Citizens Inc (CIA) 2008 Q3 法說會逐字稿

Good morning. This is Randall Riley, the Public Relations Officer for Citizens, Inc. We'll be going over the agenda of Citizens, Inc. conference call, Friday, November 7, 2008, 10:00 a.m. Here with us this morning, we have Rick Riley, Tom Kopetic, Josh Arnold, Larry Carson, and Jeff Kolander.

Okay and Josh, I'll turn it over to Josh to read the disclaimer.

Josh Arnold. Again, welcome everybody. During today's call, we will discuss the expected performance of Citizens, Inc., which will constitute forward-looking information within the meaning of the Private Securities Litigation Act. Actual results may differ materially from any forward-looking information provided in this call, and such information involves significant risk and uncertainties.

A complete disclaimer is included in Citizens, Inc., press released dated November 6, 2008, and it is incorporated by reference into this call.

We are not responsible for transcripts of this call made by independent third parties.

I will now turn the over to Rick Riley, our President.

Good morning, welcome. We appreciate the opportunity to share with you the activities of the last quarter, and the results and the things that we've been involved in lately.

We obviously, as I'm sure you, everyone well understands, the quarter has been -- and actually the days following the quarter -- have been quite an interesting period of time for us. We've experienced really some I guess extraordinary experiences in the marketplace, and yet where we are and where we're positioned, we're excited about what our future opportunities hold and where we are, and we'll get into a little more detail on that as we walk through the call.

Through this period, we've seen really a flight to quality. I think the portfolio that Citizens has maintained over the years and continues to keep, as far as our investment philosophies, have been proven out through this downturn. We see now that the approach to maintaining government guaranteed or government sponsored entities involved in the investments that we make has made a huge difference as the market has re-evaluated, and the credit markets have frozen up, and the things that have occurred, we've actually been fairly well insulated from a lot of that activity.

And of course, we're pleased with where we stand and not really trying to be braggadocios about it, but we really feel like a lot of what we've done over the years, and certainly throughout my career, that we've now been proven that the conservatism that we've operated with has been a positive thing, not a negative thing.

The other activities through the last 60 to 90 days really are the focus upon the short trading and the things that have taken place in terms of short trading rules and how that's affected and impacted us. We think that's, again, been a positive thing. So we're excited to see those kinds of adjustments and focus on the rules and how that will affect us going forward. We think that will, again, be a positive implication.

We, as you may or may not understand or appreciate, we have always been not -- I guess the best way to describe it -- we've not been a particular proponent of total return concept in our investing, and as a result of that, we have been insulated, as I said earlier, from the changes that have taken place here in the credit markets. We have always told folks and individuals that we've been dealing with that where our focus has been, like the old Will Rogers phrase, we're not so much concerned about the return on our money as we are the return of our money, and fortunately, that concept and that approach has proven to be the right approach in these days and this timeframe.

We did go out in the last year, year-and-a-half with some investments in some equities, mutual fund-type investments. We did from, the Board, Citizens Board limited that exposure to about 10% of invested assets. We did not really reach the full 10% over the last year's period where we started doing some of that. And our exposure in these markets over these volatile markets has actually been something less than 2.5% of a downturn in terms of our invested assets through this period.

So even though we did expose ourselves to some of the volatility, it's been very minimal and very insignificant as a whole.

The other thing I wanted to address is we never did make a formal announcement that we completed the Ozark transaction, but the transaction that we, the acquisition transaction that we generated in July of this year was actually approved by the Department, Arkansas Insurance Department on October 23, and within a couple of days, they had it approved, and then we had it closed on October 27. So we're in the process of integrating and aggregating that particular operation into what we're doing, and we'll get to see the benefits and the results of that integration in our fourth quarter, because that obviously was something that did not affect these particular results at the end of the third quarter.

We are-- the other thing I would tell you is that we're seeing a rather abundant set of opportunities to expand in terms of acquisition situations. They're, as far as in my career, I've never seen as many come as fast as they're coming in today's market. So we're turning them down faster, frankly, than we can consider all of what we're getting to look at, but we are getting a number of opportunities, and we're excited about that as far as our future prospects and the prognosis for where we're headed into the future on potential acquisition targets and opportunities there.

New business, we have still got a little bit of a lag year-to-date from where we've been, where we were at the same time last year. We're closing that gap a little bit from where we were in the second quarter. We were, I think, maybe at about a 10% differential between where we were year-to-date at six months. That gap has closed a little bit, and we're expecting that gap to continue to close as we go through the end of the year. So we're not particularly concerned, even though we're lagging a little, and with all of the disruption that we've seen, certainly it's in our focus, but we're confident and comfortable at this point that we're going to see our new sales be reasonably close to what they were last year. If we don't actually hit that target, we're going to be close before we get to the end of the year, we believe.

