CIA: An Egregious Stock Scheme

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Para leer el informe en espanol haga clic aquí (Citizens y CICA Life: Una Estratagia de Acciones Atroz)

Research Summary

Citizens Inc. (NYSE:CIA) uses a network of unregulated brokers to sell complex life insurance policies to foreign retail investors and retirees. The policies are sold through promises of outsized “guaranteed” returns backed by U.S. Treasury bonds. However, the money is not invested in U.S. Treasures and the policies appear designed to prop up Citizen’s stock price.

Because most of the returns to existing policyholders are driven by funds contributed by new policyholders, Citizens displays characteristics that appear analogous to a Ponzi scheme. The performance of CIA shares drive the returns to existing policyholders, but these purported returns hinge directly on Citizen’s ability to prop up its stock price with a constant flow of new money from policyholders.

The money is funneled from policyholders into Citizen’s stock through a feature in which a portion of premiums are paid back as benefits and “dividends”. These funds are routed to Citizen’s transfer agent who facilitates continuous purchases of CIA shares in the open market.

The dividend feature is structured so that most of the projected policy value hinges on the performance of CIA stock. But the inherent risks are often concealed from retail investors who are falsely told that most of their money is backed by U.S. Treasury Bonds inside “savings accounts” that will secure their retirement or children’s education.

Citizen’s founder has publicly declared that “the market has no ceiling” as brokers prey on unsophisticated families through falsehoods. Retail investors are enticed with misleading return projections. An exaggerated sense of legal standing is projected through “licenses” awarded to brokers by Citizens itself, while sales presentations use the SEC’s logo as a marketing device.

With foreign policyholders now owning over an estimated 70% of the float, Citizens stock has been inflated to absurd valuation levels. We calculate that shares (which produce GAAP losses) trade at 7.5x adjusted tangible book value, making Citizens the most mispriced insurance stock we have ever seen.

Citizen’s inflated stock price has enriched insiders while compensating brokers through commissions partially paid through interests in offshore trusts specifically created to buy CIA stock.

Citizen’s ongoing viability is directly dependent on keeping its stock price propped up.  But since Citizen’s stock price has no economic basis, the fundamental problem is that the purported returns are illusory.

To maintain the mirage, Citizens depends on a constant influx of new money. However, the financials show that many existing policyholders are now asking to be cashed out. Simultaneously, plummeting policy sales and broker defections have made it increasingly difficult for Citizens to entice new investors.

This dynamic is exactly why Ponzi Schemes collapse and, similarly, is why Citizen’s business model is doomed.

The cracks in Citizen’s façade are starting to appear. The recent surge in early policyholder withdrawals has eroded Citizen’s tangible capital and liquidity. As policyholders begin to head for the exits, loans Citizens makes to finance policyholder premium payments have ballooned to the point where the balance exceeds our calculations of tangible equity. Meanwhile, operating losses, increased liabilities, and an assortment of festering balance sheet issues cause us to question the company’s true solvency.

Longtime Executives and Directors have departed as the company has descended into turmoil.  Revelations of anti-money laundering deficiencies and a Panama Papers exposure create concern that CIA shares are potentially being used as a currency to launder money through Citizen’s insurance policies. Amidst government investigations, delinquent SEC filings and adverse audit opinions of internal controls have given way to admissions of actuarial incompetence and systemic tax compliance problems.

Our research demonstrates that Citizens appears to have moved towards the brink of collapse. Each day that it persists, new victims are being created, with unsuspecting retail investors and retirees ultimately paying the price.


Citizens Inc. (NYSE:CIA) is an Austin, Texas headquartered life insurance company that was founded in 1969 by longtime CEO and controlling shareholder, Harold Riley.

Citizens has presented itself to investors as a high quality “niche” insurer built on the stated principle that “no one will ever come into contact with Citizens without his or her life having been improved.” The company has harnessed this message to grow from less than $100 million in assets in the early 1990s to over $1.5 Billion today.

