Citizens Inc (CIA) 2011 Q2 法說會逐字稿

Welcome to the Citizens, Inc., second 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. You may begin.

Thank you. Good morning. Welcome to our second 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 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. 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 August 8, 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. What interesting times we're in. I'm impressed with [Kenny]'s ability to schedule this call today rather than yesterday. It would have been quite a different call, I guess, in the context of what was going on out in the stock markets yesterday, but we're pleased to be with you here today and glad to have to have the opportunity to share with you the quarter's results and year-to-date details that we have.

Citizens continues to move forward on a sound and solid basis, using the business plans that we've operated with for many years, and we continue to build shareholder value even though we're in somewhat challenging times, and an unusual marketplace. Of course, we do this through our offering of well designed niche products and we continue to focus on those from a marketing standpoint.

For the six months, sales continued to trend upward. Profitability has been improved slightly and from a book banking standpoint, we grew solidly from year-end 2010. So we're pleased with what we're seeing the numbers tell us and we look forward to sharing those as the call goes forward here.

We hope you've had a chance to look over the earnings release and the additional detail in the 10-Q. Our goal will be to give you some firsthand perspectives as we explain and elaborate on the quarter's reports. To accomplish this, Kay and I are going to go through somewhat of a back-and-forth tag team process across the scope of our operations, and we'll look forward to answering any questions toward the end of the call.

First, let me start with the -- I guess before I get into the Insurance segment here and talk about the Insurance operations, let me share with you the fact that we had our annual sales meetings, awards banquets and those types of things, about two weeks ago. Had a great gathering of nearly 500 folks, spent four, five days in a much cooler climate than here in Texas. We were up in the north, actually in the western part of Canada over in Vancouver, but we had a sales force gather.

And for the first time, we actually had both our US operation and our international sales folks together in the same venue at the same place. So it was a unique opportunity to share culturally and a broad-scale basis between those US-based folks, as well as our international folks. But anyway, we had a good time.

The predominant purpose of those types of events is to provide recognition tot hose folks who have excelled and achieved certain benchmarks and production objectives for the year. We hand out awards and then do some business planning and some training and those types of things, but then of course, the social opportunities just to share and interact and build that family -- sort of the family spirit that we have and that really -- we've got family members, Citizens' family members, scattered around the globe and it's always good to see them during this period of time when we get together.

But we had a successful meeting. All the indications from the sales team and those leaders in that field operation were very upbeat and positive and we were pleased to have had the opportunity to get everybody together and share on both sides of the pond, so to speak, as we got people together on a broader scale basis than we ever had before.

You might wonder how did that culturally work? And while there were challenges in getting all that done, our marketing folks and leadership for the marketing operations did a fantastic job leading through that and making sure that it worked well for all concerned and their respected constituents.

So with all that said and in that context, let me move on to the results that we're reporting here in the second quarter of 2011. Our life insurance premium growth was about 10% over last year, the same point in time. Our international business has been driving that. Of course, with our long-lasting presence and relationships in these foreign markets and the foreign residents and foreign individuals seeking safety and security, we continue to -- even though the dollar has been through what it's been through and had the challenges that it's faced here in the last few weeks or the last few days, we still see it being the strongest currency in the safest place to place our money. So we're continuing to see foreign residents interested in what we do.

Now, just to elaborate a little further, does that mean that it will remain that way going forward? Surely, there will be questions and challenges. We saw that type of thing occur during -- after the last pullback and the changes in the -- in 2008, but we continued to weather through that effectively from a company standpoint and we don't expect to see material or significant differences as a result of what's happening here in the US, but that in our perspective and our opinion, will -- time will tell and that'll be revealed as time goes on is what the truth of that is all about.

But as far as new business, we're -- through six months, we've seen a double-digit growth. I think new sales are up almost 20% year-to-date. Persistency continues to be a strong component of our profitability. We, again, don't know to predict or prognosticate what'll happen to persistency, but we've been pleasantly surprised or pleased with how things have worked over the last several years, given the challenging economic times that we've been in.

