
Premiums received | — | | 189 | | 1 | | — | |
| | | | |
Interest credited | 2 | | 140 | | 2 | | — | |
| | | | |
Less: | | | | |
Surrenders and withdrawals | — | | 530 | | 12 | | — | |
Benefit payments | 30 | | — | | — | | — | |
Balance, end of period | $ | 304 | | 20,338 | | 241 | | — | |
Weighted-average crediting rates | 2.13 | % | 3.11 | % | 3.10 | % | 4.00 | % |
| | | | |
Cash surrender value | $ | 304 | | 20,338 | | 241 | | — | |
| | | | |
Consolidated: | | | | |
Balance, beginning of year | $ | 23,950 | | 83,917 | | 37,760 | | 38,875 | |
Issuances | 2,402 | | 817 | | 126 | | 469 | |
Premiums received | 12 | | 1,184 | | 1,265 | | 132 | |
| | | | |
Interest credited | 234 | | 657 | | 294 | | 275 | |
| | | | |
Less: | | | | |
Surrenders and withdrawals | — | | 1,978 | | 870 | | 1,829 | |
Benefit payments | 1,031 | | — | | — | | — | |
Balance, end of period | $ | 25,567 | | 84,597 | | 38,575 | | 37,922 | |
Weighted-average crediting rates | 4.08 | % | 3.60 | % | 3.08 | % | 3.09 | % |
| | | | |
Cash surrender value | $ | 25,567 | | 84,597 | | 38,575 | | 37,922 | |
| | | | |
(1) Supplemental Contracts Without Life Contingencies | | | | |
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
The following table reconciles policyholders' account balances to own stockthe policyholders' account balances' liability in FHLB. Our FHLB stock is carried at amortized cost, which approximates fair value.the consolidated balance sheet.
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| March 31, 2023 | | March 31, 2022 |
(In thousands) | Life Insurance | Home Service Insurance | Consolidated | | Life Insurance | Home Service Insurance | Consolidated |
Annuities: | | | | | | | |
SCWOLC (1) | $ | 35,526 | | 309 | | 35,835 | | | 25,263 | | 304 | | 25,567 | |
Fixed annuity | 67,000 | | 20,161 | | 87,161 | | | 64,259 | | 20,338 | | 84,597 | |
Unearned revenue reserve | — | | 1,531 | | 1,531 | | | — | | 1,588 | | 1,588 | |
Other | 1 | | — | | 1 | | | — | | (1) | | (1) | |
Total annuities | $ | 102,527 | | 22,001 | | 124,528 | | | 89,522 | | 22,229 | | 111,751 | |
(1) Supplemental Contracts Without Life Contingencies | | | | | |
| | | | | | | |
Dividend Accumulations: | | | | | | | |
Dividend accumulations | $ | 42,428 | | 240 | | 42,668 | | | 38,334 | | 241 | | 38,575 | |
Other | 1 | | (1) | | — | | | — | | — | | — | |
Total dividend accumulations | $ | 42,429 | | 239 | | 42,668 | | | 38,334 | | 241 | | 38,575 | |
| | | | | | | |
Premiums Paid in Advance: | | | | | | | |
Premiums paid in advance | $ | 34,122 | | — | | 34,122 | | | 37,922 | | — | | 37,922 | |
Other | 2,294 | | 281 | | 2,575 | | | 2,180 | | 331 | | 2,511 | |
Total premiums paid in advance | $ | 36,416 | | 281 | | 36,697 | | | 40,102 | | 331 | | 40,433 | |
(7) COMMITMENTS AND CONTINGENCIES
LITIGATION AND REGULATORY ACTIONS
From time to time, we are subject to legal and regulatory actions relating to our business. We may incur defense costs, including attorneys' fees, and other direct litigation costs 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.
CONTRACTUAL OBLIGATIONS
As of June 30, 2022,March 31, 2023, CICA International is committed to fund investments up to $50.6$35.6 million related to limited partnerships previously described and other investments.described.
CREDIT FACILITY
On May 5, 2021, the Company entered into a $20 million senior secured revolving credit facility (the “Credit Facility”) with Regions Bank ("Regions"). The Credit Facility has a three-yearthree-year term, maturing on May 5, 2024, and allows the Company to borrow up to $20 million for working capital purposes, capital expenditures and other corporate purposes.
Revolving loans may be requested by the Company in aggregate minimum principal amounts of $0.5 million per loan. At the Company's election, the revolving loans may either bear a base rate, which is 1.75% plus a base rate (a
| | | | | | | | |
CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
(a fluctuating rate per annum) equal to the greatest of (a) Regions' prime rate, (b) the federal funds rate plus 0.50%, (c) the one-month LIBOR rate plus 1%, and (d) 0.75%; or an adjusted LIBOR rate, which is 2.75% plus an adjusted LIBOR rate but cannot be less than 0.75%. The Company is required to pay Regions a quarterlyan annual commitment fee of 0.375% of the unused portion of the Credit Facility in quarterly installments, which the Company expenses as it is incurred. Regions informed the Company that after June 30, 2023, the United Kingdom's Financial Conduct Authority will no longer publish a LIBOR rate that may be used as the benchmark interest rate index. Regions will transition to a replacement interest rate index on any future draws.
Obligations under the Credit Facility are secured by substantially all of the assets of the Company other than the equity interests in all of the regulated insurance subsidiaries, real estate owned by the Company, and other limited exceptions. The Credit Facility contains customary events of default and financial, affirmative and negative covenants, including but not limited to restrictions on indebtedness, liens, investments, asset dispositions and restricted payments. As of June 30, 2022,March 31, 2023, the Company had not borrowed any funds against the Credit Facility and was not in violation of any covenants.
(8) STOCKHOLDERS' EQUITY AND RESTRICTIONS
STOCK
Our Restated and Amended Articles of Incorporation authorize the issuance of 127,000,000 shares, of which 100,000,000 shares shall be Class A common stock, 2,000,000 shares shall be Class B common stock, and 25,000,000 shall be preferred stock. The two authorized classes of common stock are equal in all respects, except (a) each share of Class A common stock is entitled to receive twice the cash dividends paid on a per share basis to the Class B common stock, if any; and (b) the holders of the Class B common stock have the exclusive right to elect a simple majority of the Board of Directors of Citizens. In April 2021, we repurchased all of the outstanding Class B common stock, which is now classified as treasury stock. As a result, all of the directors are elected by the holders of the Class A common stock. Citizens has never issued any preferred stock.
A summary of the change in number of shares of Class A and Class B common stock and treasury stock issued is as follows:
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| Three Months Ended March 31, |
| 2023 | | 2022 |
(In thousands) | Common Stock | | Treasury | | Common Stock | | Treasury |
Class A | | Class B | | Stock | | Class A | | Class B | | Stock |
Balance at beginning of year | 53,758 | | | 1,002 | | | 4,937 | | | 53,170 | | | 1,002 | | | 4,138 | |
Stock issued under stock investment plan | — | | | — | | | — | | | 345 | | | — | | | — | |
Stock issued for compensation | 34 | | | — | | | — | | | 18 | | | — | | | — | |
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Balance at end of period | 53,792 | | | 1,002 | | | 4,937 | | | 53,533 | | | 1,002 | | | 4,138 | |
June 30, 2022March 31, 2023 | 10-Q 2636
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CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per share.
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Three Months Ended March 31, | 2023 | | 2022 |
(In thousands, except per share amounts) | |
Basic and diluted earnings (loss) per share: | | | |
Numerator: | | | |
Net income (loss) | $ | 4,872 | | | 6,449 | |
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Net income (loss) allocated to Class A common stock | $ | 4,872 | | | 6,449 | |
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Denominator: | | | |
Weighted average shares of Class A outstanding - basic | 49,840 | | | 50,236 | |
Weighted average shares of Class A outstanding - diluted | 50,609 | | | 50,906 | |
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Basic and diluted earnings (loss) per share of Class A common stock | $ | 0.10 | | | 0.13 | |
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CAPITAL AND SURPLUS
Each of our regulated insurance subsidiaries is required to meet stipulated regulatory capital requirements. These include capital requirements imposed by the U.S. National Association of Insurance Commissioners ("NAIC") and the Bermuda Monetary Authority ("BMA"). All domestic insurance subsidiaries exceeded the minimum capital requirements at March 31, 2023.
In order to minimize the risk of a shortfall in capital arising from an unexpected adverse deviation or excess risk, the BMA has established a threshold capital level (termed the Target Capital Level ("TCL")), which is set at 120% of a company’s enhanced capital requirement. The TCL serves as an early warning tool for the BMA. As of March 31, 2023, CICA International was above the TCL threshold. At the request of the BMA, on April 15, 2021, Citizens and CICA International entered into a Keep Well Agreement. The Keep Well Agreement requires Citizens to contribute up to $10 million in capital to CICA International as necessary to ensure that CICA International has a minimum capital level of 120% (equal to the TCL). Since CICA International’s capital level currently exceeds 120%, Citizens is not required to make a capital contribution.
CICA International had previously been granted a permitted practice by the BMA to report its fixed income maturity securities at amortized cost in its unconsolidated statutory financial statements. This permitted practice has expired.
CICA PR is a Puerto Rico domiciled company. The Insurance Code does not specifically set forth minimum capital and surplus standards, but rather requires that an insurer submit a business plan for approval to the Office of the Commissioner of Insurance that includes proposed minimum capital and surplus. CICA PR is required to maintain a minimum of $750,000 in capital and maintain a premium to surplus ratio of 7 to 1. CICA PR began issuing new business as of January 1, 2023 and since higher costs are associated with new business than renewal business (e.g., first year commissions), we expect that Citizens will have to contribute capital to CICA PR in the foreseeable future in order to maintain the required premium to surplus ratio.
(9) SEGMENT INFORMATION
The Company has two reportable segments: Life Insurance and Home Service Insurance. Our Life Insurance segment issues endowment contracts, which are principally accumulation contracts that incorporate an element of life insurance protection and ordinary whole life insurance, to non-U.S. residents through CICA International and, beginning January 1, 2023, CICA PR. These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and may utilize rider benefits to provide additional coverage and annuity
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CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
benefits to enhance accumulations. Domestically, we currently offer whole life, credit life, credit disability, and critical illness products. The critical illness products are sold in Texas and Florida through CICA and CNLIC. Both CICA and CNLIC also service whole life and accident and health policies primarily in the Southern U.S., Midwest and Mountain West.
Our Home Service Insurance segment operates through our subsidiaries SPLIC, MGLIC and SPFIC, and focuses on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas. Our policies are sold and serviced through funeral homes and independent agents who sell policies, collect premiums and service policyholders. Our Home Service Insurance segment also sells property insurance policies in Louisiana.
The Life Insurance and Home Service Insurance portions of the Company constitute separate businesses. In addition to the Life Insurance and Home Service Insurance business, the Company also operates other non-insurance portions of the Company ("Other Non-Insurance Enterprises"), which primarily include the Company’s IT and Corporate-support functions.
The accounting policies of the reportable segments and Other Non-Insurance Enterprises are presented in accordance with U.S. GAAP and are the same as those described in the summary of significant accounting policies in our Form 10-K. The Company evaluates profit and loss performance based on U.S. GAAP net income (loss) before federal income taxes for its two reportable segments. The Company's Other Non-Insurance Enterprises is the only reportable difference between segments and consolidated operations. | | | | | | | | | | | | | | | | | | | | | | | |
| Life Insurance | | Home Service Insurance | | Other Non-Insurance Enterprises | | Consolidated |
Three Months Ended March 31, 2023 | | | |
(In thousands) | | | |
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Revenues: | | | | | | | |
Premiums | $ | 26,207 | | | 12,042 | | | — | | | 38,249 | |
Net investment income | 13,311 | | | 3,470 | | | 293 | | | 17,074 | |
Investment related gains (losses), net | (437) | | | 99 | | | 50 | | | (288) | |
Other income (loss) | 879 | | | — | | | — | | | 879 | |
Total revenues | 39,960 | | | 15,611 | | | 343 | | | 55,914 | |
Benefits and expenses: | | | | | | | |
Insurance benefits paid or provided: | | | | | | | |
Claims and surrenders | 24,439 | | | 5,860 | | | — | | | 30,299 | |
Increase (decrease) in future policy benefit reserves | (1,820) | | | 842 | | | — | | | (978) | |
Policyholder liability remeasurement (gain) loss | 816 | | | 64 | | | — | | | 880 | |
Policyholders' dividends | 1,101 | | | 7 | | | — | | | 1,108 | |
Total insurance benefits paid or provided | 24,536 | | | 6,773 | | | — | | | 31,309 | |
Commissions | 4,759 | | | 4,254 | | | — | | | 9,013 | |
Other general expenses | 5,459 | | | 4,468 | | | 1,333 | | | 11,260 | |
Capitalization of deferred policy acquisition costs | (4,360) | | | (1,998) | | | — | | | (6,358) | |
Amortization of deferred policy acquisition costs | 3,162 | | | 652 | | | — | | | 3,814 | |
Amortization of cost of insurance acquired | 32 | | | 129 | | | — | | | 161 | |
Total benefits and expenses | 33,588 | | | 14,278 | | | 1,333 | | | 49,199 | |
Income (loss) before federal income tax | $ | 6,372 | | | 1,333 | | | (990) | | | 6,715 | |
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CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
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| Life Insurance | | Home Service Insurance | | Other Non-Insurance Enterprises | | Consolidated |
Three Months Ended March 31, 2022 | | | |
(In thousands) | | | |
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Revenues: | | | | | | | |
Premiums | $ | 26,931 | | | 12,433 | | | — | | | 39,364 | |
Net investment income | 11,971 | | | 3,244 | | | 272 | | | 15,487 | |
Investment related gains (losses), net | (293) | | | (242) | | | (47) | | | (582) | |
Other income (loss) | 1,088 | | | — | | | — | | | 1,088 | |
Total revenues | 39,697 | | | 15,435 | | | 225 | | | 55,357 | |
Benefits and expenses: | | | | | | | |
Insurance benefits paid or provided: | | | | | | | |
Claims and surrenders | 21,458 | | | 6,976 | | | — | | | 28,434 | |
Increase in future policy benefit reserves | 1,376 | | | (1,262) | | | — | | | 114 | |
Policyholder liability remeasurement (gain) loss | 414 | | | 254 | | | — | | | 668 | |
Policyholders' dividends | 1,350 | | | 3 | | | — | | | 1,353 | |
Total insurance benefits paid or provided | 24,598 | | | 5,971 | | | — | | | 30,569 | |
Commissions | 3,806 | | | 3,867 | | | — | | | 7,673 | |
Other general expenses | 5,691 | | | 4,350 | | | 989 | | | 11,030 | |
Capitalization of deferred policy acquisition costs | (3,306) | | | (1,475) | | | — | | | (4,781) | |
Amortization of deferred policy acquisition costs | 3,020 | | | 539 | | | — | | | 3,559 | |
Amortization of cost of insurance acquired | 24 | | | 105 | | | — | | | 129 | |
Total benefits and expenses | 33,833 | | | 13,357 | | | 989 | | | 48,179 | |
Income (loss) before federal income tax | $ | 5,864 | | | 2,078 | | | (764) | | | 7,178 | |
(10) INCOME TAXES
The effective tax rate is the ratio of tax expense (benefit) over pre-tax income (loss). The effective tax rate was 27.4% for the three months ended March 31, 2023, compared to 10.2% for the same period in 2022, respectively. CICA International is considered a controlled foreign corporation for federal tax purposes. As a result, the insurance activity of CICA International is subject to Subpart F of the Internal Revenue Code and is included in Citizens’ taxable income. Due to the 0% enacted tax rate in Bermuda, there are no deferred taxes recorded for CICA International's temporary differences. The effective tax rate varies from the prevailing corporate federal income tax rate of 21.0% mainly due to the impact of Subpart F and uncertain tax positions.