We have had some questions about what's going on, how's the world instability affecting us on a sales basis, and I would tell you that that cuts really both directions. Some of that is a positive, and some of it is a negative. Certainly, the questioning and the instability and the concerns and the lack of confidence that's out there in the marketplace, certainly we hear about it. We are hearing about it in our customer service area. We're hearing about it also out in the field when we're selling. But we're not finding that it's a huge impediment. We're just seeing that it is on everybody's minds, and is a great concern.

So we, to sit here and say that it's not affecting us probably is not a fair statement because I would expect that yes, it is affecting us. It would be hard for it not to, but in terms of having a material impact on us, we don't at this point see any major shift or change in what's going on as far as international sales and the strength of the US dollar and how that's affecting our business and what we do.

We're still viewed in the world economy as one of the strongest, the US dollar is viewed as one of the strongest currencies, and therefore, continuing to put the funds in. I'll tell you, just because of the way the Company has performed through this volatile period, we've been able to use it to our advantage in the international marketplace and demonstrate to our international clients that what we've been telling them all along is factually correct, and that they can rely and depend on us to be there for them when they need us in the future.

So I would tell you that even though some of that is negative, and there's been a lot of negative, we're seeing a lot of positive potential and possibility out of the situation.

At this point, I'm going to turn it over to Tom Kopetic and let him take you through the financial details and bring you up to date on the quarter.

Good morning. As Rick said, we're here to talk about third quarter operating results, and we'll try to highlight some of the significant financial and operational events of the quarter and year to date through September.

We can cover anything in more detail as requested, but if you have questions, please hold them until the end, and we'll be happy to discuss them then.

Net income during the quarter -- during the third quarter, we recorded a net loss of $814,000. Earnings per share were $0.14 lower than they were in the same quarter of 2007. For the year, net income is $4.9 million, which computes to an earnings per share of $0.07 per share compared to $0.22 year to date through September of 2007. The loss in the quarter is primarily due to expenses related to the two hurricanes that hit our Louisiana business totaling $1.3 million, and expense related to the change in the liability of our warrants on our preferred stock of $1.7 million. Those are the two big items. I'll talk about some of the other items as we go through.

During the quarter, premium revenue decreased slightly, and that was mainly due to the hurricanes and the disruption to our domestic business in Louisiana. International business, as Rick indicated, was flat for the quarter. New business, new international business is down, but it's offset by renewal business, in which persistency is exceeding expectations.

Our first year production is down, was down all three months in the quarter, but we have seen an upswing in October. Traditionally, the fourth quarter is our largest quarter for new business, as our agents are trying to quality for their sales convention, and we have also initiated some extra sales incentives for the fourth quarter to spur new sales.

For the year, premium revenue of $102 million is about 3.1% over prior year. Investment income for the quarter was $7.5 million, 2.6% above third quarter of last year. As Rick indicated, during 2008, the Company continued to invest in high-quality mutual funds to improve yields and help offset the fall of interest rates. And although we experienced further unrealized losses since the second quarter, and really into the fourth quarter, the Company considers these securities long-term investments, and it is confident of our ability to hold until recovery.

For the year, investment income of $22.5 million is 4.7% above prior year-to-date. Continued growth of our invested assets funded from operations is the main driver of the favorable results.

As I have indicated in previous calls, and I think Rick did before, the Company's conservative investment strategy, including our significant holdings of US Treasuries and government-sponsored securities, and our ability to buy and hold has somewhat isolated us against the volatility of the current markets, and against the write-downs that some of our competitors have been forced to take. The Company did have one minor write-down during the quarter of $223,000 on a Lehman Brothers holding, but that was our only write-down.

Claims experience, claims expense increased in reserves and policy-owner dividends of $25.7 million. For the quarter, it was $2.7 million over third quarter of 2007. The unfavorable variance includes $741,000 in expense and reserves related to the two catastrophic storms. Reserve increases of $10.2 million are $1.6 million over prior year. This increase includes $1.1 million which relates to lapsed policies, or policies that were lapsed in the second quarter, and were paid current in the third quarter, and a true-up in the second quarter manual reserve adjustments related to our policy conversion.

For the year, claims and other policy-related expenses of $71.2 are $5 million over prior year. Again, the unfavorable variance includes the hurricane expense from the quarter, and in 2007, we had favorable reserve adjustments of $1.2 million. This was compounded by reserve expense in ' 08 of just about $1 million.

