Citizens Inc (CIA) 2008 Q2 法說會逐字稿

Good morning. I'd like to welcome everyone to the Citizens Inc. Conference Call, Friday, August, 2008, 10:00 a.m. in the morning. I'm Randall Riley, the Vice President of Investor Relations, and joining us this morning we have Rick Riley, President and Chief Executive Officer, Tom Kopetic, Vice President, Chief Financial Officer, Josh Arnold, Assistant Vice President, Investment Officer, Jeff Kolander, Vice President and General Counsel, and Josh, I'll turn it over to you.

Good morning. I'm going to go ahead and read our legal disclosure here. Information herein contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the words such, may well expect, anticipate, or continue or any compatible words.

In addition, all statements other than statements of historical fact that address activities that the Company expects or anticipates will or may occur in the future are forward-looking statements.

Readers are encouraged to read the SEC reports of the Company's current 10-K as of December 31, 2007, its quarterly reports on Form 10-Q, and any current reports on Form 8-K for the meaningful cautionary language disclosing why actual results may vary materially from those anticipated by Management. The Company undertakes no duty or obligation to update any forward-looking statements contained in this release as a result of any new information, future events, or changes in the Company's expectations.

The Company also disclaims any duty to comment upon or correct information that may be contained in reports published by the investment community.

Again, we would like to thank everyone this morning for participating. I will now turn it over to Rick Riley, our President and Vice Chairman. He will give you a report on quarterly activity.

Again, welcome this morning. We appreciate the opportunity to share the information with you and give you an update on what's been happening within Citizens over the last quarter.

We've continued to work through the successful integration of the home service Security Plan operation in the home service niche market that we acquired in 2004 and then began to integrate from a systems standpoint as of the end of last year. That conversion went very smoothly. At year end, we did experience some rather large volumes of records, actually about eight times what, in terms of number of records, what we had every dealt with before, and so we've had some unique challenges through the year as we've worked on getting volumes of records processed. But from a backlog standpoint, there are no backlogs, there are no major challenges other than just working through the issues that we've got operationally with the nearly eight, nine times volume of records than what we had before.

The uniqueness of the home service market has also given us some addition work to do in terms of systems development to support that niche market. We had done some of that prior to the conversion. We're continuing to do that through this quarter, and probably will be working on different aspects of catering to that particular niche throughout this year. But we expect to have all of that system programming and system development well underway and pretty well wrapped up before the year is over with.

Again, that particular operation continues to perform well and to do well for us, and we're excited about having that particular niche as a part of our ongoing life insurance business.

We did the -- I guess one particular note during the second quarter -- we had some additional fire, property and casualty company claims, an uptick there that we did not have in the previous year. That primarily relates to some storms that went through Louisiana during the spring months, hail storms and some wind damage, but it was not particularly extensive, but we did note and have noticed a difference in the claims volume during that particular period.

We have not seen any substantial impact from the hurricane that just came in through the Gulf, Edouardo. It was pretty much a non-event. I think they got 30 or 40 mile an hour winds over in one part of the area where we had coverage, but we're not expecting to see anything particularly material out of that.

The other thing, in terms of quarterly activity, we've launched our new portfolio of product at the beginning of the second quarter. We had some, we were slow getting to market on some of the translations in some of the materials. We've seen somewhat of a lag or I think we talked about in the first quarter, an anticipation of bringing the new product online, and we saw some decrease, I guess, in sales volume during that period. But before the quarter ended, we were seeing encouraging sales and seeing the pickup on the new portfolio and the acceptance of that group of products going very well.

The other thing during that particular quarter, we had our annual sales conference and awards banquets and so forth of the international operation, and as we typically see in that particular quarter while they're out celebrating and enjoying that particular event, they're not out producing. So we, the second quarter also has that particular adversity in the numbers. But we're again, we don't see that as anything other than just one-time type of activity, and it's not particularly significant in the overall year to date. We expect before the year is over with, we'll see things come back and be pretty much normal, and routine of what they have been in years past.

