Citizens Inc (CIA) 2011 Q3 法說會逐字稿

Welcome to Citizens, Inc. Third 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 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 Counsel; and Larry Carson, Financial Reporting and Tax.

Before I turn the call over to Rick for opening remarks, let me get a few formalities out of the way. First, yesterday we issued our earnings release and filed our Form 10-Q. 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 November 3, 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. We appreciate you taking time out of your busy schedules today to join us on the third quarter call for Citizens, Incorporated. We greatly appreciate the opportunity to share these results with you and look forward to interaction with you towards the end of the call.

The Company has had another solid quarter of performance. We continued on a fairly consistent track that we saw and we reviewed with you at the end of the second quarter and first half of this year. So we're real pleased that our insurance results continue to remain healthy and the third quarter investment income was up slightly during this third quarter as a result of our portfolio growth.

Another point to note our book value is actually up nearly 7% over the same time a year ago. A little over $5 a share now, and we are pleased to see that breaking through that particular threshold. We hope you had a chance to look at the earnings release and the 10-Q that was filed yesterday afternoon, and where our goal and objective here today will be to just simply share with you some of our hands-on perspectives that we have in dealing with the business day-to-day.

To do that, Kay and I are going to tow back and forth across the different topics that we've outlined for sales here today. And we'll talk a little bit about our insurance operations, our investment performance and then we will open it up and give you guys opportunity to ask questions if you care to do so.

First let me look at the life insurance sector that we have and of course that's driven predominantly by international business. We are up -- we have a premium growth of about 6% to 8% depending on how you look at it in either in the quarter or year-to-date and we're pleased with that growth.

Early in the year we had anticipated that that might be even double digits and we do have some sales promotion activities taking place in this final quarter, which I can't indicate that they're going to reach the double digit. But certainly that's what we would hope to see happen before we close the year. But we should see a good strong close of the year based upon on what we've seen thus far through the third quarter.

The products that we are continuing to utilize and that we see the majority of the sales are accumulation oriented products. They are designed and focused on accumulation rather than debt benefit. And we continue to see the endowment products to be popular. One thing I would note is in the endowment product area where you want to bear in mind that we're niche priced with how we build those products and how we do, what we do.

We're not necessarily competing on a level playing field here in the US with those products. Those are predominantly products that are being sold in the international marketplace when we are talking about endowments. Our international group that is I guess dominating from a sales point of view is a group that's based out of Venezuela. They have actually been on top of the leaderboard from a sales perspective for the last, I believe, three years, certainly in the last two and this will make three, if that's not -- if they haven't held it all three years, but I've got a good strong leader there.

They've actually been -- had a lot of training session where we've seen about 120 of those folks come through the Austin area here over the last month of October as they've done training and encouragement and motivation here in the facilities that we have. They like to come and visit and be hands on here in the home office, and we welcomed over 120 of those folks out of that Venezuelan operation just this last month. We've got some folks coming in over the next couple weeks out of Taiwan, and we expect to see them continue to do well and even grow in that particular operation.

Just a quick update on the endowment product that we introduced in the third quarter. We've gotten all the system support in place, not been a strong push from a marketing standpoint at this point, as we were refining systems. So we got it started, we've been issuing the product, but it's been a slow start primarily waiting on the system support completion that we have now completed and gotten everything on line and working for production of that product. That's an endowment primarily geared toward education, higher education, mainly the endowments are get paid out of the age 18, 19, 20, 21 depending on how the client wants to structure that product. But we expect to see continued sales of that product as we go forward into the fourth quarter and into next year on a more robust basis.

Our first-year premiums were slightly lower in the third quarter this year compared to the previous year, but let me just remind you that in the last call that we had, we talked about having just come back from our annual sales meeting and basically this year, for the first time in the Company's history, we took all of our international sales folks as well as our Home Service sales operations and combined them into a single venue ideally to save some of the expense factors, but and the cost associated with doing those large meetings. But by doing so we also took them out of the field and out of production for a period of time during that quarter. So I am not necessarily asserting that that explains all of why it's dropped in the quarter, but certainly it will be a contributing factor when you take people out of the field in that way. So they just want to make that point as to why that may be a little bit of an aberration in that quarter.