At March 31, 2023, we determined it was more likely than not that a portion of our capital deferred tax assets would not be realized in their entirety. The Company recorded a valuation allowance of $3.7 million through Other Comprehensive Income (Loss).
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CITIZENS, INC. | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited) |
(8) INCOME TAXES
The effective tax rate is the ratio of tax expense (benefit) over pre-tax income (loss). The effective tax rate was 2.3% and (6.0)% for the three and six months ended June 30, 2022, respectively, compared to 10.4% and 49.2%, respectively, for the same periods in 2021. CICA International is considered a controlled foreign corporation for federal tax purposes. As a result, the insurance activity of CICA International is subject to Subpart F of the Internal Revenue Code and is included in Citizens’ taxable income. The effective tax rate varies from the prevailing corporate federal income tax rate of 21.0% mainly due to the impact of Subpart F and uncertain tax positions.
At June 30, 2022, we determined it was more likely than not that a portion of our capital deferred tax assets would not be realized in their entirety. The Company recorded a valuation allowance of $3.3 million through Other Comprehensive Income.
(9)(11) OTHER COMPREHENSIVE INCOME (LOSS)
The changes in the components of other comprehensive income (loss) are reported net of the effects of income taxes of 21% as of the three and six months ended June 30,March 31, 2023 and 2022, and 2021, as indicated below.
| Three Months Ended June 30, | 2022 | | 2021 | |
| | Three Months Ended March 31, | | Three Months Ended March 31, | 2023 | | 2022 |
(In thousands) | (In thousands) | Amount | | Tax Effect | | Total | | Amount | | Tax Effect | | Total | (In thousands) | Amount | | Tax Effect | | Total | | Amount | | Tax Effect | | Total |
Unrealized gains (losses): | Unrealized gains (losses): | | | | | | | Unrealized gains (losses): | | | | | | |
Unrealized holding gains (losses) arising during the period | Unrealized holding gains (losses) arising during the period | $ | (119,531) | | | 4,435 | | | (115,096) | | | 53,234 | | | (3,418) | | | 49,816 | | Unrealized holding gains (losses) arising during the period | $ | 43,436 | | | (2,280) | | | 41,156 | | | (132,765) | | | 8,957 | | | (123,808) | |
Reclassification adjustment for (gains) losses included in net income | Reclassification adjustment for (gains) losses included in net income | (24) | | | 5 | | | (19) | | | 46 | | | (10) | | | 36 | | Reclassification adjustment for (gains) losses included in net income | 38 | | | (8) | | | 30 | | | 59 | | | (12) | | | 47 | |
Effects on deferred policy acquisition costs | 810 | | | (170) | | | 640 | | | (21,492) | | | 3,777 | | | (17,715) | | |
Effects on cost of insurance acquired | 291 | | | (61) | | | 230 | | | 8 | | | (2) | | | 6 | | |
Effects on unearned revenue reserves | (2,504) | | | 526 | | | (1,978) | | | 6 | | | (1) | | | 5 | | |
Unrealized holding gains (losses), net | | Unrealized holding gains (losses), net | 43,474 | | | (2,288) | | | 41,186 | | | (132,706) | | | 8,945 | | | (123,761) | |
Change in current discount rate for liability for future policy benefits | | Change in current discount rate for liability for future policy benefits | (20,480) | | | 873 | | | (19,607) | | | 151,607 | | | (10,657) | | | 140,950 | |
| Other comprehensive income (loss) | Other comprehensive income (loss) | $ | (120,958) | | | 4,735 | | | (116,223) | | | 31,802 | | | 346 | | | 32,148 | | Other comprehensive income (loss) | $ | 22,994 | | | (1,415) | | | 21,579 | | | 18,901 | | | (1,712) | | | 17,189 | |
| Six Months Ended June 30, | 2022 | | 2021 | |
(In thousands) | Amount | | Tax Effect | | Total | | Amount | | Tax Effect | | Total | |
Unrealized gains (losses): | | | | | | | |
Unrealized holding gains (losses) arising during the period | $ | (252,296) | | | 13,392 | | | (238,904) | | | (26,188) | | | 1,955 | | | (24,233) | | |
Reclassification adjustment for (gains) losses included in net income | 35 | | | (7) | | | 28 | | | 11 | | | (3) | | | 8 | | |
Effects on deferred policy acquisition costs | 1,154 | | | (242) | | | 912 | | | 3,706 | | | (2,540) | | | 1,166 | | |
Effects on cost of insurance acquired | 443 | | | (93) | | | 350 | | | 277 | | | (58) | | | 219 | | |
Effects on unearned revenue reserves | (3,577) | | | 751 | | | (2,826) | | | (1,937) | | | 407 | | | (1,530) | | |
Other comprehensive income (loss) | $ | (254,241) | | | 13,801 | | | (240,440) | | | (24,131) | | | (239) | | | (24,370) | | |
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CITIZENS, INC.
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| | (Unaudited)
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(10)(12) RELATED 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. There were no changes related to these relationships during the sixthree months ended June 30, 2022.March 31, 2023. See our Form 10-K for a comprehensive discussion of related party transactions.
(11)(13) SUBSEQUENT EVENTS
The Company has a plan of disposal to cease operations for its property insurance business on June 30, 2023. The property insurance business operates through SPFIC and represented less than 1% of the Company’s total consolidated assets as of March 31, 2023 and less than 2% of the Company's total consolidated revenues for the three months ended March 31, 2023.
The Company has evaluated the impact of subsequent events as defined by the accounting guidance through the date this report was issued and determined that no other significant subsequent events need to be recognized or disclosed.disclosed at this time.
June 30, 2022March 31, 2023 | 10-Q 2840
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This section and other parts of this Quarterly Report on Form 10-Q ("Form 10-Q") contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, butThese forward-looking statements are not limitedsubject to statements concerning any potential future impacta number of the coronavirus disease (“COVID-19”) pandemic on our businessrisks, uncertainties and the inflationary environment that has led to market volatility and rising interest rates, as well asassumptions including those factors discussed in the "Risk Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 2021,2022, which are incorporated herein by reference. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
The U.S. Securities and Exchange Commission ("SEC") maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. We also make available, free of charge, through our Internet website (http://www.citizensinc.com), our Annual 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 SEC. We are not including any of the information contained on our website as part of, or incorporating it by reference into, this Form 10-Q.
OVERVIEW
For over 45almost 50 years, we have been fulfilling the needs of our policyholders and their families by providing insurance products that offer both living and death benefits. Citizens conducts insurance related operations through its insurance subsidiaries, which provide benefits to residents in 3132 U.S. states and more than 70 different countries. We specialize in offering primarily ordinary whole life insurance, endowment products and final expense insurance in niche markets where we believe we can optimize our competitive position.
As an insurance provider, we collect premiums on an ongoing basis from our policyholders and invest the majority of the premiums to pay future benefits, including claims and surrenders and policyholder dividends. Accordingly, the Company derives its revenues principally from: (1) life insurance premiums earned for insurance coverages provided to insureds in our two operating segments – Life Insurance and Home Service Insurance; and (2) net investment income. In addition to paying and reserving for insurance benefits that we pay to our policyholders, our expenses consist primarily of the costs of selling our insurance products (e.g., commissions, underwriting, marketing expenses), operating expenses and income taxes.
Objective of our Management's Discussion and Analysis
We refer to our Management’s Discussion and Analysis of Financial Condition and Results of Operations as our “MD&A”. The objective of our MD&A is to provide investors with information in order to assess the material changes in our financial condition from December 31, 20212022 to June 30, 2022March 31, 2023 and the material changes in our results of operations for the three months ended March 31, 2023 as compared to the same period in 2022. We also discuss in the MD&A any trends that we believe may materially affect our future operations or financial condition. Prior year amounts have been revised to reflect the implementation ASU 2018-12 as noted in Part I, Item 1, Note 1. Financial Statements - "Significant Accounting Policies" and Note 2. Accounting Pronouncements in the notes to our consolidated financial statements.
June 30, 2022March 31, 2023 | 10-Q 2941
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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operations for the three and six months ended June 30, 2022 as compared to the same periods in 2021. We also discuss in the MD&A any trends that we believe may materially affect our future operations or financial condition.
The Factors that Drive our Operating Results
We see the following as the primary factors that drive our operating results:
•Sales (i.e., premium revenues)
•Investments
•Death claimsClaims and surrenders
•Operating expenses
As premiumPremium revenues and investment income are our two primary sources of income and thus key to our profitability.
Premium revenues consist of both new sales (first year premiums) and "resells" (i.e., retaining the policy) as well as our investments and the interest we receive on such investments, are key, which lead to our profitability.renewal premiums.
We experienced slight decreases, 1.4% and 0.3%, respectively, in premium revenue in the three and six months ended June 30, 2022 compared to the priorOur total first year periods. In the three months ended June 30, 2022, premium revenue of $42.2 million decreasedpremiums increased by 24% due primarily to lower renewal premiums in both of our segments, partially offset by increased firsta new whole life product that was introduced last year premiums in our Life Insurance segment. In the six months ended June 30, 2022, premium revenue of $81.6 million decreasedinternational markets, as growth in renewal premiums was more than offset by lower first year premiums inwell as focused marketing campaigns across both of our insurance segments.
Our total renewal premium revenues decreased in the three months ended March 31, 2023 compared to the prior year period primarily due to impact from a higher level of surrenders during the last few years and from matured endowment benefits, which we expected due to contractual expiration dates.
Our net investment income increased during bothfor the three and six months ended June 30, 2022March 31, 2023 compared to the same prior year periodsperiod due primarily to a growing asset base, positive returns from our private equity investment and reinvestment into athe higher interest rate environment. Our yield increased 3 basis points to 4.25% in the first six months of 2022 compared to the prior year period, reflecting higher yields on new fixed maturity investmentsenvironment and positive returnsinvestment income from our private equity investment.limited partnerships.
As part of the ongoing process of managing our portfolio and optimizing performance, we have been diversifying our investment portfolio over the last few years, however, this diversification comes with some volatility and accordingly,
June 30, 2022March 31, 2023 | 10-Q 3042
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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due to the equity market decline in the first six months of 2022, we recorded investment related losses of $5.2 million in the current period compared to gains of $4.5 million in prior year period.
Payment of policyholder benefits for death claims and surrenders is our largest expense and thus also key to our profitability. In both the first three and six months of 2022,ended March 31, 2023, our death claimsclaim benefits decreased compared to the same prior year periods. Death claimsperiod due to a lower number of reported death claims. Our surrenders were flat in the 2021 periods in both of our segments were negatively impacted by higher reported claims, including COVID-19 related deaths, and a higher average dollar amount of claims incurred. Our surrenders decreased in the first three and six months of 2022ended March 31, 2023, compared to the same periods in 2021, which we believe was in large part due toprior year period. As expected, matured endowments increased as many of our retention initiatives.endowment policies are reaching their contractual maturity dates.
Operating expenses are our second largest expense and thus also drive our operating results.Our general operating expenses in bothfor the first three and six months of 2022 decreased as comparedended March 31, 2023 increased slightly compared to the prior year periods.period.
FINANCIAL HIGHLIGHTS
Due to the market volatility and rising interest rates during the first six months of 2022, we had aOur net loss of $3.5 million andincome was $4.9 million respectively infor the three and six months ended June 30, 2022,March 31, 2023 compared to net income of $6.4 million in the prior year period. The decline in net income is primarily driven by lower renewal year premiums, higher federal income tax expense and higher insurance benefits paid or provided, which is partially offset by higher net investment income and lower investment related losses. Our net income per share of Class A common stock was $0.10 for the three months ended March 31, 2023 compared to $0.13 in prior year period.
June 30, 2022March 31, 2023 | 10-Q 3143
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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$5.0 million and $1.4 million, respectively, in the prior year periods. As an insurance company, we hold significant invested assets in order to pay future policy liabilities. Changes in the fair value of our limited partnership investments drove investment related losses of $5.0 million and $5.6 million, respectively, in the current year periods. We did not sell these investments in the second quarter of 2022, but as discussed in Part I, Item 1, Note 5. Investments, changes in fair values of our equity securities are reflected as investment related gains or losses, in addition to executed transactions that result in a gain or loss. Due to these investment related losses driving our net loss, loss per share of Class A common stock was $0.10 for the six months ended June 30, 2022.
All other revenues (premiums, net investment income and other income) collectively increased in the three and six months ended June 30, 2022 as compared to the same prior year periods and our total benefits and expenses decreased by $0.6 million and $2.5 million, respectively, in the current year periods as compared to the same prior year periods.
Consolidated Revenue Highlights
Life insuranceInsurance premiums and investment income are our primary sources of revenue. InCollectively, insurance premiums and investment income were flat in the three months ended June 30, 2022March 31, 2023 as compared to the same period in 2021:2022.
•Insurance premiums decreased by $0.6$1.1 million, due primarily to decrease in renewal premiums in both of our segments partially offset by an increase inor 2.8%. While first year premiums in our Life Insurance segment.
•Net investment income increased by $0.6 million, or 3.7%, from a higher average portfolio yield in the current year period, a growing asset base and strong results from our private equity investment.
In the six months ended June 30, 2022 as compared to the same period in 2021:
•Insurance premiums decreased by $0.3 million, or 0.3% as higher renewal premiums werethis was more than offset by a decreasedecline in firstrenewal year premiums.
•Net investment income increased by $0.8$1.6 million, or 2.7%10.2% for the same reasons discussed above.