Citizens has cultivated extremely close ties with Mr. Riley’s alma-mater, Baylor University. Riley is a major Baylor donor and has pledged his controlling Class B shares to his Foundation, of which Baylor is a primary beneficiar (explained on Page 18 of the 10-K). Citizens “Independent” Directors are primarily composed of current and former Baylor officials, including Terry Maness, the current Dean of Baylor’s Business School.

After decades at the helm of Citizens, in June, 2015 the nearly 90 year old Harold Riley retired to become Chairman Emeritus. Power had been increasingly transferred to Riley’s sons, longtime executives Rick Riley (who became Chairman & CEO), Randall Riley (International Marketing Director), and Ray Riley (Domestic Marketing Executive). But soon after their father’s retirement, all three departed as the company descended into turmoil.

Source: Citizen’s SEC Filings.

Within the past two years, Citizens has indefinitely disbanded its regular investor conference call, made delinquent 10K filings, received adverse audit opinions of internal controls, and quietly disclosed being subject to government investigations into a myriad number of issues.

Company filings admit to serious actuarial issues, systemic IRS problems, and anti-money laundering deficiencies.

A newly hired CFO lasted less than three weeks on the job, and the longtime Chairman of the Audit Committee resigned. With a clear leadership vacuum, the board committed to an executive search which, tellingly, selected Citizen’s longtime lawyer, Geoffrey Kolander, as its new CEO.

Our Research Process

We conducted exhaustive due diligence into Citizen’s international activities, business model, and financial position.  We pulled statutory and legal filings and performed a forensic analysis of Citizen’s SEC filings and financials

We called current and former brokers who operate in Latin America to discuss their experiences with Citizens. This resulted in substantive Spanish language dialogue (translated when referenced in this report) with seven current or former brokers with varying levels of seniority. Where possible, we attempted to corroborate broker assertions with documentation.

In addition to policy documents, we obtained hundreds of pages of foreign language marketing materials that were primarily posted on public websites to solicit clients.  We note that although many of these materials contain Citizen’s logos, they appear to have been created by the brokers. Finally, we obtained a lengthy new broker training presentation (that was archived by a broker).

Citizens “Insurance” Policies Funnel Money From Foreign Retail Investors into CIA Stock

Citizens relies on a network of 3,000 brokers (who are classified as independent contractors) to sell whole life insurance policies primarily through a Colorado domiciled subsidiary named CICA Life (that we will refer to interchangeably with Citizens).  The policies accrue value as premiums are paid in and are largely sold to middle class and wealthy foreign citizens hailing from Venezuela (22% of 2015 premiums), Colombia (19%), Taiwan (13%), Ecuador (11%), and Argentina (7%)

By depicting itself as a beacon of U.S. financial strength, Citizens targets families living amidst the kind of economic instability that exists in these developing countries. CICA brokers are invited to train at Citizen’s Texas “Academy”, where company officials host sales seminars that teach the brokers how to target the fears of foreign retail investors by creating emotional urgency to close sales (see Appendix B).

Brokers sell the policies as safe U.S. dollar denominated “savings accounts” that are largely invested in U.S. treasuries and well suited for families looking to save for a secure retirement or children’s education fund.

In reality, the policies appear designed to use money from retail investors to prop up Citizen’s stock price through open market purchases. 

Citizens offers the policies through CICA Life’s “Fortune Builder” label that touts the “large cash values” that the policies will purportedly build on a tax-advantaged basis (See Appendix B). Numerous marketing presentations and brokers claim the funds are invested on a so-called “90-10” formula between treasury bonds and CIA shares.  As one current broker explained:

“These are savings plans guaranteed by an insurance plan.  Citizens invests its clients’ savings by using a 90-10 formula, where 90% of the funds are invested in U.S. Treasuries and 10% are invested in Citizens stock”

Our research indicates that the policies are sold with promises of “guaranteed returns” of typically 4.5% annually (but we have seen promises range from 3%-7%) in addition to upside returns from Citizens stock. For a middle class Colombian or Venezuelan family, the ability to save this kind of money risk-free (especially in US dollars) is particularly enticing.

