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CIA > SEC Filings for CIA > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for CITIZENS INC

Form 10-Q for CITIZENS INC


6-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q are not statements of historical fact and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the "Act"), including, without limitation, statements specifically identified as forward-looking statements within this document. Many of these statements contain risk factors as well. In addition, certain statements in future filings by the Company with the Securities and Exchange Commission, in press releases, and in oral and written statements made by us or with the approval of the Company, which are not statements of historical fact, constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure, and other financial items, (ii) statements of our plans and objectives by our management or Board of Directors, including those relating to products or services, (iii) statements of future economic performance and (iv) statements of assumptions underlying such statements. Words such as "believes," "anticipates," "assumes," "estimates," "plans," "projects," "could," "expects," "intends," "targeted," "may," "will" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.

Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by the forward-looking statements. Factors that could cause the Company's future results to differ materially from expected results include, but are not limited to:

Changes in foreign and U.S. general economic, market, and political conditions, including the performance of financial markets and interest rates;

Changes in consumer behavior, which may affect the Company's ability to sell its products and retain business;

The timely development of and acceptance of new products of the Company and perceived overall value of these products and services by existing and potential customers;

Fluctuations in experience regarding current mortality, morbidity, persistency and interest rates relative to expected amounts used in pricing and actuarial valuation of the Company's products;

The performance of our investment portfolio, which may be adversely affected by changes in interest rates, adverse developments and ratings of issuers whose debt securities we may hold, and other adverse macroeconomic events;

Results of litigation we may be involved in;

Changes in assumptions related to deferred acquisition costs and the value of any businesses we may acquire;

Regulatory, accounting or tax changes that may affect the cost of, or the demand for, the Company's products or services;

Our concentration of business from persons residing in Latin America and the Pacific Rim;

Changes in tax laws;

Effects of acquisitions and restructuring, including possible difficulties in integrating and realizing the projected results of acquisitions;

Changes in statutory or U.S. GAAP accounting principles, policies or practices; and

Our success at managing risks involved in the foregoing;

The risk factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 under the heading "Part II. - Item 1A
- Risk Factors."

Such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.

We 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


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2012

releases, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the Securities and Exchange Commission. We are not including any of the information contained on our website as part of, or incorporating it by reference into, this Quarterly Report on Form 10-Q.

Overview

Citizens is an insurance holding company serving the life insurance needs of individuals in the United States since 1969 and internationally since 1975. Through our insurance subsidiaries, we pursue a strategy of offering traditional insurance products in niche markets where we believe we are able to achieve competitive advantages. As of September 30, 2012, we had approximately $1.2 billion of total assets and approximately $5.3 billion of insurance in force. Our core insurance operations include issuing and servicing:

U.S. Dollar-denominated ordinary whole life insurance and endowment policies predominantly to high net worth, high income foreign residents, principally in Latin America and the Pacific Rim through independent marketing consultants;

ordinary whole life insurance policies to middle income households concentrated in the Midwest and southern United States through independent marketing consultants; and

final expense and limited liability property policies to middle and lower income households in Louisiana, Arkansas and Mississippi through employee and independent agents in our home service distribution channel.

We were formed in 1969 by our Chairman, Harold E. Riley. Prior to our formation, Mr. Riley had many years of experience in the international and domestic life insurance business. Our Company has experienced significant growth through acquisitions in the domestic market and through market expansion in the international market. We seek to capitalize on the experience of our management team in marketing and operations as we strive to generate bottom line return using knowledge of our niche markets and our well-established distribution channels. We believe our underwriting processes, policy terms, pricing practices and proprietary administrative systems enable us to be competitive in our current markets, while protecting our shareholders and servicing our policyholders.

Current Financial Highlights

Financial highlights for the three and nine-month periods ended September 30, 2012 compared to the same period in 2011 were:

Insurance premiums rose 6.6% and 5.3% for the three and nine month period to $43.0 million and $123.6 million in 2012 from $40.3 million and $117.4 million in 2011, primarily from renewal premiums in our life insurance segment.

Net investment income increased 8.5% and 4.6%, respectively. The average yield on the consolidated portfolio remained relatively steady for the third consecutive quarter at an annualized rate of 3.74% down from 3.92% for full year 2011. For the nine month period, the increase in the invested assets due to premium revenue growth offset the decrease in yield.

Gains of $0.6 million were realized on the sale of previously impaired equity mutual funds during the third quarter of 2012 in the life segment.