Consolidated Benefits and Expenses Highlights
The primary use of our funds is the payment of insurance benefits for claims and surrenders as well as our general operating expenses. In the three months ended June 30, 2022March 31, 2023 compared to the same period in 2021,2022, total benefits and expenses decreasedincreased by $0.6 million due primarily to:$1.0 million.
•$2.2Claims and surrender benefits increased $1.9 million decrease in claims and surrenders benefits. This decrease wasdue primarily related to increased matured endowment benefits partially offset by lower death claims in both of our segments as 2021 included a higher number of reported death claims, including COVID-19 related deaths. Surrender benefits decreased as we have focused efforts on retaining policyholders; andclaim benefits.
•$1.1Increase in future policy benefits reserves decreased $1.1 million decrease in other general expenses;due to the impact of reserves released from higher matured endowment benefits partially offset by
•$3.1 million increase increases in future policy benefit reserves as a resultour in force block of improved first year sales and better persistency.business.
In the six months ended June 30, 2022 compared to the same period in 2021, total benefits and expenses decreased by $2.5 million due primarily to:Financial Condition at March 31, 2023
•$4.4 million decrease in claims and surrender benefits due primarily to a higher volumeTotal assets of reported claims in 2021, including those COVID-19 related, in addition to an increase in the average death claim amount in that year; and$1.6 billion
•Total investments of $1.4 billion; fixed maturity securities comprised 88.2% of total investments
•$1.5 million decrease4.8 billion of direct insurance in other general expenses; partially offset byforce
•$4.4No debt
•Fully diluted income per share of Class A common stock of $0.10
IMPACT OF INFLATION AND RISING INTEREST RATES
The impact of inflation, which has led to market volatility and rising interest rates, has affected the fair value of our equity securities, leading to investment related losses. Investment related gains and losses can cause significant fluctuations from period to period and are not indicative of our operating results. We believe that investment related gains and losses, whether realized from dispositions or unrealized from changes in market prices of equity securities, have no bearing in understanding our reported results or in evaluating the economic performance of our business.These gains and losses have caused and will continue to cause significant volatility in our periodic earnings.
In addition, interest rates rose significantly in 2022 after being ultra-low for almost a decade. Higher interest rates typically reduce the market values of fixed income assets, as the interest payments from existing fixed income assets become less competitive relative to newer higher rate fixed income instruments. Because we strive to match our asset duration to our liability duration, the vast majority of our total investments are invested in longer-term fixed maturity securities. We reported pre-tax net unrealized losses of $158.2 million increaseon our available-for-sale securities at March 31, 2023. This compares to pre-tax net unrealized losses of $201.7 million at December 31, 2022, with the year-over-year change primarily driven by market interest rates.
In addition, we could experience higher surrenders and lapses and fewer sales in future policy benefit reservesthe coming months as a result of salesour policyholders conserve cash due to concerns over inflation and improved persistency.rising costs, particularly in our Home Service Insurance segment, whose customer base is primarily middle- and lower-income individuals.
June 30, 2022March 31, 2023 | 10-Q 3244
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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Financial Condition at June 30, 2022
•Total assets of $1.6 billion.
•Total investments of $1.4 billion; fixed maturity securities comprised 88.7% of total investments.
•Total stockholders' equity of $0.1 billion.
•$4.7 billion of direct insurance in force.
•No debt.
IMPACT OF INFLATION AND RISING INTEREST RATES
As mentioned above, the impact of inflation, which has led to market volatility and rising interest rates, has had a material impact on our results of operations and financial condition in the three and six months ended June 30, 2022. In addition to the market volatility that affected the fair value of our equity securities, leading to the investment related losses, higher interest rates typically reduce the market values of fixed income assets, as the interest payments from existing fixed income assets become less competitive relative to newer higher rate fixed income instruments. Because the vast majority of our total investments are invested in fixed maturity securities, we reported a pre-tax net unrealized loss of $125.4 million on our available-for-sale securities at June 30, 2022. This compares to net unrealized gains of $126.9 million at December 31, 2021, with the year-over-year decrease primarily driven by higher interest rates.
In addition, we could experience higher surrenders and lapses and fewer sales in the coming months as our policyholders conserve cash due to concerns over inflation and rising costs, particularly in our Home Service Insurance segment , whose customer base is primarily middle- and lower-income individuals.
COVID-19 PANDEMIC
The overall impact of the COVID-19 pandemic and its related economic conditions on the Company's financial results continue to be highly uncertain and unpredictable. While the Company has implemented new strategies and processes to mitigate this impact, the scope, duration and magnitude of the direct and indirect effects of COVID-19 are difficult or impossible to anticipate. As a result, it is not possible to predict its impact on the Company's results in 2022 or beyond. While we don't believe that the COVID-19 pandemic materially impacted our results of operations for the three and sixmonths ended June 30, 2022, some of the most significant factors related to COVID-19 that could cause our future results to differ significantly from our prior results or expectations include:
•a higher level of claims due to COVID-19 deaths;
•decreased premium revenue due to disruption to our workforce or distribution channels resulting from required isolation, travel limitations and business restrictions;
•higher surrenders and lapses due to cash needs our policyholders may have due to concerns over COVID-19 economic impacts; and
•volatility in our investment portfolio due to market disruptions caused by COVID-19 related concerns such as inflation.
We continue to monitor the impact of the COVID-19 pandemic on our operations.
OUR OPERATING SEGMENTS
We manage our business in two operating segments,segments: Life Insurance and Home Service Insurance.
Our insurance operations are the primary focus of the Company, as these operations generate most of our income. See the discussion under Segment Operations below for detailed analysis. The amount of insurance, number of policies, and average face amounts for ordinary life policies issued during the periods indicated are shown below.
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Three Months Ended March 31, | | 2023 | | | | 2022 |
| Amount of Insurance Issued | | Number of Policies Issued | | Average Policy Face Amount Issued | | Amount of Insurance Issued | | Number of Policies Issued | | Average Policy Face Amount Issued |
Ordinary Life Policies: | | | | | | | | | | | |
Life Insurance | $ | 83,892,034 | | | 902 | | | $ | 93,007 | | | $ | 42,524,454 | | | 633 | | | $ | 67,179 | |
Home Service Insurance | 86,437,227 | | | 6,524 | | | 13,249 | | | 54,823,369 | | | 5,431 | | | 10,095 | |
Total | $ | 170,329,261 | | | 7,426 | | | | | $ | 97,347,823 | | | 6,064 | | | |
As we previously disclosed, our strategic initiatives include the introduction of new products tailored to our specific markets. These new products helped drive the 75% increase in total insurance issued in the three months ended March 31, 2023, from $97.3 million in the first three months of 2022 to $170.3 million in 2023. The increase in total insurance issued was driven by an increase in total number of policies issued and higher average policy face amounts in both segments.
The growth in our Life Insurance segment is attributable to strong sales from our new international whole life product, which accounted for 72% of total insurance issued in this segment for the three months ended March 31, 2023. In our Home Service Insurance segment, the increase in average policy face amounts issued is attributable to sales campaigns that focused on increasing the face amount of insurance sold.
June 30, 2022March 31, 2023 | 10-Q 3345
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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Our insurance operations are the primary focus of the Company, as these 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.
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Six Months Ended June 30, | | 2022 | | | | 2021 |
| 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 | $ | 140,351,224 | | | 1,849 | | | $ | 75,907 | | | $ | 108,680,985 | | | 1,803 | | | $ | 60,278 | |
Home Service Insurance | 128,118,014 | | | 14,134 | | | 9,065 | | | 99,978,080 | | | 13,868 | | | 7,209 | |
Total | $ | 268,469,238 | | | 15,983 | | | | | $ | 208,659,065 | | | 15,671 | | | |
As we have previously disclosed, our strategic initiatives include the introduction of new products tailored to our specific markets. These new products helped drive the 28.7% increase in total insurance issued in the six months ended June 30, 2022, from $208.7 million in the first six months of 2021 to $268.5 million in 2022. The growth in insurance issued was a result of both a greater number of policies issued and higher average policy face amounts issued in both segments.
The growth in our Life Insurance segment is attributable to strong sales from our new international whole life product, which accounted for 45% of total insurance issued in this segment for the six months ended June 30, 2022. In our Home Service Insurance segment, the increase in average policy face amounts issued is attributable to sales campaigns that focused on increasing the face amount of insurance sold as well as the introduction of our new whole life product in this segment, which has a higher maximum face value than our legacy products.
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
Our revenues are generated primarily by insurance renewal premiums and investment income from invested assets.
| | | Three Months Ended | | Six Months Ended | | | | Three Months Ended |
| | June 30, | | June 30, | | | | March 31, |
(In thousands) | (In thousands) | 2022 | | 2021 | | 2022 | | 2021 | (In thousands) | | | 2023 | | 2022 |
| Revenues: | Revenues: | | | | | | | | Revenues: | | | | | |
Premiums: | Premiums: | | | | | | | | Premiums: | | | | | |
Life insurance | Life insurance | $ | 40,761 | | | 41,438 | | | 78,507 | | | 79,080 | | Life insurance | | | $ | 36,934 | | | 37,746 | |
Accident and health insurance | Accident and health insurance | 280 | | | 291 | | | 566 | | | 634 | | Accident and health insurance | | | 358 | | | 286 | |
Property insurance | Property insurance | 1,183 | | | 1,097 | | | 2,515 | | | 2,144 | | Property insurance | | | 957 | | | 1,332 | |
Net investment income | Net investment income | 15,892 | | | 15,320 | | | 31,379 | | | 30,564 | | Net investment income | | | 17,074 | | | 15,487 | |
Investment related gains (losses), net | Investment related gains (losses), net | (5,016) | | | 4,859 | | | (5,598) | | | 5,151 | | Investment related gains (losses), net | | | (288) | | | (582) | |
Other income | Other income | 634 | | | 553 | | | 1,722 | | | 1,468 | | Other income | | | 879 | | | 1,088 | |
Total revenues | Total revenues | $ | 53,734 | | | 63,558 | | | 109,091 | | | 119,041 | | Total revenues | | | $ | 55,914 | | | 55,357 | |
Premium Income. Total life insurance premium revenues decreased $0.8 million for the three months ended March 31, 2023 compared to the same period in 2022 primarily driven by lower renewal premiums. Property insurance premiums were impacted by an increase in premiums paid for catastrophic reinsurance coverage.
Net Investment Income. Asummary of our net investment income and annualized net investment income performance are summarized as follows:
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| | | Three Months Ended |
| | | March 31, |
(In thousands, except for %) | | | | | 2023 | | 2022 |
| | | | | | | |
Gross investment income: | | | | | | | |
Fixed maturity securities | | | | | $ | 14,945 | | | 13,883 | |
Equity securities | | | | | 165 | | | 151 | |
Policy loans | | | | | 1,539 | | | 1,589 | |
Long-term investments | | | | | 921 | | | 523 | |
Other investment income | | | | | 124 | | | 21 | |
Total investment income | | | | | 17,694 | | | 16,167 | |
Investment expenses | | | | | (620) | | | (680) | |
Net investment income | | | | | $ | 17,074 | | | 15,487 | |
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Net investment income, annualized | | | | | $ | 68,297 | | | 61,948 | |
Average invested assets, at amortized cost | | | | | $ | 1,519,149 | | | 1,473,240 | |
Annualized yield on average invested assets | | | | | 4.50 | % | | 4.20 | % |
June 30, 2022March 31, 2023 | 10-Q 3446
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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Income from our fixed maturity securities constitutes the vast majority of our net investment income, as they comprise 88.2% of our investment portfolio based on fair value. Our total investment income increased by 9.4% for the three months ended March 31, 2023 compared to the same period in 2022, primarily due to a higher average portfolio yield on our fixed maturity securities in the current period. Long-term investment income increased as our private equity investment asset base grew. Our yield increased 30 basis points to 4.50% in the first three months of 2023 compared to the prior year period due to the rising interest rate environment.
Investment Related Gains (Losses), Net. We recorded investment related losses during the three months ended March 31, 2023 of $0.3 million compared to $0.6 million during the same prior year period. The losses are primarily related to the fair value change of our limited partnership and equity security investments resulting from the inflationary environment and volatility in equity markets. We did not sell these investments as changes in fair values of our equity securities are reflected as investment related gains or losses, in addition to executed transactions that result in a gain or loss.
Other Income. Other income consists primarily of supplemental contracts issued to policyholders in our Life Insurance segment upon the surrender or maturity of their original policies.
BENEFITS AND EXPENSES | | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
(In thousands) | | | | | 2023 | | 2022 |
| | | | | | | |
Benefits and expenses: | | | | | | | |
Insurance benefits paid or provided: | | | | | | | |
Claims and surrenders | | | | | $ | 30,299 | | | 28,434 | |
Increase (decrease) in future policy benefit reserves | | | | | (978) | | | 114 | |
Policyholder liability remeasurement (gain) loss | | | | | 880 | | | 668 | |
Policyholders' dividends | | | | | 1,108 | | | 1,353 | |
Total insurance benefits paid or provided | | | | | 31,309 | | | 30,569 | |
Commissions | | | | | 9,013 | | | 7,673 | |
Other general expenses | | | | | 11,260 | | | 11,030 | |
Capitalization of deferred policy acquisition costs | | | | | (6,358) | | | (4,781) | |
Amortization of deferred policy acquisition costs | | | | | 3,814 | | | 3,559 | |
Amortization of cost of insurance acquired | | | | | 161 | | | 129 | |
Total benefits and expenses | | | | | $ | 49,199 | | | 48,179 | |
Claims and surrenders benefits and other general expenses are our primary expenses. Total benefits and expenses increased in the three months ended March 31, 2023 as compared to same period in 2022.
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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Premium Income. Total premium income decreased $0.6 million and $0.3 million, or 1.4% and 0.3%, for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021.
•Three months ended June 30, 2022: Total premiums decreased primarily due to lower renewal premiums in both of our segments partially offset by an increase in first year premiums in our Life Insurance segment. Despite the increase in first year premiums in the Life Insurance segment, total first year premiums decreased by 5.4% year-over-year during the second quarter due to a decrease in the Home Service segment, which we believe is associated with a change in the mix of business sold as we introduce new products.
•Six months ended June 30, 2022: Total premiums decreased slightly as higher renewal premiums were more than offset by a decrease in first year premiums. We believe the increase in renewal premiums resulted primarily from strong sales in 2021 and continued retention and collection efforts. The first year premiums decrease occurred in both of our segments. In our Life Insurance segment, we believe the decline is attributed to lower average premiums related to strong sales from our new international whole life product while the Home Service segment decline we believe is associated with a change in the mix of business as we continue the introduction of new products.
