Citizens Inc (CIA) 2011 Q4 法說會逐字稿

Welcome to the Citizens year end 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 to now turn the call over to Ms. Osborne. You may begin.

Thank you, Melinda. Good morning. Welcome to our earnings conference call. I'm Kay Osbourn, Citizens' Chief Financial Officer. Joining me on the call today is 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. Yesterday we issued our earnings release, and filed our 2011 10-K. Both documents are available on our website at 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 March 12, 2012, 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 and welcome. We appreciate you joining us on the call today. We would like to highlight 2011 results in the discussions today. Basically, we're talking about the strength of our niches, and the thing that we do or have done effectively in terms of building continued premium growth, even though we've had some relatively difficult economic conditions, and we're looking forward to the 2012 to hopefully going to see some improved, an improved economic climate that we can operate around.

Our investment income was up on an expanded portfolio, largely as a result of the premium growth that we've seen. Our book value continues to move up steadily, which we're pleased to see over the last several years of steady continuous growth there. Kay and I will intend and will work to try to provide you perspective regarding 2011, as well as describe potential future growth prospects that we have during this call.

To do that, we will operate in a format where we're working back and forth between our insurance operations, our investment performance, and then toward the end of the call we'll open it up and take questions, should there be any. First, let me look at the life insurance segment. It accounted for $118.2 million of our 2011 premiums, which represented 88% of the growth that we saw during 2011.

Our international business, of course, is the largest part of that segment. We have been serving foreign clients in the international arena for more than 35 years. We do all of our business here in the United States on US banks, and remain focused on guaranteed accumulation products, rather than term life or death protection oriented product design.

The healthy growth in the 2011 premiums were predominantly a result of continued strong persistency, as well as steady new business sales across our international venue. One of the contributing factors to that is a policy loan feature. We've talked about that in the past, the fact that we do have a automatic premium loan built into our contracts, so that in the event that there's a timing of premium collection differential, then we normally see a consistency, and a steady execution of collection process, and it basically gives a client an opportunity to not be as concerned about the timeliness of that payment of the premium. But it does, even though it's -- it just gives flexibility, is really the point I'm trying to make with that particular focusing on that particular feature.

Generally, we'll see, or it's not uncommon to see the arrival of the funds on a delayed basis, but usually that's not extensive. It's a matter of 30 to 60 days outside of a grace period, as a general rule. But that premium loan provision protects, not only the client, but also protects us, relative to that premium income flow.

We have seen, again, continuing focus on endowment products. They have made up more than half of the first year premiums this year, or in 2011. And the thing that's important, probably, to keep in mind and to remain aware of is the fact that the both whole life and endowment products are priced for long-term returns and profitability. We make a point not to design product that's solely dependent upon the yield or spread in our yields on investments. We'll talk about that a little bit more later.

Our international markets, where we're having the most success, Venezuela, because of its tumultuous nature, we find being one of the leaders in this past year, and that's fairly common in our business, when we're dealing with US dollar premium income, that becomes a desired -- the US dollar and the US dollar assets are a place for these countries and these third world residents to find a place to put their assets.

Columbia continues to function in a secondary role, as it's been our longest contributor in the international marketplace, where we've got the deepest roots, and it remained a consistent source of new sales throughout 2011. The Taiwanese market, where we've established a foothold, I guess really over a decade ago, did not see a lot of growth in 2011, but remains a solid foothold for Asian expansion opportunities, we believe.

In the US, we had a good quarter in the fourth quarter. The bulk of our US premium comes from renewals on books of business that we've either acquired or developed over our history and our past, but at the same time, continues to provide steady renewal premium income. Also, we've seen encouraging development in several areas, Texas, several areas within the state of Texas, particularly, but also in a couple of other areas around the nation, Georgia, North Carolina, I think have also seen some development efforts be successful over there. That predominantly comes from routine recruiting and production of new business. At this point I'll turn this over to Kay, and let her talk a little bit about the pre-tax income on life business.