We continue to see endowment sales growing and expanding. That's been really kind of an expected dimension because you see the foreign client primarily moving toward guarantees and the security that the guaranteed endowment contract provides them.

Geographically, we're seeing sales led by -- out of Colombia, followed by Venezuela and then Taiwan. That's been the -- those have been the leading countries thus far this year. We are still spread across a broader segment than that, but those are the three top -- the top three producers through this quarter.

We do have a new product that's being introduced here in this third quarter that we anticipate will be well received in the marketplace, at least through the sales meetings and the sales discussions that we had. What little bit was revealed and described or distributed at that point was received very favorably, so we're looking forward to that product. It's a niche product geared toward higher education accumulations and the need to provide a university or secondary-level educations for children of these foreign nationals.

So on the domestic front, our US business continues to perform steadily. The US-based block of business is predominantly made up of business that we've acquired over probably, I guess, over a 40-year span of time, but that business continues to steadily perform for us as a whole.

At this point, Kay, I'll let you give a little detail in the financials and put a little color on what's there.

Okay. Thank you. I'm going to give you some highlights from our perspective, but I would encourage you to review the 10Q that was filed yesterday for further information. Life operations, premium increased in the current year with $29 million and $55 million for the three and six months ended June 30, 2011. The overall number of policies issued in 2011 was approximately 2,800 compared to 2,500 in the prior year for the six months ended. Total international direct policy premiums based upon statutory accounting totaled approximately $53.4 million compared to $48 million for the six-month periods of 2011 and 2010.

Current results are impacted by the following significant factors -- the decrease in net investment income, which we've been discussing in prior quarters, is continuing to impact performance. The portfolio yield is currently 3.91% compared to 4.98% for the same period in 2010. We're also seeing the increase in the reserve buildup related to the endowment products that have become more popular. These now represent 75% of new policies in force in 2011 compared to 63% in 2010 and we offer endowments internationally that are endowments for 10 year, 15 year, 20 year and age 65, with the 20-year endowment being the most popular.

We're also seeing improved persistency which results in lower amortization of deferred acquisition costs. Also, the segment results were impacted by the allocation of expenses. Based upon a routine time study, the allocation change was made at the beginning of 2011 and results in a greater allocation to the life segment and lower expenses allocated to the home service segment than the levels reported in 2010. So those are also impacting comparability.

We did also complete the merger of Integrity Capital Corporation and Integrity Capital Insurance Company as of April the 1st this year and we do anticipate future expense reductions overall relative to financial reporting costs and just general overhead associated with not having to operate that separate entity.

And just to highlight, our overall consolidated expenses were down approximately $446,000 due to just overall expense management that we've been continuing to work on. So those are the key drivers I wanted to bring up for you and I'll turn it back to Rick for the home service segment.

In our home service segment, we continued to see it contribute, although the contribution to premium growth thus far this year has not been -- has been more nominal than remarkable, but it has been steady and it continues to function in a reliable fashion and predictable fashion, and we're pleased again with the results that we see coming out of that particular segment of our business.

The contributions or the sales, I guess, come predominantly out of Louisiana and Arkansas and we've been working to get new development out of Mississippi, and we're seeing good results there. So that particular segment or element of our premium development, we are anticipating will be enhanced not only through continued expansion into other markets, but also by acquisition of other blocks of business.

The rate increases on the fire business that were done at the beginning of the year continue to perform as expected. We do have them under review and continue to monitor how that performance needs to be maintained or enhanced and frankly, at this point, no plans to make a change, but we're in a review process and so any change that would be made there probably would come toward the end of the year, beginning of next year.

There has been no real economic impact in this home service market. Sometimes you might anticipate or expect that when the lower income population is stressed by the economic conditions that you might see pullback and this -- the life insurance premium might be one of the things that would be sacrificed. Thus far, we haven't seen a great problem in that arena and we continue to see limited growth expansion in that particular marketplace.

