CIA - NYSE

Welcome to Citizens, Inc. 2012 Third Quarter Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the call over to Ms. Osbourn. You may begin.

Thank you, Glaimy. Good morning, welcome to our earnings conference call. I’m Kay Osbourn, 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 third quarter 2012 10-Q. Both documents are available on our website at www.citizensinc.com. During the call today, we will discuss the expected performance of the 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 6, 2012 and is incorporated by a reference into this call. we are not responsible for transcripts of this call made by independent third-parties. And finally, a reconciliation of non-GAAP information as required by Regulation G was provided with this release and also is available on our website. Rick?

Thank you, Kay, and good morning, everyone. We appreciate you joining us on the call today. Our 2012 third quarter was a very good quarter for us, certainly a step-up from the second quarter. And that’s in spite of the losses that we experienced in our Louisiana Home Service operation as a result of Hurricane Isaac, that’s occurred there toward the end of August. We’ve been working hard with the clients and policyholders there in Louisiana to address and recover from that storm and things have been going very exclusively and effectively for us through the process, as everyone would probably understand that particularly those in the northeast with Sandy that it’s not a pleasant experience to go through. but we can attest to you from the State of Louisiana that you can survive it, and it will get better as time goes on. Our sympathy and our concern and heartfelt concerns for your situation there on the northeast certainly is there and we very much appreciate the challenges that you face in the coming days and weeks. On that same note however, I can tell you that not anything that’s happened there and Sandy in the northeast has had any impact on us and our operation, and for that, we feel blessed and the experience that we’ve had this year with hurricanes has not been that significant as far as the Company is concerned overall. Basically, the overall strength that we see in this third quarter comes from the foundational aspects of our business. we continue to see growth and opportunity for expansion. We have continued to see the book value grow as we move forward in time, and we’re probably in the strongest position today that we’ve ever been in relative to undertaking transactions for consolidation and growth in the acquisition market. The other thing that I guess, let’s go and move, let’s move at this point on into the life segment, insurance operations and our Life Insurance segment. in that particular operation, we recognized a growth in our premiums year-over-year for the quarter, 90% of that growth is related to this life segment, 10% over in the Home Service segment. It appears at this point that on a full year basis, the sales of the Company may well exceed where we were at this point at the end of the year of 2011. We certainly are pleased with what we’ve seen developed through the third quarter, and how we’ve started in the fourth quarter and all looks like, all things look like, and again, I guess I should comment that that’s fairly difficult for us, because in the first half of the year, in this particular market, it’s usually the slow period for us. And so things are tracking pretty much on par and normally for us and that the third and fourth quarters are usually our strongest quarters in this Life Insurance segment of our business. We’ve been serving this foreign residents through our Company for over 35 years. Our clients continue to remain focused on accumulation more so than placed amount of policies. and of course, that’s how we emphasize and promote and make our sales. The endowment products continue to be popular. Those that have the guarantees that’s really what we see most interest to our foreign clientele, although we do still have a decent volume of ordinary life and whole life product that gets sold in that same venue. In terms of how we’re being affected globally in this business, in this particular segment, clearly, our clients are located in economies that are little different than the U.S. economy. they’re coming to us here in the U.S., because of the stability of the U.S. dollar. But we are seeing growth in the Latin American economies that it’s not -- it’s at a slower pace this year than it was in previous years. but we’re not seeing any particular significant impact as a result of any of the economic conditions in Latin America. And then as far as the Asian community, Taiwan, that particular economy is flat. it’s not growing. It’s been contracting I think more so in the past, but it’s not -- it has been flat for the better part of this year. so we don’t see and again, we don’t see any real impact economically from those environments and those conditions relative to what we’re doing businesswise, clearly from the quarter’s results we’re seeing good, solid, continued sales and developments of growth, at least at or above the level of where we were a year ago. Again, I guess on a year-to-date basis, we were slightly lagging behind where we were profitability wise, on a year-to-date basis. but yet on a sales perspective, we’re optimistic that we don’t see that, see a little bit of growth in the sales before the years over with. In the USA market, it’s a part of this life segment. we have a minimal amount of U.S. sales, most of that premium, most of that income results from renewals that it come through acquisitions and historically build business that was really 20 to 30 years of history. The states then within which most of this business comes from is Texas, Georgia, Wyoming and South Carolina were the majority of all of what we’re getting and issuing during this year from our sales operation on a USA basis. Kay, at this point, I’ll turn it over and let you review some of the highlights financially.

Okay. I’m just going to add just a few points relative to what Rick has expressed. As noted, we are reporting strong premium growth relative to first year new business and policy renewal premium in the third quarter for the 9 months of 2012, compared to 2011. This is driven by our international policyholder business, which has reported strong results with 7.9% and 7.2% growth in direct premiums earned for the 3 and 9 months compared to 2011. Our benefit and expenses did rise, our mortality and surrender trends are within expectations, commission expense also reflected the business mix and the rise in the first year sales and those are really the highlights for the life segment. and so I’ll pass it back to Rick for Home Service segment.

