Citizens Inc (CIA) 2010 Q2 法說會逐字稿

Welcome to the Citizens Incorporated conference call to discuss second-quarter results. After the Company's introductory remarks, there'll be a question-and-answer session.

With that, let me turn the call over to Josh Arnold, Citizens' Vice President of Investor Relations to begin the call.

Good morning, and thank you operator.

Welcome to our second-quarter conference call. On the call today from Citizens are Rick Riley, our Vice Chairman and President; Kay Osbourn, our Executive Vice President, CFO and Treasurer; and Geoff Kolander, our Executive Vice President, Corporate Secretary and General Counsel, as well as other members of the Citizens, Inc. financial team.

This quarter, we issued both our earnings release and 10-Q on Friday. Both documents are available on the Company's website, www.citizensinc.com. Going forward, we are planning to have both of these documents available for your reference before the interim conference call. We generally will try to avoid crossing over a weekend before the conference call unless it cannot be avoided.

Now for the formalities. 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 risks and uncertainties. A complete disclaimer is included in Citizens, Inc.'s press release dated August 6, 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. Thank you.

Good morning, and welcome. We're closing in on our 2010 goal of $1 billion in assets, that was established little over a decade ago. We're now within $30 million of that particular goal and everyone's excited to see that come to fruition.

By this time, we hope you've had an opportunity to review the earnings release and the additional information that's provided in our 10-Q, and our goal today will be to provide some additional perspective on information contained within those documents, as well as provide you an opportunity to ask any questions you might have.

To accomplish this, Kay and I plan to cover three topic areas; our insurance operations, investment portfolio, and then our capital position and deal-making capabilities.

Let me start with insurance operations in our international area. Renewal premiums in the international market continue to be sound and solid. They have followed a period where new sales have leveled off near -- about $17 million level over the last couple of years. We anticipate that those -- with the economy and the situation that we've had here, the conditions we've had over the last couple of years that, those have bottomed out, they have leveled off, and that we expect to see that turn and come back as the economy improves and economic conditions improve.

The Colombian market, Taiwanese market and Venezuelan market, all remain -- continue to be the producing leaders of the new business. We are -- we have actually received business out of 28 different nations thus far this year. Brazil and China are the two markets that are showing the best promise for growth coming in this year, as we go -- based on what we've seen thus far in our operational details.

We have discussed in the Management's Discussion and Analysis the operating results relative to the insurance segment that I would highlight that we have had some decreasing expenses, which are impacting our earnings positively. That relates to the Integrity Capital acquisition that we had expenses in the first part of 2009, which are not continuing into 2010 and also some expense efficiencies that we've gained just in general overhead, operating expenses. So I wanted to highlight that as well.

All right. In our home service and property/casualty segment, we continue to see premium and revenue increase in that particular segment. That particular operation has continued to have growth and consistent development over this year. They're -- it's a relatively modest percentage, but it's a steady, consistent growth that they're building and that they're building on and we're pleased with what we see there.

We are still working to expand in that particular market for contiguous states and throughout the southern part, where the debit business and the home service operations are prevalent. We have some activities in place in terms of getting product approved and getting -- the ability to go ahead and make some additional inroads as far as the home service business is concerned in some of the states that are contiguous to where we're currently operating.

As Rick has noted, we're seeing in the operating results just the premiums that remain strong and the consistent growth in the block, and other operating results are really in line with management's expectations at this time.

On the -- with respect to our investment portfolio, let me address the fact that we continue to maintain a strictly conservative investment philosophy. We're -- we've been particularly cautious, I think, as most entities have been during this current interest environment.

We've, again, seen in the second quarter of this year, toward -- right at -- really, actually right at the last few weeks of the quarter, an enhanced or increased call activity, not altogether different than what we saw in the second quarter -- early part of the second quarter last year, we did see and are experiencing some of that in the end of the second quarter, beginning of the third quarter.

The Company portfolio still consists of AAA-rated security that about 67% of the portfolio is currently AAA-rated. 98.3% of our portfolio is investment grade. We continue to reevaluate investment strategy in this low interest rate environment. We have begun -- we've used some corporate utility investments as a way to maintain some of that. So we've broadened outside of just the agency paper to continue to maintain some diversification -- or to get some diversification in the portfolio, but also to maintain slightly higher spreads on some of the investments that we have.

Current crediting levels on most of our policies are about 4% and we are maintaining, for the most part, investments that exceed that. So we do still have a limited amount of spread on those investments. Although that is limited -- I mean that's less than what we have seen in the past, it's just -- we're being squeezed like everyone else is on that particular area.

I think one thing of particular note though is that -- when we design our products and our portfolio that we offer, we do not design it in a way that we're dependent upon interest spreads. So, therefore, we continue to have profitability out of the product and out of the products that we sell from the other dimensions of the design that we have in those products.

From an accounting perspective, there were no impairments recorded during the quarter or year-to-date relative to other-than-temporary impairment review. All of our investments are monitored on a continuous basis relative to industry and impairment concerns and those items are monitored ongoing. We did have impairments in the first six months of 2009 for $111,000 under OTTI review.

We also recorded gains in the portfolio related to available-for-sale securities that were sold during the quarter and produced gains that are also affecting the earnings and given us some positive impact.

