Citizens Inc (CIA) 2011 Q1 法說會逐字稿

Welcome to the Citizens, Inc., first quarter 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. (Operator Instructions.)

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

Thank you. Good morning and welcome to our first quarter conference call. I'm Kay Osbourn, Citizens' Chief Financial Officer. Joining me today on the call are Rick Riley, our Vice Chairman and President; Geoff Kolander, our Executive Vice President, Corporate Secretary and General Counsel; 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. First, our earnings release was issued yesterday, and our 10-Q was filed this morning. 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 Safe Harbor disclaimer is included in the Citizens, Inc., press release dated May 5, 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.

Good morning. Welcome. Thank you for joining us this morning. I guess we want to start from a little bit of a look-back in that we have reached our first $1 billion of assets over the last 40 years, four decades, and we've set a goal for the next $1 billion that we're going to seek to achieve. And what we're going to be doing over the next decade, in about one-quarter of the time that it took us to get to the first $1 billion, we're going to be working to get to the second $1 billion. So we just want to be sure that everybody understands that that's our goal in terms of building and growing the Company, and that's where we're headed.

To reach this goal, we expect to continue the same pattern of development and growth that we have over the history of the Company. We'll be doing that through sales of niche products in the different markets that we have. And then also, strategically, we expect to use compatible acquisitions of other companies, US-based companies, to further develop the growth and the expansion of the business.

The most noteworthy element or point for this particular quarter, in my judgment, is the fact that the trends that we began in 2010, those sales are up, expenses are down, we're seeing solid persistency. And on the negative side, we've got compressed spreads on our investment portfolio. But effectively, those trends have carried on into this first quarter of 2011, and we're seeing a great deal of continuity and consistency between what happened in 2010 and where we've started in 2011. Positively, we're seeing sales continue to move upward, even at a little more rapid pace than what we saw in 2010, and we're pleased with what that indicator is providing us.

Our goal today will be will be to identify areas that we believe are the highlights of the quarter. We'll share some of that and additional information with you, as we can, as we go through the process here. And Kay and I are going to talk a little bit about insurance operations, our investment performance, and then at the end of the call, we'll open it up for questions.

Looking to the life insurance segment, our premiums are up. Premium growth we are seeing at 5.8% in this first quarter of the year. International business is the primary driver of that particular dimension, and we believe that's driven by the long-lasting present relationships that we have with foreign residents that are seeking the safety and security of the US dollar and using a life insurance product to achieve that objective that they have for securing their personal wealth.

The new business, as I've said earlier, has been healthy. We're seeing a strong increase in the number of policies issued this quarter over the same period last year.

Again, as we mentioned, the quality of business is good. We're happy with the persistency. We continue to see the persistency being maintained at or above levels that we have presumed or assumed in the products, which certainly leads to additional profitability for the bottom line. And that's what -- we are pleased to see the persistency being maintained and trending the way that it is.

We continue to see policyholders focused on the contract guarantees. The endowment sales continue to be strong, an element of what's happening. And we see good, steady consumer demand for our products.

As far as the landscape for our international presence, I know there's been a number of different events, the earthquakes in Japan and the overall economic condition of the world. We still do not have any real significant impact that we can determine or discern from any of the extraordinary events in the Asian market. We're pleased at this point that we're not seeing a lot of that over in our other niches. I'll deal with that when we get to the home service sector, but again, we're not seeing particularly significant impact from any of those things that have been happening around the world.

The South American economies appear to be less unstable as we go forward. But the instability that we've seen in those markets is not as prevalent as it has been. We're seeing, again, good, robust sales coming from that marketplace.

Our sales here in the USA have been minimal. We still have a group of products that we have for sale and a group of producers that continue to produce in a steady fashion, but not necessarily growing at this point. We would expect that most of the growth in that particular segment will be through acquisitions that complement our overall portfolio of product that we hold.

We are currently updating rates and commissions and policy forms in that particular market, and we expect to release a revised and enhanced version of some of the USA product that we believe will help motivate sales in that particular area as we move into the latter part of this year.

The two significant drivers that we've seen as far as the life segment is concerned is the reserve buildup and expenses. And I'm going to let Kay speak a little more specifically about those details in her part of this conversation.

Thanks, Rick. As indicated, the endowment sales have been up relative to our other whole life sales internationally, which is driving the reserve increase that we see in the quarter results. They do have a quicker reserve buildup than a whole life insurance product.