Our persistency is a key driver of profitability. We continue to see it remain healthy and we are pleased in that international market to see that holding and remaining positive and above average actually. In our US business, we do have -- we've had a decent quarter there and we are seeing some results of the new developments that's taking place here in Texas. Predominantly what you see in the US domestic market is renewals of premiums from blocks of business that have been purchased over the last 20 years or so.

At this point, I will turn it to Kay and let her begin to give you a little more details on behind the scenes.

Thank you, Rick. I would again just reiterate that we have already filed the Form 10-Q and so there is detailed discussion relative to our segments and our financial highlights and drivers for the quarter. And I would encourage you to read that for more thorough detail, I'm really just going to do some highlighting for you today.

As Rick indicated, the Life segment, the overall number of policies issued in 2011 was approximately 4,200 compared to 3,800 in the prior year for the nine months ended with the same average policy face amount of approximately $64,000. The current results are impacted by the following significant factors, we have a -- the decrease in net investment income for the nine months with the portfolio yield of 3.96% compared to 4.55% for the same period in 2010. We also have the increase in reserve buildup on the endowment product as those account for about 75% of our new policies issued that are in force in 2011 compared to 57% of new policy issued in 2010.

These endowments, as Rick indicated, are for ages of endowment life of 10, 15, 20 and age 65. The improved persistency, as Rick indicated, also affects several components in our financials. The primary one being the amortization of our deferred acquisition costs. So, those are actually down for the nine months due to the improved persistency. They're up for the three months because our assets, our DAC asset base has grown and so you just have more amortizations relative to a larger balance.

Also the segment results are impacted, as I indicated in our previous quarterly call, by the expense allocation that we do on a routine basis where we do a full review of how the expenses operationally are allocated between our segments, and our Life segment got a little bit of an increase in expenses comparatively to the 2010 allocation and that also you will see in the Home Service segment, which goes the other direction.

So those are the highlights, I mean, we're really, this quarter I would sum it up and say that we're really seeing the same trends that we've been indicating to you previously in our calls. But those are the Life segment highlights, and I'll turn it back to Rick for the Home Service segment.

Again we saw the same type of modest increase in growth in our Home Service segment. Our premiums are up about 2.5% both on the quarter and year-to-date approximately. The contributions into the new sales are coming out of, of course, Louisiana, Arkansas and Mississippi with Mississippi really being the greatest -- what we believe to be the greatest potential and certainly it's the newest market where we've stepped in. And it's been a steady development and growth of new sales in that particular state. And we're happy to see that development and growth taking place as it is.

We're also continuing to see positive impact from the rate increases on the fire business, the property business that we have, again that's a limited liability contract and sort of coverage. We did have meetings in the last 30 days with our catastrophic underwriters. We're not in a position to be able to predict where they're going be in terms of how they are going to rate us, but we did make a strong effort to meet personally with the cat underwriters this past few weeks and gave them a personal insight in understanding as to the business and the actions that we've taken to manage the overhead associated with that building and the risk factors that are naturally inherent in the business that we've operated now for I guess 20-plus years as far as the fire Company is concerned. But anyway, we're -- we were pleased to have the opportunity to meet with these folks and we believe we'll see good strong positive results from those first hand meetings.

Our, you know, one of the things I think we may have talked about in the last quarter or a question that came up was, how did the economy here in the US affect this lower income clientele, and we continue to see those activities as far as surrenders or any loss of the business there to be fairly well in line with what we would expect nothing abnormal or extraordinary as far as how the economy is affecting or anything that we could look to or point to that would give any adverse indications as far as how that book of business is operating.

I think Kay mentioned just a minute ago there has been a shift because of the reallocation of expenses between segments, and so we did see a positive impact in this Home Service segment as a result of those expense allocations, but I'll let Kay take it further little more detail.

Our net investment income decreased in this portfolio from a 4.9% yield a year ago to 4.54% for our annualized yield rate for the quarter end. This investment portfolio has a larger concentration in corporate and municipals than the Life segment investment portfolio, which is weighted more significantly in the US agencies, so that's why you see the difference in the portfolio yields for the different Life and Home Service segment.

Our claims experience, which is favorable for the three and nine months in 2011 compared to 2010 with $3.5 million and $10.7 million of death claims for the current period compared to $4 million and $12.1 million for the prior year. So those are items that are obviously impacting us favorably. Also the property claims we have are up slightly in the current year. We did have a more favorable experience in 2010, but we had some weather-related claims that impacted us in the second quarter and third quarter, but they are still within expected levels and not anything that we anticipate causing us negative profitabilities.