And relative to the equity -- increase of stockholders' equity, we did have an increase in unrealized gains related to the mark-to-market adjustment on available-for-sale securities. We also had a decreasing equity, $1.3 million for the three months and $0.8 million for the six months related to increasing the tax valuation allowance because of deferred tax assets that we have on equity securities. So, those items are impacting our equity for the current quarter.

On the capital structure, we have good strong capital balances. We continue to operate, at this point, with no debt on the balance sheet. We're very well positioned to do deals.

We anticipate our acquisition opportunities will increase, as this market climate continues and these conditions persist. We would prefer to do deals in the $50 million to $150 million range, but we will continue to seek complementary situations with those who are willing to join forces with us as we grow the business.

With that presentation, at this point, we'll turn this call back to the operator and ask for questions.

(Operator Instructions) Your first question comes from Ed Shields with Sandler O'Neill.

Hey, good morning everyone.

Good morning, Ed.

Good morning, Ed.

I noticed in the 10-Q over on page 37, you discussed Citizens National Life, the statutory capital position being a little below the limits in Mississippi and Florida. Could you discuss that a little bit and discuss what your plan is there? I know the premiums there are only for renewals and not very sizable, but still kind of curious as to what's going on.

Sure. Ed, Citizens National is a stipulated premium company, so it's got a unique charter. The predominant reason for the decrease in the capital structure there was a settlement of some litigation that actually was related to business that we ceded a number of years ago, but -- because the entity was -- we just got drawn into that litigation and end up having to be a party through the settlement, nor to get it resolved. As a result of that, the capital structure decreased rather dramatically in a short period of time and that's what that's related to.

We're currently in ongoing dialog and discussion with three different departments regarding Citizens National. I don't anticipate that it'll be anything -- we don't anticipate seeing anything of the like kind again. So it's more of a matter of where do we go from here and what are we going to do in terms of maintaining that separate charter and that business operation.

We are finding frankly that that particular -- that's a unique charter in the State of Texas. It gives us some opportunity from a sales standpoint that is a little different than what we have in a legal reserve charter. And so, we're working under -- we're currently utilizing that particular marketing environment to build and develop some USA sales opportunities that wouldn't otherwise be available.

So we anticipate continuing to work through the charter and continuing to use it going forward, but that's really the background the situation is going on presently.

But there's no current sales going on with -- in those two states in particular or is it more broad based than that?

Not, it's just in those two states.

Okay.

There were some higher capital and surplus requirements in those states that we fell below when this happened. We didn't have any active marketing taking place in those states, so it was simple just to withdraw that authority until such time as we resolve or rectify the capital structure that's there.

Okay. Moving to a second question on the investment portfolio. I noticed that the mutual funds are getting decreased kind of sequentially and that you now have a more significant proportion of the investments in corporate bonds. Are you still planning on kind of dialing down the equity funds and mutual funds and [spanning] into more corporates or, what's going on there? And are the corporates only utilities? Are there other corporates in there?

There may be some other corporates, but -- in terms of where we've been making investments, Ed, the most of them have been in the utility area, those where we know there'll be a strong consumer demand and a need for those entities to continue to operate. But as far as the mutual funds and the shifting of the balance, your analysis is correct in terms of -- your observation is valid.

We have shifted somewhat -- some of those maneuvers with respect to the mutual funds were tax advantage type maneuvers that we were making last year, and we've got some more to make this year, but at the same time we expect the effect on the mutual funds to be neutral. So, we're not necessarily dialing it down further, but we are making adjustments with the portfolio and taking advantage of tax opportunities -- tax savings opportunities that we have with some of those particular elements. Josh, do you want to comment also --?

In the second quarter, the decrease in the equities, for the most part, is just the decrease in market value of the mutual funds that we hold. But Rick was right. We did spend some more money in the first half of 2010 in corporates buying public utilities and industrials, that are shorter bonds than our normal duration of our agencies just to kind of give ourselves a little more diversity, as this interest rate -- low interest rate environment hits us.

And that's also the cause for the tax valuation allowance increase is because of the deferred tax asset that increased related to the unrealized losses that occurred on those equities in the quarter.

And I saw it also, this will be the last question I have, that the cash balance was rather high at the end of the quarter. I'm assuming that's going to get re-invested as time goes on into your traditional investments, as well as some more corporates. What is the new money yields on those corporates compared to the total portfolio?

I mean, as Rick said earlier, in the last two weeks of the quarter, we began to experience large call volumes. It's not going to be as greater to as last year, Ed, because of a lot of the money last year that got called, we put into corporates which are non-callable.

Current levels for our normal agency paper are around 4.5% right now. We bought some corporates here recently, but not near as many just because on the shorter corporates as the -- at the low interest rate environments it is those spreads have shrank on those corporates to where they're down to 2.5% and 3%. So we really haven't been buying many corporates here in the last month or so, Ed.

Okay. Thank you.

(Operator Instructions) At this time, there are no further questions.

We just want to thank everyone for the call today. If you have any further questions, please contact Kay Osbourn, our CFO, or myself and we will help you get answers though. Again, thank you for the call today, and at that, we will conclude the call. Thank you.

This concludes today's conference. You may now disconnect.