We're also seeing that our death claims and surrender trends were within expected levels. Surrenders dipped slightly from the amounts reported a year ago at March 31, 2010, when we saw about 4% of surrenders based on whole life insurance in force. Those figures were 3% for this current reporting period, so we're seeing those surrenders come down slightly.

We also have an impact for the current quarter relative to an expense allocation review that we did in the last quarter of 2010 based on an expense study, and whereby we're allocating our expenses between the insurance subsidiaries. And those allocations changed effective January 1 of this year and are impacting the results of the segment. We have allocated expenses away from the home service segment and moved them to the life segment, based on those expense studies. So that is impacting their results for the quarter.

We also saw that overall consolidated expenses were down approximately $240,000, due primarily to lower salaries and legal expenses in the current period compared to March of 2010. So those are the key drivers in the life insurance segment.

And then I'm going to turn it over for Rick to highlight the home service.

Yes, in the home service market, we continue to see steady sales and also premium growth in that particular segment. We've continued to work in expanding our presence and distribution of product in Arkansas. And more recently, we've gotten product approved for distribution in Mississippi, and we are actively working in that particular market. I think those approvals actually came toward the end of the first quarter, so we should see a more significant impact of the expansion into Mississippi coming through the balance of the year.

We did have a fire rate increase that also affected the premium growth at the beginning of this year. January 1, I believe, was the effective date for that. Again, that's a limited liability fire business. It's not a wholesale homeowner's type coverage, but predominantly dwellings and contents that are covered for limited liabilities.

As Kay mentioned a moment ago, the expense reallocations that have taken place, those are really truing up. It's a process that we go through. I believe it's been a couple of years since we've done that, but it will be, going forward, we anticipate an annual process as we review and reevaluate how those expenses are being allocated between the various corporate entities that we have.

One other point that I missed a moment ago in the life segment is that we are expecting to consolidate the Integrity Capital organization into the CICA Life Company. So that will eliminate that additional reporting overhead. In that particular corporate entity going forward, we expect that that should go, since we've been doing the servicing and we've actually owned and controlled the entity for the last couple of years, we don't expect it to be particularly disruptive. It just should be an integration step that just happens as a normal course of business for us.

That really addresses the home service comments I've got. Kate, if you want to give some additional color there, that would be great.

Okay. Relative to the claims and surrenders, they were lower by $200,000 when you compare that to the levels that they were in 2010, so that's also impacting the results, in addition to the expense allocation we discussed earlier.

As Rick noted, the fire company has seen some business changes that we've been working on relative to the premium rate increase, which was about 5.1% and was effective January 1 of this year. In addition to the reduction in commissions, that company is reporting a statutory profit of approximately $200,000 for this current quarter, whereas compared to the same period for 2010, we had a loss of $129,000 relative to statutory results. So we are seeing the management changes that we've made for profitability in that company coming through.

It also has lowered its expense ratio to 43% based on this quarter for 2011 compared to 67% in 2010. So we're definitely making some strides relative to that entity.

Those are the main drivers, other than the investment income, which we're going to talk about next.

We continue to see growth in the investment asset base that we've got. Healthy cash flows are coming from the insurance operations, and yet, all of that good, positive development doesn't quite offset the lower investment yield in the fixed income market. So we are seeing, as far as investment income is concerned, a retraction and a decline that, quite honestly, has been something we've been talking about and expecting. We don't know exactly where we'll see a bottoming out of that particular trend. We continue to make investments, although in the last several weeks, that's tapered off a little bit. With the markets pulling back in the fixed income area, we haven't really had as many opportunities, and it's a more few and far between as far as where we can make some of those investments.

But the other good side of that is we're not seeing the calls, either. So we are continuing to experience and work through the period. We're continuing to utilize callable US government-sponsored enterprise step-up products, high-grade essential service, municipal issues, and a few limited corporate issues, predominantly in the utilities space.

We continue to keep our investment decisions focused on the expected duration. We are using callables to a great extent. And as we use those callable securities, we're primarily focusing on what we anticipate the call to be as we make the investment in any one of those step products. We anticipate that we will have opportunities to invest as the market does change because of how those step-up instruments are going to force that out. Or either that, or we're going to get the yield that we would prefer to have because of the high step-ups in some of those instruments that we've purchased.