We did enter into two reinsurance assumption agreements in the quarter on two small Louisiana Home Service blocks. I just wanted to highlight that for you. Those are immaterial blocks, but they provide us with a marketing force in addition to the one that we already had in Louisiana. Rick may want to highlight that for you a little bit more, but those are the highlights for the Home Service segment from that standpoint.

Thanks, Kay. Yes, it is a point I missed in terms of talking about the additional -- the acquisition of those two blocks of business -- they -- there is, again, as Kay pointed out, they are really immaterial relative to our overall operation, but strategically they are very complementary to what we have in the state, and we expect them and that customer base and the opportunity for additional growth of sales in those particular communities where these two blocks were located to be complementary to the rest of the sales operations that we got going in Louisiana in the Home Service market.

Let me switch now over to investments and talk a little bit about where we are and where things have tracked. I know we talked in the last quarter about had we reached bottom? And I was asked to make a prediction I guess about whether or not we had reached bottom and I was hesitant to do that. I am still hesitant to say we've reached bottom, but certainly we can see the trend changing now and at least the decline -- the rate of decline toward bottom has certainly slowed and we are seeing whether we in fact have reached bottom.

As we started into this, I think about the time we had the call last quarter, we were beginning to experience some more turmoil in the markets, and it is really unpredictable as far as what was going to be happening over the coming weeks, but that was more of an aberration in the marketplace. We've come through that fairly effectively. We are continuing to invest in much the same way that we did throughout the year.

Clearly, the opportunities were a little different in the third quarter as a result of some of the turmoil. But we have been continued to strategically focus our investment opportunities on really big more opportunistic type items whether it's a municipal security, one of the things that we have done through the quarter is recognize and began to take advantage of some tax free. We can't do a lot of tax free within the insurance Company operation because it doesn't serve much purpose, because of the way the tax laws work relative to the Insurance Company operation.

But in our non-life Company operations, we are finding opportunities to make investments in some municipals and gaining yields between 4.5%, 5.5% as far as an effective yield on some of the municipals in the non-Life entities. So we're pleased with the opportunity to take advantage of some of those situations that we find in the marketplace.

As Kay pointed out in our Life sector and in international market, we continue to remain focused on US Government sponsored enterprises, primarily [STEP] agreements. We're kind of churning through those STEP agreements seeing them a lot of what we bought a year ago at a 2% rate being called now as they begin to step up or they -- and which was not really unexpected quite honestly, but we are finding opportunities to put them back at either at that same rate or may be in an alternative municipal investment or even a higher rate. And then of course what we're doing that and making those investments in some of these munis that we're able to pick up and I'm talking about taxable munis now rather than non-taxable munis, we're actually avoiding some of the call activities because the calls are not as frequent as they are on the US Agency Paper.

So we continued to stay focused on the US Government Paper because it is important to us, but at the same time, and it's important to our clients, particularly our international clients, they want to see the portfolio remain in a high grade US-based paper. One of their main objectives in acquiring our product is the safety and security of the US dollar. And so we want to be sure and accommodate all of that in our thinking when we're making investments. And that's one of the reasons we remain focused. Even though the rates are down and low, we are continuing to stay focused in that arena and hopefully we'll be able -- we'll be in a position here to see the rates move back up in the shorter term and longer term.

But at the same time, while we're going through this process, we've actually shortened our durations and so we've gotten in a position to where win rates in the market do move. We think we're very well positioned to take advantage of that. I think our average overall portfolio modified duration is about 4.5 years. So we're continuing to see that move down as we work through some of these calls and some of the things that we do.

Let's see. I think that covers really the things that I wanted to talk about here as far as the investments in the investment environment. And, Kay, I'll let you add additional color relative to what you're seeing.

All right. Invested assets are up approximately $66.6 million for the year ending, totaling approximately $792 million at 9/30/2011. As mentioned our annualized consolidated yield rates are now down to 4.11% on the consolidated portfolio compared to 4.66% a year ago reducing our earned investment income in the current year.

As noted in our earnings release, the decline in our yield rate by quarter appeared to be leveling off primarily because of a shrinking differential between the rates on called securities and the rates available on new securities. Just to give you a little bit of perspective, our yield declined from 9/30/2010 to 12/31/2010 on the consolidated yield 34 basis points. And on from 12/31/2010 to 6/30/2011, we declined 19 basis points. And from 6/30/2011 to this current quarter, 9/30/2011, we declined 2 basis points. So that's why we're indicating a leveling off as you can see in those figures.