Claims and surrenders expense increased 5.6% and 4.3% for the three and nine months ended 2012 as the home service segment was impacted by Hurricane Isaac which hit the Louisiana coast on August 29, 2012 and caused increased property claims. In addition, we experienced higher death claims expense in the current year compared to 2011 due to the release of incurred but unreported death claims liability in 2011 of $0.7 million. Excluding this prior year liability release, death claims were flat.

Changes in reserves resulted in liability increases due to the increased sales of endowment products that build up reserves at a faster pace than whole life longer term mortality based products. Additionally, the sustained low interest rate environment also results in a higher reserve development due to the lower interest yield assumptions in the current period compared to prior years.


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2012

Our Operating Segments

Our business is comprised of three operating business segments, as detailed below.

Life Insurance

Home Service Insurance

Other Non-Insurance Enterprises

Our insurance operations are the primary focus of the Company, as those operations generate the majority of our income. See the discussion under Segment Operations for detailed analysis. The amount of insurance, number of policies, and average face amounts of ordinary life policies issued during the periods indicated are shown below.

                                                      Nine Months Ended September 30,
                                         2012                                                2011
                      Amount of       Number of     Average Policy        Amount of       Number of     Average Policy
                      Insurance       Policies        Face Amount         Insurance       Policies        Face Amount
                       Issued          Issued           Issued             Issued          Issued           Issued
Life               $ 243,529,971         4,234     $        57,518     $ 265,605,986         4,181     $        63,527
Home Service         151,309,545        21,895               6,911       152,408,350        21,285               7,160

Note: All discussions below compare or state results for the three and nine-month periods ended September 30, 2012 compared to the three and nine-month periods ended September 30, 2011.

Consolidated Results of Operations

A discussion of consolidated results is presented below, followed by a discussion of segment operations and financial results by segment.


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                  CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
                               September 30, 2012


Revenues

Revenues are generated primarily by insurance premiums and investment income on
invested assets.
                                      Three Months Ended              Nine Months Ended
                                         September 30,                  September 30,
                                      2012            2011           2012           2011
                                                       (In thousands)
Revenues:
Premiums:
Life insurance                   $     41,257         38,639        118,608        112,481
Accident and health insurance             414            383          1,244          1,151
Property insurance                      1,281          1,277          3,792          3,781
Net investment income                   8,114          7,478         23,303         22,281
Realized investment gains, net            763             35          1,107             41
Decrease in fair value of
warrants                                  241            239            314          1,454
Other income                              112            282            321            509
Total revenues                         52,182         48,333        148,689        141,698
Exclude fair value adjustments           (241 )         (239 )         (314 )       (1,454 )
Total revenues excluding fair
value adjustments                $     51,941         48,094        148,375        140,244

Premium Income. Premium income derived from life, accident and health, and property insurance sales increased 6.6% and 5.3% in 2012 for the three and nine months compared to the same periods ending September 30, 2011, primarily resulting from the life segment as discussed under Segment Operations.

Net investment income performance is summarized as follows.

                                              September 30,    December 31,    September 30,
                                                  2012             2011             2011
                                                       (In thousands, except for %)
Net investment income, annualized            $      31,071          30,099           29,708
Average invested assets, at amortized cost         829,936         767,079          744,234
Annualized yield on average invested assets           3.74 %          3.92 %           3.99 %

Yields on invested assets vary between segment operations due to different portfolio mixes in the segments. The life segment typically invests more in U.S. government securities than the home service segment which has a larger percentage of holdings in the corporate and municipal sectors. The weighted effective yield for new money invested by the Company for the first nine months of 2012 was approximately 3.1% compared to new money yields of 3.4% for the same nine months ended in 2011.


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2012

Investment income from debt securities accounted for approximately 82.7% and 82.4% of total investment income for the three and nine months ended September 30, 2012. We have reduced bond holdings of U.S. Government-sponsored enterprises, such as Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC"), which comprised 18.7% of the total fixed maturity portfolio based on amortized cost at September 30, 2012 compared to 42.7% at December 31, 2011 due to the low yields in the current environment. We have increased our investment purchases of corporate and municipal securities over the past several quarters, focusing on utility service sectors in corporate securities. State and political subdivision holdings at September 30, 2012 increased to 46.9% and corporate holdings totaled 32.2% based upon amortized cost compared to 29.1% and 25.6% at December 31, 2011, respectively. In addition, we have invested in short duration bond mutual funds as these securities offer a competitive yield.