We invested about $54 million in the first quarter. The predominant investments there were predominantly municipals and some corporate securities with a few mixed in of the government-sponsored entities, Fannie Mae or Freddie Mac type instruments.

As far as the long-term view, we anticipate that the environment is going to continue to be a low rate environment even longer than what we might have thought at this time a year ago. We had anticipated that by 2011, or certainly 2012, we'd begin to see it move a little bit. As things have progressed and evolved, it now becomes a little more questionable as to whether or not we're going to be in this low rate period for an extended period.

We're prepared, and expect that if that's the way it plays, that what you've seen is a trend and what you've seen happening, we should hit a bottom-out position as far as those lower yields and the effect that they've had on our overall portfolio later this year, provided that we don't see a continuing deterioration or evolution downward. It's hard to imagine that they could go much lower. But in any event, we feel comfortable and expect that, frankly, that it will get better as time passes here.

The other comment I wanted to make -- Kay, you go ahead and make your comments here on the investments, and then I'll wrap up here in a minute.

Okay. The other items I just wanted to highlight that Rick has touched on is just the investment yields that are impacting investment income for the quarter. The life segment yields have dropped from 4.97% at March 31, 2010, to 3.85%. The home service yield has dropped from 5.13% to 4.56% for the current period.

The reason for the variance in those yields is really the portfolio mix, as Rick has indicated. The home service portfolio holds a higher quantity of corporates and municipals and less government securities than the CICA portfolio. So that's the difference in those yield variations. And the consolidated yield dropped from 4.97% at March 31, 2010, to 4.06% at March 31, 2011. So that is impacting our investment income significantly, as we've noted.

The other item I wanted to highlight is that the rating has changed relative to the portfolio. As Rick has indicated, he's invested into new corporates and municipals, which has resulted in our AA rating increasing to 14.2% from the year-end level of 9.1%. And that's primarily just due to, obviously, investment-grade, high-quality securities. But we are changing our investment strategy, looking at some public utility issuers and average maturities in the range of seven years.

So those are some items I wanted to highlight, since they've changed from the December 31, 2010, information we reported.

In addition, I wanted to highlight for you some of the non-operating items. Our tax rate, we anticipate, will remain at around 35%, the corporate rate. We don't foresee any significant indicators that will move that tax rate. Also, I've disclosed in the 10-Q that was filed this morning, the RBC ratios for the life insurance companies, those are all above the minimum 200% level, so those have all been disclosed for information purposes. So I did want to highlight that.

We also have the warrants that are impacting our financials that we adjust to fair value at each reporting date. Those warrants, we do have some of those warrants will expire this July 2011, and then also next July 2012. So those are some items just to highlight for you, and I'll turn it back to Rick to recap.

Thank you, Kay. And on that note, one of the things that I intended to observe earlier in the call was the fact that Kay and her team have worked very effectively at refining and improving different analytics and things that they're doing, and also then sharing some of that information with you in the 10-Q. And we encourage you to look at that. I think even the news release in this particular quarter has got some new elements or different dimensions to it. So there are some new pieces to the puzzle that we've shared and put out there, and we hope you'll find those of value to you.

As we look at where we are, again, we see positive trends moving into 2011 as we continue the upward sales track and the lowering of the expenses. We continue to have, and expect to have, profitable insurance operations going forward.

Also, on the M&A front, we're currently involved in assuming a couple of blocks of business that are coming out of a guaranty situation. They will be very complementary over in Louisiana to those books and that particular home service operation. Then there is another complementary company or block situation over there that we're looking at and involved with.

And then as far as -- there are other companies on the radar screen we're continuing to monitor and position ourselves to take advantage on an M&A front. And we expect to see some more activity in that arena as we move forward and the situations or circumstances become available.

We still would like to find, and are continually looking for, a large transaction, something in the order of $100 million or even as much as $150 million. But those are a lot harder to find, and we'll just be patient until we get to that point.

James, I think at this point we're ready to open the call for questions, and we look forward to taking those.

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

Thanks for the additional disclosures. I'll be looking at the 10-Q here in a little bit. I haven't had a chance to get to it yet, so I'm looking forward to that.

First, let's touch on the investment portfolio, Rick. You said that you could be reaching a bottom on that yield here later this year. Can you quantify what that bottom would be?

