Citizens Inc (CIA) 2009 Q2 法說會逐字稿

Good morning. We'd like to welcome everybody to Citizens, Inc.'s Second Quarter Earnings Call.

With us this morning, we have Rick Riley, our President and Vice Chairman; Kay Osbourn, our CFO; Larry Carson, Vice President of Financial Reporting and Tax; and Jeff Kolander, our General Counsel.

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, since such information involves significant risk and uncertainties. A complete disclaimer is included in Citizens, Inc.'s press release dated August 6th, 2009. 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 call over to Rick Riley, our President and Vice Chairman, who will update you on the quarter.

Thank you, Josh. I appreciate the opportunity again this morning to share with everyone the progress that we've made over the last couple of quarters.

But first, let me address the fact that we've got all of the acquisitions that we've made fully integrated into the operation. There are a few loose ends on the Ozark conversion work that was done in the second quarter, completed substantially by the end of the second quarter. And so we'll have all of that fully integrated and working, as we move on into the third quarter and iron out whatever those little conversion issues there are over the next coming days.

We have -- the Integrity Capital conversion and integration occurred fairly smoothly in the early part of the second quarter. So we've actually gotten both of those two acquisitions fully assimilated and into the normal operations of the organization.

Just a little bit on the international marketplace -- we are seeing some reduction in our -- or we're lagging, I guess, behind in our sales. I think we talked maybe 10% through the first quarter, although we anticipated at that point that we'd see that recover as we went through the year. As we're getting in through the second quarter, we're seeing actually that that has continued. We also have had activities in the international marketplace, with the loss of one of our global general managers that has contributed somewhat to that.

Although most of the field operation underneath that general manager was redistributed and reassigned back to other managers, we're finding that probably that disruption, as well as the worldwide economic conditions and the events of the economies around the globe, are causing some of the slowdown there.

We still have good pace of sales, and we still have good enthusiasm. Matter of fact, one of the things this last two weeks -- we've had our record attendance in training sessions here outside of our offices with international, with folks out of one of our -- with one of our global managers in Latin America having record numbers of folks over the last two weeks here through training courses. So we're pleased and excited about the fact that we've got people still interested, and very much looking forward to where the future goes, as far as the international business is concerned.

We're seeing some opportunities to expand over in the Pacific Rim. Particularly, I know Ray made some contacts in his trip this last week or so, covered within the last month, over in Taiwan; also in the mainland China area, where they've made some additional contacts and did some training and some work over there on the ground within the last couple of -- I guess about a month ago, when he started that trip.

But in any event, the expansion there in the international market is still a focal point for us, trying to open up additional markets in Vietnam, Thailand, other places over in that Pacific Rim area. Of course, Singapore and Malaysia are places we've been working and expect to have some additional growth and development through that area.

The home service market's been another bright spot for us in the last quarter and the first half of this year, in that we're seeing growth come in that particular market, particularly with the addition of the Ozark field operation and that team. We're seeing that particular segment do -- had somewhat of an increase in sales, despite the economic conditions and things we're seeing elsewhere.

So we're pleased with that. It's exactly what we expected we would get with our involvement in that operation. And we're expecting to see that continue to move forward and continue to grow.

As far as the Security Plan Fire Company -- we currently have a rate increase that's pending to get applied, and I think we've got the application in place at this point. We've also made some adjustments to those policies to add -- or are planning to make some adjustments to policies to add deductibles and some other cost-containment type features that will help enhance the function of the Fire Company.

The other -- probably the more significant event is actually a post-quarter event, and that's the complete retirement of the preferred stock issues that we had out there. It's kind of cleaned up our capital structure. And we converted the preferred stock to $1.7 million of common in the first part of July. So we've now got all of the restrictive covenants and the things that were binding us and holding us back somewhat on our -- through that preferred structure out of our hair, and we'll be in a position where we can move forward a little more flexibly and a little more powerfully, as we talk and begin to work toward our next acquisition opportunities.

We still do have the warrants on those preferred shares that will be out there for another couple of years, I think through 2011. So we expect to continue to see the same type of income statement volatility as a result of those warrants. But it's not -- that is what it is, and it'll be something that we'll outlive here in a couple or three years.

Investments-wise, we've seen a shifting -- a lot of call activity in the quarter. The call activity caused us to decrease yields on some of our investment portfolio. I think we probably talked about that in the last quarter, but it's -- that activity was a significant part of the second quarter. And so we're just reiterating that fact.

Essentially, the impact is a reduction in the yield on some of those government-guaranteed investments that we have, or government-sponsored entities that we invest in, the agency paper. We're seeing that those items have actually reduced by half a point to a point or so in terms of investment yield. And that's -- you'll see that reflected in this first half of the year's results.

In that same quarter, the other thing we did is -- or in the second quarter, we've actually activated a hold to maturity portfolio. That should insulate some of the financial reporting from market volatility, and it actually is a better reflection for us in terms of what our investment objectives are. And we believe it'll be a more appropriate way to carry those investments that we put into that hold to maturity portfolio.

I think that's probably the most significant things that I've got to cover. And at this point, I want to turn the call over to Kay Osbourn, Chief Financial Officer, and ask her to review the financial results.

Good morning. I'd like to recap the earnings and highlight some notable financial items for you this morning.