                            Three Months Ended        Nine Months Ended
                               September 30,            September 30,
                              2012         2011        2012        2011
                                          (In thousands)
Gross investment income:
Fixed maturity securities $    7,048      6,740      20,247      19,990
Equity securities                487        311       1,496         886
Mortgage loans                    31         22          76          73
Policy loans                     841        756       2,454       2,175
Long-term investments             96         61         217         168
Other investment income           19         23          76         106
Total investment income        8,522      7,913      24,566      23,398
Investment expenses             (408 )     (435 )    (1,263 )    (1,117 )
Net investment income     $    8,114      7,478      23,303      22,281

The average consolidated invested asset portfolio has increased approximately 8.2% with primarily investments in the fixed maturity securities portfolio accounting for the most significant increase in the investment income, despite the decline in overall portfolio yield. The purchase of bond mutual funds has resulted in increased dividend income for the three and nine months ended in the current year compared to the same periods a year ago. In addition, the increase in policy loans, which represents policyholders utilizing their accumulated policy cash value, contributed to the increase to investment income.

Change in Fair Value of Warrants. The Company adjusts the liability related to its outstanding warrants to purchase shares of Class A common stock at each reporting date to reflect the current fair value of the warrants computed based on the Class A common stock value calculated using the Black-Scholes option pricing model. As the Class A common stock value increases and decreases, the change in the warrant liability also increases and decreases in inverse order. The adjustment to fair value is recorded as an increase or decrease in the fair value of the warrants in the consolidated statement of operations. The remaining warrants were the subject of a cashless exercise transaction whereby the Company issued 12,487 Class A shares on October 6, 2012. See Note 8 - Convertible Preferred Stock: Warrants of the accompanying financial statements for further discussion.


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                  CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
                               September 30, 2012


Benefits and Expenses
                                      Three Months Ended            Nine Months Ended
                                         September 30,                September 30,
                                      2012           2011          2012          2011
                                                      (In thousands)
Benefits and expenses:
Insurance benefits paid or
provided:
Claims and surrenders             $    15,627        14,803        46,490        44,587
Increase in future policy benefit
reserves                               16,901        14,365        47,793        39,683
Policyholders' dividends                2,600         2,169         6,755         5,751
Total insurance benefits paid or
provided                               35,128        31,337       101,038        90,021
Commissions                             9,769         9,224        28,164        28,226
Other general expenses                  6,055         6,642        19,013        19,743
Capitalization of deferred policy
acquisition costs                      (7,547 )      (6,531 )     (20,530 )     (20,536 )
Amortization of deferred policy
acquisition costs                       4,134         4,171        12,693        12,480
Amortization of cost of customer
relationships  acquired                   598           708         1,834         2,113
Total benefits and expenses       $    48,137        45,551       142,212       132,047

Claims and Surrenders. A detail of claims and surrender benefits is provided below.

                                 Three Months Ended          Nine Months Ended
                                   September 30,               September 30,
                                   2012          2011         2012         2011
                                                (In thousands)
Death claims                 $     5,053         4,917      16,530        15,531
Surrender benefits                 5,068         5,166      14,735        14,915
Endowments                         3,812         3,576      11,445        10,595
Property claims                    1,017           586       1,880         1,601
Accident and health benefits          91            79         229           334
Other policy benefits                586           479       1,671         1,611
Total claims and surrenders  $    15,627        14,803      46,490        44,587

Increase in Future Policy Benefit Reserves. The increase in future policy benefit reserves for the three and nine months ended September 30, 2012, was influenced by the current low interest rate environment necessitating higher reserves for policies issued in the last few years due to lower long term yield projections compared to prior assumptions, resulting in higher reserve build up compared to prior issue years. In addition, we continue to experience growth in new sales of endowment products, which require higher initial reserve levels, than whole life products.

Policyholder Dividends. The majority of our international policies are participating, and the dividends are factored into the premium rates charged. As policy provisioned dividend rates generally increase each year that a policy is in force, dividend expense is expected to increase as this block of insurance becomes more seasoned.

