Citizens Inc (CIA) 2009 Q4 法說會逐字稿

Good morning. Welcome to Citizens Inc.'s year-end 2009 earnings release call. On the call today we have Rick Riley, our Vice Chairman and President, Kay Osbourn, our Executive Vice President, CFO and Treasurer , Jeff Kolander, our Executive Vice President, Corporate Secretary, and General Counsel, Larry Carson, Financial Reporting and Tax, and I'm Josh Arnold, Vice President, Investment Officer and Public Relations. During today's call we will discuss the expected performance of Citizens Inc. which -- (Technical difficulties - inaudible) -- 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 risks and uncertainties. A complete disclaimer is included in Citizens Inc.'s press release dated March 10, 2010, and 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.

Good morning, thank you, Josh. We appreciate the opportunity to again to share the quarter's results, the year-end for 2009. We completed the year in good shape for the year, relative to how -- how the end of year 2008 ended. So we were pleased to have seen the recovery, and see the changes in the Company's portfolio, and the activities throughout the year. Let me start first with the international -- or I guess our life insurance segment, and the international update. We've got production in the international segment, is flat between the years. Essentially no growth between 2008, 2009, but given the effects of the economy on a global scale, we're comfortable that we're in good shape with that. And certainly given what's happened within the life industry overall, and the hesitancy that we've seen in some of the purchasing we're -- of life insurance, we're happy with where those results are given the -- the state of affairs or the economy.

We as -- we're still continuing to be leaders in several markets in Latin America. We've seen continued growth in the Brazilian market where we've done some work. We stumbled a little bit in that market last year, but have continued to see growth as we -- as we go through that. And we're happy with what we're seeing coming out of the field, and the expansion that's taking place there. We've had some meetings and discussions in expanding into other new markets and other areas. One of particular note in the last year is the Russian market. We're not focused on anything in particular there at this point, but there is possibility that we can maybe open something down that line in the future, so we're looking for that. We're -- we're continuing to pursue that. Whether we'll get it established or not, is yet to be determined. I guess the other thing that we're seeing in that particular arena is endowment sales, that have begun to take an increasing portion of the new -- new production that we're seeing in our international segment. Endowments I think currently represent almost 50% of the sales in 2009.

The next element here is our home service segment. We've -- we've seen increased sales in this particular market. I think it's predominantly related to the acquisition that we made of the Arkansas company. But in addition to that, we're still seeing strong continued increase in growth in the production of the home service market that we have there in Louisiana predominantly. That team, and that group of people in that market performed very well over the last year, and have made good strides to continuing their growth. They've been in a growth mode now for the last couple of years, but they did a very nice job during this -- during 2009 in terms of growing that market on a continuing, steady basis, in spite of the economic conditions that we've experienced.

Ozark, the company in Arkansas, the Ozark National Life was merged into Security Plan, the home service Louisiana company during the year 2009, which is effectively expanding the market for Security Plan and its operations into the state of Arkansas. And we've merged and integrated those operations together, and continue to operate those as a part of that home service segment. Security Plan Fire, these -- the small subsidiary that we have within the Ozark -- I mean within the -- the Louisiana market place, for property and casualty coverages, those are small limited liability policies, fire policies predominantly. That -- that book of business performed marginally during the year, last year, as we -- we really -- we really ended up -- we had no hurricanes and no unusual events. But we did not -- we've had increased expenses, and we've now got those things aligned. And we're seeing that as we got towards the end of the year with the rate increase that we made, and then some changes in product -- specific product provisions, we believe that we'll see enhanced profitability.

We did see Q4 profitability as a result of that particular operation there in Louisiana. But what I would say is, that it really is marginal at best at this point in time. It's one that we're keeping a close eye on, and we intend to monitor going forward, although we do believe that we've taken the steps necessary to put it on the right track, and get it headed in the right direction.

Those product changes did include a 20% rate increase on the coastal parishes. We also had a 5% rate increase on parishes that were above the coast, and no additional increase relative to the rest of the state. We also instituted a statewide deductible and a named storm deductible of 5%. So those were the changes that we think will impact our profitability positively going forward.