But the projected returns are premised on a fundamental hoax. The money is not invested in U.S. Treasuries and most of the returns are driven by the policyholder’s investment in CIA’s common stock.

Potential clients are shown return projections that claim to illustrate how the policies will accrue value (see page 26 of the training presentation). For example, the broker projection below dangles a $1.2 million projected value (70 years into the future) for a $70k CICA Life insurance policy.

We calculate that this equates to a 5% IRR that is driven almost entirely from the projected reinvestment of policy benefits and dividends into CIA common stock (column 4). This estimate hinges on the broker’s projection that CIA stock will appreciate by 12% annually (which would require CIA shares to grow to $25,090 per share!).

Source: CICA Broker Marketing Materials

Importantly, the policies appear to produce little, if any, actual guaranteed returns. After 20 years, the guaranteed cash value of the policy shown above is only $70k, which is merely equal to the cumulative premiums that have been paid.  As a result, it seems probable that many retail investors mistakenly believe that the stock-driven returns have been guaranteed (as at least one marketing website explicitly states).

Unsuspecting families and retirees seem to accept these projections at face value. As one former broker explained:

Most people here in Caracas have zero knowledge of finance or the stock market. No paperwork is shared with the client about his prospective returns. The agent shows him/her the calculations on the spreadsheet and that’s all.”

Money from clients is funneled into CIA stock through a feature in which Citizens pays a portion of premiums back to policyholders as annual benefits and “dividends” that, in turn, are sent to Citizens transfer agent to make open market purchases of Citizen’s stock on behalf of policyholders.

For years, policyholder dividends were routed to Panamanian and British Virgin Islands trusts administered by a trustee, Galindo, Arias & Lopezthat is specifically named in the Panama Papers. This structure was subsequently changed so that dividends are now routed to the company’s transfer agent, Computershare, which then buys shares on behalf of the policyholder in the open market under the “Stock Investment Plan.”

Brokers Prey On Retail Investors With Falsehoods

Citizen’s SEC filings, in our interpretation, downplay the company’s involvement in the sales process by emphasizing the independence of the brokers (see page 3 of the 10-K). Yet Citizens hosts broker training sessions at its Texas facility and Ray Riley claims in his Linkedin profile to have “recruited, trained, and managed a sales force of more than 3,500 associates” during his tenure as Chief Marketing Officer.

We obtained training materials that show how CICA brokers are organized into an undisclosed multi-level marketing scheme that is based on recruiting and shared commissions (See Appendix C).  Citizens pays brokers commissions of up to 110% of the first year premiums they generate in addition to attractive benefits such as luxurious company-sponsored cruises.

5% of broker commissions are automatically paid through assigned interests in opaque offshore trusts specifically set up to buy CIA shares in the open market.

With incentives to pump CIA’s stock, we uncovered evidence that the brokers engage in extremely deceptive sales tactics based on falsehoods.

Falsehood #1: “The Market Has No Ceiling”

In a Youtube video, Harold Riley briefly explained the logic behind the “stock investment plan”:



We have these trusts that invest back in what? Into Citizens’ stock. Are they gambling? No. They are simply taking an opportunity to get a market gain because the market has no ceiling.

-Harold Riley. 6:09 in Youtube Video.


With the founder declaring that “the market has no ceiling”, we learned how projections of CIA’s future share price are widely manipulated to project illusory returns. One former broker explained that:

Agents arbitrarily put returns on Citizens stock anywhere between 7% and 14% [annually]. The strategy to invest in Citizens’ stock is sold as a retirement plan with higher returns. In Venezuela there is very little knowledge about retirement plans. So the way you explain things to folks is that this is a retirement plan with higher returns and since the majority of the company’s investments are made in Treasuries, it’s not that high risk.

Baseless stock price projections and misrepresentations, in our opinion, likely explain why “most all” policyholders have elected to participate in Citizen’s technically optional stock plan. During interviews, several current brokers made false or misleading statements regarding the stock price (presumably in an effort to sell us a policy).  One current broker, for example, claimed that:

The stock has an important role because when you buy one of our plans, part of that annual payment earns a higher percentage than if you put the money in the bank… It’s [CIA stock] quite stable so in the long run you can get some good returns. We are not speculative. We guarantee capital. The stock does not vary much in price.