So, in addition to the premium results that Rick has highlighted for you, I'll give you a few significant factors impacting the life operations. We do show a decrease in portfolio yield, which is impacting investment income for this segment, with a yield of 3.89%, compared to 4.17% in 2010. This life segment has approximately half of its total holdings in fixed maturity investments held in US Government and Government sponsored issues.

We also have assumption changes in reserves, due to lower long-term investment yields, which are resulting in an increase in the reserve liability balance of about $800,000. Our endowment products design has reserving impact that builds up reserves at a faster rate than our traditional whole life products, due to the shorter durations.

We also noted that we had fewer reported claims in the current year, reflecting a 6.9% decrease in death claims, as well as we also noted that our persistency has improved in the current year. As far as our deferred acquisition costs, we normally set our assumptions for policies issued in 2011 in the fourth quarter, and we are reflecting the lower long-term investment yield than we had, a lower yield than we had previously anticipated, which is decreasing our DAC asset, and increasing amortization by about $1 million in the fourth quarter. This increase in amortization is outweighed by the decrease in amortization that we've reflected, due to the improved persistency in this block over the levels that we saw in 2010.

And with those highlights, I'll turn it back to Rick for the home service operations highlights.

Now let's look at the home service. Again, in that segment, we see a contribution of about $43.2 million in premiums for the year. That's the remaining 12% of the premium growth that we saw. We had a small assumption of business in kind of an incremental blocks of business in Louisiana that were compatible with that block, and those acquisitions were made, or that particular transaction was effected in August.

We closed it finally right after the end of the year, but the results are reflective there in the fourth quarter. But more importantly, about that particular book or that particular, those, a couple different blocks of business there, but those both were provided, are providing an opportunity to expand sales into areas not previously contributing to our overall annual growth, and we expect an increased, or an enhanced level there, coming out of those particular opportunities that we've picked up there.

The home service segment continues to have a steady and positive impact on what we're doing, in terms of the life insurance operations, or the business. Our life insurance subsidiaries and the -- as far as the property and casualty company that we have, that's a subsidiary of the security plan life operation over in Louisiana and Mississippi and Arkansas where those, where it's operating.

The fire company is a strictly Louisiana-only entity, but it performed well this past year as a result of a rate increase that was effective at the beginning of 2011, and we were pleased with the results out of that particular operation this year. As you would understand, I'm sure, the economic conditions do play somewhat into what happens in -- this is a lower economic socio income area that we're serving in these, in this particular market niche, and as a result we do have an impact on surrenders and those types of things when -- and even premium loans, again, over in this segment where that does occur when the premium's not readily available to be collected.

With that I'll turn it to Kay and let her give a little more perspective there.

Thank you, Rick. Net investment income in this segment is driven by a portfolio yield of 4.47% for the current year, compared to 4.65% in 2010. The investment portfolio of this segment has relatively even distribution of fixed maturity investments in the US Government and Government sponsored issues, corporate securities, and also municipal bonds.

We also noted that death claims decreased by 7.6% from the prior year reported amount. We also have in our IBNR estimate, we are reflecting a $600,000 decrease, due to favorable development. Our estimate is impacted by Hurricane Katrina experience from 2005, which is working its way out of the claim developments. We also review our expense allocations annually, and we're reporting a decrease in this segment relating to our expenses of $1.5 million compared to prior year levels.

This allocation change increased the life segment by the same amount. Our overall general expenses are down in the current year, totaling $26.9 million, compared to $27.1 million in 2010 and $28.4 million in 2009, respectively, as we've continued to manage our operating costs. The amortization of deferred acquisition costs in this segment increased in the current year, due to the higher lapse rates, as noted by Rick previously, and also due to assumptions setting for policies issued in the current year. That increase for the assumptions setting resulted in about a $400,000 increase to DAC amortization. We typically lock in our assumptions for new business issued in the fourth quarter of each year.

With that, I'll turn it back to Rick.