Net Investment Income. Asummary of our net investment income and annualized net investment income performance are summarized as follows:
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| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
(In thousands, except for %) | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
Gross investment income: | | | | | | | |
Fixed maturity securities | $ | 14,259 | | | 13,796 | | | 28,142 | | | 27,896 | |
Equity securities | 144 | | | 216 | | | 295 | | | 423 | |
Policy loans | 1,517 | | | 1,563 | | | 3,106 | | | 3,207 | |
Long-term investments | 576 | | | 180 | | | 1,099 | | | 253 | |
Other investment income | 31 | | | 5 | | | 52 | | | 20 | |
Total investment income | 16,527 | | | 15,760 | | | 32,694 | | | 31,799 | |
Investment expenses | (635) | | | (440) | | | (1,315) | | | (1,235) | |
Net investment income | $ | 15,892 | | | 15,320 | | | 31,379 | | | 30,564 | |
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Net investment income, annualized | | | | | 62,758 | | | 61,128 | |
Average invested assets, at amortized cost | | | | | 1,476,336 | | | 1,447,241 | |
Annualized yield on average invested assets | | | | | 4.25 | % | | 4.22 | % |
Income from our fixed maturity securities constitutes the vast majority of our net investment income, as they comprise 88.7% of our investment portfolio based on fair value. Our total investment income increased by 4.9% and 2.8% for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021, primarily due to a higher average portfolio yield on our fixed maturity securities in the current year period. The activity in the six months ended June 30, 2021 included income from a non-recurring "make-whole" call redemption. Long-term investment income increased as our private equity investment asset base grew and we received some early distribution income.
Investment Related Gains (Losses), Net. We recorded investment related losses of $5.0 million and $5.6 million during the three and six months ended June 30, 2022 as compared to investment related gains of $4.9 million and $5.2 million during the same prior year periods. The gains and losses are primarily related to the fair value change
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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of our limited partnership and equity securities investments, mostly in our Life Insurance segment, due to the inflationary environment and volatility in equity markets.
Other Income. Other income consists primarily of supplemental contracts issued to policyholders in our Life Insurance segment upon the surrender or maturity of their original policies. We believe this income has been increasing over the past few quarters due to our retention initiatives.
BENEFITS AND EXPENSES | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
(In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
Benefits and expenses: | | | | | | | |
Insurance benefits paid or provided: | | | | | | | |
Claims and surrenders | $ | 27,097 | | | 29,296 | | | 55,531 | | | 59,885 | |
Increase in future policy benefit reserves | 9,378 | | | 6,287 | | | 15,947 | | | 11,519 | |
Policyholders' dividends | 1,515 | | | 1,475 | | | 2,868 | | | 2,781 | |
Total insurance benefits paid or provided | 37,990 | | | 37,058 | | | 74,346 | | | 74,185 | |
Commissions | 8,924 | | | 8,801 | | | 16,597 | | | 16,958 | |
Other general expenses | 10,400 | | | 11,503 | | | 21,430 | | | 22,885 | |
Capitalization of deferred policy acquisition costs | (6,184) | | | (5,787) | | | (10,965) | | | (10,772) | |
Amortization of deferred policy acquisition costs | 5,970 | | | 6,074 | | | 11,787 | | | 12,257 | |
Amortization of cost of insurance acquired | 263 | | | 309 | | | 499 | | | 676 | |
Total benefits and expenses | $ | 57,363 | | | 57,958 | | | 113,694 | | | 116,189 | |
Claims and surrenders benefits and other general expenses are our primary expenses, both of which decreased in the three and six months ended June 30, 2022 as compared to same periods in 2021.
Claims and Surrenders.
| | | Three Months Ended | | Six Months Ended | | | | Three Months Ended |
| | June 30, | | June 30, | | | | March 31, |
(In thousands) | (In thousands) | 2022 | | 2021 | | 2022 | | 2021 | (In thousands) | | | 2023 | | 2022 |
| | | | | |
Claims and Surrenders: | Claims and Surrenders: | | Claims and Surrenders: | | |
Death claim benefits | Death claim benefits | $ | 5,873 | | | 6,544 | | | 12,890 | | | 15,484 | | Death claim benefits | | | $ | 5,382 | | | 7,017 | |
Surrender benefits | Surrender benefits | 11,607 | | | 13,529 | | | 23,866 | | | 26,336 | | Surrender benefits | | | 12,316 | | | 12,259 | |
Endowment benefits | Endowment benefits | 2,152 | | | 2,251 | | | 4,286 | | | 4,652 | | Endowment benefits | | | 2,109 | | | 2,134 | |
Matured endowment benefits | Matured endowment benefits | 6,133 | | | 5,662 | | | 12,267 | | | 10,784 | | Matured endowment benefits | | | 8,765 | | | 6,134 | |
Property claims | Property claims | 163 | | | 315 | | | 305 | | | 636 | | Property claims | | | 342 | | | 142 | |
A&H and other policy benefits | A&H and other policy benefits | 1,169 | | | 995 | | | 1,917 | | | 1,993 | | A&H and other policy benefits | | | 1,385 | | | 748 | |
| Total claims and surrenders | Total claims and surrenders | $ | 27,097 | | | 29,296 | | | 55,531 | | | 59,885 | | Total claims and surrenders | | | $ | 30,299 | | | 28,434 | |
Death claim benefits decreased 10.3% and 16.8%23.3% for the three and six months ended June 30, 2022, respectively,March 31, 2023 compared to the same periodsperiod in 2021. Death claims in our Life Insurance segment decreased 17.8% and 44.7% during the three and six months ended June 30, 2022 respectively, and Home Service Insurance segment claims decreased 7.3% and 5.2% during the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021. The decrease in both segments during the three and six months ended June 30, 2022
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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compared to the same periods last year was due primarily to a lower volume of reported death claims, including COVID-19 related deaths, and lower average death claim amounts.
Surrender benefits decreased 14.2% and 9.4% for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021. Surrender benefits represented less than 0.5% of total direct ordinary whole life insurance in force of $4.7 billion as of June 30, 2022. We have focused our efforts on retaining policyholders and believe we have begun to see positive benefits from these efforts starting in the second half of 2021.claims.
Matured endowment benefits increased 8.3% and 13.8%42.9% for the three and six months ended June 30, 2022, respectively,March 31, 2023 compared to the same periodsperiod in 2021.2022. We anticipated this increase based upon the dates when our endowment contracts were sold and thecontractual maturity dates set forth in the contracts.
Other General Expenses. General expenses decreased 9.6% and 6.4% in the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021. We had lower operating expenses primarily due to lower employee benefit costs in the three months ended June 30, 2022. In the six months ended June 30, 2022 we had lower consulting fees paid to our former CEO and lower professional fees incurred in connection with the change in control of the Company in 2021, partially offset by higher expenses associated with our home office and travel and convention expenses as we return to pre-pandemic business operations.policies.
Explanation of other benefits and expenses
Increase (Decrease) in Future Policy Benefit Reserves. Future policy benefit reserves reflect the liability established to provide for the payment of policy benefits that we expect to pay in the future and thus generally increase when we have a higherlarger in force block of business due to higher sales and better persistency (i.e., more policies on which we expect to pay future benefits) and decrease when we have lower sales and persistency. TheIn the three months ended March 31, 2023, the change in future policy benefit reserves increased 49.2% and 38.4% for the three and six months ended June 30, 2022, respectively,decreased compared to the same periods in 2021prior year period due to better salesthe impact of reserves released from higher matured endowment benefits despite increases in insurance issued and persistency. In addition, the changeincreases in future policy reserves for the three and six months ended June 30, 2021 was lower due to an $0.8 million adjustment for the conversion of a smallour in force block of policies to our new actuarial valuation system for our Life Insurance segment during the second quarter of 2021.business policy benefit reserves.
Commissions. Commission expenses are a cost of acquiring business, as commissions are the primary compensation paid to our independent consultants and independent agents for selling our products. First year commission rates are higher than renewal commission rates and thus commissions fluctuate directly in relation to first year sales. As discussed above, in the three months ended March 31, 2023, we experienced a 24% increase in first year sales leading to an increase in commissions related expenses.
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 and thus fluctuate primarily with first year sales. Amortization is impacted by persistency, surrenders, and new sales production and thus it may fluctuate from periodon a constant level basis for the grouped contracts over the expected term of the related contracts to period depending on these factors.approximate straight-line amortization.
SEGMENT OPERATIONS
Our business is comprised of two operating business segments, as detailed below.
•Life Insurance
•Home Service Insurance
These segments are reported in accordance with U.S. GAAP. The Company's Other Non-Insurance enterprises include non-insurance operations such as IT and corporate-support functions, which are included in the table presented below to properly reconcile the segment information with the consolidated financial statements of the Company.
June 30, 2022March 31, 2023 | 10-Q 3748
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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presented below to properly reconcile the segment information with the consolidated financial statements of the Company.
The following table showssets forth income (loss) before federal income taxes by segment during the periods indicated.
| | | Three Months Ended | | Six Months Ended | | | | Three Months Ended |
| | June 30, | | June 30, | | | | March 31, |
(In thousands) | (In thousands) | 2022 | | 2021 | | 2022 | | 2021 | (In thousands) | | | 2023 | | 2022 |
Income (loss) before federal income tax expense: | Income (loss) before federal income tax expense: | | Income (loss) before federal income tax expense: | | |
Segments: | Segments: | | Segments: | | |
Life Insurance | Life Insurance | $ | (2,363) | | | 7,127 | | | (1,333) | | | 7,021 | | Life Insurance | | | $ | 6,372 | | | 5,864 | |
Home Service Insurance | Home Service Insurance | 106 | | | 538 | | | (1,134) | | | (220) | | Home Service Insurance | | | 1,333 | | | 2,078 | |
Total segments | Total segments | (2,257) | | | 7,665 | | | (2,467) | | | 6,801 | | Total segments | | | 7,705 | | | 7,942 | |
Other Non-Insurance enterprises | Other Non-Insurance enterprises | (1,372) | | | (2,065) | | | (2,136) | | | (3,949) | | Other Non-Insurance enterprises | | | (990) | | | (764) | |
Total income (loss) before federal income tax expense | Total income (loss) before federal income tax expense | $ | (3,629) | | | 5,600 | | | (4,603) | | | 2,852 | | Total income (loss) before federal income tax expense | | | $ | 6,715 | | | 7,178 | |
LIFE INSURANCE
We had a net loss of $2.4 million and $1.3 million, respectively in the three and six months ended June 30, 2022 as compared to net income of $7.1 million and $7.0 million, respectively, in the prior year periods. As discussed above in "Financial Highlights" this change was due primarily to investment related losses in the current year periods. We recorded investment related losses of $4.0 million and $4.3 million during the three and six months ended June 30, 2022, respectively, as compared to investment related gains of $4.6 million and $4.5 million during the same prior year periods.
All other revenues (premiums, net investment income and other income) collectively increased in the three and six months ended June 30, 2022 as compared to the same prior year periods due primarily to higher net investment income. Total benefits and expenses in this segment benefited in each of the three and six months ended June 30, 2022 from lower claims and surrender benefits; however, increased overall in both periods compared to the prior year periods due to the increase in insurance issued and better persistency, which led to a higher increase in future policy benefit reserves and commissions.
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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Detailed results of operations for the Life Insurance segment for the periods indicated are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
(In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Revenues: | | | | | | | |
Premiums | $ | 29,834 | | | 30,138 | | | 56,765 | | | 57,201 | |
Net investment income | 12,347 | | | 11,879 | | | 24,318 | | | 23,477 | |
Investment related gains (losses), net | (3,984) | | | 4,644 | | | (4,277) | | | 4,536 | |
Other income | 633 | | | 553 | | | 1,721 | | | 1,466 | |
Total revenues | 38,830 | | | 47,214 | | | 78,527 | | | 86,680 | |
Benefits and expenses: | | | | | | | |
Insurance benefits paid or provided: | | | | | | | |
Claims and surrenders | 21,568 | | | 23,531 | | | 43,026 | | | 46,801 | |
Increase in future policy benefit reserves | 7,576 | | | 4,054 | | | 12,706 | | | 7,712 | |
Policyholders' dividends | 1,509 | | | 1,466 | | | 2,859 | | | 2,762 | |
Total insurance benefits paid or provided | 30,653 | | | 29,051 | | | 58,591 | | | 57,275 | |
Commissions | 4,792 | | | 4,398 | | | 8,598 | | | 8,629 | |
Other general expenses | 5,358 | | | 5,147 | | | 11,049 | | | 10,373 | |
Capitalization of deferred policy acquisition costs | (4,307) | | | (3,816) | | | (7,613) | | | (7,377) | |
Amortization of deferred policy acquisition costs | 4,613 | | | 5,200 | | | 9,095 | | | 10,548 | |
Amortization of cost of insurance acquired | 84 | | | 107 | | | 140 | | | 211 | |
Total benefits and expenses | 41,193 | | | 40,087 | | | 79,860 | | | 79,659 | |
Income (loss) before federal income tax expense | $ | (2,363) | | | 7,127 | | | (1,333) | | | 7,021 | |
Life Insurance segment premium breakout is detailed below.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
(In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Premiums: | | | | | | | |
First year | $ | 2,766 | | | 2,724 | | | 4,753 | | | 5,203 | |
Renewal | 27,068 | | | 27,414 | | | 52,012 | | | 51,998 | |
Total premiums | $ | 29,834 | | | 30,138 | | | 56,765 | | | 57,201 | |
| | | | | | | |
Premiums. Total premiums for three and six months ended June 30, 2022 decreased 1.0% and 0.8%, respectively, compared to the same periods in 2021. We derive most of our premium revenue in the Life Insurance segment from renewal premiums, which decreased 1.3% and increased slightly in the three and six months ended June 30, 2022, respectively, as compared to the same periods in 2021, which we believe was due to strong sales in 2021 and the success of our retention programs. First year premiums increased slightly for three months ended June 30, 2022 compared to the same period in 2021, which we believe is due to sales campaigns and our new international whole life product launched in March 2022. First year premiums decreased for the six months ended June 30, 2022 as compared to the same period in 2021. We believe that the decline is primarily related to a decline in production in | | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
(In thousands) | | | | | 2023 | | 2022 |
Revenues: | | | | | | | |
Premiums | | | | | $ | 26,207 | | | 26,931 | |
Net investment income | | | | | 13,311 | | | 11,971 | |
Investment related gains (losses), net | | | | | (437) | | | (293) | |
Other income | | | | | 879 | | | 1,088 | |
Total revenues | | | | | 39,960 | | | 39,697 | |
Benefits and expenses: | | | | | | | |
Insurance benefits paid or provided: | | | | | | | |
Claims and surrenders | | | | | 24,439 | | | 21,458 | |
Increase (decrease) in future policy benefit reserves | | | | | (1,820) | | | 1,376 | |
Policyholder liability remeasurement (gain) loss | | | | | 816 | | | 414 | |
Policyholders' dividends | | | | | 1,101 | | | 1,350 | |
Total insurance benefits paid or provided | | | | | 24,536 | | | 24,598 | |
Commissions | | | | | 4,759 | | | 3,806 | |
Other general expenses | | | | | 5,459 | | | 5,691 | |
Capitalization of deferred policy acquisition costs | | | | | (4,360) | | | (3,306) | |
Amortization of deferred policy acquisition costs | | | | | 3,162 | | | 3,020 | |
Amortization of cost of insurance acquired | | | | | 32 | | | 24 | |
Total benefits and expenses | | | | | 33,588 | | | 33,833 | |
Income (loss) before federal income tax expense | | | | | $ | 6,372 | | | 5,864 | |
June 30, 2022March 31, 2023 | 10-Q 3949
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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Taiwan due
In our Life Insurance segment we reported income before federal income tax of $6.4 million in partthe three months ended March 31, 2023 as compared to COVID lock downs and continued declineincome of $5.9 million in productionthe prior year period primarily driven by higher net investment income, partially offset by lower renewal year premiums.
