10-Q: Citizens Inc. Q3 Earnings Show Mixed Results Amid Investment Losses

Citizens, Inc. reported a mixed third quarter, with increased revenues and net investment income, but a decline in year-to-date net income driven by investment losses and higher matured endowment payouts.

Summary

• Net income before federal income tax for Q3 2025 increased to $4.5 million from $3.0 million in Q3 2024, primarily due to a $1.7 million increase in net investment income and a $1.0 million increase in other income.
• Year-to-date net income before federal income tax decreased to $9.6 million in 2025 from $11.3 million in 2024, mainly due to a $3.3 million decrease in investment related gains and losses and a $3.8 million increase in insurance benefits paid.
• Total assets stood at $1.7 billion as of September 30, 2025, with total direct insurance in force at $5.4 billion.
• Total investments were $1.4 billion, with fixed maturity securities comprising 89% of the portfolio.
• Diluted earnings per share of Class A common stock for the nine months ended September 30, 2025, was $0.14, down from $0.22 in the prior year period.
• Direct first-year premiums increased by 8% in Q3 2025 and 23% year-to-date, driven by new product sales and an increased number of producing agents in the Life Insurance segment.
• Matured endowment benefits significantly increased to $21.7 million in Q3 2025 from $12.6 million in Q3 2024, and to $57.6 million year-to-date from $34.5 million in 2024, as many endowment policies reached contractual maturity.
• The company recorded investment related losses of $1.3 million in Q3 2025 and $1.7 million year-to-date, primarily due to a non-cash write-down of a BlackRock ESG investment.
• Gross unrealized losses on available-for-sale fixed maturity securities decreased to $150.6 million as of September 30, 2025, from $185.7 million at December 31, 2024, reflecting a decrease in average market interest rates.
• The Home Service Insurance segment saw income before federal income tax increase to $3.0 million in Q3 2025 from a loss of $0.1 million in Q3 2024, benefiting from investment gains and favorable actuarial assumption changes.

Sentiment

Score: 5

Explanation: The company exhibits mixed performance with revenue growth and strategic initiatives, but significant declines in net income and EPS year-to-date due to investment losses and increased matured endowment payouts. While management is addressing challenges, the financial results indicate a neutral to slightly negative sentiment, balanced by a strong capital position and proactive measures.

Positives

• Q3 2025 net income before federal income tax increased to $4.5 million from $3.0 million in Q3 2024.
• Net investment income increased by $1.7 million in Q3 2025 and $1.3 million year-to-date, partly due to a one-time $1.7 million dividend from a limited partnership investment and new investment strategies.
• Direct first-year premiums grew by 8% in Q3 2025 and 23% year-to-date, indicating strong new sales, particularly in the CICA Domestic final expense business.
• The Home Service Insurance segment's income before federal income tax significantly improved to $3.0 million in Q3 2025 from a loss of $0.1 million in Q3 2024, driven by investment gains and favorable actuarial assumption changes.
• Death claim benefits decreased in the Life Insurance segment due to lower volume and the coinsurance agreement with RGA.
• The company maintains a strong capital position with no debt and all domestic insurance subsidiaries exceeding minimum capital requirements, including CICA Domestic's RBC above 350%.
• Gross unrealized losses on available-for-sale fixed maturity securities decreased by $35.1 million from December 31, 2024, to September 30, 2025, due to a decrease in average market interest rates.

Negatives

• Year-to-date net income before federal income tax decreased to $9.6 million in 2025 from $11.3 million in 2024.
• Net income for Q3 2025 was $2.417 million, a decrease from $2.790 million in Q3 2024.
• Diluted earnings per share of Class A common stock for the nine months ended September 30, 2025, decreased to $0.14 from $0.22 in the prior year period.
• Investment related gains and losses resulted in a net loss of $1.3 million in Q3 2025 and $1.7 million year-to-date, primarily due to a non-cash write-down of a BlackRock ESG investment.
• Insurance benefits paid or provided increased by $3.8 million year-to-date, largely due to increased matured endowments in the international business.
• The Life Insurance segment's income before federal income tax decreased by $0.9 million in Q3 2025 and $5.8 million year-to-date.
• Sales in Taiwan are declining due to succession difficulties in a primary distribution agency, regulatory challenges, and geopolitical shifts.
• The company faces headwinds in Venezuela affecting premium revenues due to the strength of the US dollar and difficulties in obtaining dollars.
• The Home Service Insurance segment's premiums slightly declined, attributed to external economic pressures like inflation impacting lower-income customers.

Risks

• Policyholder election behavior for matured endowments is unknown; if too many policyholders elect lump sum distributions, the company could face liquidity risk, potentially requiring the sale of investments at inopportune times.
• Profitability could be impacted if policyholders leave money on deposit with the company at guaranteed rates higher than market rates earned on investments.
• Higher than expected early policyholder surrenders, influenced by factors like increasing interest rates, post-pandemic beliefs, and inflationary pressures, could negatively impact cash flow.
• Rapid growth in CICA Domestic's first-year sales creates a significant increase in advance commission payments, posing a liquidity strain on capital.
• The ongoing trade secret lawsuit could negatively impact cash flow if the company does not succeed in its appeal.
• Regulatory restrictions on insurance subsidiaries' ability to pay dividends or transfer cash to the holding company could limit parent company liquidity.
• Deterioration and/or volatility in worldwide debt or equity markets could materially impact the valuation of investments and consolidated financial statements.