We currently hold 35.9% or $607.8 million of our invested assets portfolio, including cash in US Treasury and US Government sponsored enterprises as of the current quarter, as well as we have increased our bond mutual funds holdings to $45.4 million or 5.3% compared to 3% at year-end 2010.

We have invested a significant amount of our available cash into the AA taxable municipals during this year as noted by Rick increasing our holdings in this rating category. We are holding 97.5% of our fixed maturity investments in investment grade BBB or higher securities. We did not invest in below investment grade securities and the 2.5% held in our portfolio represents securities that are downgraded or securities that no longer obtain ratings.

We did not record any other than temporary impairments in 2011 for the year-to-date or for the quarter. So, those are my highlights and I'll pass it back to Rick for closing comments.

Again, we've had a good solid quarter and continuing the trends that we've seen year-to-date, good healthy operation -- insurance operations, and even though we've had a rather tumultuous investing environment, we continue to be pleased with the way things are working through this downturn and look forward to seeing it turn back the other way and get the opportunity to reinvest at more solid return rates than what we've been able to do in the short term here.

We continue to be focused and interested in making acquisitions. We do look at them routinely. We did -- as closing the small blocks of business out of Louisiana last quarter is something that we really are willing to do deals on virtually any size and shape as long as we can make them aggregate to the benefit of our shareholders, if we can continue to see this Company, you know, has been built and grown over the last 40 plus years through both acquisitions and sales of product, and we expect to continue doing the same things as we move into the future.

With that I -- [Randy], I'll turn it back to you and let you open us up for questions.

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

Hey, good morning, everyone.

Good morning, Ed.

I'd like to start-off with the investment portfolio. I've got a couple of questions here. Thanks for the duration info and the yield info. We're kind of stuck in this low interest rate environment, and I guess the first question I've got is, how do you see the low interest rate environment playing out with your investment? Duration is pretty short at 4.5 years. So that would kind of suggest some continued drag going forward, but you've indicated that it seems to be flattening out on the yield. Thanks for that Kay. But I mean, where do you see it going over the next year, two years?

Well, Ed, let me give you a little perspective. We understand that if -- particularly on these STEP type instruments, when we're making those investments, we're looking not just at duration as being the driver. We are looking at both duration as well as yield to maturities, and we're particularly focused and concentrated on investments that if the -- once the market rates do begin to move and if we do get locked into holding these to maturity, our focus has been geared around, and let me give you just kind of thresholds or benchmarks that we've utilized in our decision making. If we're in the 8-year to 12-year range then typically we're taking instruments that will yield at or above 4%.

If we're investing in the 12-year to 15-year range, then we're expecting, and we're capturing investments through our purchases that will yield. I think the bottom has been somewhere in the 4.6% range, but our target is really 4.7% and above. We've been pretty successful at getting the 4.7% to just north of 5% as a general rule on all of these investments as far as what we're, what we would expect -- we would get yield to maturity if we end up not being called and not being turned over.

There is a fairly broad variety of calls, of instrument structures and so we don't have all the money. If you look at a graph on it, it shows that there is an awful lot of maturities in the 15-year, 16-year, 14-year range based on what we've had to do over the last couple of years. However, if you look at the structures of the individual instruments, you're going to find that you're not likely going to see all of it materialize in that one realm because the variety of structures that we're using create -- really you're going to call [force calls] or likely create call opportunities all along the way.

So we don't -- even though it looks kind of like an aberration on the chart or on a graph, it won't likely work out that way as far as the ultimate maturities. So by staying focused on both duration and trying to anticipate what's going to be the optimal call point, but at the same time focus on these yield maturities, we believe we got our sales positions very effectively for what's going to happen in the both short term and long term.

And I think just as we go forward with our new premium incomes, we will be able to invest those as rates go up at those current yielding rates, which will dampen if you were just looking at the static portfolio today.

Okay. Thanks. What about callable securities in the first quarter or second quarter of next year? I know from conversations I've had with some other companies, they are having a pretty good bucket of called securities in the first quarter or expectations for that. Do you have any sense on that?