Life Insurance segment premium breakout is detailed below.
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
(In thousands) | | | | | 2023 | | 2022 |
Premiums: | | | | | | | |
First year | | | | | $ | 2,594 | | | 1,987 | |
Renewal | | | | | 23,613 | | | 24,944 | |
Total premiums | | | | | $ | 26,207 | | | 26,931 | |
| | | | | | | |
Premiums. First year premiums increased 30.5% for three months ended March 31, 2023 compared to the same period in Venezuela2022, which we believe is due to onesales campaigns and our new international whole life product, which launched in March 2022. Our total premiums for three months ended March 31, 2023 decreased 2.7% compared to the same period in 2022. We derive most of our top distributors leaving our Company. As we discussedpremium revenue in Item 3 - Legal Proceedingsthe Life Insurance segment from renewal premiums, which decreased 5.3% in our Annual Report on Form 10-K for the yearthree months ended DecemberMarch 31, 2021, we believe these distributors are illegally competing with us and stealing our trade secrets and business.2023 as compared to the same period in 2022.
International Life Insurance Premiums. Life insurance premiums are generated largely from our international policyholders from more than 70 different countries across the globe. The majority of our international premiums are derived from whole life and endowment products. The following table sets forth for our premiums collected from the top five producing countries our direct premiums fromof our international life insurance business for the three and six months ended June 30, 2022March 31, 2023 and 2021.2022.
| | | Three Months Ended | | Six Months Ended | | | | Three Months Ended |
| | June 30, | | June 30, | | | | March 31, |
(In thousands) | (In thousands) | 2022 | | 2021 | | 2022 | | 2021 | (In thousands) | | | 2023 | | 2022 |
Country: | Country: | | | | | | | | Country: | | |
Colombia | Colombia | $ | 6,365 | | | 6,023 | | | $ | 11,896 | | | 11,267 | | Colombia | | | $ | 6,057 | | | 6,030 | |
Taiwan | Taiwan | 4,163 | | | 4,743 | | | 8,678 | | | 9,227 | | Taiwan | | | 5,302 | | | 4,923 | |
Venezuela | Venezuela | 4,204 | | | 4,496 | | | 7,955 | | | 8,864 | | Venezuela | | | 3,722 | | | 4,090 | |
Ecuador | Ecuador | 3,319 | | | 3,346 | | | 6,094 | | | 6,267 | | Ecuador | | | 3,246 | | | 3,026 | |
Argentina | Argentina | 2,731 | | | 2,408 | | | 4,438 | | | 4,236 | | Argentina | | | 2,184 | | | 1,861 | |
Other Non-U.S. | Other Non-U.S. | 10,880 | | | 10,083 | | | 18,570 | | | 18,188 | | Other Non-U.S. | | | 8,841 | | | 8,933 | |
Total | Total | $ | 31,662 | | | 31,099 | | | 57,631 | | | 58,049 | | Total | | | $ | 29,352 | | | 28,863 | |
Domestic Life Insurance Premiums. Domestic premiums in our Life Insurance segment were $1.2 million and $2.2 millionremained consistent in the three and six months ended June 30, 2022, respectively,March 31, 2023 compared to $1.3 million and $2.5 million in the same prior year periods.period. Our domestic in force business results primarily from receipt of renewal premiums from blocks of business of various insurance companies we have acquired over the years andas we ceased selling ordinary life in 2017. We currently offer whole life, credit life, credit disability and critical illness products domestically.
Net Investment Income. Our net investment income increased by 3.9% and 3.6%11.2% for the three and six months ended June 30, 2022, respectively,March 31, 2023 compared to the same periodsperiod in 2021 from2022 due to our higher average portfolio yield in the current year period. Fixed maturity securities income for the six months ended June 30, 2021 included a non-recurring "make-whole" call redemption. Long-termyield. The majority of investment income increasedis derived from fixed maturity securities; however, long-term investment income continued to increase as our limited partnership investments asset base grew and we received some early distribution income.grew.
Investment Related Gains (Losses), Net. The investment related losses for the three and six months ended June 30, 2022 were a result of the change in estimated fair market value for our limited partnerships, as previously discussed.
June 30, 2022March 31, 2023 | 10-Q 4050
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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Investment Related Gains (Losses), Net. We recorded investment related losses of $0.4 million during the three months ended March 31, 2023 compared to investment related losses of $0.3 million during the same prior year period resulting from the change in estimated fair market value for our limited partnerships, as previously discussed.
Claims and Surrenders. The following table shows thesets forth our primary claims and surrender benefits paid within theour Life Insurance segment for the three and six months ended June 30, 2022March 31, 2023 compared to the same periodsperiod in 2021.2022.
| | | Three Months Ended | | Six Months Ended | | | | Three Months Ended |
| | June 30, | | June 30, | | | | March 31, |
(In thousands) | (In thousands) | 2022 | | 2021 | | 2022 | | 2021 | (In thousands) | | | 2023 | | 2022 |
Claims and Surrenders: | Claims and Surrenders: | | Claims and Surrenders: | | |
Death claim benefits | Death claim benefits | $ | 1,519 | | | 1,849 | | | 2,509 | | | 4,533 | | Death claim benefits | | | $ | 748 | | | 990 | |
Surrender benefits | Surrender benefits | 10,776 | | | 12,978 | | | 22,413 | | | 25,229 | | Surrender benefits | | | 11,628 | | | 11,637 | |
Endowment benefits | Endowment benefits | 2,149 | | | 2,248 | | | 4,278 | | | 4,647 | | Endowment benefits | | | 2,108 | | | 2,129 | |
Matured endowment benefits | Matured endowment benefits | 5,981 | | | 5,489 | | | 11,988 | | | 10,469 | | Matured endowment benefits | | | 8,620 | | | 6,007 | |
A&H and other policy benefits | A&H and other policy benefits | 1,143 | | | 967 | | | 1,838 | | | 1,923 | | A&H and other policy benefits | | | 1,335 | | | 695 | |
| Total claims and surrenders | Total claims and surrenders | $ | 21,568 | | | 23,531 | | | 43,026 | | | 46,801 | | Total claims and surrenders | | | $ | 24,439 | | | 21,458 | |
During the three and six months ended June 30,March 31, 2023 and 2022, and 2021, the majority of our claims and surrender benefits in our Life Insurance segment were related to payment of surrender benefits and matured endowment benefits. Surrenders decreased 17.0% and 11.2% in the three and six months ended June 30, 2022, as compared to the prior year periods. We believe this improvement is due to the successMany of our retention programs aimed at curbing surrenders. Maturedendowment policies are reaching their contractual maturity dates and thus matured endowment benefits have generally been increasing but can fluctuate, which we expected due to the timing of maturities.are increasing. Death claims benefits decreased for the three and six months ended June 30, 2022, asMarch 31, 2023 compared to the prior year periods. We believe thatperiod. Mortality experience is closely monitored by the COVID-19 pandemic contributed to high death claims in the 2021 period.Company as a key performance indicator and these amounts were within expected levels.
Increase (Decrease) in Future Policy Benefit Reserves. The change in future policy benefit reserves increased 86.9% and 64.8%decreased as a result of reserves released from higher matured endowment benefits which is offset by increases in our in force block of business for the three and six months ended June 30, 2022, respectively,March 31, 2023 compared to the same periodsperiod in 2021 due to better sales and persistency. In addition, the change in future policy reserves for the three and six months ended June 30, 2021 was lower due to an $0.8 million adjustment for the conversion of a small block of policies to our new actuarial valuation system during the second quarter of 2021.2022.
Other General Expenses.
March 31, 2023 | 10-Q 51
Table of Contents General expenses increased in the three and six months ended June 30, 2022 compared to the same periods in 2021 due primarily to expenses associated with our home office and travel related expenses including our convention. We did not have a convention in 2021 due to the COVID-19 pandemic.
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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HOME SERVICE INSURANCE
Income before federal income tax expense in our Home Service Insurance segment decreased by $0.4 million and $0.9 million in the three and six months ended June 30, 2022, respectively, as compared to the prior year periods, driven by investment related losses due to the changes in the fair value of our equity securities. The effect of the investment related losses on pre-tax net income was partially offset by lower death benefits, fewer hurricane property claims and lower operating expenses in the current year periods.
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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Detailed results of operations for the Home Service Insurance segment for the periods indicated are as follows:
| | | Three Months Ended | | Six Months Ended | | | | Three Months Ended |
| | June 30, | | June 30, | | | | March 31, |
(In thousands) | (In thousands) | 2022 | | 2021 | | 2022 | | 2021 | (In thousands) | | | 2023 | | 2022 |
Revenues: | Revenues: | | | | | | | | Revenues: | | | | | |
Premiums | Premiums | $ | 12,390 | | | 12,688 | | | 24,823 | | | 24,657 | | Premiums | | | $ | 12,042 | | | 12,433 | |
Net investment income | Net investment income | 3,283 | | | 3,243 | | | 6,527 | | | 6,588 | | Net investment income | | | 3,470 | | | 3,244 | |
Investment related gains (losses), net | Investment related gains (losses), net | (925) | | | 206 | | | (1,167) | | | 429 | | Investment related gains (losses), net | | | 99 | | | (242) | |
Other income | 1 | | | — | | | 1 | | | 2 | | |
| Total revenues | Total revenues | 14,749 | | | 16,137 | | | 30,184 | | | 31,676 | | Total revenues | | | 15,611 | | | 15,435 | |
Benefits and expenses: | Benefits and expenses: | | Benefits and expenses: | | |
Insurance benefits paid or provided: | Insurance benefits paid or provided: | | Insurance benefits paid or provided: | | |
Claims and surrenders | Claims and surrenders | 5,529 | | | 5,765 | | | 12,505 | | | 13,084 | | Claims and surrenders | | | 5,860 | | | 6,976 | |
Increase in future policy benefit reserves | 1,802 | | | 2,233 | | | 3,241 | | | 3,807 | | |
Increase (decrease) in future policy benefit reserves | | Increase (decrease) in future policy benefit reserves | | | 842 | | | (1,262) | |
Policyholder liability remeasurement (gain) loss | | Policyholder liability remeasurement (gain) loss | | | 64 | | | 254 | |
Policyholders' dividends | Policyholders' dividends | 6 | | | 9 | | | 9 | | | 19 | | Policyholders' dividends | | | 7 | | | 3 | |
Total insurance benefits paid or provided | Total insurance benefits paid or provided | 7,337 | | | 8,007 | | | 15,755 | | | 16,910 | | Total insurance benefits paid or provided | | | 6,773 | | | 5,971 | |
Commissions | Commissions | 4,132 | | | 4,403 | | | 7,999 | | | 8,329 | | Commissions | | | 4,254 | | | 3,867 | |
Other general expenses | Other general expenses | 3,515 | | | 4,084 | | | 7,865 | | | 7,878 | | Other general expenses | | | 4,468 | | | 4,350 | |
Capitalization of deferred policy acquisition costs | Capitalization of deferred policy acquisition costs | (1,877) | | | (1,971) | | | (3,352) | | | (3,395) | | Capitalization of deferred policy acquisition costs | | | (1,998) | | | (1,475) | |
Amortization of deferred policy acquisition costs | Amortization of deferred policy acquisition costs | 1,357 | | | 874 | | | 2,692 | | | 1,709 | | Amortization of deferred policy acquisition costs | | | 652 | | | 539 | |
Amortization of cost of insurance acquired | Amortization of cost of insurance acquired | 179 | | | 202 | | | 359 | | | 465 | | Amortization of cost of insurance acquired | | | 129 | | | 105 | |
Total benefits and expenses | Total benefits and expenses | 14,643 | | | 15,599 | | | 31,318 | | | 31,896 | | Total benefits and expenses | | | 14,278 | | | 13,357 | |
Income (loss) before federal income tax expense | $ | 106 | | | 538 | | | (1,134) | | | (220) | | |
Income before federal income tax expense | | Income before federal income tax expense | | | $ | 1,333 | | | 2,078 | |
In our Home Service Insurance segment we reported income before federal income tax of $1.3 million in the three months ended March 31, 2023 as compared to income of $2.1 million in the prior year period. This decrease is primarily driven by an increase in catastrophic reinsurance costs and higher total insurance benefits paid or provided partially offset by investment related gains due to the changes in the fair value of our equity securities.
Premiums. Total premium revenue declined by 2.3%3.1% in the three months ended June 30, 2022March 31, 2023 compared to the same period in 2021 which we believe is associated with the change2022 despite an increase of 15.1% in our business mix as we continue the strategic transformation of this business and introduce new products, which are lower cost to policyholders than some of our legacy products. Premium revenue increased by 0.7% in the sixfirst year premiums for three months ended June 30, 2022March 31, 2023 compared to the same period in 2021. This2022. The decline in premium was attributed to lower property insurance premiums from an increase is due to higherin catastrophic reinsurance costs and lower life insurance renewal premiums during the six months ended June 30, 2022 as a result of collection efforts by our independent agents as well as the impact from a pricing increase on our property casualty business products.year premiums.