Additionally, we did close a transaction on a couple of additional small blocks of home service business during the quarter, or actually, during this -- the beginning of the third quarter here at -- August the 1st is the date we closed transaction. We picked up -- again, they're small blocks, about $4.5 million in assets and approximately $275,000 annualized premium. So it's not expected to have a material impact, or even a noticeable impact, in terms of operations, but it will complement what we do in the home service marketplace and actually, the business that we picked up was in areas of the state of Louisiana that we did not already have a concentration. So they're very complementary blocks as far as the enhancement to that overall operation there in Louisiana.

The home service segment actually benefited through the quarter and the year-to-date based upon lower overall claims and surrenders, and I'll let Kay elaborate a little further on that in her comments.

Okay. And the premiums totaled $10.8 million and $21.6 million for this segment compared with $10.6 million and $21 million for the three and six months of 2011 compared to 2010. We saw modest growth. We did have a tickup in 2010 relative to our premium level, so we're really holding there and improving a little bit, so we're encouraged with those results.

The net investment income is also a driver relative to this segment's results. The yield also decreased due to the call activity which we've discussed previously and we're currently projecting an annualized yield of 5.8 -- or I'm sorry -- 4.61% and it was 5.8% for the six months of 2010. As Rick noted, our claim experience was favorable for the three months and the six months in 2011 compared to 2010 with $3.0 million and $7.3 million for the current period, compared to $3.8 million and $8.2 million for 2010. Also, property claims totaled approximately $500,000 and $1 million for the three and six months compared to $300,000 and $900,000 for the prior year. We did have approximately 70 weather-related claims in the current quarter, but consider this within expected levels.

Also, as noted previously, our general expenses are lower for the three and six months in 2011 due to the expense allocation adjustment as noted, so those are also impacting this segment positively. So those are the key items for the home service segment.

Now we're to investments. We've seen a growth in our invested assets over this year of about $40 million. That comes, of course, through the additional capital that has come into the Company as a result of exercising of warrants and as well as -- I guess actually, some of that -- there is a nominal amount of that in that -- in the first half of the year. There will be more of that coming here in the third quarter as a result of that exercise, but the Company continues to see a healthy cash flow from its insurance operations and yet, at the same time, that increased invested asset based hasn't completely -- or doesn't offset the overall lower marketplace yields that we've seen for the last couple of years now.

We continue to focus on -- in terms of acquisition of securities, predominantly we're in step-up type securities. We're focused intentionally on the duration or the anticipated duration of the portfolio and trying to maintain as short a position as we can, at the same time getting the yields that we need to have to cover our reserve growth and reserve commitments.

We've invested about $105 million year-to-date. That comes not only from the cash flow that we get from the insurance operations, but also from calls that we've seen. Those calls have continued through this year, but they're certainly continuing at a much lower pace than they did in 2010. We're not seeing quite the same volume that we did a year ago.

We continue to prefer to make our investments in essential service municipalities and -- well, excuse me. First off, our preference is government-guaranteed securities or step-up-type instruments, but in addition to that, we will utilize essential service issues from municipalities, also public utility corporate bonds, if we can find those that fit the situation. So you've seen us diversify a little bit over the last year into a slightly different portfolio allocation, but it still stays predominantly focused on the US-government based securities overall.

We have seen -- in terms of the longer term view, and I think that we talked a little bit in the last quarter about whether we were going to bottom out or where we're going to bottom out in terms of our overall net yield. Over the last year, we've seen -- excuse me -- particularly this year, we've seen about a 26-basis point decline of over where we were at year end and that compares to an 81% decline for the six months preceding.

So it clearly has diminished in terms of the speed at which that decline is occurring. Whether or not we've actually bottomed out is not clear, and given the more recent turmoil that we've seen here in the last week or so, it's probably not even reasonable to try to predict where that -- whether we've hit bottom or not, but we believe that we're nearing bottom and that we probably have gotten closer to it and that we don't expect it to continue to be as exacerbated going forward as we have -- as we've seen over the last year.

