Citizens Inc (CIA) 2010 Q3 法說會逐字稿

Welcome to Citizens, Inc., third-quarter 2010 conference call. At this time all participants are in a listen-only mode. After the formal remarks there will be a question-and-answer session.

I would like to now turn the call over to Ms. Osbourn. You may begin.

Thank you. Good morning. Welcome to our third-quarter conference call. I'm Kay Osbourn, Citizens' Chief Financial Officer. Joining me on the call today are Rick Riley, our Vice Chairman and President; Geoff Kolander, our Executive Vice President, Corporate Secretary, and General Counsellor; and Larry Carson, Financial Reporting and Tax.

Before I turn the call over to Rick for our opening remarks, let me get a few formalities out of the way. Both our earnings release and 10-Q were issued on Friday, November 5. Both documents are available on our website at www.CitizensInc.com.

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 the Citizens, Inc., press release dated November 5, 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 our President, Rick Riley.

Thank you, Kay. Good morning. Welcome, everyone. You'll allow me to indulge you just a moment, when I started with the Company in 1976 our founder and Chairman had established a billion-dollar goal for the Company. At that point it was $1 billion of life insurance in-force.

He had a wooden plaque created; it still hangs today in our break room for all of our employees to be reminded. It says -- you become what you think about; we are thinking a billion.

A little more than a decade ago he set another billion-dollar goal for us, a rather ambitious one considering the Company's assets only totaled $255 million at the time. The new goal would be to achieve $1 billion in assets by the year 2010.

In spite of the unusual economic challenges that we faced over the last few years, I am thrilled to tell you that today Citizens has officially reached that milestone with this quarter's report. We hope that you had a chance to look at the earnings release that we sent out and also the detail that is in the 10-Q.

Our goal today will be to add some additional color to those, the details that are in those documents. Kay and I are going to cover three primary areas. First, insurance operations; the investment portfolio; and then a few other corporate details and items that we will cover toward the end of the call.

First and foremost, Life Insurance segments. The Life Insurance business is moving. We're seeing a modest improvement year over year.

The US dollar-denominated international business we see improving this year. Instead of being flat as it has been in the earlier part of the year, we are beginning to see that it is improving in terms of upward growth in sales.

Again, it is moderate. It is nominal. It is not extraordinary. But certainly we are pleased to see it begin to move again in an upward direction.

The Home Service segment and final expense preneed areas of the Company continue to steadily grow through this year. They are in a somewhere 4% to 5% growth range year over year.

Our claims and surrenders continue to trend within normal ranges across all segments. We have made some policy benefit changes this year with the new GAAP era for all the new business that is being produced during 2010. Primarily that is driven by the change in the interest rates and the fact that we are having to make assumptions. Where we were assuming a 4.5% flat, we have now moved to a graded -- a little better matching of those rates to the business, grading from 3.6% to 5.1% over the life of the contracts.

That change actually resulted in an increase to reserves of approximately $460,000 in the current quarter.

We have also made an adjustment in our mortality, which will make a slight -- I think have a slight decrease impact on the reserves. But it is not particularly significant in the overall scheme of things.

Lapses continue to function pretty well within normal range. However, what we have done with our assumptions now is to split out ordinary business from endowment business and try to get a better matching there of how the lapses are occurring relative to the line of business that we are operating with.

As far as merger and acquisition opportunities, we are seeing several situations and opportunities coming through, really through insurance departments' receiverships where companies have not fared well and they have got the books of business available to be purchased there. We are looking at some of those.

We have not made any acquisitions since the end of -- I guess the beginning of 2009. Although we continue to look at opportunities, they have not been as robust as they were I would say last year, although we continue to see some. We are aware of two or three different situations that we could take an interest in, let me put it that way.

At this point, Kay, I will get you to give a little financial highlight, and then we will come back and talk more specifically about some of the investment details.

All right, thank you. Just a couple more items relative to the Life segment that I would like to point out. We do have in the current quarter two reserve corrections which are coming through our results that related to a decrease in reserve of approximately $510,000. Those areas were due to valuation database errors that we found during the current quarter.

We also are noting better persistency in this current quarter which is positively impacting our deferred amortization cost. You see that coming through in the bottom-line results as well.

Rick, do you want to go ahead with the Home Service?

In our Home Service and property casualty market, we are anticipating -- we have gotten a 5.7% rate increase approved. We expect that to be implemented January 2011.

These are targeted increases in that what we have done is, in order to avoid disrupting the existing business that we have in these various parts of the state, we have targeted the increases in somewhat of a rearrangement or even a splitting of one of the zones toward the northern part of the state where we were having some adverse activity.