June 30, 2022March 31, 2023 | 10-Q 4252
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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Claims and Surrenders. Claims and surrender benefits, which are the largest portion of our expenses in the Home Service Insurance segment, are summarized as follows:
| | | Three Months Ended | | Six Months Ended | | | | Three Months Ended |
| | June 30, | | June 30, | | | | March 31, |
(In thousands) | (In thousands) | 2022 | | 2021 | | 2022 | | 2021 | (In thousands) | | | 2023 | | 2022 |
Claims and Surrenders: | Claims and Surrenders: | | Claims and Surrenders: | | |
Death claim benefits | Death claim benefits | $ | 4,354 | | | 4,695 | | | 10,381 | | | 10,951 | | Death claim benefits | | | $ | 4,634 | | | 6,027 | |
Surrender benefits | Surrender benefits | 831 | | | 551 | | | 1,453 | | | 1,107 | | Surrender benefits | | | 688 | | | 622 | |
Endowment benefits | Endowment benefits | 3 | | | 3 | | | 8 | | | 5 | | Endowment benefits | | | 1 | | | 5 | |
Matured endowment benefits | Matured endowment benefits | 152 | | | 173 | | | 279 | | | 315 | | Matured endowment benefits | | | 145 | | | 127 | |
Property claims | Property claims | 163 | | | 315 | | | 305 | | | 636 | | Property claims | | | 342 | | | 142 | |
A&H and other policy benefits | A&H and other policy benefits | 26 | | | 28 | | | 79 | | | 70 | | A&H and other policy benefits | | | 50 | | | 53 | |
| Total claims and surrenders | Total claims and surrenders | $ | 5,529 | | | 5,765 | | | 12,505 | | | 13,084 | | Total claims and surrenders | | | $ | 5,860 | | | 6,976 | |
The majority of claims and surrender benefits in our Home Service Insurance segment relate to death claim benefits. Death claim benefits decreased 7.3% and 5.2%23.1% in the three and six months ended June 30, 2022, respectively,March 31, 2023 compared to the same 2021 periods.2022 period. The decrease in death claim benefits was due primarily to a slightly lower volume of reported claims, including less COVID-19 related deaths.claims. Mortality experience is closely monitored by the Company as a key performance indicator and fluctuates from quarter-to-quarter based on reported claims. Property claims decreased due to a lower volume of reported claims and fewer hurricane property claims.
Other General Expenses.Increase in Future Policy Benefit Reserves. General expenses decreasedThe change in future policy benefit reserves increased as a result of increases in insurance issued and lower total death claim benefits for the three months ended June 30, 2022March 31, 2023 compared to the same period in 2021, primarily due to lower employee health benefit costs.2022.
OTHER NON-INSURANCE ENTERPRISES
| | | Three Months Ended | | Six Months Ended | | | | Three Months Ended |
| | June 30, | | June 30, | | | | March 31, |
(In thousands) | (In thousands) | 2022 | | 2021 | | 2022 | | 2021 | (In thousands) | | | 2023 | | 2022 |
Income (loss) before income tax expense | Income (loss) before income tax expense | $ | (1,372) | | | (2,065) | | | (2,136) | | | (3,949) | | Income (loss) before income tax expense | | | $ | (990) | | | (764) | |
This operating unit represents the administrative support entities to the insurance operations. Its revenues are primarily intercompany and have been eliminated in consolidation under U.S. GAAP, which typically results in a segment loss. Revenue in this operating unit consists primarily of net investment income and investment related gains or losses, while expenses consist of other general expenses related to corporate functions. In the three and six months ended June 30, 2022, the Other Non-Insurance Enterprises had a loss of $1.4 million and $2.1 million, respectively, compared to a loss of $2.1 million and $3.9 million for the same periods in 2021, as other general expenses decreased in the current year period due to payment of consulting fees to our former CEO and professional fees in connection with the change in control of the Company in 2021.
INVESTMENTS
Our investments are an integral part of our business success. Our cash and invested assets at June 30, 2022March 31, 2023 were $1.4 billion, of which 87.4%87.0% was invested in fixed maturity securities, all of which are classified as available-for-sale. We closely monitor the duration of our fixed maturity investments, and investment purchases and sales are executed with the objective of having adequate funds available to satisfy our insurance obligations.
June 30, 2022March 31, 2023 | 10-Q 4353
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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The following table showssets forth the carrying value of our investments by investment category and cash, cash equivalents and the percentage of each to total cash and invested assets.
| Carrying Value | Carrying Value | June 30, 2022 | | December 31, 2021 | Carrying Value | March 31, 2023 | | December 31, 2022 |
(In thousands, except for %) | (In thousands, except for %) | Amount | | % | | Amount | | % | (In thousands, except for %) | Amount | | % | | Amount | | % |
Cash, Cash Equivalents and Invested Assets | Cash, Cash Equivalents and Invested Assets | | Cash, Cash Equivalents and Invested Assets | |
Fixed maturity securities: | Fixed maturity securities: | | | | | | | | Fixed maturity securities: | | | | | | | |
U.S. Treasury and U.S. Government-sponsored enterprises | U.S. Treasury and U.S. Government-sponsored enterprises | $ | 13,856 | | | 1.0 | % | | $ | 15,070 | | | 0.9 | % | U.S. Treasury and U.S. Government-sponsored enterprises | $ | 9,688 | | | 0.7 | % | | $ | 13,278 | | | 1.0 | % |
Corporate | Corporate | 734,762 | | | 51.9 | % | | 893,008 | | | 54.0 | % | Corporate | 758,974 | | | 53.7 | % | | 715,645 | | | 52.5 | % |
States and political subdivisions (1) | States and political subdivisions (1) | 343,389 | | | 24.2 | % | | 383,958 | | | 23.3 | % | States and political subdivisions (1) | 308,580 | | | 21.8 | % | | 307,358 | | | 22.5 | % |
Mortgage-backed (2) | Mortgage-backed (2) | 110,014 | | | 7.8 | % | | 133,795 | | | 8.1 | % | Mortgage-backed (2) | 103,071 | | | 7.3 | % | | 99,995 | | | 7.3 | % |
Asset-backed | Asset-backed | 34,879 | | | 2.5 | % | | 44,676 | | | 2.7 | % | Asset-backed | 49,277 | | | 3.5 | % | | 43,242 | | | 3.2 | % |
Foreign governments | Foreign governments | 104 | | | — | % | | 110 | | | — | % | Foreign governments | 101 | | | — | % | | 101 | | | — | % |
Total fixed maturity securities | Total fixed maturity securities | 1,237,004 | | | 87.4 | % | | 1,470,617 | | | 89.0 | % | Total fixed maturity securities | 1,229,691 | | | 87.0 | % | | 1,179,619 | | | 86.5 | % |
| Short-term investments | | Short-term investments | 1,244 | | | 0.1 | % | | 1,241 | | | 0.1 | % |
Cash and cash equivalents | Cash and cash equivalents | 22,407 | | | 1.5 | % | | 27,294 | | | 1.7 | % | Cash and cash equivalents | 18,924 | | | 1.4 | % | | 22,973 | | | 1.7 | % |
Other investments: | Other investments: | | | | | | | | Other investments: | | | | | | | |
Policy loans | Policy loans | 78,586 | | | 5.5 | % | | 80,307 | | | 4.9 | % | Policy loans | 78,659 | | | 5.6 | % | | 78,773 | | | 5.8 | % |
Equity securities | Equity securities | 12,711 | | | 0.9 | % | | 14,844 | | | 0.9 | % | Equity securities | 11,899 | | | 0.8 | % | | 11,590 | | | 0.8 | % |
| Other long-term investments | Other long-term investments | 66,002 | | | 4.7 | % | | 57,399 | | | 3.5 | % | Other long-term investments | 72,254 | | | 5.1 | % | | 69,558 | | | 5.1 | % |
Total cash, cash equivalents and invested assets | Total cash, cash equivalents and invested assets | $ | 1,416,710 | | | 100.0 | % | | $ | 1,650,461 | | | 100.0 | % | Total cash, cash equivalents and invested assets | $ | 1,412,671 | | | 100.0 | % | | $ | 1,363,754 | | | 100.0 | % |
(1) Includes $146.8$128.5 million and $160.6$133.2 million of securities guaranteed by third parties at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively.
(2) Includes $109.8$102.7 million and $136.5$98.8 million of U.S. Government-sponsored enterprises at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively.
The carrying value of the Company’s fixed maturity securities investment portfolio at June 30, 2022March 31, 2023 was $1.2$1.23 billion compared to $1.5$1.18 billion at December 31, 2021.2022. As discussed above, this declineincrease reflects the impact of interest rate sensitivity on the fair value of our fixed maturity securities. The distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of June 30, 2022March 31, 2023 did not materially change from December 31, 20212022 – the weighted average was “A” at both dates. Our portfolio mix did not materially change during the six months.
Cash and cash equivalents decreased as of June 30, 2022March 31, 2023 from December 31, 20212022 and can fluctuate from period to period primarily due primarily to the reinvestment of funds in higher interest rate securities.timing from operating and investing activities.
Other long-term investments increased by $8.6$2.7 million as of June 30, 2022March 31, 2023 from December 31, 20212022 due to additional funding of our limited partnership investments.
Obligations of States and Political Subdivisions
The Company’s fixed maturity securities investment portfolio at June 30, 2022March 31, 2023 and December 31, 20212022 included $343.4$308.6 million and $384.0$307.4 million, respectively, of securities that are obligations of states and political subdivisions, including municipalities (collectively referred to as the municipal bond portfolio).
June 30, 2022March 31, 2023 | 10-Q 4454
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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The Company's municipal bond portfolio includes third-party guarantees. Detailed below is a presentation by the Nationally Recognized Statistical Rating Organization ("NRSRO") rating of these holdings by funding type as of June 30, 2022.March 31, 2023.
| | | General Obligation | | Special Revenue | | Other | | Total | | % Based on Amortized Cost | | General Obligation | | Special Revenue | | Other | | Total | | % Based on Amortized Cost |
(In thousands, except for %) | (In thousands, except for %) | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | (In thousands, except for %) | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | |
State and political subdivision fixed maturity securities including third-party guarantees | State and political subdivision fixed maturity securities including third-party guarantees | | State and political subdivision fixed maturity securities including third-party guarantees | |
AAA | AAA | $ | 15,036 | | | 14,574 | | | 3,862 | | | 3,794 | | | — | | | — | | | 18,898 | | | 18,368 | | | 5.1 | % | AAA | $ | 14,073 | | | 13,949 | | | 6,494 | | | 6,584 | | | — | | | — | | | 20,567 | | | 20,533 | | | 6.1 | % |
AA | AA | 48,577 | | | 47,211 | | | 117,530 | | | 127,360 | | | 11,067 | | | 11,102 | | | 177,174 | | | 185,673 | | | 51.7 | % | AA | 48,733 | | | 48,641 | | | 114,841 | | | 130,002 | | | 10,714 | | | 11,090 | | | 174,288 | | | 189,733 | | | 56.7 | % |
A | A | 15,847 | | | 16,082 | | | 94,993 | | | 101,882 | | | 4,599 | | | 4,408 | | | 115,439 | | | 122,372 | | | 34.1 | % | A | 5,956 | | | 6,252 | | | 88,770 | | | 97,907 | | | 4,474 | | | 4,403 | | | 99,200 | | | 108,562 | | | 32.4 | % |
BBB | BBB | 2,560 | | | 2,547 | | | 8,326 | | | 9,131 | | | 1,399 | | | 1,450 | | | 12,285 | | | 13,128 | | | 3.7 | % | BBB | 626 | | | 656 | | | 8,295 | | | 9,501 | | | 1,375 | | | 1,450 | | | 10,296 | | | 11,607 | | | 3.5 | % |
BB and other | BB and other | 4,298 | | | 4,401 | | | 15,295 | | | 15,257 | | | — | | | — | | | 19,593 | | | 19,658 | | | 5.4 | % | BB and other | 2,963 | | | 3,185 | | | 1,266 | | | 1,267 | | | — | | | — | | | 4,229 | | | 4,452 | | | 1.3 | % |
Total | Total | $ | 86,318 | | | 84,815 | | | 240,006 | | | 257,424 | | | 17,065 | | | 16,960 | | | 343,389 | | | 359,199 | | | 100.0 | % | Total | $ | 72,351 | | | 72,683 | | | 219,666 | | | 245,261 | | | 16,563 | | | 16,943 | | | 308,580 | | | 334,887 | | | 100.0 | % |
| State and political subdivision fixed maturity securities excluding third-party guarantees | State and political subdivision fixed maturity securities excluding third-party guarantees | | State and political subdivision fixed maturity securities excluding third-party guarantees | |
| AA | AA | $ | 30,307 | | | 29,432 | | | 44,434 | | | 46,949 | | | 6,845 | | | 6,518 | | | 81,586 | | | 82,899 | | | 23.1 | % | AA | $ | 34,169 | | | 34,123 | | | 39,052 | | | 42,762 | | | 6,597 | | | 6,505 | | | 79,818 | | | 83,390 | | | 24.9 | % |
A | A | 28,543 | | | 28,496 | | | 124,179 | | | 134,577 | | | 7,159 | | | 7,138 | | | 159,881 | | | 170,211 | | | 47.4 | % | A | 16,823 | | | 17,178 | | | 121,766 | | | 136,950 | | | 6,952 | | | 7,133 | | | 145,541 | | | 161,261 | | | 48.2 | % |
BBB | BBB | 4,555 | | | 4,455 | | | 27,869 | | | 29,917 | | | 1,663 | | | 1,855 | | | 34,087 | | | 36,227 | | | 10.1 | % | BBB | 2,568 | | | 2,561 | | | 27,060 | | | 30,101 | | | 1,639 | | | 1,855 | | | 31,267 | | | 34,517 | | | 10.3 | % |
BB and other | BB and other | 22,913 | | | 22,432 | | | 43,524 | | | 45,981 | | | 1,398 | | | 1,449 | | | 67,835 | | | 69,862 | | | 19.4 | % | BB and other | 18,791 | | | 18,821 | | | 31,788 | | | 35,448 | | | 1,375 | | | 1,450 | | | 51,954 | | | 55,719 | | | 16.6 | % |
Total | Total | $ | 86,318 | | | 84,815 | | | 240,006 | | | 257,424 | | | 17,065 | | | 16,960 | | | 343,389 | | | 359,199 | | | 100.0 | % | Total | $ | 72,351 | | | 72,683 | | | 219,666 | | | 245,261 | | | 16,563 | | | 16,943 | | | 308,580 | | | 334,887 | | | 100.0 | % |
The table below shows the categories in which the Company held investments in special revenue bonds that were greater than 10% of fair value based upon the Company's total municipal bond portfolio at June 30, 2022.March 31, 2023.
| (In thousands) | (In thousands) | Fair Value | | Amortized Cost | | % of Total Fair Value | (In thousands) | Fair Value | | Amortized Cost | | % of Total Fair Value |
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Education | Education | $ | 58,278 | | | 62,222 | | | 17.0 | % | Education | $ | 48,486 | | | 54,317 | | | 15.7 | % |
Utilities | Utilities | 53,540 | | | 55,118 | | | 15.6 | % | Utilities | 46,416 | | | 49,303 | | | 15.0 | % |
Transportation | Transportation | 38,807 | | | 44,071 | | | 11.3 | % | Transportation | 38,239 | | | 44,661 | | | 12.4 | % |
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The Company's municipal bond portfolio is spread across many states, however, municipal bonds from Texas and California comprise the most significant concentration of the total municipal bond portfolio as of June 30, 2022.March 31, 2023. The Company holds 20.5%21.7% and 12.6%14.3% of its municipal bond portfolio in Texas and California issuers, respectively, as of June 30, 2022.March 31, 2023. There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal bond portfolio as of June 30, 2022.March 31, 2023.