We did report net income of $7.1 million, or $0.10 per basic earnings per share on common stock, and $0.04 diluted earnings per share for the six months ended for June; compared to net income of $5.7 million, or $0.11 per share for basic and diluted for the same period in 2008. For the three months ended, we earned $2.7 million, or $0.03 per basic and diluted earnings per share; compared to $3 million, or $0.06 basic and diluted earnings per share for the same period in 2008.

Our revenues have increased 8.3% in the first six months of 2009, where we're reporting $90.1 million, compared to $83.2 million for the same period in 2008. If you exclude the fair value adjustment on the warrants of $3.1 million in 2009, our revenues have increased 4.3%, with $87 million reported in 2009 compared to $83.4 million in 2008.

Our premium income is up 3.6%, primarily due to the increase in renewal premium. We also have included in those numbers $1.8 million related to the acquisitions of Integrity Capital and Ozark National, which were not in the 2008 results.

Net income decreased to $14.3 million in 2009 compared to $14.9 million in 2008. That decrease was notable due to the call activity that we experienced on the securities portfolio, where we're investing in lower-interest rate investments as well as the time lag in investing monies.

Investment income related to our equity securities increased from $210,000 to $299,000 for the three months and six months, compared to $280,000 and $549,000 of 2008. This increase primarily resulted from the equity securities of Ozark which are now included in the portfolio.

We also had net realized gains in the current period of $1.8 million for the six months ended June 30th, compared to minimal gains in 2008. Those are primarily due to gains related to sales of fixed maturity securities sold in the first six months of the year, offset by other-than-temporary impairment losses that were recorded in the first quarter of $111,000. There were no OTTI impairments in the second quarter of '09, and the new guidance relating to OTTI did not impact the Company in the current period, as we attributed all of our OTTI impairment to credit-related losses.

Our stockholders' equity did increase from $171,541,000 at December 31st, 2008 to $190,064,000 at 6/30/2009. The increase is primarily attributable to the acquisitions relative to the first quarter, in addition to the recovery in the market value of the securities that are positively impacting the other comprehensive income adjustment by $11.8 million for this quarter alone.

So those are the significant impacts, I think, relative to key indicators in the financials that are driving some of the numbers. And I'll turn it back to you, Rick.

All right, Josh, you want to open up the call for questions and answers, and we'll see if we got anything anybody would like know more?

I think we've got the call open. Are there any questions, or anything that -- maybe other issues that we could address while we're together?

Good morning, folks, it's Paul Newsome.

Hi, Paul.

Quick question -- given the drop in the portfolio yield, how do you -- how does the new portfolio yield compare with what you -- with the actuarial assumption for your life insurance policies?

Hey, Paul, this is Josh. I'll take the first stab at this, and then Rick can chime in whenever he will.

The big drop [in] income for the quarter was the call activity. And we were purchasing investments around a 6% yield, and now lowered to 5% to 5.5% during the quarter, and then the time lag between when investments call, then we actually get it re-invested. We did, at year end and in the first quarter of this year, lower all policy interest rate guarantees to their minimum values to help us with that going forward.

Actually, what he meant to say is we lowered the declared rates --

Right.

-- through the guaranteed rates, which are -- which continue to provide us the same spread, Paul. I think that's what your question is. We continue to experience the same spread that we had by lowering those. That's not an absolute, because not all could get to a 4% range, or some of them, I think, even at 3.5%. And I believe that we probably leveled at about 4% when we brought those down.

So when we're making a statement, it's not an absolute statement of bringing everything to their absolute minimum. But we did bring everything to the lowest point guaranteed at the beginning of the year. And so the spreads that we're experiencing -- we pretty well anticipated what was happening and should be pretty well out in front of it, as far as what's happening relative to product assumptions.

Now, on products that you had -- and there's a limited volume of these products that maybe had 4.5% or 5% guarantees. Certainly, that spread has been cut somewhat, but there's not a large volume of product in those categories. The majority of what we have is at 4%, 3.5% or 4%, minimums.

So are you pretty much at the minimum across the board for the business that you've written?

Generally speaking, we are paying at the minimum, yes. It was not -- again, it's not an absolute. But from a percentage of the portfolio or of the book, the answer is yes, we're at that bottom.

So if the portfolio yield continues to fall, you would expect further margin compression?

There would be. But at the same time, I think that the -- yes, the point that you're making is valid -- it would be there. But I don't think that we're going to experience that. Because as we get back -- we've already seen the values turn back the other direction. And we're expecting that we're actually going to see improvement. And as we lag in terms of moving those rates back up, we'll actually see some increased profitability, we believe.

And Paul, from an investment standpoint, I think we've seen security yields kind of come back a little bit here at the end of June and July. So they were pretty low the first part of the second quarter, and they've started to tick back up here into June and July. So I don't think this will be as much of a problem going forward.

And we did anticipate as well that the investments would rebound over the next three to five years. So we did kind of adjust our maturity of investments to put some of our exposure into shorter-term investments, so that we could reinvest in higher rates as things turn around.

Is new money at a higher rate than your portfolio yield?

Actually, it's right about where our portfolio yield is right now.

Yes, that's what I was going to say. I think it's probably --

It's probably dead even.

-- [going to] break even.

Yes.

Great. Thank you.

You bet.

Any other questions? Any other insights we could provide?

All right. Hearing none, we appreciate again very much the opportunity to share the results with you, and look forward to meeting with you again next quarter.