Ed, I don't know specifically where it will be. There's not anything that I've got statistically or otherwise that indicates the bottom. I think you could look at the information that we're providing there in the Q, as it gives you the path of the trend that we've been seeing as far as those investments.

What I think probably is the most significant contributor will be the activities that we saw in the investments that we made. We made, it seems like $100 million or a little over $100 million in the latter four months of last year, placements of securities in the latter four months of 2010. And a lot of that went into these step instruments that started at 2% or 2.5%. At that point in time, most of those starting rates were in that 2% to 2.5% range.

We're beginning to see the impact of that in this particular -- you obviously didn't see much of that impact in the latter part of last year, because it was in that fourth quarter when it occurred. But in this first quarter, you're beginning to see the impact of those lower yields in those called instruments. And so I think that what you'll see is -- as we've moved on toward the end of the year, though, Ed, and as we've moved into 2011, we weren't going in at those lower 2% to 2.5%. We were really getting in at a starting point that was 3% and even upwards to 3.5%, as a general rule.

So that's what's really leading me to believe that it will bottom out a little bit. Because what we've been doing in this first quarter, investment-wise, is actually at or above what we were doing in the latter half of last year, plus the fact that some of the calls, I was really pleased in the early part of this year with some of the calls that we had. We were pulling 5%, 5%, and 5.5%, and 5.25% instruments were being called, and we were able to replace a lot of that same money at or about the same rate. My recollection is I think I had one investment there that we lost maybe 30 basis points or something, but it really was pretty insignificant.

So we've been able to maintain a fairly strong investment posture, although as I said earlier, the ability to invest these last few weeks as the bond market has begun to pull back, and we don't have the same opportunities that we had during the first quarter. So that's why I believe that we may not have seen the bottom yet. But a lot of it's just going to depend on where that fixed income market goes.

So we're thinking of maybe hitting 3.5% yield on the portfolio, or even lower than that? Or what are we thinking here?

At this point, your guess is as good as mine as far as where it may go in terms of the bottom. I believe that 3.5% would probably be a realistic perspective, given what we've done and the investments that we've made over the last quarter of last year and the first quarter of this year.

Okay. Of all the calls of agency paper during the quarter, how much was that on a dollar basis, do you know?

I believe it was about $28 million calls compared to about $38 million the prior quarter, same time.

But even as we've moved on into the second quarter, there's not been the activity that we saw even in the first quarter. So it certainly has -- I think the lowest calls that we saw come in were something in the 4% and 3-3/8% range, which was a little bit surprising. But I think it was also an aberration. It really wasn't indicative of a large volume.

It looks like it's about $20 million in this current quarter, Ed, compared to about $28 million prior quarter a year ago.

Okay. You're thinking that's going to slow down, too, right?

It clearly has slowed down from what we've seen in the first quarter. We have gotten some calls. I don't want to indicate that we haven't, because we do continue to get calls. But they're not of any magnitude or volume. I couldn't tell you what the quarter's is, other than just off the top of my head. I believe it's been something less than $10 million for the quarter, coming into the second quarter. But by the time we get to the end of the second quarter, it may track pretty much like the first quarter did in terms of having a volume of about $20 million to $25 million, something like that.

Right. Changing subjects, with the events that happened in the South, the big tornado outbreak, do you think you have any exposure there on the P&C side?

I'm glad you brought that up. That was one of the things I was supposed to cover in the home service segment I forgot to cover. But we did have a tornado that hit in Rayne, Louisiana. It was fairly substantial, did a great deal of damage. But the impact on us was really well within normal annual claim levels. So we didn't, even though we did have a direct hit in Louisiana, the impact on us was not anything that looked -- it didn't even show up. It was the claims for the period were substantially equivalent to what they have been on any other year. So we're not seeing any of the adverse weather that we've seen here in the United States affect any of the markets that we've got the P&C exposure in.

Right. And obviously, it was more of a Mississippi and Alabama event. You don't have presence there at the moment, right?

That is correct. The Arkansas stuff is there. While we're in Arkansas, we don't have P&C exposure. Our P&C exposure is limited strictly to Louisiana, so it's only the storms there in Louisiana that impacted us.

Are you going to be expanding the P&C into Mississippi?

It will depend, frankly. If we can expand it, we're not going to into Mississippi particularly. We don't really have a desire to go down the coastline. Our interest would be up into Arkansas or maybe over into Texas with expansion plans for the P&C company. But frankly, if we can't do it on the same limited liability basis we deal -- in Louisiana, we have a specific home service market that's provisioned in the code, so unless we can operate in a similar fashion in other states, we'll be relatively guarded or limited as to how we would expand any of those P&C coverages.