Our Home Service as we mentioned earlier had a 10% growth about $11.1 million in premiums as a result of the quarter. They’ve had, and as you may recall from previous quarters, that particular segment is not a robust growth segment. it is a steady growth segment, it kind of goes against industry trend, because in a lot of across the industry otherwise. That type of business is in a shrinking mode, but we’ve been successful over the last several years of seeing fairly consistent steady development in growth. And again, not in any robust manner, but at least consistent from year-to-year and we’re pleased to be able to be kind of bucking the trend that the rest of the industry has, relative to the Home Service segment. Hurricane Isaac did impact us, and did impact the bottom line of this segment during the period. total claims for that are not fully known at this point. we’re working through a lot of that volume that we had and we are expecting that the claims are not going to be catastrophic in nature. It’s not clear at this point, whether we’ll actually penetrate the cat consideration that we have there as a backstop. But at this point, we’re really pleased with what we’re seeing in terms of how the deductibles that we put into the policies and some of the things that we did to shore up the exposure and the risk that we had in that particular segment, seemed to work fairly effectively through this Isaac situation that we’ve dealt with. There was a disruption to the route collection process, which is fairly difficult when you have named storms to come through the area. at this time, it was not as disruptive as it was with Katrina and Rita many years ago. But we did see a slowdown and a disruption of the process during the month of September. But we believe now that we’ve fully recovered from all of that and back on top of all of that backlog that occurred as a result of the storms. I think at that point, Kay, I’ll turn it back to you and let you to talk a little bit more about the segment.

Okay. I’ll just give some highlights relative to the Hurricane Isaac numbers. As Rick indicated, we initiated a named storm deductible a couple of years ago of $250,000 and that is helping us in lowering our overall claim expense. Of the 634 claims submitted by quarter-end, 227 were declined or closed primarily due to the named storm deductions. we anticipate based on current projections that a total of approximately 500 claims will be paid relative to the storm with 150 being paid prior to the quarter-end with an average claim cost of approximately 1,500. I’d give you some details on other expenses on the consolidated level. we’re continually managing our operating expenses, and we’ve seen improvements relative to expense reductions. We have employee benefit cost reductions as we move to a self insurance program several years ago. And we have lower claim cost in the current year. we also have actuarial and accounting fees reduction as we continue to manage those areas. In addition our internal audit, department continues to provide assistance relative to control testing and sort of compliance, which helps contain those costs. I did want to note the commission expense has decreased for the 3 and 9-month periods in 2012 by 1.5% and 2.4% compared to 2011. Even now, premium revenue is increased by 1.9% relatives to the full 9 months in the current year. Due to agent compensation based on overall route growth. so it’s impacted by the overall growth in the route that drives the compensation in this segment, also changes were made during the current year to combine certain districts and route and that is also contributed to the overall commission reduction based on this compensation method. With those highlights, I’ll turn it back to Rick for our investment overview.

All right. in the investment area, we ended up with higher than the preferable cash balance at the end of the quarter that’s prior predominantly as a result of some of the calls and some of the activities that we saw in the portfolio as we closed at September. We have made some investments during the month of October to get that little down somewhat and have seen some additional calls during the month of October. So it says, it has been in the previous quarters, it’s kind of a churning process and we’re continuing to work through the callable instruments that we have elected or selected for our portfolio. and from an overall perspective, we’re pleased to see the investment rates beginning kind of hold or remain relatively stable through the quarters this year. As far as our average of overall return yield level, we are continuing to remain focused on yields and duration when we’re making investments and making those selections of where we take our risk, we’re not doing it in the quality necessarily. we’re doing it more as it relates to duration or period of -- the holding period that we may be subjected to if and when the market changes rate wise. So we do, we’re very pleased with the way the portfolio has been recognized in the marketplace. It’s continued the unrealized gains, remained strong and remained very positive for us. and so we’re happy with the fact that a portfolio even in this difficult environment continues to stay strong. I mean we clearly understand that has right to move and began to move up. We’ll see that shift, but with a shorter duration, the impact on that should be fairly negligible. And again, it all depends on whatever is at the market and I would caution you guys, I’m sure you understand, I appreciate it if understood, how that was going to work, that would be making a whole lot more money than I’m making these days what I’m doing. but anyway, it is a difficult time and interesting time and our activities as far as investments; we’re continuing to make the same types of investments that we’ve made pretty much throughout the year. We're not doing as many cushion type investments doing, we’re finding more opportunity and municipal securities of essential service, a variety that we can get a 4 plus percent return, and it all depends again on duration of where the maturity is on the security. but we’ve seen, I have been successful in getting even some 5% to 5.5% returns on some of our investments the last couple of quarters. and so that gives us good hope toward the future as we move -- hopefully, we’ll able to continue that level of investment and that type of commitment and keep the effective duration short, but at the same time, continue to get yields that will keep us at this level or even maybe enhance and bring us up a little bit from where we’ve been on average. Portfolio mix is changing a little bit as we move forward, because we’re not acquiring as many of the U.S. government backed, U.S. government supported or instituted, agencies or enterprises or things were backed by the U.S. government. And those things, while also diminishing, we are using high-quality high-grade municipal investments in the essential services to complement or to use in this interim period while the treasury rates are down where they are. from a longer-term point of view, I expect that we’ll continue to see the portfolio grow as a result of the premium income in sales that has been one of the major factors in helping us grow our investment income is the portfolio itself grows as the Company continues to have a steady and effective sales program. And with that Kay, I’ll turn it over to you and let you walk through some of the details in the investment area.

