Citizens Inc (CIA) 2008 Q4 法說會逐字稿

Good morning everybody. We'd like to thank you all for joining us this morning. This is Citizen's Inc. December 31, 2008 earnings release call. With us around the room here, we have Rick Riley, our President; Tom Kopetic, our CFO; Larry Carson; our Vice President of Financial Reporting and Tax. Jeff Kolander, our General Counsel; and I'm Josh Arnold. First of all, we'll go ahead and read our legal disclaimer. During today's call, we will discuss the expected performance of Citizens Inc., which constitute forward-looking statements, within the meaning of the Private Securities Litigation Act. Actual results may differ materially from any forward-looking information provided on the call. And such information involves significant risks and uncertainties. A complete disclaimer is included in Citizens Inc.'s press release, dated February 27, 2009 and is incorporated by reference into this call. We are not responsible for transcripts of this call made by independent third parties. Again, we would like to thank you for being here this morning.

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

Thank you Josh, I appreciate it. We appreciate everybody on the call today and look forward to sharing with you some of the information that we have. We first, want to start by reminding everyone here that Citizens is 100% debt free. We continue to build the Company and operate the Company in a -- from a debt free position at this point. And we've have had over the last six months, quite an interesting ride in the marketplace and around the world but we're continuing to see positive signs for the business that we're in involved in. And we look forward to what 2009 is going to provide us.

We're currently -- as we usually and are generally doing, looking at acquisitions. We've got a couple of situations that we're currently involved in. Just evaluating. Not anything that we know or have anything specific going forward. But, of course, over the last six months, we have closed two different acquisitions, as we've worked through the Integrity Capital, as well as the Ozark transactions that we worked on during 2008. The Citizens business, of course, is not interest sensitive business. And so, what we've seen -- we have a portfolio that is also focused in on A rated and above. 95.5% of of all of our asset are in the A rated category and above. So, as a result of that, we've weathered through the economic storm here pretty effectively.

Our biggest impact has been over in the equity markets. As you're probably already aware, from the press release, with the investments that we made a couple of years ago in the mutual fund arena, as all of the financial companies have or any companies that were in the market have had some impact from that. But we when we went into those investments, we went into with a long-term strategy and expected to be holding those for an extended period of time. We continue to expect to do that and expect that we will get recovery, over time, out of those -- the impact that the markets had on us. So, in hindsight, had we not gone down that path to get the additional yield through that particular limit and again, those particular investments were limited investments. Our Board authorized not to exceed 10% of invested assets. And we never even got to that level, as we went down that particular path. So, The impact on us overall has been certainly more negative than what we would have preferred. But we understand and believe and expect that as we hold the investments, we will actually see improved yield over the portfolio going forward.

One of the other things, while we're talking about what the impact of all of this has been, is RBC ratios in our insurance subsidiaries, our [SECA] life ratio is 413%, security plan. The other large company is 918%, as an RBC ratio. So, we're very strongly positioned relative to the regulatory capital that we're expected to maintain. So we're pleased with where that is, although certainly, we'd love to see it even stronger than that. In any event, we're happy with where things are and where they're tracking.

We have seen a slight reduction in international sales over the year of 2008. That, as we've talked about in the past, is partially because of the introduction of the new portfolio last year. We kind of lagged almost 10% behind through the first half of the year and then made that up. And by the time we closed the year, we're somewhere closer to the 5% decrease, I believe, in the overall sales. So, while the market has certainly impacted us over the last six months, in terms of putting a little pressure on it, we're not seeing a dramatic impact or anything particularly significant, as far as the international sales are concerned.

We continue to see, like I said, a slight reduction in where that is. And we're running, relative to 2008, at about the same level, just very slightly behind where we were year to date the previous year. So, we're expecting to see 2009, based on what we believe we see at this point, continued solid production.

We do have a very positive upbeat attitude out in the field with our international field operation. And we believe that that also gives us some degree of indication as to where things will go for the coming year. We do expect, through the coming year, a little bit lower yields in 2009 because of the interest rate marketplace. We have had some challenge getting the large volumes of cash volumes of cash invested. But we're continuing to see -- as the market begins to evolve, we're beginning some improvement there and getting back into the yields that we would like to have. It's certainly not what we had seen through the majority of '08 but improved and above where our minimum rates are and minimum guaranteed values are. So, we're happy that we'll see that function like we believe it needs to.