We continue to work and sell through our targeted niche markets which don't require -- which are not priced for profitability -- excuse me -- which are priced for profitability regardless of what the spread is on the product, so we anticipate that from a profitability standpoint, we'll continue to weather through the investment challenges that we have predominantly because of how we've positioned ourselves in the market and how we sell, and the fact that we don't march to the same drum that everybody is marching to.

So with that, Kay, I'll turn it back to you and let you provide insight to investments as you see fit.

All right. Our invested assets totaled approximately $765 million as of 6-30, 2011. The annualized yield rate is now 4.13% on the consolidated portfolio compared to 4.98% a year ago, reducing reported investment income by approximately $600,000 and $1.4 million for the three and the six months in 2011 compared to 2010.

We currently hold 42.9% of our invested asset portfolio, including cash, in US Treasury and US government-sponsored enterprises. We are, of course, monitoring the news related to the S&P downgrade of the United States from the triple A to the double A-plus, but have no current plans to change our investment strategy, nor do we think from a regulatory standpoint that we would be required to. We have invested a significant amount of our -- available for cash in triple A taxable municipals, as noted by Rick, increasing our holdings in this rating category from approximately 9% at year end to 19% as of this quarter end.

We are holding 97.5% of our fixed-maturity investments in investment grade triple B or higher securities. We do not invest in below-investment-grade securities and the 2.5% held in our portfolio represents downgrades or securities that no longer [obtain] a rating. We did not record any other than temporary impairment in 2011 or 2010 relative to the six months ended.

I'd also like to highlight a few of the non-operating items, just to give you some insight on our RBC ratios. They continue to increase relative to our insurance companies, statutory capital requirements and are all above the required minimums.

We also had a warrant that came due for expiration on 7-12 of this year and we had -- that was the largest block of our outstanding warrants representing 1,000 -- over 100 -- no, over 1 million -- excuse me -- warrants outstanding in that category. And of that, we had approximately -- I believe it was about 300,000 exercised and generated $1.8 million of cash to the Company.

The remaining shares were exercised through a cashless provision. So by that expiration of that block of warrants outstanding, that brings the warrants remaining, which will expire at different dates in 2012, down to under 200,000 warrants still outstanding. So we anticipate that the impact relative to the fair market value of the warrant liabilities will be much less significant and not have the swings on our financials that we've seen in the past. So we view that as a good thing.

So with that said, I'll turn it over to Rick for our closing comments.

Again, we thank you today for being a part of the call. We see that we're continuing to see solid and sound financial results by staying the course of this conservative management philosophy that Harold Riley, our founder, established for us nearly 40 years ago. We continue to see opportunities to -- even though we're in a unique environment and unique challenges of an environment, investments pressing us from a -- with a headwind-type pressure on a regular basis, but we continue to see the insurance operation is healthy and performing as expected and intended.

And we expect that as we go forward, we'll see opportunities to do transactions and deals. We have the capacity to do those things and we look forward to finding those opportunities. The little opportunity in Louisiana was one that we'd been focused on for over a year. It just was part of a receiver-type operation that just took a while to get it closed and get it done, but we have other small scenarios out there on the horizon. We're actually looking and would like to find something that's more significant to go forward and we hope -- hopefully, we'll discover or identify what that is in the near future.

So with that, Operator, we'll turn this back and ask you to take the questions.

Thank you, sir. And ladies and gentlemen, the floor is now open for questions. (Operator Instructions). And our first question today comes from Ed Shields from Sandler O'Neill. Please state your question.

Hey, good morning, everyone.

Good morning.

Good morning, Ed.

Let's start off with the US downgrade from triple A by S&P. Kind of got a three-part focus here -- first, could it have an impact on your international business and if so, what? Second, is there any implication for the US segment? I don't think there will be, given the home service nature of the property and casualty part anyway. And third, what's the impact on the -- kind of the average rating -- excuse me -- of the investment portfolio and whether or not that has any impact on regulatory capital levels or the NEIC's perspective on the investment portfolio.

Ed, all three great questions -- as I alluded to earlier, I don't anticipate, quite honestly, that the downgrade in the US credit rating is going to have a material, or even notable impact in our business. We still represent to these foreign customers the safe haven, and the safest haven, around the glove, as been demonstrated with the freefall that's been taking place in the last day or so.