Okay. as Rick indicated, our portfolio is strong. We did not have any other than temporary impairments during the quarter ended September 2012. We also noted an increase in investment income to the overall increase in invested assets from premium growth which outpaced the declining yield, yields did drop from 3.92% at December 31 2011 to 3.74% at quarter end. We did sell a portion of our previously impaired equity mutual fund holding during the quarter that resulted in a realized gain of approximately $6 million and as Rick indicated we’ve had a level of advantage you recall, approximately $231 million in the life and home service segment for the 9 months ended. This primarily comes from U.S. government sponsored securities of Fannie Mae and Freddie Mac, which had a AA rating and we’ve reinvested those as Rick indicated into the municipal and corporate issuers of investment grade company and state municipalities. We do expect some additional calls as noted in the same area in the government sponsored issuers in the fourth quarter. As those securities we had invested in certain step-up type investments and those will be stepping up and likely to be called. Those are the really the only highlights that I wanted to add kind of repeating and adding to what Rick said. And then also to just note that our RBC ratios are strong and have not really changed significantly from year-end. And with that I’ll turn it back to Rick for conclusion comments.

Again we thank you and appreciate you being on the call today. We have a very optimistic and positive outlook, in spite of some of the challenges that we face economically today. We have remained profitable and that is in essence part of our unique structure of our operations, we have always constructed our products, and assembled that which we offer from in the field and to our clients to be something that our shareholders can expect to be, have a profit. So because of the design of the product and because of how we function and how we have always operated, we do anticipate and expect that the Company will remain profitable through the low interest rate environment. And we expect that we will continue on the path that we’ve been on, in terms of the slow, steady, consistent growth, and development of the Company in the same manner that Harold has led the company over the 40 plus years that he has been in this building mode. We remain focused on building book value for the shareholders, and we will continue to make some maneuvers and do the things that we need to do operationally to keep the expenses down and continue to grow the business and grow and generate the profits for our shareholders. We continue to remain interested in growth acquisition opportunities. We’re not actually seeing a lot of opportunities at this point, although we anticipate with the industry and the state that it's in that certainty, we should that activity will come. It’s just a matter of being patient and finding those that are synergistic with what we do and how we work and those that we can bring in and create positive benefit for the bottom line as a result of those type of situations. But we stand ready with the capacity to do stock or cash deals, and all combination that's how it works out. We are ready to and able to do it and look forward to have any opportunity when it presents itself. Glaimy, at this point, I think we are ready to take questions.

[Operating Instructions] And our first question comes from Ed Shields.

So just a quick review of Hurricane Isaac, just did a quick math on the numbers you cited there Kay. Total losses expected to be about $750,000, is that about right?

Yes, that is correct.

Okay. And I'm guessing most of that is in IBNR.

That's correct.

Okay. Do you guys expect any pricing impact on that product as a result of the losses of Isaac or is this largely within your expectations?

Yes Ed, we do anticipate that we will be. And I guess I would really say, it is not necessarily is a function of Isaac per say, but we will be raising rates, it isn't a process that you need to stay abreast of and stay on top of and we are already in the midst of evaluating what that will be and anticipate that we will be making an increase in the not too distant future.

Will that be effective like one, one for the renewal again?

Probably, so I don't know that there has been a specific approval point, or, I don’t think there is anything hard at this point of when it will go, but that's a reasonable estimate of what it might be, that's what I would guess, if I were going to -- if you are going to put me on the spot, I would tell you one-one, but I don't know for sure that that's were reliable.

Okay. Got a question and this kind of it is more about kind of your deck models and reviews of the deck models giving the elevated persistency that you've got, in combination with the low interest rate environment. Where there any actuarial or deck unlocking this quarter?