We found similar misdirection on various marketing websites, including one that had an entire page dedicated to touting CIA stock as the way to “build a true fortune” (before recently being deleted).  Taiwanese marketing materials  (below) show how CIA stock will purportedly generate enormous wealth by growing at an implicit 16% compound long term growth rate:

Source: Taiwanese Marketing Presentation. Note the Pink and Blue Bars reflect an investment in CIA stock.


Falsehood #2: The Funds are Primarily Invested in U.S. Treasuries

In the face of extraordinary stock price projections, many policyholders likely don’t understand the significance of their exposure to CIA’s stock price.

Although several current brokers claimed they inform clients of the inherent risks of investing in CIA stock, former brokers explained that this is rarely done in practice because it is not even discussed as part of the broker training process.

Even worse, brokers and pitchbooks (like the below) repeat the claim that most of the funds inside the policies are directly invested in U.S. Treasury Bonds. This appears to create the fictitious impression that policyholders have a direct U.S. Federal Government Guarantee.

Source: Translated CICA Broker Marketing Presentation

But these representations are indisputably false because Citizens barely holds any U.S. Treasury Bonds. Instead, Citizens holds a portfolio of municipal and corporate bonds, 44% of which are rated A or lower (Page 40 of 10-K).

But importantly, policyholders don’t directly own any bonds. The “guaranteed” portion of the policy is backed directly by Citizen’s credit, which we have serious concerns about (as detailed later in this report).  In contrast to established insurers, we could not find a credit or insurer financial strength rating for either Citizens or CICA.

We find it comical that a Citizen’s SEC filing (below) claims that corporate policy prohibits it from obtaining a credit rating from name brand agencies.  Instead, Citizens touts an analysis conducted by Standard Analytical Service (a company we have never heard of).

Source: 2009 424B3 Filing.

The most recent report from Standard Analytical we could find on Citizen’s website was issued in 2012 and included an “analysis” consisting of only a single page of superficial financial data.

Falsehood #3: Exaggerations of Regulatory Standing

Brokers we spoke with declared themselves “financial advisors” with international licenses that allow them to sell policies anywhere in the world except the United States (a limitation which presumably is intended to keep the brokers out of reach of U.S. Regulators). We learned that the “licenses” are actually certificates awarded by Citizens itself after the completion of a two-week training session

Despite selling policies based on their forecasts of CIA’s stock price, CICA brokers (who often lack substantive financial experience) hold no actual securities or insurance licenses. Yet, sales presentations use the logo of the SEC as a marketing ruse to exaggerate regulatory standing:

Source: CICA Broker Marketing Website, Translated CICA Marketing Materials

One current broker falsely declared that the SEC “audits” Citizens, repeating a narrative we have seen on at least one marketing website. Other regulatory mischaracterizations are embedded in marketing materials that, for example, assure investors that the policies are:

“monitored by the relevant entities of the US government, and you know, or have heard, how the US government takes care of what is signed and secured to the consumer” [English translation].

Our securities counsel reminds us that that Section 26 of the Securities Exchange Act makes it unlawful to represent to a prospective purchaser that the SEC has in any way passed upon the merits of a security.  Thus, to the extent that CICA brokers are making false regulatory representations to pump CIA stock, they appear to be engaged in criminal activity.

More broadly, we have serious concerns regarding the overall legality of CICA’s activities and note that Citizens own filings admit that it has not qualified to operate in foreign jurisdictions and holds no foreign insurance charters.

Based on these facts, a legal opinion we reviewed concluded that the policies are illegal in Venezuela (Citizen’s largest market) and we believe same logic is applicable to many other countries where policies are sold (the consequences are analyzed later in this report).

Citizen’s Stock Price Has Been Inflated to Absurd Valuation Levels

Our research demonstrates that falsehoods and misrepresentations have been used to drive a constant flow of new policyholder capital into the stock.  This has made Citizens the single most expensive insurance listing we have ever seen.

