Citizens Inc (CIA) 2008 Q1 法說會逐字稿

Good morning, everyone. First of all we'd like to thank you for joining us for the earnings call for the first quarter of 2008 for Citizens Inc. We have members of management here around the table and we're going to walk you through current events in the first quarter as well as an earnings update. First we would like to start with reading the disclosure that's required. The following information contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which can be identified by words such as may, will, expect, anticipate, estimate, continue or comparable words. In addition, all statements other than statements of historical fact that address the activities that Citizens Inc. expects or anticipates will or may occur in the future are forward-looking statements. You are encouraged to read the SEC reports of Citizens Inc., particularly its form 10-K for the fiscal year ended December 31st, 2007 for meaningful cautionary language disclosing why actual results may vary materially from those anticipated by Management. Thank you again for joining us.

I will turn it over now to Rick Riley, who is our President and Vice Chairman, who will walk you through our first quarter events.

Thank you. We appreciate the opportunity to share with you the information today. We've had a very good first quarter and one that resulted in double-digit earnings again. We are pleased with those results, but what we want to do is let you know the integration of the home service operation through the back office continues to go well. We've -- there were a number of backlogs we encountered during the first quarter, but most all of those have been substantially eliminated through this period. And we're substantially moving forward on those objectives and those -- (technical difficulty) Sorry for the technical difficulties.

(Technical difficulties)

Apologies for the confusion there on getting the conference set up. We've now got that going and we'll carry forward. Again, the home service back office operations are moving along well and integration of that process is going well. There are some -- some development items that we'll be doing as we go through the rest of this year to make that integration even more tight and more efficient and we expect to see improvements as we go through the year as far as how the home service division of our operation is working within the Citizens' operation. Transition of our electronic systems from the current hardware over to an IBM Z series architecture continues to progress. We expect that to go on through the better part of this year and we'll have, as a result of that particular change, a capacity increase that will be probably ten-fold over -- allow us to continue to grow and expand operations nearly ten-fold over where we are today.

The -- we introduced new products in the first quarter, actually at the beginning of the second quarter, the end of the first quarter. That probably attributes a little bit for why there's some anticipation of the new product portfolio coming out. We did experience some decline in the first quarter as far as the sales levels, but we expect that that's related to the introduction of this new portfolio. We're seeing a lot of excitement and a lot of -- actually, have seen an uptick in sales during the month of April regarding that new portfolio and so we're expecting that process to continue as we go through the year and we're anticipating a great year with the new portfolio.

We're also continuing our acquisition exploration. We're looking at a number of different situations. We've been in and out of a couple of different scenarios already, some that -- nothing at this point that we can address or talk about with any specifics, but the acquisition front is something that we're still very much focused on and, like I say, we've looked at probably on average one per month since the beginning of this year. So we expect and anticipate that those things will continue as we go through the year and expect that somewhere in the balance of this year we'll find an opportunity to move on an acquisition front. But at this point in time, I'm going to turn it over to you and let you walk us through the financial details.

Good morning. We're here, like we said, to talk about the Citizens first quarter results of operations. We'll try to highlight some of the specific financial and operational events for the quarter. We can always cover anything in more detail if requested. If you do have questions, please hold them to the end and we'll be happy to address them at that point. Net income for the quarter was $2.7 million, of which $2.3 million was applicable to common stockholders. Net income and net income applicable to common stockholders increased 12% and 15% over the first quarter of 2007 respectively. For the quarter, favorable premium results, as well as favorable investment income, increased revenues by $1.5 million over 2007. Partially offsetting this increase was an increase to insurance policy related expenses of $900,000, mainly attributable to an increase in renewal commissions and increased amortization expense.

During the quarter, premium revenue increased 3.9% to a $32.7 million, which was $1.2 million over first quarter 2007. The increase was driven by a renewal premium as the Company continues to experience favorable persistency. And this persistency on renewal business is significant not only in premium dollars, but also in the reduction of expenses as a percent of premium. First year premium in 2008 was down from fourth quarter, which was expected, but it was also down from the first quarter of 2007. The unfavorable results in new business should be temporary. Management believes it is attributable to the anticipation of our new product roll-out that Rick had mentioned and we have seen indications that the new products are generating improved sales in April. Investment income for the quarter was $7.5 million, 5.6% above first quarter 2007. During 2008, the company will continue to invest in high-quality mutual funds to improve yields and help offset the fall in interest rates. Although we have experienced some unrealized losses on these investments, the Company considers these securities long-term investments and is confident of our ability to hold these securities until our position improves.

During the fourth quarter, the company received dividend distributions of $2.1 million on these mutual funds. It should also be noted that the Company's conservative investment strategy, including our significant holdings in U.S. treasury and government sponsored securities and our ability to buy and hold has somewhat isolated us against the volatility of current markets. On the claims front, claims expense and increases in policyholder benefits for the quarter were consistent with first quarter of 2007. Due to the favorable persistency in premiums, the claims/loss ratio improved to 50% from 52% in the first quarter of 2007. Total operating expenses includes both general expenses and expenses related to acquisition of new business.