And we did -- when we did put in those rate increases, one of the points to note, is that we did have a relatively small loss of business. Normally when you do rate increases, it is not uncommon to have a fairly significant loss of business. But the manner in which these were implemented, we were very pleased with the fact that the business -- we had a very insignificant impact on the on the existing book of business, as we made these changes. And we expect that they will have a very positive result going into 2010. On the -- on the acquisition front, I think we've talked about this in previous quarters. But we did successfully complete and integrate, both the Indiana operation, as well as the Ozark -- or Arkansas operation into our systems, and into our back office. We're continuing to have -- seeing streamlined economies of scale that come out of that -- those combinations. And both Ozark and Integrity Capital are performing as we expected at the time we made the acquisitions.

And on the accounting front, the Integrity Capital acquisition is incorporated into the life segment earnings. That relates to about $1.6 million of life premium revenues in 2009. It's also accounted for under the new business combination rules. So we have expensed all costs associated with the acquisition, as incurred. In addition, on the Ozark acquisition that was in the fourth quarter of 2008, that is incorporated into the home service segment. And those results of operations have been a full-year in 2009, compared to only the two months in the fourth quarter of 2008. Premiums of 2009 totaled $1.9 million in 2009. And those -- those -- that business combination was accounted for under the old rules, which was prior to the the expensing of all costs incurred, as -- as we have done with the Integrity Capital acquisition.

All right. And I guess one of the things, just as a point of clarification . Kay and I talked a little bit about how we would do this. And we're doing sort of a tag team back and forth, as we work through the various points that we wanted to talk about this morning. So instead of the format, where we were each one independently working through it, we're working through it kind of cooperatively here this morning. We appreciate your indulgence with that.

The next item we got on our points to cover, is the preferred stock issue that we had, fully converted in July of 2009. We issued 1.7 million shares when we converted that -- of class A common, when we converted that stock, effectively simplifying our capital structure. And the -- the thing that we were most pleased with, or excited about, is the fact that the restrictive covenants that have bound us somewhat on size of acquisition deals and things that we could look at, without having to go back and -- and do extra -- extra work and planning, those restrictive covenants are behind us. So we're pleased to be able to move now, and work more effectively, and look at some other, I guess, more varied type acquisition type opportunities that are out there. We still have warrants outstanding through 2012. So you should expect that there will probably be some earnings volatility during that period, while the warrants -- warrants are there, and we have to price them, and do the things that we do on the financials from period to period.

Right. Relative to the fair value accounting of those warrants liabilities, we did have an increase of revenues of $3.2 million in 2009, compared to a reduction of revenues of $2.7 million in 2008. Those fair values fluctuate, as our stock price fluctuates, and they are calculated under a valuation model using the Black-Scholes valuation method. The Company's class A shares price at year-end 2008 was was $9.70, and at year-end 2009 was $6.53. So those items are incorporated into the revenues, and do have impact that we wanted to note.

Next from an investment standpoint, that's probably the area where we've seen the most significant impact, as we saw calls last year of our portfolio, and literally turned -- turned over a large portion of our portfolio. We experienced a -- a decrease in the -- in the -- the net earnings rate on our investments, anywhere from 0.75% to 1%, maybe even to a 1.25%, depending on what instrument you are looking at as far as the impact. The calls -- again, we're staying predominantly in the agency-backed securities, so we still have the high -- the low-risk and the high degree of integrity in the investments that we've got. But as a result of that turnover in the market in the last year, we did see a reduction in our overall yield rate coming from those -- the changes in the portfolio.

We have -- our equity securities have recovered more than half of what we had to do -- had to make as a write-down last year. I think they were up $14 million this year, roughly, over where they were at the end of the year 2008. We did take some of those mutual funds out of the equation, and use the gains that we had, the booked gains that we had -- to recover or -- or offset some tax opportunities that we had, a part of a tax-planning strategies that we had. So we utilized some of those gains to actually -- to make those offsets. We still do -- can maintain a portfolio that's 75% in Triple-A rated securities. And as of the end of 2009, in contrast to where we were at the end of 2008, we had a couple of RBC issues on some of our smaller subsidiaries, we had no issues -- RBC issues, and no problem -- no issue with having to recapitalize any of those entities at the end of 2009.