The other issue there in 2008 was the Fire Company. And I wanted to address the fact that in the property and casualty business, with the Fire Company, we have made -- we're in the process of making additional changes to reduce that risk factor. You may recall, Security Plan Fire Company, in 2007, had about $1 million dollar gain on its operation. And then, during 2008 with hurricanes Gustav and Ike, had a loss that was somewhere in $800,000 range. So essentially, the profit from the previous year was wiped without by that. But we're making changes in the property and casualty side of the business to further reduce the risk, increase the premiums. And we believe that we'll be able to get that segment of the business operating more effectively.

I believe that covers -- the other thing I wanted to mention is the fact that we continue to target our expenses and work toward the economies of scale that we can gain through these integrations. We still believe there's more affect that we could have, as we continue to integrate the security plan operation. The majority of that got done through '08 but we believe there's still some additional possibilities and opportunity there. Of course, with the Ozark and the Integrity Capital operations, we're beginning to get to work on getting those integrated and we should see some economy of scale reductions through 2009 in that area. So, we will be continuing to develop and expand marketing opportunities, particularly as it relates to Integrity Capital and Ozark. As we begin to integrate those in and continue to work with those sales operations, we expect to continue to see some activity from a sales and marketing expansion point of view through both of those acquisitions. At this point in time, I believe I'm going to turn it over to you and let you take everybody through the financial results.

Thanks, Rick. Good morning and thank you thank you for joining our call. We're going to discuss Citizens 2008 and fourth quarter operating results and try to highlight some of the significant financial and operational events of the quarter and the year ending December 31, 2008. We will cover anything in more detail if requested. If you have questions, we'd like you to hold them until the end and we'll be happy to discuss them then.

Net income, during the quarter, we reported a net loss of $20.6 million, compared to net income in 2007 of $5.9 million. Basic earnings per share for the quarter was a loss of $0.49, compared to a $0.13 gain in the prior quarter of 2007. For the year, our net loss was $15.7 million or a loss of $0.42 a share, compared to earnings on a per share basis of $0.35 in 2007. The loss in the quarter and the year was due to, as Rick had mentioned earlier, the other than temporary impairments on our mutual equity fund of $23.5 million, that we took at the end of the fourth quarter.

If we were to adjust out the nonrecurring items from pretax income, we would have increased it by the $23.8 million that I mentioned. $2.7 million for expenses related to the fair value of warrants on our preferred stock and a number of items, like the hurricane, that were in 2008 that did not occur in 2007. After adjusting 2007 for nonrecurring items also, we get to a more favorable comparative net income of $9.9 million in 2008, compared to $13.9 million in 2007. And this would be consistent with 2008 increases in claims and reserves that I'll cover later.

In 2008, premium income did improve in the last quarter but was flat for the year. New international business is down for the year but again, did improve slightly in the fourth quarter compared to 2007. Additionally, renewal business has contributed to the total premiums, as persistency is exceeding expectations. Traditionally, the fourth quarter is our largest quarter due to -- in new business, as our agents are trying to qualify for the convention. And this year was no different. Investment income for the quarter was $8 million, 13.7% below 2007. The primary shortfall was in the mutual fund revenue, which had $2.2 million in distributions in 2007 but only $1 million in 2008. The continued growth of our invested assets, funded from operations, could not offset the credit crisis and the downward spiral of the market and interest rates.

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 lessened our exposure to the volatility of the current market and reduced our writedowns compared to some of our competitors. On the claims front claims, claims experienced increases in reserves and policy holder dividends of $29 million for the quarter and were $1.9 million over the fourth quarter of 2007. For the year, claims experienced an increase in reserves of $100 million, it was $6.8 million over 2007. The variances being driven by higher death claims and increases in surrenders and hurricanes that were above the fourth quarter of 2007.

Total operating expense includes both general expenses and expenses related to the acquisition in new business. In 2008, expenses increased $6.3 million to $59 million, compared to $52.7 million in 2007. The driving factors here were increased renewal commission, which were not deferred, and an increase in amortization expense. The unfavorable commission expense is mainly our home service division and was anticipated as part of our conversion in 2008. The increase in amortization expense was also anticipated, as our DAC asset continues to grow due to the favorable persistency that we are seeing. If anybody has questions, we'll be happy to answer them now. Or, if not, I'll turn the call back over to Rick Riley.