As mentioned earlier, expenses increased $900,000 to $14.1 million, compared to $13.2 million in the first quarter of 2007. The driving factors were increased renewal premiums, which were not deferred, and an increase in amortization expense. Additionally, first year commissions were lower than 2007, due to the lower than anticipated premiums as was the related capitalization expense due to the shortfall in new business. The Company does not expect this trend to continue, nor does it consider it to be significant. On the positive side, general operating expenses of $6.9 million were equal to first quarter of 2007. The Company continues to find economies of scale, which improve the quarterly expense ratio about 80 basis points. That's all I had to cover. If anybody has any questions, we'll be glad to answer them now. And if not, I'll turn it back over to Rick Riley.

This is Beth Malone. Can I ask a question?

Certainly.

Thank you. A couple of things. On the -- on the technology development and implementations that you're doing, what -- is there a way to quantify the expense saves that you're anticipating and the timing of those saves?

Beth, other than looking historically at the types of things that we've done with the electronics, it would be difficult to quantify with any specificity what that may be. It's an ongoing kind of a process for us, because we do do our own development and our own enhancements of systems and so it's kind of an ongoing process and a development process that we do routinely. It's the things that are related to home service clearly have been a new dimension for us and so we've had a considerable number of development things that we can -- that we've been able to add to our baseline system to support that particular division and that's really what we were referring to earlier. We expect and anticipate that that enhanced automation that we're able to add to our integrated systems is going to give us continuing opportunity to profit from the efficient operations that we're generating in that particular segment.

Okay. Thank you. A question on the premium levels. You indicated that they were down a little bit. Could you articulate? Are we talking about is that in the home service domestic or is that in international or is that in some of the runoff books?

Yes. What we've seen, the majority of what we've seen is in the -- the majority of that impact is in the international marketplace where we're introducing the new portfolio. So we believe that -- of course the economic conditions around the world could be having some impact on that, although we believe that from what we're seeing, the predominant impact is the introduction and the anticipation of the new portfolio. We began talking to the field operation, actually had some meetings with lead players in that international marketplace as early as December and so I think that, in terms of anticipation and the word got out. The other thing to understand is that in that particular -- in the international marketplace, the first quarter is always -- it's a cyclical type of quarter, but it's always the weakest quarter in international sales. So it was one where we saw a weaker first quarter than what we had normally been seeing, but we attribute that predominantly to the introduction of the new portfolio that's coming because we've seen good recovery here in April of the sales activity.

So are you -- did you introduce the product in April, then?

Yes. It became available in April, but they -- they were -- the field became aware of it because of our top-level meeting with international sales leadership in mid December. So I suspect that -- we're suspicious that at that point, we may have gotten them more interested in what was coming than what they had at present to sell and that may be the biggest factor contributing to the -- again, the decrease. It was not -- I mean I think it was maybe 10%, is that right, Tom?

Yes.

As far as the amount that we saw, a 10% decrease in the first quarter, comparatively. But again, we expect that to be really just a typical type of thing that would occur because of how we're transitioning portfolio.

Well, is the new portfolio more profitable, have a better margin than the old or is it the same and it just has different bells and whistles?

It's going to be similar margin as far as the portfolio is concerned. What it's got are some enhancements in commission for the agent in the field, which makes them more interested in that -- selling that product than the other. There were a few product -- a few of the products that we were able to amend and make some changes to that enhanced that. Then the other thing is there's some additional features and benefits to the client and to the product itself that enhance it and make it more appealable on the -- at the customer level. So with both of those changes and really a static or a level earnings or profitability out of the portfolio, we don't expect to see profits diminished at all as a result of what we've done. We expect to see it actually enhanced as a result of the excitement that we're seeing relative to the new product.

Okay. That's helpful. And when you talk about the integration of the home service business that -- that acquisition was made, what, in 2004, is that right?

Yes. It was in the last quarter of 2004 and then, of course, hurricanes Katrina and Rita came in '05, which really kind of set things back a little bit as far as the normal progression of events. But during '06 and '07, we saw considerable progress toward the integration and the transition of the system from the way they were doing business to the way we do business on our integrated system. We were able to make that conversion effective 12-31-07. We had a little bit of a rough quarter, getting things kind of backlogged and needing to get caught up, but we're substantially complete with all of that and things are moving well, although we still have work to do to support that operation as we go through the rest of this year.

Okay. And then one last question. On the acquisition front, you mentioned you're seeing acquisition opportunities or looking at books every month. How is that -- is that different from what it was a year ago and what conditions in the marketplace do you think are changing to make the acquisition opportunities either improve or diminish?