June 30, 2022March 31, 2023 | 10-Q 4555
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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The table below represents the Company's detailed exposure to municipal bond portfoliobonds in Texas at June 30, 2022.March 31, 2023.
| June 30, 2022 | General Obligation | | Special Revenue | | Other | | Total | |
| | | General Obligation | | Special Revenue | | Other | | Total |
(In thousands) | (In thousands) | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | (In thousands) | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost |
Texas state and political subdivision fixed maturity securities including third-party guarantees | Texas state and political subdivision fixed maturity securities including third-party guarantees | Texas state and political subdivision fixed maturity securities including third-party guarantees |
AAA | AAA | $ | 14,510 | | | 14,067 | | | 3,145 | | | 3,069 | | | — | | | — | | | 17,655 | | | 17,136 | | AAA | $ | 13,564 | | | 13,442 | | | 3,060 | | | 3,055 | | | — | | | — | | | 16,624 | | | 16,497 | |
AA | AA | 19,624 | | | 19,117 | | | 11,988 | | | 12,810 | | | — | | | — | | | 31,612 | | | 31,927 | | AA | 17,572 | | | 17,549 | | | 14,730 | | | 16,302 | | | — | | | — | | | 32,302 | | | 33,851 | |
A | A | — | | | — | | | 18,745 | | | 23,096 | | | — | | | — | | | 18,745 | | | 23,096 | | A | — | | | — | | | 17,458 | | | 22,195 | | | — | | | — | | | 17,458 | | | 22,195 | |
BBB | — | | | — | | | 1,908 | | | 1,823 | | | — | | | — | | | 1,908 | | | 1,823 | | |
| BB and other | BB and other | — | | | — | | | 510 | | | 503 | | | — | | | — | | | 510 | | | 503 | | BB and other | — | | | — | | | 500 | | | 501 | | | — | | | — | | | 500 | | | 501 | |
Total | Total | $ | 34,134 | | | 33,184 | | | 36,296 | | | 41,301 | | | — | | | — | | | 70,430 | | | 74,485 | | Total | $ | 31,136 | | | 30,991 | | | 35,748 | | | 42,053 | | | — | | | — | | | 66,884 | | | 73,044 | |
Texas state and political subdivision fixed maturity securities excluding third-party guarantees | Texas state and political subdivision fixed maturity securities excluding third-party guarantees | Texas state and political subdivision fixed maturity securities excluding third-party guarantees |
| AA | AA | $ | 27,953 | | | 27,183 | | | 3,058 | | | 3,013 | | | — | | | — | | | 31,011 | | | 30,196 | | AA | $ | 25,137 | | | 24,997 | | | 3,002 | | | 2,982 | | | — | | | — | | | 28,139 | | | 27,979 | |
A | A | 5,017 | | | 4,856 | | | 25,369 | | | 30,251 | | | — | | | — | | | 30,386 | | | 35,107 | | A | 4,860 | | | 4,852 | | | 26,978 | | | 32,867 | | | — | | | — | | | 31,838 | | | 37,719 | |
BBB | BBB | 1,164 | | | 1,145 | | | 5,307 | | | 5,249 | | | — | | | — | | | 6,471 | | | 6,394 | | BBB | 1,139 | | | 1,142 | | | 3,274 | | | 3,421 | | | — | | | — | | | 4,413 | | | 4,563 | |
BB and other | BB and other | — | | | — | | | 2,562 | | | 2,788 | | | — | | | — | | | 2,562 | | | 2,788 | | BB and other | — | | | — | | | 2,494 | | | 2,783 | | | — | | | — | | | 2,494 | | | 2,783 | |
Total | Total | $ | 34,134 | | | 33,184 | | | 36,296 | | | 41,301 | | | — | | | — | | | 70,430 | | | 74,485 | | Total | $ | 31,136 | | | 30,991 | | | 35,748 | | | 42,053 | | | — | | | — | | | 66,884 | | | 73,044 | |
The table below represents the Company's detailed exposure to municipal bond portfoliobonds in California at June 30,March 31, 2023.
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| General Obligation | | Special Revenue | | Other | | Total |
(In thousands) | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost |
California state and political subdivision fixed maturity securities including third-party guarantees |
| | | | | | | | | | | | | | | |
AA | $ | 1,965 | | | 2,036 | | | 30,221 | | | 35,601 | | | 2,478 | | | 2,731 | | | 34,664 | | | 40,368 | |
A | 1,306 | | | 1,650 | | | 7,208 | | | 8,924 | | | — | | | — | | | 8,514 | | | 10,574 | |
BBB | — | | | — | | | 866 | | | 865 | | | — | | | — | | | 866 | | | 865 | |
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Total | $ | 3,271 | | | 3,686 | | | 38,295 | | | 45,390 | | | 2,478 | | | 2,731 | | | 44,044 | | | 51,807 | |
California state and political subdivision fixed maturity securities excluding third-party guarantees |
| | | | | | | | | | | | | | | |
AA | $ | 464 | | | 445 | | | 4,691 | | | 5,447 | | | — | | | — | | | 5,155 | | | 5,892 | |
A | 2,807 | | | 3,241 | | | 15,766 | | | 18,971 | | | 2,478 | | | 2,731 | | | 21,051 | | | 24,943 | |
BBB | — | | | — | | | 3,713 | | | 3,929 | | | — | | | — | | | 3,713 | | | 3,929 | |
BB and other | — | | | — | | | 14,125 | | | 17,043 | | | — | | | — | | | 14,125 | | | 17,043 | |
Total | $ | 3,271 | | | 3,686 | | | 38,295 | | | 45,390 | | | 2,478 | | | 2,731 | | | 44,044 | | | 51,807 | |
IMPAIRMENT CONSIDERATIONS RELATED TO INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES
The Company did not record any credit valuation allowances on fixed maturity securities in either of the three months ended March 31, 2023 or 2022.
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June 30, 2022 | General Obligation | | Special Revenue | | Other | | Total |
(In thousands) | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost |
California state and political subdivision fixed maturity securities including third-party guarantees |
| | | | | | | | | | | | | | | |
AA | $ | 1,543 | | | 1,574 | | | 26,605 | | | 30,812 | | | 2,559 | | | 2,730 | | | 30,707 | | | 35,116 | |
A | 1,353 | | | 1,650 | | | 6,651 | | | 8,102 | | | — | | | — | | | 8,004 | | | 9,752 | |
BBB | — | | | — | | | 866 | | | 865 | | | — | | | — | | | 866 | | | 865 | |
BB and other | — | | | — | | | 3,787 | | | 3,777 | | | — | | | — | | | 3,787 | | | 3,777 | |
Total | $ | 2,896 | | | 3,224 | | | 37,909 | | | 43,556 | | | 2,559 | | | 2,730 | | | 43,364 | | | 49,510 | |
California state and political subdivision fixed maturity securities excluding third-party guarantees |
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AA | $ | — | | | — | | | 2,434 | | | 3,062 | | | — | | | — | | | 2,434 | | | 3,062 | |
A | 2,896 | | | 3,224 | | | 13,658 | | | 16,459 | | | 2,559 | | | 2,730 | | | 19,113 | | | 22,413 | |
BBB | — | | | — | | | 3,923 | | | 4,043 | | | — | | | — | | | 3,923 | | | 4,043 | |
BB and other | — | | | — | | | 17,894 | | | 19,992 | | | — | | | — | | | 17,894 | | | 19,992 | |
Total | $ | 2,896 | | | 3,224 | | | 37,909 | | | 43,556 | | | 2,559 | | | 2,730 | | | 43,364 | | | 49,510 | |
Information on both unrealized and realized gains and losses by category is set forth in Part I, Item 1, Note 3. Investments of the notes to our consolidated financial statements herein.
June 30, 2022March 31, 2023 | 10-Q 4656
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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IMPAIRMENT CONSIDERATIONS RELATED TO INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES
The Company did not record any credit valuation allowances on fixed maturity securities in either of the three and six months ended June 30, 2022 or 2021.
Information on both unrealized and realized gains and losses by category is set forth in Part I, Item 1, Note 5. Investments of the notes to our consolidated financial statements herein.
LIQUIDITY AND CAPITAL RESOURCES
Below are our primary capital resources (based on carrying value of each) as of the periods indicated below.indicated.
| (In thousands) | (In thousands) | June 30, 2022 | | December 31, 2021 | (In thousands) | March 31, 2023 | | December 31, 2022 |
Fixed maturity securities | Fixed maturity securities | $ | 1,237,004 | | | 1,470,617 | | Fixed maturity securities | $ | 1,229,691 | | | 1,179,619 | |
Cash and cash equivalents | Cash and cash equivalents | 22,407 | | | 27,294 | | Cash and cash equivalents | 18,924 | | | 22,973 | |
Liquidity refers to a company's ability to generate sufficient cash flows to meet the needs of its operations. In the three months ended March 31, 2023 our operations resulted in $7.4 million in net cash. We manage our insurance operations as described herein in order to ensure that we have stable and reliable sources of cash flowsflow to meet our obligations. We currently anticipate meeting our short-term and long-term cash needs with cash generated by our insurance operations and from our invested assets. At June 30, 2022, we had $22.4 million in cash and cash equivalents and $1.4 billion in invested assets. As described above, cash and cash equivalents decreased as of June 30, 2022 from December 31, 2021 due primarily to the reinvestment of funds in higher interest rate securities and the decline in the fair value of our fixed maturity securities is due to rising interest rates. As discussed in Part I, Item 1. Note 5. Investments in the notes to our consolidated financial statements herein, we expect the fair value to recover as the securities approach maturity. We have only recorded a $0.3 million unrealized loss on securities due in 1 year or less. From time-to-time, we may raise capital by selling shares in our SIP (as defined below) and we may also access our Credit Facility if needed (also as described below).
PARENT COMPANY LIQUIDITY AND CAPITAL RESOURCES
Citizens is a holding company and has minimal operations of its own. Our assets consist of the capital stock of our subsidiaries, cash and investments. Our liquidity requirements are met primarily from two sources: cash generated from our operating subsidiaries and our invested assets. Our ability to obtain cash from our insurance subsidiaries depends primarily upon the availability of statutorily permissible payments, including payments Citizens receives from service agreements with our insurance subsidiaries and dividends from the subsidiaries. The ability to make payments to the holding company is limited by applicable laws and regulations of Bermuda, Puerto Rico and U.S. states of domicile which subject insurance operations to significant regulatory restrictions. These laws and regulations require, among other things, that our insurance subsidiaries maintain minimum solvency requirements, which limit the amount of dividends that can be paid to the holding company. The regulations also require approval of our service agreements with the applicable regulatory authority in order to prevent insurance subsidiaries from moving large amounts of cash to the unregulated holding company.
In addition to the above-mentioned sources of cash, we offer a Stock Investment Plan ("SIP"), whereby investors, policyholders, independent contractors and agents, employees and directors can directly purchase our stock. At our option, purchases of stock under the SIP can be made from newly issued or treasury stock, rather than in the open market, in which case, we can raise capital by selling our shares.
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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The Credit Facility provides additional liquidity to the Company for short-term and longer-term needs. As of June 30, 2022,March 31, 2023, we have not borrowed any money under the Credit Facility and have no immediate plans to do so.
INSURANCE COMPANY SUBSIDIARY LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of our insurance operations are primarily met by premium revenues, investment income and investment maturities or sales. Primary cash needs relate to payments of policyholder benefits, investment purchases and operating expenses. Historically, cash flow from our operations has been sufficient to meet our cash needs. We have not had to liquidate a material amount of investments to pay our expenses and we did not do so in the sixthree months ended June 30, 2022.March 31, 2023. We believe that we have adequate capital resources to support the liquidity requirements of our insurance operations if the cash flow from our insurance operations is insufficient to meet our cash needs. See Contractual Obligations and Off-balance Sheet Arrangements in our Form 10-K and below for a discussion of known and estimated cash needs. Cash flow projections and cash flow tests under various market interest rate scenarios are performed annually to assist in evaluating liquidity needs and adequacy.
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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Cash from Operating Activities. Cash provided by or used in operating activities is an important liquidity metric because it reflects, during a given period, the amount of cash generated that is available to pay our operating expenses, invest in our business or make strategic acquisitions. In the sixthree months ended June 30, 2022,March 31, 2023, our operations provided $22.3$7.4 million in net cash.
Cash from Investing Activities. We have traditionally also had significant cash flows from investing activities due to both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows, for the most part, are reinvested in newfixed income securities and to a lesser extent limited partnerships or other alternative investments. Net cash used inoutflows from investing activities totaled $27.9$11.0 million for the sixthree months ended June 30, 2022. Due to the higher interest rate environment, we purchased $64.7 million in fixed maturity securities and we also used $14.7 million to purchase other long-term investments. OurMarch 31, 2023. The investing activities fluctuate from period to period due to timing of securities activities such as calls and maturities and reinvestment of those funds.
Cash from Financing Activities. Cash provided by financing activities was $0.7We purchased $25.1 million in the six months ended June 30, 2022, due primarilyfixed maturity securities and we also used $3.5 million to the issuancepurchase other long-term investments. 87% of shares under the SIP.our total cash, cash equivalents and investments consist of marketable fixed maturity securities classified as available-for-sale that could be readily converted to cash for liquidity needs.
Trends, Demands and Restrictions on our Uses of Cash
Because claims and surrender benefitssurrenders are our largest expense, a primary liquidity concern is the risk of either (i) an extraordinary level of early policyholder surrenders, or (ii) higher than expected mortality.mortality experience. In order to mitigate the risk of early policyholder surrenders, we include provisions in our insurance policies, such as surrender charges, that help limit and discourage early withdrawals. As previously discussed, surrender benefits had been higher than usual the last several years as many of our policies have reached the age where surrender charges have expired and due to other reasons, like the loss of one of our biggest distributors in Venezuela. However, we have been aggressively managing policyholder retention efforts and in the sixthree months ended June 30, 2022,March 31, 2023, surrender benefits slightly decreased.have leveled. To the extent that early surrenders are higher than expected, our liquidity could be negatively impacted. We continue to monitor surrenders and early withdrawals.