Let's talk a little bit about the investments, and where we are in terms of investment activities. We were able to grow investment income, despite the lower interest rate environment that we found ourselves in, while at the of the third quarter, I think we talked a little bit about bottoming out our yield toward, it appeared that we were headed that direction. And then in behind that, we got the announced intention to keep rates low, and I'm sure that's going to likely have an average yield impact continuing to depress those going forward, although as we closed the fourth quarter, we actually saw some indication of that bottoming and potential inflection of rate.

But while we saw the positive improvement, I would tell you what we see on an ongoing basis has continued to be a challenging environment to maintain or secure short-term yields of any magnitude, and even longer-term yields we're seeing continue to be depressed during this period of time. And that causes us, frankly, to keep as much as of the investments shorter term, which means we will necessarily continue to see this compressed investment income that we've seen over the last 1 year, 1.5 years, and 2 years. And we anticipate that that continued pattern will be there, although we are comfortable that we have seen the majority of the movement in that regard has pretty well taken place.

We're not sure how to predict exactly what this long, how long the low interest rates are going to go, and what the overall long-term impact will be. What we'll be doing is continue to make sales, and develop the premium income, and we'll keep trying to grow the investment portfolio and investment income out of the growth of the portfolio overall, like you've seen occur here in this fourth quarter. We continue to see, or lately have seen, some reinvestment in our step, government step type instruments, beginning to give an indication that rates are moving up slightly.

Again, it's not anything particularly material. But we're encouraged to see some of the entry level points getting up beyond the 1% level, and even moving 1.5% to 2% of late. So that gives us encouragement there.

We want to emphasize, again, that the predominant design and development of our products that we have targeted at these niche markets are priced for profitability in and of themselves. They are not solely dependent upon spread, and therefore, we expect that we'll be able to continue to grow the investment portfolio and our organization from this advantaged niche position that we've worked out of for quite a number of years.

Kay, if you want to wrap up there with --

All right we saw lower realized gains on investment securities in this year, relative to 2010 and 2009. We primarily sold securities in order to benefit from tax planning strategies in all three of the years, and just to a lesser extent in this year. We did record one other than temporary impairment of $70,000 in the fourth quarter of 2011, related to one American Airlines bond that was due to mature in 2012. As you know, American Airlines filed bankruptcy chapter 11 re-organization.

In addition, we wrote down a real estate property holding in Arkansas that is classified as held for investment, based upon a current appraisal and impairment review. This write down to $561,000, and is reflected in the current quarter. In addition, in our 10-K, we also disclosed the adoption of ASU 2010 26, which is the new guidance relative to deferred acquisition costs, and the successful efforts accounting application.

We are anticipating a reduction in the DAC asset of approximately $10.5 million, and this will also impact our pre-tax earnings positively by an estimated $500,000, due to the projected lower amortization in those upcoming year financials. So, that information is disclosed in the 10-K, and we encourage you to look at that disclosure if you're interested in more information relative to that topic. With that, I think that that's all the highlights that I have, and I think that we'll turn it over to Melinda to open us up for questions.

Yes, thank you. The floor is now open for questions.

(Operator Instructions)

Our first question comes from Ed Shields. Please pose your question.

Hey, good morning, guys.

Good morning.

I think I pressed the number 7 too many times.

Maybe that will make you lucky.

Yes, maybe so. Maybe I need to get to a casino. So, I wanted to talk about the assumption changes for the new policies that you mentioned in the press release, as well as in your prepared comments, causing the $800,000 increase in reserves. Can you go through what the changes were. I think it's really just for investment yield, but any changes related to persistency or mortality, or any other moving parts there?

No, no Ed, you're exactly right it's relative to the long-term yields.

Okay. And can you disclose where you've moved that assumption to, and where it moved from, or just the Delta between the two?

Let me let our actuary speak it that. Jonathan Pollio is also here in the room with us, and he can take that question.

Hi, this is Jonathan Pollio, Vice President, Chief Actuary. We dropped the interest rate on the short-term side by about 20 basis points, and we dropped it on the long-term side by about 70 basis points. It's kind of an upward slope, which is now pretty standard in the industry.

