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Is Citizens Life Insurance A House Of Cards? Strong Sell

Oct. 13, 2014 12:13 PM ETCitizens, Inc. (CIA)NWLI16 Comments
The Pump Stopper profile picture
The Pump Stopper


  • Citizens Inc. is a low-quality life insurance company trading at sky-high valuations of 66X P/E and 4.5x Price/Tangible Book, yet faces multiple total wipeout risks.
  • CIA sells insurance overseas without a foreign presence with questionable legality - while a questionable "Stock Investment Plan" artificially generates temporary demand inflating CIA's stock.
  • When foreign insurance regulators wake up, there could be huge fines that could completely wipe CIA out - Brazil fined peer company NWLI $6 billion.
  • CIA has -75% to -88% downside just to trade at a similar valuation as superior peer company NWLI. Multiple additional risks create potential for -100% overnight loss and total wipeout.
  • The economies of CIA's largest end-markets in South America are imploding, creating serious macro headwinds for CIA.

Citizens Inc. (NYSE:CIA) is a life insurance company that trades at sky-high multiples of 66X P/E and 4.5x Price/Tangible Book, despite anemic low-single digit ROE and nominal growth prospects. I believe the stock is grossly inflated by artificial and temporary demand generated by the company using policyholder money to buy its own stock. Furthermore, the threat of regulation, devastating fines and an unraveling of its business all have the potential to completely wipe out CIA stock overnight. Even if CIA somehow manages to avoid all the ways it could be wiped out, when it re-rates to a rational valuation, CIA has -88% downside from valuation alone.

This is how I see CIA's scheme, and I seriously question its legality:

  1. CIA sells life insurance in developing countries where it has no legal presence, using intermediaries where they "do not determine whether our independent consultants are required to be licensed to sell insurance".
  2. CIA then lends some of the cash from policy revenue BACK to the policyholder under its "Stock Investment Plan".
  3. The policyholder (in part through a Panamanian trust) then buys CIA shares in the open market!

(chart by me)

How big is this scheme in proportion to CIA's total business?

  • I estimate 95% of CIA's life insurance is sold to non-US customers.
  • CIA states it has no international offices or licenses, and does not determine whether independent consultants are licensed.
  • I estimate over 60% of the shares outstanding are now owned by these policyholders (The 85 y/o CEO controls the company with super-voting "B" shares).
  • A shocking 75% of CIA's tangible common equity[1] is the $52mm of policy loans
  • In 2013, 52% of CIA's pre-tax earnings came solely from interest on these policy loans.

Anything where common stock is used as collateral for a loan reminds of Enron's

This article was written by

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Comments (15)


Im felipe from Colombia, I have an insurance with Citizen, Which I aquired 11 years ago, I already payed 60.000 USD, right now COP vs USD change about 60% in the last months, I read your article and I dont know if its a good Idea to finish and get some of the money from the insurance, about 70% because I have to pay a penalty, but anyway the 60% increase in the USD vs COP (colombian peso) will help me to don´t lose money, what do you think? take into account that in 3 months i have to pay the annual fee which is 5.000 USD, and I earn in COP, so the fee is 60% more expensive than last year
Hi Felipe,

Did you liquidate or still keep your policy with Citizen?
Dear PS,

Allow me to put your drama into perspective. While you have some points in your analysis, statements on regulatory threats and South American countries might have another interpretation, to say the least.

Devastating fines / regulation by Venezuela: Highly unlikely. It is a country sinking into Cuba-style Communism with a record of poor to no enforcement of its many laws.

Venezuela is an oil-rich nation hostage to a rogue government. That is why policies like those offered by CIA are so attractive to those who can still afford it there. The official rate of VEB 11 per USD is way stronger than the black market rate of VEB 174/USD -the exchange rate you mention is only available form imports of medicines and food, mostly by government agencies.

Therefore, a person standing to receive a monthly rent in US of a few hundred to a few thousand from a CIA policy (marketed as a retirement plan) could live as lavishly as many of the corrupt government officials.

CIA has been selling policies in Venezuela for almost 50 years -I understand- and so have many other US and European companies. ALL without an insurance company license or licensed dealers. NWLI, State Trust, a bunch of insurance companies from Florida and Puerto Rico and a host of Isle-of-Man and channel island companies come to mind.

Never heard of any of them being subject of even the mildest administrative complaint. Never heard of any unlicensed dealer being prosecuted. I met several of them when they came to sell me their products while I lived in Caracas (Venezuela).

If anything, the economic woes of Venezuela could hinder new policy sales (less than 15% of all company revenue) and renewals (85% of revenue), but how much of this business does come from Venezuela nowadays?

