Citizens Inc (CIA) 2010 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Citizens Inc. Year End Conference Call. (Operator Instructions) At this time, it is my pleasure to turn the floor over to your host Kay Osbourn.

Thank you, Doug. Good morning and welcome to our fourth-quarter conference call. I am Kay Osbourn, Citizen's 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 Counsel, Larry Carson, Financial Reporting and Tax, and Jonathan Pollio, our Actuary.

Before I turn the call over to Rick for our opening remarks, let me get a few formalities out of the way. First, our earnings release was issued on Thursday and is 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. Action results may differ materially from any forward-looking information provided in this call since such information involves significant risks and uncertainties. A complete Safe Harbor disclaimer is included in the Citizen's Inc. press release dated March 10, 2011 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. Welcome everyone. Glad to have you on the call this morning. Happy to report that we close the year or completed the year last year pretty well as we anticipated or expected. We hope you had a chance to look at our earnings release and of course our goal today will be to add some additional perspective or insight into the information that is contained there in that document as well as our 10K which we expect to file later today. First, Kay and I are going to do a tag team type exchange here as we work through insurance operations, our investment portfolio and then other opportunities that we see coming in the future.

From an overview point of view, our new sales remained consistent, year-over-year. We saw some very slight up tick in terms of the new sales numbers, but generally, they were about the same level from one year to the next. Persistency continued to be a positive trend for us. Therefore, our premiums are at year-over-year, without the influence of an acquisition situation. The investment income, again, with constant between years, even though the market was in a downward rate trend, this is occurring primarily because our increased asset base and our attention and focus on keeping our invested assets working and getting out as the calls came and as we had activity in that portfolio, continuing to stay focused on getting those things reinvested at as an effective rate as we could make at the time. Claims and surrenders were flat, year-over-year, but they are pretty well within what expectations we had.Our reserves continue to build as we expected, predominantly based upon endowment sales or the increase in endowment sales that we've got. Our expenses continue to decline as our audit, legal and several different aspects of our operating expenses have been managed more effectively over the last several years. So, that trend has continued downward in that area, one of which we're particular pleased about.

Another comment I wanted to probably provide just from an overview perspective were some of the trends or some of the change in what's happening in our international marketplace. We did see a shift in the leader as far as where production is coming from this year. Venezuela topped the list whereas Colombia had been topping that list in previous years. But, the same for countries, Venezuela, Ecuador, Colombia and Taiwan continue to be the predominant producers. Although, you got Argentina, Brazil, Bolivia trailing and chasing a behind that top four category. Just to give you a little bit of detail there, the Venezuelan market represents about 18% of our submitted business this past year; Ecuador 13%, Colombia 12%, Taiwan 10% and then it drops down to single-digit percentages below that. But, if you look at all the top 10 countries that are producing business, they represent 73% of the overall new business submitted in our international marketplace.

The other thing I wanted to comment on before I turn it to Kay and let her walk through some of the financial details -- or some of the financial details in the insurance segment, or the insurance operational area, I want to just briefly on the fact that we continue to see a trend toward endowment sales increasing. We've noticed that, over the last several years, we've seen that kind of flip or an inversion in that where we used to be 60% whole life, 40% endowment we are now seeing the reverse of that. We're seeing, in today's market, 60% in the endowments and 40% in the whole life area. That is predominantly driven by what we believe to be customers interest in guarantees. The endowment products are actually more expensive, but in the current economic environment, the guarantees are driving the purchases we believe. Kay, you want to take it at this point?

Yes. Our life segment generated $13.9 million year-to-date income before taxes, compared to $10.5 million in 2009 and the quarter numbers are $8.3 million in 2010 compared to $2.5 million in 2009. As Rick indicated, we are seeing metrics relative to the business mix changing some of the financial numbers, the reserves are actually increasing at a faster rate relative to previous numbers, due to the endowment sales picking up reserves quicker. We also, as Rick indicated, had better persistency so therefore, our DAC amortization is down year-to-year comparing the two. We also, I'll talk a little bit later, but we do have realized gains impacting the life segment this quarter of $6.4 million in the quarter. We did have gains in the home service segment area in the prior-year and we will discuss that a little bit more when we get into the investment details. But, that's primarily the life highlights.