Our whole life and endowment products provide the policyholder with alternatives once the policy matures - they can choose to take a lump sum payout or leave the money on deposit at interest with the Company. As of June 30, 2022, 39%March 31, 2023, 37% of the Company's total insurance in force was in endowment products. Approximately 14%17% of the endowments in force will mature in the next five years. Policyholder election behavior is unknown, but if too many policyholders elect lump sum distributions, the Company could be exposed to liquidity risk in years of high maturities. Meeting these distributions could require the Company to sell securitiesits investments at inopportune times to pay policyholder withdrawals. Alternatively, if the policyholders were to leave the money on deposit with the Company at interest, our profitability could be impacted if the product guaranteed rate is higher than the market rate we are earning on our investments. We currently anticipate that our available operating cash flow and capital resources will be adequate to meet our needs for funds, but we will monitor closely our policyholder behavior patterns.
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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Death claims, which were high in 2021 due in part to COVID, have decreased to pre-pandemic levels during the first six months of 2022. We continue to closely monitor claim volumes to evaluate whether there is a delay in reporting or filing for benefits as a result of the COVID-19 pandemic.
As discussed above, we are subject to regulatory capital requirements that could affect the Company’s ability to access capital from our insurance operations or cause the Company to have to put additional cash in our wholly-owned subsidiaries.
Our domestic companies are subject to minimum capital requirements set by the NAIC in the form of risk-based capital ("RBC"). RBC considers the type of business written by an insurance company, the quality of its assets, and various other aspects of an insurance company's business to develop a minimum level of capital called "Authorized Control Level Risk-Based Capital". This level of capital is then compared to an adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level RBC fall below 200% for our domestic companies, a series of remedial actions by the affected company would be required. Additionally, we have a parental guarantee between Citizens and CICA, Citizens' wholly-owned subsidiary domiciled in Colorado, to maintain a RBC level above 350%. At June 30, 2022,March 31, 2023, our domestic insurance subsidiaries were above the required minimum RBC levels.
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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CICA International is a Bermuda domiciled company. The BMA requires Bermuda insurers to maintain available statutory economic capital and surplus at a level equal to or in excess of the BMA's Enhanced Capital Requirement, which requires a certain Target Capital Level ("TCL"). As of June 30, 2022, CICA International was above the TCL threshold. At the request of the BMA, on April 15, 2021, Citizens and CICA International entered into a Keep Well Agreement. The Keep Well Agreement requires Citizens to contribute up to $10 million in capital to CICA International as necessary to ensure that CICA International has a minimum capital level of 120%. Since CICA International’s capital level currently exceeds 120%, Citizens is not currently required to make a capital contribution. Any capital injection that Citizens is required to make under the parental guarantee with CICA or under the Keep Well Agreement with CICA International could negatively impact the Company’s capital resources and liquidity.
CICA International had previously been granted a permitted practice by the BMA to report its fixed income maturity securities at amortized cost in its unconsolidated statutory financial statements. This permitted practice has expired.
CICA PR is a Puerto Rico domiciled company. The Insurance Code does not specifically set forth minimum capital and surplus standards, but rather requires that an insurer submit a business plan for approval to the OIC that includes proposed minimum capital and surplus. CICA PR is required to maintain a minimum of $750,000 in capital and maintain a premium to surplus ratio of 7 to 1. CICA PR began issuing new business as of January 1, 2023 and since higher costs are associated with new business than renewal business (e.g., first year commissions), we expect that Citizens will have to contribute capital to CICA PR in the foreseeable future in order to maintain the required premium to surplus ratio. Like with CICA International, any capital that Citizens is required to contribute could negatively impact the Company's capital resources and liquidity.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
As of June 30, 2022,March 31, 2023, we have no additional contractual obligations or off-balance sheet arrangements other than those described in Part I. Item 1, Note 7. Commitments and Contingencies in the notes to our consolidated financial statements herein and in Part II, Item 7, Contractual Obligations and Off-Balance Sheet Arrangements in our Form 10-K. 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.
CRITICAL ACCOUNTING POLICIES
We believe that the accounting policies set forth in Part I, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - "Critical Accounting Policies" and Part IV, Item 15, Note 1. Summary of Significant Accounting Policies of our consolidated financial statements in our Form 10-K continue to describe the significant judgments and estimates used in the preparation of our consolidated financial statements.statements except as follows. The following items have changed due to adoption of Accounting Standard Update ("ASU") No. 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts.
DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs (“DAC”) are costs that are incremental and directly related to the successful acquisition of new or renewal insurance contracts. Such costs include the incremental direct costs of contract acquisition, such as sales commissions; the portion of employees’ total compensation and payroll-related fringe benefits related directly to time spent performing acquisition activities, such as underwriting, issuing, and processing policies for contracts that have actually been acquired; and other costs related directly to acquisition activities that would not have been incurred if the contract had not been acquired.
Inherent in the capitalization and amortization of DAC are certain management judgements about what acquisition costs are deferred. Approximately 94.0% of our capitalized DAC are attributed to first year and renewal excess commissions. The remaining 6.0% are attributed to other costs that vary with and are directly related to the
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CITIZENS, INC. | MANAGEMENT'S DISCUSSION & ANALYSIS |
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successful acquisition of new insurance business. Those costs generally include costs related to the production, underwriting and issuance of new business.
DAC is amortized on a constant level basis over the expected term of the related contracts to approximate straight-line amortization. For the Life Insurance Segment, the constant level basis used is policy count in force. For the Home Service Insurance Segment, the constant level basis used is face amount in force. The constant level bases used for amortization are projected using mortality and lapse assumptions that are based on the Company’s experience, industry data, and other factors at the end of each reporting period and are consistent with those used for the liability for future policy benefit life reserves. Annually, the Company completes experience studies to evaluate mortality and lapse. If those assumptions are updated, the DAC amortization basis is recalculated and the impact of the assumption change will be reflected in the cohort level amortization in future periods.
COST OF INSURANCE ACQUIRED
The Company recognizes an intangible asset that arises in the application of GAAP purchase accounting as the difference between the reported value and the fair value of insurance contract liabilities, or comparable amounts determined in purchased insurance business combinations. This intangible asset is referred to as the Cost of Insurance Acquired (“COIA”), which is amortized on a basis consistent with DAC, such that it is amortized in proportion to policies in force for the Life Insurance Segment and face amount in force for the Home Service Insurance Segment to approximate straight-line amortization. Inherent in the amortization of COIA are certain management judgements about the ending asset balance and the annual amortization. The key assumptions are based upon interest, mortality and lapses at the time of purchase.
A recoverability test that considers, among other things, actual experience and projected future experience is performed at least annually. These annual recoverability tests are based initially on an estimate of the available premium (gross premium less the benefit and expense portion of premium) for the next 50 years using best estimate assumptions related to interest rates, mortality and lapses. Management believes that our COIA is recoverable for the three months ended March 31, 2023. This belief is based upon the analysis performed on estimated future results of the block and our annual recoverability testing.
POLICY LIABILITIES
As premium revenue is recognized, a liability for future policy benefits is accrued. The liability for a future policy benefit is the present value of estimated future policy benefits to be paid to or on behalf of policyholders less the present value of estimated future net premiums to be collected from policyholders. The liability is estimated using current assumptions that include investment yields, discount rate, mortality and lapses and withdrawals. These current assumptions are based on judgements that consider the Company’s historical experience, industry data, and other factors. Annually, the Company completes experience studies to evaluate mortality and lapse. The results of these studies are used to update current year best estimate assumptions used in establishing benefit liabilities and DAC.
The current discount rate assumption is a yield curve that equals the yield of an upper-medium grade fixed income instrument, based on an A-quality corporate bond. The current discount rate assumption is updated quarterly and used to remeasure the liability at the reporting date, with the resulting change reflected in other comprehensive income. For liability cash flows that are projected beyond the duration of market-observable A credit-rated fixed-income instruments, the Company uses the last market-observable yield level and uses linear interpolation to determine yield assumptions for durations that do not have market observable yields. The locked-in discount rate for policies issued prior to transition equals the rate set at contract issuance. For current year issues, the locked-in discount rate is the average of the current year quarterly discount rates and will change throughout the year as new discount rates are calculated, with the change reflected in net income.
June 30, 2022March 31, 2023 | 10-Q 4960
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
ForAs a smaller reporting company, we have elected to comply with certain scaled disclosure reporting obligations and therefore are not required to provide the Company’s disclosures about market risk, please see Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk in our Form 10-K. Except as set forth below, there have been no material changes to the Company’s disclosures about market risk in Part II, Item 7A. of our Form 10-K. For additional information regarding market risks to which we are subject, see Part I, Item 1, Note 5. Investments - "Valuation of Investments" in the notes to our consolidated financial statements herein.
MARKET RISK RELATED TO INTEREST RATES
Our exposure to interest rate changes results from our significant holdings of fixed maturity investments, which comprised 87.4% of our investment portfolio based on carrying value as of June 30, 2022. These investments are mainly exposed to changes in U.S. Treasury rates. Changes in interest rates typically have a sizable effect on the fair values of our fixed maturity securities. The interest rate of the ten-year U.S. Treasury bond increased to 2.98% at June 30, 2022 from 1.52% at December 31, 2021. Net unrealized losses on fixed maturity securities totaled $125.4 million at June 30, 2022, compared to gains of $126.9 million at December 31, 2021, based upon bond interest rates in relation to the U.S. ten-year Treasury yield.
To manage interest risk, we perform periodic projections of asset and liability cash flows to evaluate the potential sensitivity of our investments and liabilities. We assess interest rate sensitivity annually with respect to our AFS fixed maturity securities investments using hypothetical test scenarios that assume either upward or downward shifts in the prevailing interest rates. The changes in fair values of our fixed maturity securities as of June 30, 2022 were within the expected range ofrequired by this analysis.
There are no fixed maturity securities or other investments classified as trading instruments. All of the Company's fixed maturity securities were classified as AFS at June 30, 2022. At June 30, 2022 and December 31, 2021, we had no investments in derivative instruments or subprime loans.Item.
Item 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures.
Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of June 30, 2022.March 31, 2023. Based on such evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2022March 31, 2023 to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and such information is accumulated and reported to management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the sixthree months ended June 30, 2022,March 31, 2023, there were no changes in the Company's internal control 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.
June 30, 2022March 31, 2023 | 10-Q 5061
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Part I, Item 3,3. Legal Proceedings of our Form 10-K includes a discussion of our legal proceedings. There have been no material developments in the three months ended June 30, 2022March 31, 2023 from the legal proceedings described in our Form 10-K except that due to continuing scheduling difficulties related to the COVID-19 pandemic, the trial in the Trade Secret Lawsuit has been delayed to October 2022..
Item 1A. RISK FACTORS
Part I, Item 1A, Risk Factors of our Form 10-K includes a discussion of our risk factors. There have been no material changes in the three and six months ended June 30, 2022March 31, 2023 from the risk factors included in our Form 10-K.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended June 30, 2022, the Company issued 16,118 shares of its Class A common stock which were not registered under the Securities Act of 1933, as amended (the "Unregistered Shares"). The Unregistered Shares were all issued to policyholders residing in Venezuela and all of whom had purchased shares of the Company's Class A common stock through the Company’s Stock Investment Plan (“the Venezuelan Shareholders”). The Venezuelan Shareholders were victims of identity fraud that resulted in 23,051.2252 shares being fraudulently sold via the Company’s transfer agent, Computershare. The Company and Computershare investigated the fraud and obtained affidavits from each of the Venezuelan Shareholders wherein such persons swore that they did not authorize the sale of the shares nor did they receive any proceeds from such sales. Based upon the evidence collected by Computershare and the Company, the Company's board authorized an offering pursuant to which the Company will issue up to 23,051.2252 shares of its Class A common stock to the Venezuelan Shareholders, at a purchase price of $0.01 USD per share.
(a) Securities sold. The Company sold 12,811 shares on May 9, 2022 and 3,307 shares on June 7, 2022.
(b) Underwriters and other purchasers. There were no underwriters. All of the Unregistered Shares were sold to the Venezuelan Shareholders.
(c) Consideration. The aggregate offering price for the Unregistered Shares was USD $230.51.
(d) Exemption from registration claimed. The offering of the Unregistered Shares was conducted pursuant to Regulation S under the Securities Act of 1933, as amended.
(e) Terms of conversion or exercise. Not applicable.
(f) Use of proceeds. The Company intends to use the $230.51 for general corporate purposes.
Issuer Purchases of Equity Securities
In May 2022, the Board of Directors authorized an equity repurchase plan for $8 million. The timing of any share repurchases under the repurchase authorization is dependent upon several factors, including market price of the Company's securities, the Company’s cash on hand, cash flows from operations, general market conditions, the Company's blackout periods, and other considerations. This program has no set termination date and may be
suspended or discontinued by the Company’s Board of Directors at any time. The Company purchased the following shares of its Class A common stock during the three months ended June 30, 2022.
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Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs [2] |
April 2022 | — | | $ | — | | — | | |
May 2022 | 301,708 | | 3.3140 | | 301,708 | | |
June 2022 | 90,375 | | 3.3205 | | 90,375 | | |
Total | 392,083 | | | 392,083 | | $ | 6,700,000 | |
[1] The stock repurchase program was publicly announced on May 10, 2022.
[2] The Company was authorized to repurchase up to $8.0 million of its outstanding shares of Class A common stock.
[3] The stock repurchase program does not have an expiration date.
[4] No stock repurchase program has expired during the three months ended June 30, 2022.
[5] There is no stock repurchase program that the Company has determined to terminate prior to expiration, or under which the Company does not intend to make further purchases.None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS
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Exhibit Number | | The following exhibits are filed herewith: |
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101* | | Inline XBRL Document Set for the condensed consolidated financial statements and accompanying notes in Part I, Item 1, Financial Statements of this Quarterly Report on Form 10-Q* |
104* | | Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set* |
* Filed herewith.
† Indicates management contract or compensatory plan or arrangement.
June 30, 2022March 31, 2023 | 10-Q 5362
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/ Gerald W. Shields |
| | | Gerald W. Shields |
| | | Chief Executive Officer & President |
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| | By: | /s/ Jeffery P. Conklin |
| | | Jeffery P. Conklin |
| | | Vice President, Chief Financial Officer, Chief Investment Officer & Treasurer |
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Date: | August 4, 2022May 8, 2023 | | |
June 30, 2022March 31, 2023 | 10-Q 5463