Great. Third subject, life insurance premiums ticked up pretty nicely in the quarter. What were the main drivers? I know in the press release, it cites a couple or three countries. But could you put some metrics on it -- maybe year-over-year growth, or are there any incentives in those countries to get additional growth or anything else like that going on?

No, there's not anything particularly significant about what we're doing. What I would say is it's just that the development of the sales -- we're just seeing a renewed -- because things in the world overall are not as precarious or as unpredictable, or maybe people are not as fearsome, we don't have the instability in those. In the global communication that we've seen, we're just seeing sales development grow. So there's not anything I can point to specifically. Sometimes you can say that the sales promotion or the convention promotions or the things that we're doing -- 2010? 2010's lower how?

Just the submitted business we had in 2010 was lower than what we've seen historically. So I think we're also seeing a bump-up because of that.

We're getting additional sales activity coming out of those markets is really what it boils down to. We're just seeing an increase in the interest in what's going on. But in terms of focusing on a given country or a given market, no, we're not doing that at all.

Okay. Could you talk about the endowment product? I haven't seen too much of a discussion on it. What are some of the basic features of the product? I know the reserves are up because of it, and most of the sales -- what, 75% of the sales -- were in the endowment product.

Ed, the thing that interests -- what I've understood from our marketing folks is the thing that interests and draws attention is the guarantees. The fact that that product has guaranteed provisions in it are what people are looking for. In the whole life arena, it's a little more, the sale is built around a projection or an expectation of what you can build and save and accumulate so that you can generate retirement income.

The endowment product does the same thing. It's just that now it's a more firm or specific set of accumulations. And it's a little more expensive, quite honestly, so it's one of those products that we're collecting more premium for the same period to be able to hit those guarantees. But the bottom line is that the endowment product guarantees are what people are interested in having, and that's what the sales force has been promoting.

And what are the guarantees?

It's a guaranteed endowment payment at the end of the period. It varies. It can be a 15-year, 20-year, or 10-year endowment. Say, at a given retirement age, 65, that's where a lot of the interest is, is again working -- if you understand that most of these folks are accumulating funds that will generate and give them an income they can't outlive later in life, that's really what we're selling and that's what we're promoting. So it's those living benefit aspects of the policies that the endowment products provide even more ability to reach those objectives that they've got for retirement purposes. So that's really what the driver is.

What are the margins on this product versus your other, more traditional products?

They're essentially the same. When we design product, we require -- or we expect and we build the product with the idea that we'll get a 15% to 20% return on the product. Specifically, on that series, I don't know that same statistics that say what we are actually achieving at this point, because you don't really get to those profit actual numbers until you've been in it for a number of years. But at this point, my expectation and our expectation is that we'll reach those assumed or presumed margins on those products. They're certainly all going to be above 10% as we go forward. But we would expect that they will actually be closer in line to a 15% number, just because of how we design product.

Okay. Are any of these endowment products pre-funded in full, or is it just ongoing renewal premiums that go in there as well?

They can be. We see some pre-funding. What you refer to as pre-funding, I would refer to as discounted premium payments. We're discounting those payments at a 4% rate, so that if somebody does pre-fund it, we're presuming that we can get a yield of 4% to cover that. And obviously, in the current market with our average yields coming down, that's not as effective. We may have to look at lowering that discount rate. But we believe in the long term that we'll be able to meet that and that it's not a big factor.

But again, it's not a heavily used feature, either. It does happen, but it's not something that's dominating anything or particularly significant in the overall sales process. Most of these are annual premiums.

Okay. So you'd say it's like what? Single digits are the pre-funded, or 10%?

Yes, probably so. I think it's probably between 5% and 10%, but again, I don't have a statistic on that while I'm sitting here.

Okay, great. That's all my questions. Appreciate it.

(Operator Instructions.) Okay, and Rick, there appear to be no further questions, so I'll turn it back over to you for some closing comments.

Thank you very much. Again, we appreciate the interest in the Company. We appreciate the opportunity to share this information with you today. And if ever there's anything we can do to help further provide insight or understanding regarding our Company and our operation, we'd welcome the opportunity to do that. Thank you very much.

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