Citizens has lost money on a GAAP basis each of the past two fiscal years and has generated only low single digit returns on equity over most of the past 20 years. Yet Citizen’s shares trade at 7.5x our $1.18 per share calculation of tangible book value (below right).  Our calculation deducts intangible assets (which can’t be used to pay liabilities) and, in our opinion, represents a best-case liquidation value for the company.

Source: Internal Analysis. Citizen’s Q3 2016 10-Q.  Note that Tangible Book Value is a Non-GAAP metric. CIA’s primary intangible asset is deferred policy acquisition costs.  These represent commissions and other sales expenses that have already been paid but are deferred to be recognized in the future for accounting purposes. This is a clear intangible asset that has no financial value.

We see no plausible economic reason that Citizens should trade at such an enormous premium to other publicly traded insurers, including a close comparable, National Western Life Insurance (NWLI). Harold Riley started his career at NWLI before founding Citizens across the street and NWLI’s business model is also focused on selling international life insurance policies through a network of foreign brokers. By contrast, NWLI doesn’t funnel policyholder money into its stock and NWLI’s shares at a discount to stated book value and 1.4x adjusted tangible book value.

Citizens Depends On New Money From Policyholders To Prop Up Its Stock Price

The hallmark of a Ponzi scheme is the payment of purported returns to existing investors from funds contributed by new investors. Because the performance of CIA stock drives most of the returns to existing policyholders, Citizen’s ongoing viability is directly dependent on keeping its stock price propped up.

But since the stock price has no economic basis, the fundamental problem is that the purported returns are illusory. To maintain the mirage, Citizens depends on a constant influx of new money from foreign policyholders.

Policyholder purchases represent the clear majority of buying demand for Citizen’s stock. In total, we estimate that Citizen’s foreign policyholders and brokers currently hold over 70% of the total shares outstanding and have historically accounted for roughly $15 million in annual share purchases (Please see Appendix A for a detailed explanation of this estimate). 

We interpret company disclosures to admit that Citizen’s ability to generate returns for existing investors hinges on the amount of capital that flows into its stock investment plan. The 10-K warns that CIA’s stock could fall if either premiums or policyholder participation in its stock plan were to decrease (below).

Source: 2016 10-K Filing

As Policyholders Head for The Exits, Citizen’s Business Model Is Doomed

Citizens requires a constant flow of new money.  But the financials have recently begun to show that many existing policyholders are now asking to cash out.  Simultaneously, it has become increasingly difficult for Citizens to entice new investors.

This dynamic is exactly why Ponzi Schemes collapse and, similarly is why Citizen’s business model is doomed.

After experiencing increased operating losses and liabilities in 2015, Citizens slashed the all-important dividend payments to policyholders by 34% through September, 2016 and the filings warn that additional cuts may potentially follow (see pages 5 & 32 of the Q3 10-Q).

Because the dividends help drive purported returns to policyholders, they are integral to maintaining policyholder confidence in Citizens.  Following the dividend cuts, the financials clearly demonstrate that policyholder sales have plummeted while policy surrenders (early redemptions) have spiked.

After having steadily increased for years, new policy sales (first year premiums) declined by 2.7% in 2015. The company attributed the decline to the departure of Randall Riley, explaining that “marketing transition takes time.” However, this explanation appears bogus because new policy sales (first year premiums) are down another 13% through September, 2016 and accelerated to a 21% decline in the most recent quarter (demonstrated in the table embedded on page 42 of the Q3 10-Q).

Simultaneously, policy surrenders (early terminations) have spiked. Surrenders surged by 30% in 2015, which the company credited to “aging” as older policies no longer have surrender penalties associated with them. But surrenders have increased by another 10% through September, 2016 and the company’s filings now state that much of this activity is coming from earlier duration policies (which still have surrender charges).

Source: November 10-Q Filing

This means that policyholders are increasingly willing to pay the enormously punitive surrender charges (amounting to 50-100% of accrued value during the first 10 years) just to terminate their policies.