Just to run down the other than temporary adjustments that we recorded in 2008 and 2009, for 2009 we had minimal impairments that were really related to the acquired portfolio of the Ozark securities. We had additional impairments of $300,000. Those were recorded all to the income statement, as they were primarily equity securities, and the few bonds that were reported were all impaired due to credit losses. In 2008, we had impairments relative to the equity mutual fund holding, as Rick has discussed. And those did recover in 2009, about 50% of their value. And we did, like he mentioned, take a tax planning strategy to go ahead and realize some of those gains for book purposes, and create a tax loss that we were able to capture some tax, capital gain carry forwards that would have expired, if we had not utilized that strategy.

In addition, an item to note is that our effective tax rate for 2009 is 15.8%, compared to 24.7% in 2008. This lower tax rate is primarily driven by the tax valuation allowance, which is related to the deferred tax asset on the other than temporary impairments that were recorded at year-end 2008. We were able to release some of that valuation allowance in the current year, which resulted in $2.8 million of reduction in tax expense in 2009. In addition, we also have the fair value of the warrants going through the revenues section of the income statement, and those are not tax affected. So our tax rate is -- is down from the enacted tax rate of 35%, primarily due to those items.

And then as a -- as a course -- a correlating element of our interest earnings and reduced yield, we have also made adjustments in our products and our crediting rates on our products. We have most everything being credited at a -- a -- at around 4% which most -- and most all of our products we moved to the -- toward or down to these guaranteed minimum bases. The -- we are expecting to see some of crediting spreads to ease up and loosen during the -- during 2010. So perhaps we'll see some improvement in that area, if that -- if that happens.

We're -- continued to -- continue to be focused on growing the Company, and developing the Company in much the same way that we have over the last 40 years of its history. We are excited to see forthcoming,p the goal that we've set back in 1999 to reach a $1 billion in assets by the year 2010. We do believe that during this year of 2010 -- we will -- we will reach that $1 billion dollar asset goal that was set more than a decade ago. We're continuing to talk about what the next goal will be. And I'm sure we'll find a new $1 billion dollar goal to set, when we're talking in the -- in our shop here. We're always thinking about $1 billion, so we'll probably see if we can find another $1billion dollar goal to set, and work toward as far as growing the Company, and developing into the future. But with that, I think we covered pretty much everything that we were wanting to try and touch on this morning. I'll open it up for questions, or any interactive dialogue that anybody would like to have.

Hey, good morning, this is Ed Shields from Sandler O'Neill. I just had a quick question on ETA valuation allowance that we have for the quarter -- (Technical difficulties - inaudible) How much was it, and can you just provide a little bit of color on that?

Yes, we will. The -- I apologize for the -- for the feed. Michael, I'm not exactly -- for the feed back. I'm not exactly sure why we're getting it as bad as we are. But we did get the question, and we'll see if we can provide a little bit of insight here into the -- do we have -- do you understand where to go with that?

I think so. I think that you are asking about the tax valuation allowance.

Yes. Yes.

Okay, yes. The tax valuation allowance was set up due to the other than temporary impairment that were recorded at year-end 2008, which created a deferred tax asset. But the deferred tax asset had to be reviewed for recoverability, which is why the asset -- the valuation allowance was recorded at year-end 2008. As the market has recovered, that valuation allowance has been reduced and been able to be released. We have different components of the valuation allowance that goes through different sections of the financial statements. There's pieces that go through other comprehensive income, as well as portions that go through the income statement.

What was the actual dollar amount in the fourth quarter?

Yes. The valuation allowance was $2.8 million compared to the income statement and 2.7 was -- (Technical difficulties - inaudible)

Did you get that? Ed? (Technical difficulties - inaudible) Okay. Are there any other questions or comments? Again, we apologize for this line. I'm not sure what has occurred this time. (Technical difficulties - inaudible) All right. Hearing no other questions, we'll end the call at this point. Thank you.