Commissions. Commission expense is directly related to new and renewal insurance premium fluctuations and production levels by agents and associates. Commission expense for the three months ended September 30, 2012 increased due to higher first year premiums in the life segment compared to 2011 premium levels.
Commission expense for the nine months ended in 2012 decreased


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2012

slightly from the prior year primarily due to a reduction in expense of $0.4 million related to commissions payable that were held pending validation that are no longer considered payable. When the payable was reduced, this resulted in a reduction in commission expense.

Capitalized and Amortized Deferred Policy Acquisition Costs. Costs capitalized under current accounting guidance include certain commissions, policy issuance costs, and underwriting and agency expenses that relate to successful sales efforts for insurance contracts. The increase for the three months ended September 30, 2012 compared to the same period in 2011 is the result of an increase in first year premium production in the current year which increased capitalized amounts. Though premium revenue increased for the nine months ended in 2012 , it was primarily related to an increase in renewal premiums compared to the prior year. Commissions paid on renewal premiums are significantly lower than that paid on first year business and therefore result in muting the impact of the third quarter sales to leave the nine months ended in 2012 at comparable levels with 2011 year to date amounts.

Amortization for the nine months ended September 30, 2012, include certain adjustments to refine estimates that increased amortization by $0.7 million which affects current year comparability. Amortization of deferred policy acquisition costs is impacted by persistency and may fluctuate from year to year.

Federal Income Tax. The effective tax rates for the three and nine-month periods ended September 30, 2012, were 28.0% and 25.5% versus 26.2% and 30.7% for the same periods in 2011. Differences between our effective tax rate and the statutory tax rate result from income and expense items that are treated differently for financial reporting and tax purposes. See Note 9 - Income Taxes in the consolidated financial statements for further discussion.

Segment Operations

The Company has three reportable segments: Life Insurance, Home Service
Insurance and Other Non-Insurance Enterprises. These segments are reported in
accordance with U.S. GAAP. The Company evaluates profit and loss performance of
its segments based on net income or loss before income taxes.
                                         Income (Loss) Before Income Taxes
                                     Three Months Ended          Nine Months Ended
                                       September 30,               September 30,
                                       2012           2011        2012         2011
                                                   (In thousands)
Life Insurance                  $    2,355           1,729        1,492       3,920
Home Service Insurance               1,566           1,207        5,804       5,576
Other Non-Insurance Enterprises        124            (154 )       (819 )       155
Total                           $    4,045           2,782        6,477       9,651

Life Insurance

Our Life Insurance segment issues ordinary whole life insurance domestically and U.S. Dollar-denominated ordinary whole-life policies to foreign residents. These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured. Additionally, the Company issues endowment contracts, which are principally accumulation contracts that incorporate an element of life insurance protection. For the majority of our business, we retain only the first $100,000 of risk on any one life. We operate this segment through CICA and CNLIC insurance subsidiaries.


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2012

International Sales

We focus our sales of U.S. Dollar-denominated ordinary whole life insurance and endowment policies to high net worth, high income residents in Latin America and the Pacific Rim. We have successfully participated in the foreign marketplace since 1975, and we continue to seek opportunities for expansion of our foreign operations. We believe positive attributes of our international insurance business include:

larger face amount policies typically issued when compared to our U.S. operations, which results in lower underwriting and administrative costs per unit of coverage;

premiums typically paid annually rather than monthly or quarterly, which reduces our administrative expenses, accelerates cash flow and results in lower policy lapse rates than premiums with more frequently scheduled payments; and

comparable persistency levels and mortality rates as experienced with U.S. policies.

International Products

We offer several ordinary whole life insurance and endowment products designed to meet the needs of our non-U.S. policyowners. These policies have been structured to provide:

U.S. Dollar-denominated cash values that accumulate, beginning in the first policy year, to a policyholder during his or her lifetime;

premium rates that are competitive with or better than most foreign local companies;

a hedge against local currency inflation;

protection against devaluation of foreign currency;

capital investment in the United States' more secure economic environment; and

lifetime income guarantees for an insured or for surviving beneficiaries.

Our international products have living benefit features. Every policy contains guaranteed cash values and most are participating (i.e., provides for cash dividends as apportioned by the board of directors). Once a policyowner pays the annual premium and the policy is issued, we immediately pay the owner a cash dividend as well as an annual guaranteed endowment, if elected. The policyowner has several options with regard to the dividend and annual guaranteed endowments, including the right to assign policy values to our stock investment plan, registered under the Securities Act of 1933 (the "Securities Act") and administered in the United States by our unaffiliated transfer agent.

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