Brokers also appear to be defecting as the company’s filings recently began to warn of “ex associates moving business to other insurance carriers” (above).  Former brokers voiced concern about “ethical issues” at CICA, with one stating that she had joined a group of other ex-brokers that are investigating CICA’s “suspicious dealings”.

Since Citizens operates a multi-level marketing scheme, defections inherently tend to have an outsized impact on results because the company is reliant on recruitment to generate sales.  In fact, the mass departure of sales reps has been a key factor in the historical collapse of other multi-level marketing schemes.

Recent Capital Erosion Appears to Have Moved Citizens Towards the Verge of Collapse

Ominously, Citizen’s most recent 10-K filing added new language warning of the liquidity impact of policyholder departures:

“Unanticipated increases in early policyholder withdrawals or surrenders could negatively impact liquidity. A primary liquidity concern is the risk of unanticipated or extraordinary early policyholder withdrawals or surrenders.

The financials show that Citizen’s tangible capital is eroding. Although capital remains above regulatory minimums, from 2013 through the end of 2015 Citizen’s statutory equity (a regulatory capital calculation) fell by roughly 22%, to just $93 million.

Cash on hand has declined from $82 million at the start of 2016 to just $32 million in September (Citizen’s lowest balance since the financial crisis).  In November, Citizens transferred $20 million of capital from its domestically-focused Louisiana life insurance subsidiary to its internationally-focused CICA subsidiary, a transaction which we believe signals further issues (because most of the policies are being redeemed from CICA).

Citizen’s precarious financial position, in our opinion, is best demonstrated by measuring tangible common equity relative to assets (the TCE Ratio, which is a Non-GAAP metric).  Our analysis emphasizes tangible assets because we are focused on understanding Citizen’s ability to pay its liabilities (which, indisputably, can’t be satisfied through goodwill).

We calculate that Citizen’s TCE ratio was only 3.7% at the end of Q3 2016. Said another way, our research indicates that a mere 3.7% degradation in assets would wipe out tangible equity.

Source: Internal Pro-forma Analysis. Totals in Millions

We note that as recently as 2012, Citizen’s TCE ratio stood at over 7%, meaning that it has deteriorated by 50% over the course of the past five years. Citizen’s tangible capitalization also compares poorly to its close comparable, NWLI, which we calculate as having roughly twice as much tangible equity relative to its assets (above).

Our analysis supports our opinion that the company has little margin of safety to absorb losses or impairments. This is highly problematic because Citizens has festering balance sheet issues that cause us to question the company’s true solvency:

1) Actuarial Incompetence

Citizens FY 2014 10-K included an admission of having a material weakness in internal controls related to an “ineffective” actuarial function. The filing further declared that this “failure related to personnel competency” and that Citizens was “removing the Company’s Chief Actuary.”

Citizen’s admission of actuarial incompetence causes us to mistrust the entirety of the company’s financial statements which are the direct product of the company’s actuarial assumptions.

While a detailed actuarial analysis is beyond the context of this report, we discovered that Citizens has extended its mortality tables (projections of death rates). Citizen’s filings explain that competitors are burdened with higher costs from mortality tables based on “significantly shorter life spans.” This assertion is a major red flag to us because, in our view, aggressive actuarial assumptions should not be a competitive advantage.

November 10-Q Filing

Because the financials appear to hinge on the assumption that Citizen’s policyholders will live longer than average, we are concerned that Citizens has deployed actuarial shenanigans to reduce projected expenses and pad the financials.

Waves of violence and major medicine shortages have led to a health care crisis in Venezuela.  Sadly, the fact that the country recently experienced its deadliest year ever makes Citizen’s actuarial assumptions appear especially suspect.

In addition, Citizen’s reserve for future policy benefits is potentially underfunded. This is because Citizen’s accounting “locks in” interest rate assumptions at the time its policies are sold, as opposed to adjusting them to market rates. This practice does appear consistent with GAAP, however, it seems likely that the company’s liabilities are being discounted at rates materially higher than the prolonged low interest rate environment would otherwise dictate (and above what Citizens earns on its assets).  Thus, we fear that company’s liabilities are understated.