We have now focused and targeted rate increases on that particular area, but we did not attack all the other areas with the same kind of a change factor. So, again it is a targeted kind of a change, one that we believe will have very minimal impact on lapse but should protect us in those areas where we are experiencing higher than normal claims ratios.

We are also noting in the Home Service segment that it is effectively contributing to our bottom line as a very viable niche market that we have entered into.

We noted the increased claims during the quarter. That is still within levels of expectation by management. But we did note that the volume increased as well as the higher face amounts reported in the current quarter, which is increasing those results. And those are the main highlights for the Home Service area.

Let me shift now if I may over to investments and talk a little bit about where we are and where we are going. Obviously the environment is a challenging environment and one where we -- with the portfolio that we have, which is really heavily influenced by call activity, as we have been reporting over the last really year and a half or so, we continue to have calls of our securities. And we are reinvesting in the current environment, which obviously is yielding a lower overall yield on the portfolio.

We continue to be squeezed in that regard. However, what we are doing in our portfolio, whereas we used to invest for longer terms periods, during this period that we have got and we are involved in today, we have shifted our focus to be more short oriented in terms of how we are investing.

We are experiencing a yield of, in the overall portfolio today, 4.3% and some change overall with an average maturity -- excuse me, an effective maturity of 4.64 years and a modified maturity of 3.39 years. Clearly, those will adapt as the market changes, and we understand that they will.

What we expect to be able to do is, as the markets moves we are using securities and structures today that give us the ability to protect ourselves on the upward movement. So the best way I can describe that we are doing that is primarily we are using agency step instruments that give us the ability to insulate ourselves.

If the market rises and we are locked in for a 15-year instrument, we can be assured that over the next three to five years we are going to see that rate step up above 4%. And I don't have an actual average of what those steps actually average to, but we are expecting it to be somewhere in the 4.5% range, maybe 4.4% as a general rule based on what we are acquiring today as far as instruments.

So we feel comfortable that we are going to have our policy minimums covered. But speaking to that extent, let me address the point that we now have lowered all of our policy crediting rates to their minimums.

Those range anywhere from 2% to 5.5%. The majority of the insurance portfolio that we have is about 4% as far as their crediting rate as a minimum.

We currently are able to, through the step instruments and the other utility and industrial notes that we buy, the Build America bonds that we buy, as well as certain other high-grade taxable munis, we are getting yields to maturity that are in the 4.5% range regularly. Some are higher.

Generally, we expect to see the portfolio continue to turn and churn and turnover. And we will be positioned as we move forward to take advantage of the rate increases as they occur.

We do anticipate that the market will begin to advance, and we will get an opportunity to put these funds back out at higher rates as the calls occur or as the maturities occur, based upon what the -- based upon the instruments we have been investing in, in the last year or so.

I guess really to give you an overview of where we view ourselves in management of the portfolio and what our objective and strategy is, it's kind of -- you could probably take the story of the tortoise and the hare. We are just going to be steady.

We are going to be just like that tortoise, and we are going to be steady and sure-footed as we work toward our goals and toward our objectives and as we have been.

Really much like what we have done over the last 15, 20 years we are going to continue to invest for preservation of our principal and then also then working to try to achieve maximum income on that investment that we make.

The other point I think I would like to make, just I had a question some time back regarding how the investments here are handled. We do that through an executive committee process.

The investments we achieve -- we actually secure investment opportunities from several different brokers around the nation. From those opportunities we then make our decisions and evaluate each of those opportunities relative to a given purchase.

I think that addresses all the things, Kay, that I was going to try to do in the investment area, if you want to address --

All right. I think you have covered it very well. The main items that I would like to add to what Rick has said is just that we continue to invest in high-quality securities, investment-grade securities, and that is our focus as he mentioned earlier.

In addition, we did have realized gains and loss impacts during this quarter compared to 2009 that fluctuate just relative to opportunities in the market. We do hold over 70% of our fixed maturities in available-for-sale securities. So realized gains and losses is a component of our income statement earnings that will fluctuate based on items that come through during the quarter.

Overall, we are pleased with where the Company is and how things have tracked, particularly in light of the current environment that we are in. We believe that the insurance operations that we have -- primarily again our niche-type operations -- they are healthy. They are continuing to work well relative to the products that we have got in the marketplace. We anticipate that we will continue to see improvement over the coming months.

I think there is also a question historically or routinely about how are we doing in the international economies. How are those affecting our business?