I don't -- well, we don't have a concentration in the first quarter. They will be based on some of the investments that we've made. We've actually made investments thus far in terms of rolling some of this, and we've made investments that are going to put calls into the second quarter and also into the third quarter and fourth quarter next year. So, again, when we're doing this, we're not doing it with a singular mentality, we're really spreading things out and forcing things into a broader, I don't say, laddering, but more of a diversified maturing or calling duration.

And, there is always, for example, last year we've seen a good bit of call activity in the fall because of the fact that we did a lot of investing for -- on a year long basis last year. We didn't get a lot of opportunity to do six-month options then. This time we're getting six-month as many six-month options and some of them even shorter than that in terms of how we're being able to get into them -- out of the secondary market. We're not always taking new paper coming out. We're working secondary paper as well. So, again, we're spreading it and diversifying what we're doing pretty aggressively, not so that we can avoid having things concentrated and avoid that type of condition or situation that you're describing.

I would assume that what you're seeing in some of your other companies that are going to be coming up in their calls, we've really already experienced because of our callable portfolio that we hold more significantly than a lot of insurers. So we've really turned the portfolio over in the low interest rate environment due to the call activity and that's one of the things that we've been real careful to highlight in our financials because and that is really what's causing that yield to now be -- the decrease to be diminished is because we've really hit bottom on turning that over. And I think what you're seeing is that other insurers just haven't arrived at where we already have been and are coming through.

Yes, they may have to do with different durations of portfolios and what have you.

Right, right.

Exactly.

Sticking with the investments, this quarter you guys had (inaudible) like from the 10-Q a pretty big increased allocation of the bond mutual funds, could you discuss the rationale for going into the mutual funds versus bonds directly?

Sure. What we saw because of the volume and the amount of the call activity, what we saw was an opportunity there to get a little stronger yield on some of the shorter term. And it gives us more control over when we can come back out, we've been successful in negotiating some unique opportunities to exit on a basis other than what would traditionally be there. So we're finding that we can -- furthermore I don't want to mislead you with that.

For the most part, the bulk of those are essentially a year long kind of a commitment, but it gives us the opportunity to exit from those positions at our discretion rather than being subject to the call provisions that we currently have. And it should give us a more consistent 2.5% to 3.5% yield on some of that shorter money that we've been putting out in 1.5% to 2%. So we believe that we'll actually see a positive impact from those. And it's a modest amount our Board has given us the authority to use up to 10% of our invested assets in these equities and we're not even close to doing that and we're not expecting to do that, it's just that -- it's just a strategy that gives us an interim liquidity hedge I guess against what we've been doing in the short term laddering or spreading of the funds.

Okay. Moving on to just broadly speaking sales, I guess, really more looking on the international kind of arena, does the fourth quarter impacted by the holiday season at all, a little bit of downtick in sales volume?

Actually if you look at us historically you'll find that our fourth quarter -- we really kind of skew, it was more predominant in years -- in many years ago before we had the Home Service and they're with us. But the Home Service will balance out the international marketplace, but you'll find it usually in the fourth quarter, the latter half of the year for the international marketplace is stronger quarter.

So I expect that the quarter will be a solid quarter just like we've seen year-to-date. I don't anticipate any, as I mentioned earlier we've got some sales contests and things like that to certainly influence it, but I don't think it will be, that any of that will be dramatic enough to make any kind of a major blip on the radar, but I do expect that the quarter will be a strong quarter just as it has and normally is because of the skewing of the business that we have into that fourth quarter period.

Okay, that's useful. Kind of sticking with that idea of the sales contests and your disclosure on the DAC accounting change that was in 10-Q which was useful, I guess the question I've got is you say the DAC assets going to be -- could be reduced to $10 million to $13 million, which isn't a lot given the size of your DAC asset. Earnings has a small impact. Did you indicate shareholder equity impact on that from the $10 million to $13 million DAC asset reduction?

Yes, I mean, (inaudible) with tax effect that number and that's our balance sheet impact, Ed.

Okay. So there will be no retained earnings impacts or anything like that or offsets?

No, not other than. No.

Okay. All right I think that's it for me. Thanks for having the call, and I appreciate your time.

All right. Great. I appreciate it.

(Operator Instructions) And there appear to be no further questions at this time.

Well, again, we thank, everyone, very much for the opportunity to share the information today and we look forward to sharing you -- with you again in after we get through the year-end and next quarter. Thank you very much.

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