2) Loans to Policyholders Exceed Tangible Equity 

Citizens currently has $64 million in loans to policyholders outstanding that yield 7.7%. Citizen’s policies include an “auto-loan” feature whereby the company will automatically pay premiums for policyholders by making loans against the value of their accounts

Having grown by roughly 80% over the past 5 years, the policy loan balances have ballooned to now exceed tangible equity. This suggests that surrender rates are being artificially suppressed because the company itself is financing premium payments on an increasing number of policies.

Yet Citizens recognizes $4.5 million in annual accounting profits from the loans (Page 28 of 2015 10-K). This amounts to over half of Citizen’s pre-tax income in 2012 and 2013 (Citizens has lost money each of the past fiscal years).  These profits are circular because the loans finance premium payments that generate no cash (since the company has essentially made payments to itself).

The loans are collateralized by the insurance policies which, in our opinion, are of a highly uncertain value. We also have a tough time seeing the company successfully collect the loans through courts in countries such as Venezuela and Colombia.

3) Tax Noncompliance Liabilities Appear to Exceed Tangible Equity

In a March, 2015 8-K filing, Citizens announced that:

“ a substantial portion of its endowment policies and whole life insurance policies do not qualify for the favorable U.S. federal income tax treatment afforded by Sections 7702 and 7702A of the Internal Revenue Code of 1986. The policies at issue were primarily sold to non-U.S. citizens residing abroad”.

7702 noncompliance, in our interpretation, means that Citizen’s products are not considered to be life insurance for tax purposes and that many customary tax advantages do not apply to Citizen’s policies.

To reimburse policyholders for the anticipated tax liabilities, Citizens set aside a reserve of $12.8 million. Inexplicably,  this amount is at the low end of the company’s range of potential outcomes listed in its filings (Page 57 of the Q3 10Q) which, at the high end, could reach $40.5 million in compensation (which would impair most of Citizen’s tangible equity).

But because Citizens has quietly disclosed that it will only reimburse US policyholders and not foreign policyholders, this amount potentially understates the actual economic impact of this issue for policyholders.

Source: November, 2016 10-Q

Citizen’s filings recognize that the issue primarily affects international policyholders. While the tax implications for foreign policyholders are complex and dependent on their country of residence, our understanding is that tax liabilities may have been triggered (especially if foreign residents have not completed IRS Form W-8).

Remediation similar to US policyholders would cost Citizens in excess of $100 million (based on the low-end of the company’s own estimates for U.S. Policyholders), an amount which exceeds statutory equity.  Without more disclosure, it is impossible for us to pass judgement on the likelihood of the IRS making a claim.  However, we note that “tax” is included in the list of “regulatory actions and investigations” that Citizens has disclosed being subject to (discussed later in the next section).

We also note that Citizens carries a $65 million deferred tax asset (Page 2 of Q3 10-Q), the value of which hinges on the future profitability of the business. Arguably an intangible asset, deducting this accounting entry from our tangible equity calculation would leave Citizens with a negative adjusted book value.

Panama Papers Exposure, Anti-Money Laundering Deficiencies, and Regulatory Investigations.

In addition to operational and financial problems, serious regulatory issues appear to threaten Citizen’s ongoing viability.

The fact that Venezuela and Colombia represent over 40% of Citizens business, by itself, creates extremely high Anti-Money Laundering (“AML”) & Bank Secrecy Act (“BSA”) risks. Indeed, that is why U.S. financial institutions tend to avoid these countries.  But these risks are even higher because Citizens was specifically named in the Panama Papers:

Source: ICIJ Offshore Leaks Database

The dividend feature embedded in Citizen’s policies, in our opinion, makes them especially well-suited for money laundering.

This is because a policy that was hypothetically purchased with “dirty” money would then immediately begin to receive “clean” dividends back from Citizens that, in turn, are invested in CIA shares. Through this means, we are concerned that CIA stock could potentially be used as a currency to launder money through Citizens insurance policies.