Alright.Over in the home service segment, we continue to see steady sales growth year-over-year. In addition to that, we've also got on our property and casualty subsidiary, again it's a relatively small element of the overall entity, but we were successful in implementing a 7.6% rate increase on those products beginning January 1 of this year. So, we anticipate continued improvement in the property and casualty element of the business. Just as a commentary there, I think it's important to realize that the property and casualty component of our business is really not a core component, however, it is an integral part of the home service marketing and sort of a lead generator in terms of being able to position ourselves for the ordinary life sales that we make in the home, particular segment. So, it's instrumental and an important part. But certainly not a core component or a material component of what we do overall. We expect that in the home service market that will continue to see direct sales as well as acquisitions continue to grow that particular segment of our business and develop the enhancement or expansion there.

Our home service segment did generate $6.7 million of income before taxes, compared to $9.2 million relative to year-to-date results for 2010 compared to 2009. And, our quarter to date results were $2.2 million for this fourth quarter versus $6 million for the prior fourth quarter 2009 results and that does relate to those realized gains that I indicated earlier. We had $4.8 million of realized gains due to security sales in the home service segment in 2009 that are causing the differences in those results. We also did see the amortization of DAC decrease in the current year due to the persistency as indicated earlier. And as Rick also provided you some details, we did see operating expenses decline due to some efficiencies that we've gained year-to-year.

Now, let's go to the investment area. It's probably the area that had the greatest amount of challenge, I guess as the market has the rates in the market have declined and the unique opportunities or unique challenges for turning the portfolio over as we have calls. But, our spread compression has been the biggest challenge that we faced in the investment area. But, we are managing through the environment with acceptable returns and seeking value and high quality issues, fixed income purchases that we've made. Fourth-quarter calls of agency issues continue to be significant although the trend seems to have diminished greatly as we started into 2011. The products that we have all are operating or set at their guaranteed minimums as far as where the Board has set current rates. The lowest of those rates are 3%, the majority of the portfolio that we have in place is guaranteed at around 4%.

Our investment turnover of the portfolio certainly saw some decrease in our overall yield, approximately 30 basis points in terms of what happened and what we did in the fourth quarter. The instruments that were called were yielding somewhere in the 5% to 5.25% range at the time that they were called. And, we were able to replace a large portion of those with securities that have yields in the 4.5% to 5.5% range depending on what we were purchasing. Let me get a little bit of insight on that. We purchased a number of step rated agency issues that basically, two thirds of the purchases that we made in the fourth quarter were focused in that direction. And, about one third of those caught focused really more toward Build America bonds municipal securities. These are bonds that have some backing of federal subsidies and dimensions to them to give them a heightened level of quality. So, we had about a third of the portfolio invested in that direction in the fourth quarter with two thirds into the agency certificates and agency paper where we've been before. Generally, we are getting 5.5% yields on the Build America securities and overall, in the fourth quarter, we are yielding just over 5% on the investment that we made during that period.

As Rick indicated, our ratings distribution has changed due to the movement of securities out of the AAA government holdings which accounted for 74.2% of our holdings in 2009 and now account for 65.3% in 2010. We moved those agency holdings as indicated to municipals and corporate, and that increased our holdings in the AA category to 9.1% and the BBB category to 12.9% and 2010 compared to levels of 4.9% and 8.2% in the respective categories for 2009. So, we are getting little bit different distribution relative to our rating across securities as we move into other industries and other holdings.

Also, I'll talk about the realized gains relative to the quarter and the years to date. We did sell some equity mutual funds investment in the life segment this quarter, approximating $6.4 million of realized gains. We also had sold equity mutual fund holdings in the prior year in 2009 in the home service segment. These are the securities that also had the valuation allowance for tax purposes. And so, we're also able to relieve all of our tax valuation allowance at this year-end and so that is also impacting our current quarter numbers and year-to-date numbers as we are able to let those tax benefits flow through. So those are items that are impacting the quarter and also, we did not have any, other than temporary impairment, in this quarter. For the year of 2010, we wrote one security down to a holding value of zero which resulted in a $27,000 charge to income. But, in 2009, we had other than temporary impairments of approximately $300,000 for comparability. But, those are the key factors that are impacting the realized gains and losses in the portfolio holding.

As we come into 2011, what I would tell you that we are being a little more selective since we don't have the call activity that we had and we've got less availability of funds to make investment, we are being relatively selective about where we make the investments. We're continuing to make them in agency and the Build America bonds area. Although, we have made an investment in the unique corporate situation here there. Most of the Build America bonds type investments that we are making their are dealing with essential service securities, things that are going to be related to utilities or schools or things that are essential needs of the taxpaying committee where these bonds are being issued. We are also maintain those in relatively limited areas of the country. Some the Midwest, South, and maybe a little bit in North Carolina or the East Coast area there but generally, it's southern states, Texas, Oklahoma, Kansas, those types of Midwestern state are where we are predominantly utilizing the BAB type securities.