Additionally, endowment expenses increased by just over $1 million from policy maturities; however, this expense is priced into the product and is reserved during the life of the policy.

Operating expenses include both general expenses and expenses related to the acquisition of new business, and these have increased $2 million to $14.9 million compared to $12.9 million in the third quarter of 2007. The driving factors are increased renewal commissions, which are not deferred, and an increase in amortization expense.

The unfavorable commission expense is mainly in our home service division, and was anticipated as part of our conversion, part of the conversion, to our policy administration system. The increase in amortization expense was also anticipated as our deferred acquisition asset is growing, and as it grows, the amortization will grow with it.

Year-to-date expenses of $44 million are $4.2 million over prior year, and as with the quarter, it is related both to lower capitalized expenses and higher than anticipated amortization.

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

All right, the call is now open for questions, or q-and-a, anything that we can do to help provide additional insight, we'd be happy to do that.

Okay, this is Beth Malone. Just a couple of questions; on the dollar, the strength or weakness of the dollar, how important is that in your sales? I mean, can we track demand by how the dollar is changing?

Well, it certainly, the logic of it would imply that you could, Beth, but our experience over the years has been that it's not that significant. As we've watched the euro get stronger than the dollar, and things go up and down, and you would expect that that would have an impact on our international sales operation. And certainly, it generates more discussion and more interest of our sales operation and sales folks as those types of things occur. But when it comes back to actually quantifying it in terms of the direct impact on the sales, as I said earlier, I wouldn't say that you can't, you couldn't say that it doesn't affect us, but we can't quantify in a material way what that would be. And I don't think you could take a metric and track it and suggest that it does mean something, because frankly, we're not seeing it in any of how we do what we do in terms of one-on-one sales with our clients.

So if that wasn't the case, then the slower sales, is that more due to just the uncertainties that the world is experiencing right now?

Generally yes, but I would also tell you that some of the lower sales have occurred just because of the transition that we made in the year from an older portfolio to a new portfolio. We did not launch that as cleanly or as efficiently as we should have, and that's, I think we talked about that a little in the second quarter, that we were lagging where we should have been, or where we thought we should have been in terms of sales because of that transition from the old portfolio to the new.

The positive side of that is that the newer portfolio has been received well, and has been adopted well in the field. We're just, the way we view the downturn this year is that it's more geared toward what we've done in terms of product adjustment than it is in what's actually happening around the world economically.

Okay, thank you. And then on the acquisitions, with so may out there and the opportunities expanding every day, what limitations do you have from a capital perspective to be able to make new acquisitions?

Well, currently there are some limits in terms of a debt limit, because of the preferred holding that we have has a $30 million debt limit cap in it, so we're working under those constraints currently. We've been in contact with the preferred holders about the possibility of relinquishing that, or changing that dynamic. But at this point, it would be, it wouldn't be prudent to say one way or the other how that's working, but it's not, well I don't expect to see that change short term. I'd expect that whole issue comes and matures in July of 2009, and so that particular constraint that we've got is really a limited constraint, less than 12 months in duration.

Otherwise, our limits are going to be just the capital available that we've got, and what I would tell you the bigger issue is going to be is the condition that some of these entities are in. What we're seeing is that the downturn in the market has literally wiped out capital and surplus of some companies because of their investment strategies. So having the capital available to be able to go in and either merge them and absorb them without creating capital issues for yourself, or having the capital available, or raising the capital to be able to go out and make additional acquisitions, those are all things we're looking at and things that we're entertaining as far as how we would position ourselves to go forward.

We have some capacity to do things. I would tell you it's the smaller type deals that we could easily do. If you get into the $100 million or $100 million-plus deals, it becomes a little more challenging as far as what we think we're capable of doing.

Okay, and one last question. Do you think, given the condition of some of these companies, that you can get some kind of help from the regulators as being a white knight on some of these? Or is that not a logical approach?

It certainly would be a possibility. We're strongly capitalized, so we have some ability to do that, but I can assure the regulators are going to be looking on both sides of that and determining that on the back side, what you're going to look like after you do it, and whether or not you're going to be as well positioned as you were going into the transaction.

But certainly, we could be considered in certain situations a white knight. We're not trying to do that as much as we're trying assimilate and identify the best possible prospects and those that are compatible with our business model, that fit well with what we're doing so that we can continue to grow and build the Company and generate the future profitability on the same basis that we've been working in the past.

Okay, thank you very much.

You bet. Are there other questions?

If not, again we appreciate very much the opportunity to share with you where we are and where we've come, and we look forward to talking with you again the next quarter.

We will also be filing our 10Q this afternoon.

Thank you.

Thank you.