At this point, I'll turn it over to Tom and let him talk through and walk you through the financial numbers for the quarter.

Good morning, and thanks for joining our call. Again, we're here to talk about Citizens' second quarter results of operations. We'll try to highlight some of the significant financial and operational events of the quarter and year to date through June.

As always, we will cover anything in more detail as requested. If you do have questions, please hold them until the end, and we'll be happy to discuss them then.

Net income for the quarter was $3 million, with earnings per share of $0.06 per share compared to $0.07 per share for the quarter in 2007. Year-to-date net income of $5.7 million equates to $0.11 a share compared to $0.12 in 2007, so we're slightly off where we were last year.

Premium revenue for the quarter increased 6.4% to $35.2 million, which is $2.1 million over 2007. The increase is driven by renewal premium on our international business, as we continue to see favorable persistency. As Rick indicated, our first year of production was down at the beginning of the quarter, but strengthened throughout the quarter. As we did roll out the new products, sales were sluggish at the beginning of the quarter, but it seems to be favorably received in the field, and we're seeing the results towards the end of the quarter.

For the year, premium revenue of $67.9 million is 5.2% over last year. Investment income for the quarter was $7.5 million, 5.9% above second quarter 2007. As we indicated in the first earnings call, the Company has continued to invest in high-quality Mutual Funds to improve yields and to help offset the fall of interest rates.

We have experienced some unrealized losses on these investments; however, we've seen them coming back in the month of July. And the Company considers these long-term investments, and is confident of our ability to hold until market conditions improve.

For the year, investment income of $14.9 million is 5.8% above prior year. Continued growth in our invested assets funded from operations is the main driver in the favorable results.

As I have previously indicated, the Company's conservative investment strategy, including our significant holdings in US Treasury and Government-sponsored securities, and our ability to buy and hold has somewhat isolated us against the volatility of current markets.

Our claims experience for the quarter, claims and policy-owner benefits paid of $27.8 million was $2.6 million over second quarter 2007. The unfavorable variance is due to higher death claims and higher surrender expense. As Rick indicated, also adding to that was property claims in Louisiana for the spring storms.

Additionally, we had an adjustment in second quarter of 2007, which was a correction of overstated claims where we had a favorable $650,000 reduction. That's also adding to that variance.

For the year, claims expense and increases in policyholder benefits of $27.8 million are $2.6 million over 2007. Our operating expenses, total operating expenses include general expenses and expenses related to the acquisition of new business. Expenses increased $1.2 million to $14.9 million compared to $13.7 million in 2007. That's for the quarter. The driving factors were increased renewal commission, which are not deferred, and the increase, an increase in amortization expense.

The commission expense is mainly, as Rick indicated earlier, is mainly in our home service division, was anticipated as part of our conversion, and it should trend out through the latter part of the year as commissions are paid on a collective basis or unearned premium, or unearned premium will be amortized into income during the next two quarters and should reduce that variance.

Amortization expense of $1.4 million for the quarter is $800,000 over 2007, and again, this is conversion-related to our home service division.

On the positive side, operating expenses of $7 million for the quarter are $300,000 favorable to second quarter 2007, as the Company continues to find economies of scale, which improve the quarterly -- or excuse me -- improve the expense ratio by 177 basis points.

If anybody has any questions, we'll be happy to answer them now, or if not I can turn it back over to Rick Riley.

All right, again we appreciate the opportunity to share with you. Let me give you a couple of --

Did we have a question out there?

Yes, I 'm sorry, I thought I had to queue.

That's fine, go ahead Beth.

Yes, just a couple of things. Could you talk a little -- maybe you mentioned this but I didn't understand it -- the commission, percentage of commission to premium kind of jumped up in the second quarter compared to what it was in the first. And could you talk a little bit about why that might have occurred?

Yes Beth, let me -- what's happening as far as the home service division is concerned is we have, we are in order to secure and make the transition from the old system and the old world in which that particular marketplace operated, we have allowed them to, from a field standpoint, maintain some degree of latitude or subjectivity into that process in order to maintain stability and continuity of the book of business as we transitioned it from one computer system to the other.