As for South America being "chaotic" as another commentator said, well that is why some markets are called emerging, and everything from sales to profits and risks are higher there than in mature, slow-growth markets like the USA, Europe and Japan. Emerging markets are "chaotic" by definition and when they cease to be so they become less of an opportunity investment-wise.

By the way, the riot pictures are from February 2014 (Venezuela) and April 2014 (Colombia). Things got much quieter after those incidents. Venezuelan riots were crushed by Venezuelan military with the help of Cuban and Middle-Eastern militia disguissed as Venezuelan military. In the end, over 30 people got killed and many were imprisoned while the World looked the other way. The economic "implosion" has more to do with plummeting oil prices.

In Colombia, President Santos got re-elected despite protests, mainly beceause of his success in negotiating peace with guerrilla leaders to end over five decades of conflict. Colombia has one of the most solid and fastest growing economies of South America as a result. Not precisely a country on the verge of collapse.

Brazil is the "B" of BRIC countries and despite its economic headwinds it still accounts for roughly 50% of Latin America's GDP (excluding Mexico). Businesspeople there have been used to invest their profits in US currency, away from local tax authorities, for as long as I remember, some of it into US-denominated retirement plans. So its doubtful that the ongoing downturn would make them change their minds, as it did not in the previous crises in the 70s, 80s or early 90s.

In a way, the "chaotic country" argument is like saying foreing investors should not put money into US securities because of the riots over the recent killings of African-American youngsters by White police officers in that country or into Thailand due to the frequent coups there, or in Italy and France due to their economic malaise, and so on.

Thus, the statements on South American countries seem biased due to a US-centric perspective.

Things are different everywhere. Riots do no equate to imploding economies. Insurance regulators in Venezuela have not and are unlikely to get tough on CIA or on any of the dozens other foreign insurance companies selling policies there (marketed as retirement plans, annuities, and so on), economic woes actually make such policies more attractive (as a protection of hard-earned wealth).

I give you a point for the rest: the Stock Plan, transparency issues, high P/E multiple, etc. Definitely, such issues should be further explored by relevant authorities and investors alike.

Kindest regards
NWLI is very different than Citizen's both in valuation and their business practice.

NWLI provides a real product to it's customers and has a very long track record. Obviously i wish they would not have the chairman's wife on the board and wish they paid out a bigger dividend.

we own NWLI for a few years sub 150. we expect in the next few years that book value will get to 450 bucks and the stock will be earnings 35-40 dollars a share per year. And if rates ever go up to the 3.50 range on the 10 year we could see 9% ROE and this trade back to .9x book value or 400 dollars (i am using end of 2015 numbers).
Ron Redfield profile picture

I am fairly certain that your comment above on NWLI is incorrect. "NWLI never paid any money to Brazil, all courts ruled that there was no jurisdiction for this complaint."

FYI here are my NWLI investment notes: http://1drv.ms/1wfLF0W
Edward J. Roche profile picture
They were unable to serve notice per existing law/past legal decisions from what I see.
Ed there's a lot of companies that sell below book. Unlike NWLI, however, those companies have actual earnings and don't put their wives on the board. If your so captured by book value, shouldn't you be diving headlong into Genworth Financial?
rentierparasite profile picture

Hi, PS --

Definitely some funky stuff going on here, but it seems like a tough short. They've been doing this for years, and have a built-in pipeline for equity sales above book, when and why should anything ever change?

excuse the company which is custodian of the shares is called computer share and is in canada
Ron Redfield profile picture
"NWLI never paid any money to Brazil, all courts ruled that there was no jurisdiction for this complaint."

Edward, IIRC, you were the catalyst for me to enter NWLI years back. Assuming you are FI. I am not familiar with your assessment above. Would you please link or discuss where that can be confirmed?

Edward J. Roche profile picture
NWLI never paid any money to Brazil, all courts ruled that there was no jurisdiction for this complaint. NWLI is currently a great bargain selling at 60% of book value. I have no opinion in CIA.

In general if you have a case, avoid the overly dramatic illustrations and wording that just hurts your credibility.

Edward J. Roche, President of Freedom Mountain Investments
The Pump Stopper profile picture
I have no opinion on NWLI as it is not the focus and I did point out that NWLI valuation is very low, which seems appropriate to me given the risks.

if you see something factually inaccurate in the rest of the article about CIA, I'd love to hear it.
ikarus profile picture
I, for one, think the dramatic illustrations make his reports at least 200% better.
Adam Gefvert, CFA profile picture
South America is very chaotic right now in multiple countries, Brazil, Venezuela, Argentina, etc.. I wouldn't be invested in an insurance company located down there.
Keubiko profile picture

Another good one PumpStopper.
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