But again, when we went through this type of thing in 2008, we saw an apprehension, if you will, toward new sales, so we -- the -- I guess, to be quite honest or straightforward about it, I wouldn't be shocked if sales were more level, I guess, between now and the end of the year, then continue to increase at the pace that they've been increasing year-to-date, but even with the pace that we've had year-to-date, we should see -- I think we'll continue to see strong sales.

And frankly, the truth of the matter is that all these tumultuous things in these foreign countries, we usually see upticks in improvement, but this is such a unique situation as far as the downgrading of US credit, I'm no sure I'm capable of predicting what the ramifications might be and where that may go. So I don't anticipate it to be much of an issue, but I -- because I still think it's the best solution going.

As far as the impact relative to the US market and the home service market and anything here, you're right. I kind of answered that in the context of how -- in your third question relative to the regulators, they're -- the regulators are not going to change the way -- that doesn't -- the downgrade rating here does not have an impact on how the regulators are going to view our capital or our position with that particular change.

That's not dramatic enough, or significant enough or material enough, to tweak their radar screens as far as how they value these investments. They're going to be looking at the portfolio in much the same way that they did in 2010, so I don't really think it's going to be a particularly significant impact here in the US either from a regulatory standpoint or a sales standpoint, either one.

Okay, fair enough. Let's shift gears. Have you guys examined the EITF09-G on DAC accounting with successful versus unsuccessful? And if you have, have you got kind of any preliminary thoughts on that, what it may do to the DAC reserving or DAC accounting and how you may adopt this when it comes time at year end?

Ed, we're currently -- we have a project underway where we are assessing the impact of that new accounting guidance. We're doing that in coordination, of course, with our actuarial department, as well as our external auditors and making sure that we're considering all the implications and looking at what other companies are doing as well relative to this new guidance, but we're not in position at this time to make any estimates or give any insight into where we're going to end up until we get that project completed, but we do anticipate that we will be ready to give that insight at the third quarter reporting timeframe.

Okay. Do you think you'll be more likely, just from where you're standing right now, adopt it retrospectively or how are you thinking about that?

We really haven't made that decision. Obviously, the retrospective application is important relative to comparability depending on how significant the change will be to us. Citizens has, in the past, been what I would consider conservative relative to other companies' application of DAC and deferral of costs. So we really are still making an assessment relative to prospective or retrospective, and it'll all depend on materiality of the adjustment and what we think best suits us and comparability aspects going forward.

Great. Third and last question here and I'll get back in queue to let other folks get on. In regards to the M&A environment, I appreciate the comments, but from what you're seeing, is shopping or items, properties for sale, coming around more frequently, less frequently? Is it more of a size-based thing or is it going to be more like what you announced in regards to the Louisiana acquisition of a couple of things out of essentially receivership? Any color there you can provide would be appreciated.

Sure. Ed, just from an acquisition -- on an acquisition front, it certainly has been more -- it's been a lot quieter. We usually get a lot of calls from brokers or routinely get calls from brokers. I was commenting to Harold here a week or two ago that it's been a lot quieter this year than it has been. So the opportunities are not as robust, at least as far as what we're seeing or what's being drawn to our attention.

I think, frankly, what our approach is going to be is one that's a little more proactive in terms of us creating opportunities and going out and engaging different scenarios out there in the market that we're aware of that either are -- appear to be potential targets or we know of circumstances that give us the opportunity to at least initiate a conversation. So I would tell you that I think going through the balance of the year, depending on what happens with the tumultuous nature of the market, I expect that we'll probably have to make our opportunities going forward as opposed to having them come in on -- drop on our doorstop as been the -- a lot of our track in the past.

Great. Thank you.

You bet.

Thank you, sir. (Operator Instructions). And there appear to be no further questions in the phone queue at this time.

All right. Again, we thank you very much for the opportunity to share our results with you here today and as always, if there's anything we can do to help provide insights, do not hesitate to call. Thanks.

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