No, Ed, we don't have unlocking adjustments relative to our long duration contract, that's really relative to interest sensitive type business, which we don't sell. And so the deck assumption are locked in as our pre and reserve assumptions at issuance. We do have new GAAP areas that we work through each year in the fourth quarter. And those GAAP areas, I will look at what current year issuance assumptions need to be, so those are actually effective for businesses issued in just the current year, we locked those assumptions in under what used to be called OFAB 60, but the current accounting guidance for long duration contacts and those do not change, as you go forward, it runs through current-year earnings as differences in those assumptions are experienced.

But that’s actually an annual process that you go through each year to reset those for that particular book for that year, so that’s something that's routine and then part of the overall process that we go through Ed.

So may be with that, you can just talk about persistency, because I think you’re getting some pretty good benefits from persistency so lapse rate sound like they are coming in a little bit lower than you had thought they would come in. Where is persistency at in general, with the international book of business?

Your comment is on target, we are experiencing persistency better than what some of the assumptions have been historically. We’re pleased with that, we are not always clear that it’s going to remain or stay that way, but at the same time, for the last several years now, we've experienced a very positive impact of persistency above and greater than what our assumptions have been. And it's certainly been a contributor to our overall profitability, because it does impact the bottom line when these contracts persist and carry beyond what the assumptions are. Again, some of that is driven by the way the products are designed, and the fact that you’ve got surrender charges and things that kind of preclude people from wanting to withdraw early. And so it is not uncommon to see those things go ahead and carry all the way through those surrender periods, which in our case are 15 years, I believe is that right. As a general rule, we’ve used the 15 year period of time for spacing out those investments -- those surrender charge elements, and as a result that gives us a great deal of stability, and I think contributes to how the persistency experience that we have, what we see in that experience.

Okay. Kind of same kind of concepts here with the goodwill on the balance sheet, I know that's mostly through the M&A activity in the U.S. Could you just perhaps or your goodwill test impairment testing, and of course this is kind of being triggered from my end, and that one of large life insurance companies had a fairly large goodwill impairment this quarter, related to its annuity business. But obviously, you are not really doing that in the U.S. I'm just wondering if, what your processes on that impairment testing and when do you normally do that?

We do that, as of 12/31 Ed on a routine basis, we annually are required to test goodwill under the accounting guidance and more frequently, if triggers indicate that we need to. We have passed goodwill testing in the past several years with the relatively nice margins, and we don't anticipate any goodwill impairment for this year-end either.

What triggers could make you look at that, I'm just kind of curious, if you could just disclose what some of those triggers are?

Yes, I mean, if you look in our 10-K we kind of give you an overview of that, but it is basically, if our fair value of the Company decreases significantly, so like we do our market value approach to fair value, our goodwill and review based on that analysis and so there’s triggers such as our stock price. Obviously, our stock price has been holding very strong in this environment. so that would be one trigger that could be something you would look to. Also the profitability within the business, we do fair value projections on cash flow, if something were to change significantly that would cause us to believe those cash flows would be significantly different. We would have to evaluate that. but we have no such triggers that we’re aware of.

Okay, that’s very helpful. Shifting over to the investment portfolio, you mentioned that you’re probably going to have more bond calls in the fourth quarter. Can you quantify that for me at all?

Today we’ve had about $17 million in that other government-sponsored category that I was mentioning. But I can’t give you any other quantification other than that, Rick might be able to give you some highlights.

No, I think that’s probably most of the call activity is in that government-sponsored entity area. and so I think that represents the bulk of it. There have been some maturities that have occurred, there are not anything that’s outside or extraordinary at all. I think that probably encompasses the bulk of it.

Okay. so you’re not expecting a lot of call activity here in the fourth quarter or the really next year?

I’m not anticipating a lot no, again, it’s -- I think there was fairly historically over the last couple of years, there has been a fairly heavy concentration of September and October activity. and that’s where I think what we’re seeing here. There may be a little bit more as we get into December, just because of how some of the purchases go, but also that’s an odd month from a purchase standpoint, and on an issuance in standpoint, just because of holidays in that period. So I think my speculation there not knowing, not having brought that, with me to this meeting. I don’t anticipate that it’s there is a lot more activity although there probably is still some activity that will be there between now and in the year.

Okay. and then just one last one quickly, the total portfolio yield you’ve indicated that 3.74% held up pretty well. Can you tell me what your new money rate is?

Believe it’s 3.1. I actually disclosed that in the Q.

Okay. I haven’t gotten there.

Pretty consecutive in there, but I believe it was 3.1 for the third quarter.

Okay. I’ll go and look it up.

Fair about that.

[Operator Instructions] And there appear to be no further questions coming from the phone lines at this time.

Well, thank you very much. We appreciate everyone’s time on the call today, and if there is anything we can ever help with. Please don’t hesitate to let us know. Thank you very much.