We don't have a crystal ball we don't know exactly where things are going. Clearly, the nature of the adjustment we've seen over the past couple of years an enhanced ability that we've got in the Middle East as well as even some of the things that are happening now geographically around the world, certainly create a lot of angst and concern in the marketplace and we understand that. We don't anticipate there is going to be any radical changes in what we've been dealing with over the last couple of years in the near-term. But, we are going to continue to do and follow the same basic patterns with solid seeking high-quality investments and focusing more on the quality investments that we are the yield but at the same time we expect yields to be similar to what we've been able to get thus far and hopefully anticipating some improvement if the markets will settle and begin to stabilize little bit . Obviously if the investors leave the safety of the bond market and we should see spreads widened a little bit and we will be able to take advantage of some of that if it does happen to occur.

Over on the merger acquisition front and the area there in terms of where our opportunities are we have obviously seen less of those in the past 12 months. We do have some things that we are looking at and some opportunities, none of which are really of any great magnitude at this point. But, we certainly are continuing to look at deals and we do continue to see deals, they're just not nearly as frequent as they were in 2009. 2009 was really the big year but we do you still see some opportunity there and we are going to be looking to take advantage of those opportunities as they fit well with our particular mix.

Just to get some insight on the tax rate, we do have a lower tax rate for the quarter and year-to-date as indicated by the release of the valuation allowance. We have $2.5 million release of valuation allowance in 2010 year-to-date compared to $2.7 million in 2009. In the current quarter, the fourth quarter, we had $3.1 million related to release of valuation allowance that is positively impacting the bottom line results and reducing our tax rate. We had $1.8 million of that amount related to an OCI other than comprehensive income release for the valuation allowance. So we do anticipate the tax range to rate somewhere between 33% to 35% in the upcoming year, but, those are items that are positively impacting the bottom line primarily due to the release of the tax valuation allowance. One other item I wanted to point out, as Rick indicated as for the Company 's performance, all of the life company's risk based capital levels improved from 2009 to 2010 as we saw positive financial results. So, those are all good indicators of the future.

Alright.As we begin to wrap up here, clearly we've got current economic challenges that are going to continue but we've got a good, healthy insurance operation and we expect to see it continued to perform well going into the 2011 and future years. We are cognizant of the economic instabilities and the climate that we've got as cultural as cultural instabilities. We don't anticipate that any of that is going to be detrimental to our business. Frankly, and some of the Latin American countries, when we seen instability we actually see enhanced productivity, but at this point and I guess in Venezuela the fact that is topping the market is a good indicator that's really what, typical of what we see in our dollar market business.

From an investment standpoint, pretty well talked through the different issues. We're comfortable with where our strategy is, we're continuing to meet our cash flow expectations and needs and so, we don't anticipate seeing that strategy adjust or change. But again, as the market changes we may have to adapt to do things differently even though it may be a slight adjustment or slight changes that we would make. We are optimistic about our business segments and very hopeful that the world, worldwide instability will settle down sooner rather than later. As we remember and think about our founders, visionaries perspective, and a reminder to us, over the years you become what you think about, were thinking $1 billion. We want to share with you that were thinking about reaching $2 billion in assets and less time than it took us to reach our first billion, perhaps even in a short of time as another decade. We are continuing to think about where we are going to set those goals or what we are going to do with those goals but just wanted to know what we are thinking about and with that, I will turn the call over to Doug and let you start -- open up the Q&A.

(Operator Instructions) Ed Shields from Sandler O'Neill.

Thanks for the call. The information was pretty good. I'm probably just going to review a couple of the numbers just to make sure I've got them right.Rick, you said that the rate increase at 1/1 for the property casualty segment was 7.6%, is that right?

That's correct.

And that was one 1/1/2011 right?

That's correct.

Where do you think rates are going to continue to go? Because this is what the second or third year in a row for rate increases in that segment?

Ed, that segment, the B&C segment it is a lot like a health segment. It's one you've got to continually be on top of the rate increases and you can't let them track or not make them so, I don't know that I would tell you that they are going to decrease or change significantly, although, because I would anticipate, frankly, that there would be annual increases in that particular segment or in that particular dimension of that segment. But, as far as a level or amount, that's going to be indicative, clearly by what we experience claims wise and clearly from a client perspective, I'd like to see those lowered and not be a significant as 7.6% but there's not any way I can predict what that will be because it will all be indicative of what happens in that particular entity.