Josh, have you Unmuted?

Yes, you're good.

All right. Any questions for this call or anything we could provide in terms of additional insights to what the Company is experiencing?

Sure, you guys, this is Paul Newsome here at Sandler.

I'm sorry, say it again.

It's Paul Newsome here at Sandler O'Neill.

Hi, Paul.

Could you just go a little bit more into detail about some of the mortality issues you had in the fourth quarter? And just kind of why, if you exclude the investment results in particular, why the profit margin didn't seem to be where you would want it and priced for it on an operating [basis]?

Paul, this is Tom. We did see significantly higher death claims in the fourth quarter and really throughout 2008. But it's a function of life insurance. There's not -- we didn't change anything in our underwriting or in how we administrator our claims. We just think it's really more of a cyclical pattern and it probably should right itself.

Paul, again, most of it's in the home service segment. Death claims on the international business was actually lower than 2007. So, it was mostly if the home service arena.

And then, relative to your question Paul on the return and the yields, I think that those are more a function and a factor of the fact that we found we found -- our portfolio is geared toward an interest rate risk factor. And it's the government guaranteed portfolio, primarily, we saw a lot of calls as we went in to the latter part of the year. And I think the impact on the overall profitability had to do with the reduced investment yields. We extended -- the other aspect of that, Paul, would probably be the extended expenses, as far as the conversion and integration of Security Plan that stretched out through the better part of the year. We had anticipated, early in the year, that we would have achieved some levels of integration earlier in the year than we did. As we got towards the end of the year, we began to get to the point that we needed to be. And that's why I was saying earlier, I believe there are going to be continued improvements in that particular aspect of the operation, as we move on into '09 because we still see room for improvement in terms of expense factor reduction.

On the investments, specifically with the OTTI charges, I just want to make sure that I understand how the [tool] funds work. Are these essentially all mark to market through your income statement, as like sort of a trading cap mutual fund would be? Or are you treating this as if you held the actual securities? And then, if that's the case, when does an OTTI charge get triggered for you?

Paul, most of that is -- they are held in the available for sale portfolio. They're only mark to market when the Company does its other than temporary impairment analysis and deems that the securities will not recover to their basis in the near term. And currently, the guidance out there suggests that the near term is one year. So, when they've been under water for about a year is when they were marked down. They were actually above water at this time last year, slightly, but have fallen through '08 with the market. But they are in the available for sale portfolio. And they are -- they will not be marked to earnings as trading securities, only through impairments. So, they won't go through the P&L every quarter. Only when we deem there's an impairment. And they will not be written up through income either, only when we sell them. When we actually get the money back through the P&L.

I would imagine we will expect some more OTTI charges, given what's happened with the stock market.

It will come down to our analysis at the end of the first quarter, Paul, just to see exactly how they've fared through this down turn from December until through today and into March. So, we'll see where we come out at the end of March. But we'll have to run another OTTI analysis to see where they're at. So, depending on they fared, there could be or there couldn't be. But if the markets continue to fall, it would be more likely than not.

Has the mortality results improved so far in the quarter or are we still looking at these issues with mortality?

It's still really too early to tell that Paul.

We're not aware of anything unusual or any activity in that regard, Paul, that would give us any indication that it's anything other than just routine and normal activity, from a claims experience perspective. I would think and my expectation is that the increase we saw during '09, as Tom pointed out earlier, is typical within the life insurance business. You have years that are higher than other years. We have no reason or expectation that what we saw there is anything other than that type of a fluctuation between years.

Fair enough, thank you.

Great. Are there any other questions? Any other things that we could touch on?

Paul, one more thing to kind of clarify the quarter. Is the -- we had to set up a $6.9 million valuation allowance in the fourth quarter because of the other than temporary impairment, that we took on the the mutual funds, that kind of skewed the quarter earnings a little bit. But I just wanted to clarify that.

All right. If there are not any other questions, again, we thank you very much for the opportunity to provide the information. And looking forward to giving you a quarter end report, on the first quarter next period.

Thank you.

The moderator has disconnected. The conference will now end.