Future Outlook

The company anticipates a continued trend of product mix shifting towards newer whole life products, replacing maturing endowment products. Matured endowment benefits are expected to remain elevated, but at slightly lower levels, over the next few years after the highest level of maturities in 2025. Management is closely monitoring policyholder behavior patterns regarding matured endowments and is investigating options to reduce liquidity risk associated with advance commission payments for rapidly growing domestic sales. The company is also evaluating the impact of ASU 2024-03 on future financial statement disclosures.

Management Comments

• We expect this trend [product mix towards newer whole life products] to continue due to the anticipated volumes of endowment maturities being replaced by higher volumes of whole life products.
• We have begun investing in investment grade private placement fixed income securities and structured notes where we expect higher returns; this investment strategy led to slightly higher net investment income in the three and nine month periods.
• Many of our endowment policies are reaching their contractual maturity dates and thus matured endowment benefits increased as expected as many of our endowment policies reach their contractual maturity dates. We expect continued year-over-year increases in matured endowment benefits throughout the remainder of 2025, then expect the matured endowment benefits to remain at elevated, but slightly lower levels over the next few years, as more of these contracts expire.
• In the third quarter of 2025, this review results in favorable changes to mortality, lapse, and accrual assumptions in our Home Service segment and in CICA Domestic, consistent with emerging trends in Company experience. Conversely, this review resulted in additional reserves in our international business from better than expected retention of our endowment products.
• We believe growth in this segment [Home Service Insurance] is being impacted by inflation on the cost of living, which has affected new sales since the customer demographic is primarily lower-income individuals.
• Sales in Taiwan have been declining recently due to succession related difficulties within our primary distribution agency in Taiwan, regulatory challenges and geopolitical shift. We are facing some headwinds in Venezuela that may affect premiums revenues, due to the strength of the US dollar compared to the local currency and their difficulties to obtain dollars.
• We currently anticipate that our available operating cash flow and capital resources will be adequate to meet our needs for funds, but we are closely monitoring our policyholder behavior patterns, and in 2024, introduced a new product designed to allow policyholders with maturing endowments to purchase a new life insurance policy.
• We may also seek other options, such as loans at the holding company level (from the Credit Facility or otherwise) that would allow us to reduce the liquidity risk should CICA Domestic's required commission payments exceed current resources.

Industry Context

The company's performance reflects broader industry trends, including the impact of rising interest rates on investment valuations and policyholder behavior (e.g., seeking higher returns elsewhere, leading to surrenders). Inflationary pressures are noted to affect sales in the Home Service segment, which targets lower-income markets. Geopolitical shifts and local economic conditions (e.g., Venezuela's currency strength) are impacting international premium revenues. The company's strategy to invest in private placement fixed income and structured notes indicates a proactive approach to enhance yields in a challenging investment landscape.

Legal Proceedings

• The company is subject to legal and regulatory actions, including an ongoing trade secret lawsuit where legal fees were awarded to certain defendants in Q2 2024. The company has not paid these fees and has appealed the judgment. No material developments occurred in Q3 2025.

Related Party Transactions

• The company has routine related party transactions, including management service agreements, a tax sharing agreement, and inter-company dividends and capital contributions. No changes related to these relationships occurred during the nine months ended September 30, 2025.

Stakeholder Impact

• Shareholders: Experience lower diluted EPS year-to-date, but adjusted book value per share increased. Investment losses and the ongoing legal proceeding could impact shareholder value.
• Policyholders: Benefit from matured endowment payouts and new product offerings, but face potential liquidity risks if lump sum distributions are high.
• Employees/Agents: Benefit from the equity compensation program and increased producing agents, but rapid sales growth could strain commission payments.
• Creditors: The company has no debt and an unused credit facility, indicating low immediate risk.
• Regulatory Authorities: The company's insurance subsidiaries continue to meet statutory capital requirements, maintaining regulatory compliance.

Next Steps

• Continue to monitor policyholder behavior patterns regarding matured endowments and the effectiveness of the new product introduced in 2024 to encourage policyholders to purchase new life insurance policies.
• Investigate various options to reduce regulatory capital and liquidity risk should CICA Domestic's required commission payments for rapid first-year sales exceed current resources.
• Evaluate the impact of adopting ASU 2024-03, 'Income Statement Reporting Comprehensive Income Expense Disaggregation Disclosures', on the notes to the consolidated financial statements.
• Continue the appeal process for the trade secret lawsuit judgment.

Key Dates

Recommendation

The company's Q3 2025 results present a mixed picture. While revenues and net investment income saw increases, the year-to-date net income and EPS declined significantly due to substantial investment losses from a BlackRock ESG write-down and higher matured endowment payouts. Management is actively implementing strategies, such as new product launches and reinsurance agreements, to mitigate these challenges and manage liquidity risks associated with high endowment maturities and rapid sales growth. The company maintains a strong capital position with no debt. However, the ongoing legal proceedings and external economic pressures (inflation, geopolitical shifts) create uncertainty. Given the proactive management response to headwinds, but the material impact on profitability, a 'hold' recommendation is appropriate for investors to observe the effectiveness of these strategies and the resolution of key risks.

Keywords

Life Insurance, Home Service Insurance, SEC Filing, 10-Q, Financial Results, Investment Income, Premiums, Matured Endowments, Actuarial Assumptions, Liquidity, Capital Resources, Risk-Based Capital, RBC, BlackRock ESG, Unrealized Losses, Reinsurance, Policyholder Liabilities, Earnings Per Share, Insurance Claims, Corporate Governance, SEC, Citizens Inc.