It really depends mostly on the weather, right?

It does. Weather, we had for example a storm last -- there was tornadoes and rain in Crowley, which is kind of central part of the state. I understood that we probably had 10 insurers that were impacted by that particular event. And, we are anticipating they were probably be some additional ones but there's not anything -- we don't anticipate that it's a particularly significant event, typical of springtime weather and therefore, it wasn't extraordinary like Katrina or Rita or Gustav are those that actually got us, came through the Louisiana market in years past.

Right. Kay, I have a question for you as well. Could you go over the valuation allowance that was recognized in the fourth quarter again? If I took my notes right, it seemed like the fourth quarter valuation allowance was larger than all of 2010? Or did I get that backwards?

No, the valuation allowance that was released in the fourth quarter was $3.1 million . So, there was some other offsetting items in the taxes that created differences for the year-to-date.

Okay. So, it was $3.1 million for the quarter? Okay.

Correct.

And, I guess, I don't know if you have any RBC numbers available?

No, I did not bring those with me, Ed.

Okay. That would probably be a nice thing to get at some point, particularly being able to do a sequential -- seeing the sequential kind of improvement.

We actually talked about, Ed, putting that into some of that detail into the 10-K. I don't think we got it in there this time, but it is a charter illustration I think that we'd like to add to that particular disclosure.

Yes, it would be useful information.

I can provide those numbers at the next quarter call.

Okay. And really, I'll have one last one here for you and it's kind of taking the events of the day, I'd be somewhat remiss if I didn't ask if the unfortunate events happening in Japan today with the earthquake, if that has any bearing whatsoever on any of your operations?

At this point, we're not aware of any at all. I understand, and I've got very little information on it, I started early this morning and didn't even turn on the news and not even necessarily aware of all what has transpired. Although, I did hear a blurb about the fact that Japan had some extraordinary activity.

My understanding is of the one inquiry I've made, relative to the Taiwan area where we have a concentration of business is that there's been no impact there at all. Or not anticipated that there's going to be a material impact in that area. So, at this point, I think we have avoided being materially or significantly impacted by anything that's happening over in that rim of fire in the Asian Pacific area.

Yes. Because if I remember correctly you really don't have any business in Japan is that correct?

That's correct. I mean, we have policy holders that live in Japan but we don't do a robust business there and have very little, I would tell you that our bigger exposure, outside of Taiwan, would probably be down in Malaysia or down in the Indonesian area. But again, we've weathered some of those situations in the past. We don't have a heavy concentration of business there so the likelihood or probability of a seeing much adverse impact on of any of that Asian or Pacific rim area is pretty limited.

Right. I didn't think so, and then I remembered you didn't have much, anything really formally in Japan. But just given the nature of the headlines, got to ask the question.

Absolutely, we understand.

I guess I have one last little detail, I noticed on the balance sheet, the property and equipment line has picked up in this quarter. What drove that? If anything that you have in mind?

We are actually reworking or retooling and reengineering, renovating the facilities that we've got over in our home service segment. Where we originally acquired the Company in 2004, they were operating out of what I would describe as sort of warehouse facilities. And, given the dimension of the organization that they have and the way that they've been contributing to us overall, and our plans for expanding and developing within that market, we've actually done some renovation of the facility. We owned a piece of real estate that really was more of a storage facility and we've converted it into offices and eliminated the leasing of space that we had or at least we are anticipating the elimination of those cost factors as we've acquired and provisioned for using our own property that we had there and renovating it. So, that's the underlying basis behind what you are seeing.

Okay. It was just something I noticed because year-over-year is up about $1 million or so it's worth asking about.

Oh, absolutely.

Great.

And the other dimension of that, just in terms of discussing, we continue -- you may have seen in years past, the acquisition of property that we use as a training facility, a training academy up about 60 miles west of here up on Lake Buchanan and that particular facility has been a continuing ongoing development and as a matter of fact in the last several months or last couple months I guess we've been working toward putting in our own [washateria] and I'm sure some of that expense factor maybe in some of which are seen as we prepared and enhanced that property as well.

(Operator Instructions) And there'd don't appear to be any further questions I'd like to turn the floor back over to our speakers.

Very well.

Well, alright. We thank everyone for joining this morning and we hope you have a great day.

Thank you, ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may all disconnect your phone lines at this time and have a great day.

Thank you.