Citizen’s most recent audit committee report cited the implementation of “new restrictions regarding third party payments”, which suggests that third parties were paying the premiums for life insurance policies on other individuals. Policy documents also indicate that dividends can be assigned to a third parties. We see this as being highly problematic from an AML perspective because these kind of transactions could be structured to effectuate bribes or launder money.

Citizen’s own disclosures warn that “We may experience greater risks associated with certain deficiencies recently identified in our BSA Program”. New language was added to the most recent 10-K warning of being subject to “regulatory actions and investigations” related to issues including “anti-money laundering, bank secrecy, anti-bribery, anti-corruption and foreign asset control laws, among others”.

Penalties for AML related violations can be extremely severe as demonstrated by the $9 Billion penalty paid by BNP Paribas and $1.9 Billion paid by HSBC. Numerous media reports indicate that the Trump Administration will maintain stringent AML regulation.

Source: Factset Blackline

The language in Citizen’s new disclosure extends beyond AML issues and admits to being subject to other government investigations relating to “compliance with U.S. federal securities laws”, “tax”, and “state laws”.  This indicates that multiple regulatory agencies are investigating Citizen’s activities.

Filings also warn of growing foreign regulatory risks. The company states that outside advisors conducted a review which seems to recognize the company’s policies as being illegal:

Source: November, 2016 10-Q

Citizen’s close comparable, NWLI, was hit with a $6 billion fine by Brazilian regulators in 2011 (which was later reduced) and we note that NWLI recently ceased issuing policies to residents in Central America and the Pacific Rim.   Due to Citizen’s concentration in a select number of counties, a fine or cease and desist order, in our opinion, would be devastating because it would potentially eliminate a sizeable portion of Citizen’s customer base.


Appendix A:  Estimate of Policyholders Ownership:


Disclosure regarding policyholder ownership is extremely sparse.  We base our estimates on two specific data points:

  1. According to a 2005 13D, the Panamanian Gala trust held 17.4 million shares or roughly 46% of the float. After the switch to Computershare, the trust subsequently shrank in size as shares became registered in the name of the policy beneficiaries. This had the effect of clouding the true policyholder ownership of the stock.
  2. The 2012 10-K  (page 43) revealed that the plan purchased $15.2 million worth of shares during the year. This total is nearly identical to the $15.3 million worth of shares that Citizens disclosed purchasing during 2005.

Extrapolating $15.2 million in annual purchases leads us to estimate that policyholders have purchased at least an additional 24 million shares since the August, 2005 filing was made for cumulative holdings in excess of 41 million total shares (representing roughly 82% of the 50 million shares outstanding).  But this estimate does not capture policyholder stock sales, which we have not found included in any disclosure.  As a result, we think its fair to pare back our estimate by 6 million shares—which equates to an estimated policyholder ownership of 70% of the shares outstanding.

Note: Share Purchase estimates are based on average share price for the year.


Appendix B: Sales Tactic Examples

We obtained a lengthy presentation dated 7/16/15 of slides embedded in a broker training presentation at Citizens Academy (we have posted here).

Translation (Above Left): The emotional story allows magnifying or increasing the need / problem to justify the purchase. Allows the customer to be projected into a crisis situation and thus able to reconsider their current state.
Translation (Above Right): Bring life to your story with details. Dramatize through volume and pauses.  Fear of loss is more powerful than desire for gain.

Citizen’s Undisclosed Multi-Level Marketing Scheme

We  discovered that Citizens operates an undisclosed multi-level marketing scheme. The training documents reveal that the brokers are organized into numerous tiers. During interviews, one former broker openly describe this as a “pyramid” based on recruiting new brokers and shared commissions. Each new tier triggers increased commission rates as well as incentives such as luxurious company sponsored cruises.

(Above Left: shows how commissions increase as brokers climb the pyramid. Above Right: shows how recruitment generates increased earnings for brokers.

(Above: another representation of how commissions scale at different levels).