Right. That, that's useful. Any idea, or guessing, or thoughts about if this low interest rate environment persists through 2012 and 2013, you know, with the guidance that's come out where the Government's not going to raise rates until mid 2013 or '14, if there's going to be further assumption changes going forward, or are you pretty confident where you're at right now?

We expect these to be, I do a best estimate assumption, and we put in a pad to handle any uncertainties, and I'm fairly certain that pad should handle any uncertainties.

So, we don't anticipate changing it for those future current upcoming yields levels.

If there were any changes, it would be at fourth quarter next year right?

Correct.

Okay. So, that's one item. With new money being put to work in the low interest rate environment, obviously you mentioned some of the Government securities are 1%, 1.5%, 2% yields. Any thoughts about going for a little bit more yield in other areas? I know you don't price your products for investment spread, or you don't need investment spread for the profitability of the products, but every little bit helps in this environment, so is there any kind of re-assessment of investments in this environment?

Ed, really what I was trying to communicate with those particular, those are generally step type instruments that keep us short in the short-term. We don't really accept those. We're not really committing to anything in that step arena that, if we end up needing to hold it, that yields us anything less than 4.6% thus far.

I'm not saying that we wouldn't take a 4.5%, but at this point we really haven't taken anything on a longer term basis that's less than the 4.6% rate, and those are really entry level rates, not necessarily what you would get, so what I'm trying to communicate in that respect is the fact that the interest rates that we're utilizing are really more short-term geared, and we're anticipating this low 2% environment over a very short period of time, and we're willing to take the shorter-term turnover of the funds and the lower yield during that period.

We did make some investments in the latter part of last year in some bond mutual funds that are generating yields north of 2%, even approaching 4%, and I think even one of the funds may actually be north of 4%. But we're not out chasing yield. I don't want to misrepresent the approach that we take, because we're a very conservative investment oriented operation, and we're more concerned about the return of our money than the return on our money, particularly during this unusual economic period of time, and we're happy to get additional yield. We are doing some of that through municipal securities.

We're, in the non-life companies, we're actually using some non-taxable munies, which give us better overall yield. So, we're continuing to get good decent yield. As a matter of fact, like I say, in the fourth quarter we saw improvement in the overall yield rate. Even though I'm not sure that it's bottomed out, I am happy that, with what we're seeing. We're getting better yield than what the market, and the conditions of the market actually implies we should be getting.

Right. I guess one of the areas I was thinking of is, most of your life insurance peers invest, for example, in commercial mortgage loans. Industry average is roughly 10% of the investment portfolios in that asset class, and if I'm not mistaken, you all don't have a lot there.

That's correct. We do not. It's just an area that we do not make a lot of -- I'm not saying we wouldn't make one in that environment, it's just that we generally steer clear of that. You've got to also appreciate that the fact that our international clientele are very strongly interested in the US dollar, and the US Government backed instruments, so in their life insurance segment, you'll see a fairly strong concentration of investments in that arena, primarily for that purpose.

We branched out of that this last year, last couple of years, into some munies, which we clearly don't have the fully faith and credit of the US Government, but are also US-based and strong alternatives, we believe, to that particular market. We do it primarily for our constituency and our customer base that's interested in that strong US dollar-based investment.

Right. I wasn't trying to suggest anything else there either, by the way.

Again, we're familiar with some of the other things, we're just pretty risk averse, and particularly in this climate, we've just maintained our conservatism through the process.

So let's shift gears a little bit to kind of distribution. During your comments, I think you mentioned that North Carolina and Georgia were looking a little bit interesting, and parts of Texas in the US Business. Could you just develop, or expand on any initiatives you may have in place on distribution? Are you looking to enter new states in the US? And then also, if you could comment on distribution on the international market, are there any developments there for increasing agencies, or independent agents, or new markets or anything of that sort?

Yes, I wish I would have brought some statistics, some details with me about where all we got production last year. You know, we get production out of a number of different states each year, and what I really was commenting on is, I've seen some positive development going on in these areas. I don't mean to particularly focus on any of those states as being dominant states or predominant states by any stretch.