Frankly, what we find is that I think the dominant or the number-one country today in the international market I think is Venezuela from a production standpoint. With that economy or that country economically and politically in turmoil, that is fairly common for the type of international business that we do.

So that is not a surprise. That is normal and what we would expect. We then also have good, strong production coming out of our Latin American market as well as our Taiwanese market over in the Pacific rim.

So we continue to be encouraged by what we see in terms of sales and growth and growth potential. Obviously the economy as it continues to track -- if we knew exactly how it was going to go or we had a crystal ball, we could give you some better insight. But frankly we are pleased with where we are given what we've been through and where we are going based upon what we anticipate today.

We are not anticipating changing our investment strategy, except as the market changes and the rates begin to rise obviously we will begin to look at longer durations instead of shorter durations. But until that happens I don't expect to change in what we are currently doing.

At this point I guess I will turn this over to the operator. Anthony, we are ready for question and answers.

(Operator Instructions) Ed Shields.

Good morning, everyone, and congratulations on reaching your $1 billion in assets goal.

Thank you, Ed.

You're welcome. I have a question. Now that you have reached the $1 billion mark are you going to announce a new goal? If so, what might that be?

We are in discussions about what that -- yes, we are going to make a new goal. We have toyed with a couple of different ideas.

One in particular is to reach the next $1 billion within the next 10 years. It took 25 years -- or 40 years, excuse me, to get to the first billion-dollar asset goal, and we have toyed with the idea that over the next decade we think we could hit a second billion.

But at this point we haven't set one; we are just talking about it.

Fair enough. Again, congratulations.

One of the other things I would like to ask is the impact of the weaker US dollar in your overseas markets. Do you think that will have any impact on sales overseas, increase premiums over there? Or are those markets relatively unaffected by currency fluctuations?

Well, we are not particularly affected by the currency because we do all of the transactions that we do in US dollars on US banks.

Right.

So most of the business obviously is safe-haven type activity, where these foreign customers are seeking US dollar investments as a way to protect their assets. But certainly the weakness of the dollar can have an impact. We don't find in our sales operations that it is that big of an impact.

We do find that when there is a lot more media coverage of the weakening of the dollar, we do hear about it from the field. But we don't find that it dramatically impacts or affects what is happening.

I think the instability that we saw over the last -- oh, a year or so ago, maybe a year and a half ago, where it was more unpredictable at about where the economies were going to get and what was going to happen to all the global world economy, we found in that time frame there was a lot more angst or concern about making purchases.

But that seems -- while it still is there in the foreign economies, it is not nearly as prevalent as it was a year and a half ago.

Okay. I guess I've got two questions for Kay. First of all, the tax rate has been moving around lately with roughly 44% this quarter and 27% last quarter for various reasons. Where do you think the tax rate will end up for the year? Anything you can say about 2011 as well would be appreciated.

Well, Ed, we have had a move in tax rate. We will grant you that. We have tried to explain that in the Q to give some insight into what is causing that movement.

We do have some tax planning strategies that we do anticipate will impact the tax rate toward the end of the year, so I would expect that tax rate to come down. I really don't know exactly where it will end up, whether it will be a little bit above 35% or a little bit below. But we do anticipate that it will be in that range. The upper 30s by year-end is kind of where we are looking.

But it is moving relative to permanent differences in our tax items. We did have some current year intercompany transactions that are eliminated under consolidation rules; that did produce tax expense in the current year. But like I said due to some tax planning strategies we anticipate that that will come down.

Okay, and anything on 2011? Do you think it will be back around the 35% kind of target?

I think it will. We do have some impact relative to the fluctuation in the fair value of the warrants that causes some movement in our tax rate as well. But those warrants are due to end in 2011 and 2012, and the majority in 2011. So I do anticipate that the tax rate will move to a more consistent, right around the 34%, 35% range.

Okay. The second question I guess I have got is -- you mentioned and discussed the review of the reserve assumptions and the reserve database error that essentially netted out, I guess you could say.

Was there any impact on DAC? Was there any DAC unlocking in this quarter?

Yes, there was. We did have DAC items that came through. I don't recall -- what was the impact? $300,000 decrease relative. It was an increase in the DAC asset that came through in the current quarter as well for those reserve items.

All right. Well, you guys covered it pretty well for me, so that's it for me.

Great.

Thank you.

Thank you, Ed. Appreciate it.

(Operator Instructions) There appear to be no further questions on the phone right now.

All right. We do again appreciate everybody's participation in the call today. We thank you very much and look forward to updating you again after we close the year. Thank you.

Thank you. This does conclude today's teleconference. We thank you for attending. You may disconnect your lines at this time and have a great day.