We believe that as we go through the year and expect as we continue to refine that process with them that we will see the trend and the norms what we have typically seen in that particular segment to get back toward a normal commission expense factor rather than what they've trended upwards. It's a few hundred, $300,00 or $400,000 higher through the year-to-date numbers, as I recall, but again, that's part of the management of that integration of that home service book that's causing that.

Okay, also, could you talk a little bit about the premium income on the top line for the quarter, it came in about 3% over last year, and it was 4% in the first, and last year, the June quarter had grown in double digits year-over-year, and could you just, is that just the adjustments from the Security Plan, or are there books of business that have run off that makes it kind of lumpy?

I think the biggest factor of that particular premium deviation is what we saw in our international market where we've seen a dip in that first and second quarter as we transition to the new portfolio. I don't think, there -- Security Plan is tracking in a pretty flat mode, and not, theirs was never double digit as far as the niche market, or the home service market was concerned. But the international market is the one that is actually off slightly as we transition from the old portfolio to the new, and that's what you're seeing in those numbers is more of the impact through the international marketplace, not the home service.

Well, you think there's some catch-up in the second half as these products, these policies may not have been sold --?

No, we're absolutely seeing a strong trend. We're believing, frankly that by the time we get to the end of the year that we will be back to what is pretty much normal. We're seeing a strong recovery from that dip that we saw in the first half of the year, and a continuing improvement. We do have a couple of areas, a couple of major producing segments, if you will, or groups of individuals in that international market that are off still year-to-date, but the other six or eight of them are above, are moving back to being on trend or even above where they were last year on a production basis.

So we're seeing that the dip that we encountered in the first half of the year, and the transitional aspects of moving to the new portfolio to be just more of a one-time transitional kind of a problem, not an ongoing lasting issue.

Okay, and then are there any developments in new country or new markets at this point? Like I know you had mentioned at one point Russia or some other countries, anything -- or China.

There's nothing -- well, China continues, has been an emerging kind of a market for us. Certainly, it's a natural fit coming out of Taiwan, and we do see some continuing development and ongoing development there in the Chinese marketplace. But all of that Asian market is continuing to expand and grow at a pace that's above what our Latin market has been in terms of a typical or standard pace.

So we're seeing the Asian market to continue to do well, and expect that it will, but the Chinese market is one of the faster growing areas. In terms of new markets that we're opening up, we've seen some activity with a group out of Germany. We have not been actively seeing much coming out of the Russian market at this point, although we had certainly talked and had some discussions with a group out of Germany, I mean out of Russia. We're just not doing anything currently with that.

We've also got a group relatively new on the scene, but that we're working with out of Italy. So we do, we are active in other markets and active in opening other areas, but typically, you may recall even on the Taiwan market, we started on that really around the turn of the Century, and it wasn't until we got three or four years into the decade that we saw much happen in that particular market. But then when we did, it grew at a very rapid pace, and that's, these other new emerging areas, I would expect, I wouldn't expect to see anything real robust or significant in the short term, but as we continue to get a foothold and make the right connections with the right representatives, we'll see those markets grow as well.

Okay, and then is there any impact from currency, like if the dollar gets weak or strong, do you ever see a reaction to either the purchase of your stock by those trusts, or more policies sold? Or does that really not have a bearing?

We do not see much. We hear a lot of talk from analysts and from I guess I'd say Wall Street gurus about that particular element, but we don't experience it much on the front lines, and within the world that we work. Our marketing people do encounter it periodically, but it's very rare because most of the clientele that we're dealing with are not quite as sophisticated or not quite as focused I guess on those particular elements because what we're dealing with is US dollars and the US currency, and it's strictly a protection and a hedge against most of the environments that these folks are living in.

Certainly, there are competing elements in terms of the euro or other currencies that folks may go into, but we don't see it manifesting itself in any material manner within our distribution network.

Okay, and then on the investments, you all said you made some investments in Mutual Funds, and I just wondered, is that as cost effective or does it make more sense just to buy the securities outright given the size of your portfolio?