But we just see there has been activities there, and some growth in terms of the volume of premium that we see coming from that particular venue. But it's not, in terms of an overall nationwide expansion, we're working in a rather concentrated mode, building and developing predominantly here in the state of Texas. We're encouraging and working with other distribution networks that express an interest in our product base, that they're interested in working with us, then we typically will build off of that expression of interest on behalf of the distributors.

And on the International side?

On the International side, in terms of the expansion and the growth, I still think that Latin America continues to be an area where we will, I don't want to say be dominant, but we'll continue to see expansion and growth there. I think in the Asian market, it's been disappointing, honestly, to see the Taiwanese pull back, but I think a lot of that had to do with just the conditions in that particular country, and the way that they're dealing with their world.

But over in China, Vietnam, and down through the Asian continent in the third world countries there, we've got opportunities. I don't have anything to point to as far as a predominant producer or network that's operating there. We just believe that with the strong foothold that we've got there in Taiwan, that we'll be able to continue to work out from there, and continue to develop in that Asian market.

Okay. And then my last one, I would be remiss if I didn't ask about what you're seeing in the M&A environment in the marketplace? Any increase in properties or items being brought to you, or anything related to the economy, anything there?

I appreciate you bringing it up, I actually had that in my conclusion comments here to kind of wrap up, but we do -- We have not seen an extremely large volume, we're not seeing large opportunities. We are seeing a number of small opportunities. We are expecting to continue to build and develop our Company and our growth in the same manner we have, historically, through acquisitions.

I think what I've seen, more than not, Ed, is the fact that the increased regulatory scrutiny environment and attention. I know the new holding company act that's coming out, that the NAIC is promoting relative to holding company structures, the model act that they've designed seems to be lighting up, particularly smaller operations who have multiple businesses operating under that one umbrella.

The insurance holding company world is imposing upon them in a way that they may not care to be influenced, So, I think the opportunity to possibly pick up some of those companies that are tied up in those kinds of structures is going to be more prolific going forward, particularly as the NAIC is successful in putting in this new --

I mean, the holding company laws are not new, but the newer provisions of the model act open the door, primarily, for intrusion into all of the related businesses, and these business owners just are not going to accept that. So, I think you'll see some of the divestiture of some of those small company opportunities that are out there, and frankly, I hope that we expect to be positioned to actively operate in that particular arena.

When do you expect that model act to be implemented?

Well, the state of Texas passed it as is, I think last year. I know that Louisiana's currently contemplating it in its coming legislative session. I don't know where, I haven't monitored across all the states where that's going, but the Louisiana one, in particular is where I've gotten some of my insights and particular perspective on the imposition on some of those business units that are operating over there in that state.

Right. So, so would it be fair to characterize potential M&A activity more along the lines of the small blocks that you picked up in Louisiana earlier this year, or I guess in 2011?

It's fair to characterize that's what I've seen more of of late. I don't know that there's not going to be a larger opportunity on -- I think, again, the low interest rate environment is another contributor to that.

Yes.

I think that that low interest rate environment is hurting some companies, and there are probably going to be some that are going to be available for sale as a result of the economic conditions that we're in, because since many of those do live off of spread. They don't function like we do, and therefore I believe there are going to be opportunities even in other arenas besides just these small arenas, as well.

Got it. Thank you very much.

You bet.

Thank you, Ed, I think --

Is there, is there other questions?

No, sir. There are no further questions coming from the phone lines at this time.

All right we appreciate, again, your time, and we're looking forward to the future in 2012 with a positive outlook. The Company will be able to continue to do what it's been doing very well for a number of years. The niche markets work well for us, and we continue to expect to work down that path, and even though we've had an unstable economic environment, we are encouraged by where yields have tracked to, although we're cautiously optimistic about where that will play. We do expect to be active in the acquisition market, and we look forward to having those opportunities. But again, we appreciate you joining us on the call today, and we thank you for your time.

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