It's -- I would tell you that it's probably not a lot different than what we've seen from a year ago, although each acquisition situation is unique. There's no -- I would tell you in my career, in my history, I've not seen any two that are alike thus far. They each have their own challenges and opportunities and uniqueness of integration challenges or profitability possibilities. But the -- the enhanced regulation that we see in the insurance industry continues to make particularly small operations -- and we're -- we would love to find additional home service type situations, that's one of the areas that we're focused on. We're not absolutely limited to that, by any stretch, but we're looking at expanding and broadening the home service sector and segment of our business and we'd love to find the opportunities in that sector. But at the same time we're -- our interest is in ordinary whole life traditional type books of business that we understand how to put on -- put onto a system that we have that's fully integrated across all these different lines of life business and then operate them and, in effect, create the profitability out of how we run the back office.

So what is the -- I don't know how competitive the -- I would think any acquisition or books of business is going to be competitive. Are there going to be other people that want to buy those same assets? What is it that you all provide that would give you a leg up in terms of competing for these books of business? Is it the willingness to pay cash instead of stock or can you pay more because you can integrate them more efficiently? What's your edge over some of these other competitors that might be looking to buy the same book?

That's a good question. I'm not sure. The sellers are probably the ones that would be better qualified to answer that question, but -- because, again, each situation is unique. I would tell you that, yes, we probably have an ability to negotiate effectively. We've been doing this for a number of years. We have a team of people here who can go into a situation and evaluate and judge what the needs are and what the benefits are going to be quickly. It doesn't take -- it's kind of like the old saying or the old adage that when a guy walks into a blacksmith's shop and picks up that horse shoe off the anvil and he drops it real quick, he asks him, what's the matter, is it hot? He says, no, it just doesn't take me very long to look at a horse shoe. And frankly, that's where we are when we go into these companies, we have enough experience and a team that's broad enough that we understand how we need to go look at what we need to look at, make a deal. We're in a position with the capital structure that we have and with the earnings that we have to be able to go in and make offers and transactions in a very effective and efficient manner. And I would tell you that our advantage is the nimbleness with which we're able to effect the transaction on a negotiated basis. We do not bid on transactions, we don't go into bidding situations, but we will negotiate with any buyer -- or any seller to make a deal and put a transaction together.

Okay. Well, thank you.

You bet.

Beth, just -- this is Tom Kopetic. Just one other comment on your very first question related to expenses. Our general operating expenses in 2007 were comparable to 2006 and, as I indicated, our first quarter is comparable to our first quarter of 2007, so although in 2007 we added $15 million worth of revenue, we held general expenses constant. So although we can't quantify a lot of the savings, we've held expenses literally at the same place they've been since 2006 and we are now going to have additional savings in 2007 from the conversion in that we can shut off our AS400 operations which were out of Donaldsonville. So it's difficult to quantify, but certainly you can see it on the financial statements that we are holding expenses constant despite the environment that we're in today.

Okay, thank you.

Any other questions?

Yes. Good morning. This is [Jim Fox]. Congratulations on another great quarter.

Thank you.

You're welcome. The question I have for you regarding the new product and percentage wise, granted, you just started releasing that in April or selling that in April. Could you characterize how well that's doing as compared to last April?

It's up comparatively between months, April to April, but in terms of specifics, I don't have those -- I don't have those with me here this morning.

That's fine. Just saying that it's up comparatively speaking, that's good. Also, the only other question I have for you is your technology, your switch to IBM. Is that part -- is that considered part of your operating expenses and, if so, could you -- would you say that that would be a reason why your operating expenses year-over-year are stable?

It is. Yes, it is. We have -- we've had a limited amount of capitalization of expense, primarily related to some of the work that we've done on the home service development that we've done there. But as far as the transition on the IBM and the movement there, that is something that's been ongoing for really about three years in terms of making that transition. We're getting close to getting it all -- wrapping it up. Hopefully that will occur during the year this year as far as close out or completion of a lot those major objections that we've had to get over on the IBM equipment. But it is an ongoing thing. It has been an integral part of our operating expense, yes.

Great. Thank you. It looks like you're doing a good job in honing your management and I appreciate you holding the conference call this morning. Thank you.

I think another point to address the expenses is we -- we've had flat expenses over three years and we talk about buying -- acquiring companies and bringing them on to our company and running them more efficient. And that's what you see here, you're buying distributed plan with the latest acquisition, putting them on our systems and running them more efficient than they did before, therefore you increase premiums, but your expenses stay flat. And I think that's a core piece of our business model that's coming through in the financials.

Great. Thanks again, guys.

Thank you. Any other questions, anything else we can answer while we've got everybody on today? If not, we thank you very much for the opportunity and we'll talk to you again next quarter.

Thank you.

Thank you.

The moderator has disconnected. The conference will now end.