Beth, our theory behind buying Mutual Funds is that we don't have to do the diversification ourselves that the Mutual Funds do. So we don't have unique risk to a Company. We can diversify that away by buying Mutual Funds. It's a more conservative approach as you know, that is our investment strategy to be more conservative.

And the other aspect of that, Beth is that we're -- it's not a robust thing that we're doing. We're limiting those investments to no more than 10% of the portfolio, so we've got a relatively small overall investment there. But it should provide some additional opportunity for earnings in the future as those equity markets come back.

Okay, and then could you talk just about what you're seeing from an acquisition perspective in the US -- I assume most of the interest is in the US -- more Security Plan type deals, and what that looks like, and is it getting, are you getting any closer to seeing something that could turn into a transaction?

Sure, let me, I was about to head that direction as just kind of a wrap-up. We are currently, we currently have an agreement on a small situation. We are currently in the process of doing due diligence on that particular deal. We have been involved in three different situations during the second quarter, one of which was actually sold on a basis that was significantly higher than what we valued the deal at. And so we did not, we were not involved in that.

We typically, as a general rule, will not, as just a matter of how we do, how we do acquisitions and involve ourselves in acquisitions, we do not bid on acquisitions. We will negotiate a transaction, but we do not get into the bidding aspect. So when a transaction moves in that direction, we simply will withdraw and take ourselves out of that process. But we are finding that there are numerous acquisition prospects and possibilities. Like I say, we do have one underway currently. We are expecting and anticipating a second that we will be able to pursue as we go into the third quarter here, and again, these are both not giant or large situations, but they are the types of things that helped get us to where we are today, and we expect that we'll continue to find and seek out these types of acquisition opportunities.

And we're finding that in the market, some because of what's happened in the market and the fact that we've got either risk-based capital issues or asset quality issues that companies have gotten themselves into that the acquisition prospects have improved, and we're certainly looking and looking for good opportunities to add to the portfolio here and we just have to be very cautious and we're not interested in buying somebody else's problem, obviously. But at the same time, if we can find good situations that we can integrate and bring together and further enhance what we're doing, we're certainly actively doing that.

Now, are these blocks of life policies like you've bought in the past where they're closed blocks that you're running off, or are these actually ongoing businesses like Security Plan was where it would continue on?

The current situation that we currently have an agreement on is similar to Security Plan. As a matter of fact, has parallels and will probably be a part of that particular segment when it's aggregated into the mix. Yes, it does have active marketing and ongoing business opportunities, and really down two different marketing fronts, one in the home service marketing area, as well as in a pre-need division that it's got operating.

So we see its ability to contribute and actually be enhanced what Security Plan's business model is all about. We see that as an expansion of that particular segment of our business.

Okay, and then one last question on the claims, you had I guess you would call it adverse mortality in the quarter, and it was wondering whether you see there's any basis, is it a trend, was it pricing, was it underwriting or was it just a statistical aberration?

I think it's just, from my understanding of it, and Tom you may want to speak to it if you have more specific insight, my understanding is more of just a typical thing you see every now and then in a given quarter where you have adverse or one-time uptick. It's not particularly indicative of any trend as far as underwriting or a quality, but it's just one of those things where you have a quarter where you have the adversity, you have a concentrated adversity or a concentrated accumulation of claims that occur.

Yes, I would agree with that. There was a minor adjustment in the second quarter of 2006, or 2007 that I mentioned earlier that reduced the claims expense in 2007, so that's partially making that unfavorable variance a little bit bigger, but other than that I thin it was just an anomaly in the quarter, and I don't think we'll see that repeat.

Oh okay, all right, well thank you.

All right, any other questions or other areas that we could discuss or address for you while we've got the call open?

If not, again we appreciate everybody's participation here today, and thank you for the opportunity to share the current Company situation. We look forward to getting with you again next quarter.

Also, we will be filing our June 30 10-Q on Monday for the filing timeline.

Again, if that's it thank you.