CIA - NYSE

Welcome to Citizens, Inc. Year End Conference Call. [Operator Instructions] I would like to now turn the call over to Ms. Osbourn. You may begin.

Thank you, Rich. Good morning. Welcome to our earnings conference call. I am Kay Osbourn, Citizens’ Chief Financial Officer. Joining me on the call today are, Rick Riley, our Vice Chairman and President; Jonathan Pollio, our Vice President and Chief Actuary; and Larry Carson, Financial Reporting & 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 we filed our 10-K this morning. They are both available on our website at www.citizensinc.com. Second, during today's call we will discuss the expected performance of Citizens, Inc., which constitutes forward-looking information within the meaning of the Private Securities Litigation Act. Please see the earnings release and our SEC filings, which are incorporated by reference into this call for information on the risks and uncertainties that may cause actual results to differ materially from the forward-looking information we provide. We are not responsible for transcripts of the call made by independent third parties. Finally, a reconciliation of non-GAAP information as required by Regulation G was provided with the release and is also available on our website. Rick?

Thank you, Kay. Good morning everyone. We appreciate you joining our 2012 year-end call. Citizens’ continues to benefit from the strong business foundation that it has. We see ongoing growth in assets and revenue and excellent opportunities for expansion. We also are pleased to see the higher growth in book value and finally then, we continue to operate with an immediate ability undertake acquisition transactions, which we hope 2013 will provide as we go forward into this next calendar year. 2012 results continue to be impacted by the low interest environment that we've been in now for several years and probably will be for a couple more years, but you will see that the impact of that interest rate condition throughout the financial results as we talk through and work through here today. But let me first start with our life insurance segment. That accounted for $126 million of our 2012 premiums, about 5% of the premium growth. So we are pleased to see that particular -- and that’s predominantly coming out of our international segment -- international niche of that segment. We are pleased to see them continue to grow and develop and expand and in terms of premium growth within that particular area. Our niche is providing foreign residents around the world, primarily in Latin America and the Pacific Rim, with U.S. dollar based safe haven solution for their personal assets. We have served that market for over 35 years and our policy holders are generally focused on accumulation rather than phasing out. The recent events in -- Venezuela has been one of our more active markets over the last decade, and the recent events with Hugo Chavez passing, certainly leaves us with a little bit of an unknown in terms of that market or where it may go. Our business usually benefits from instability and unpredictable conditions, so it may not be adverse, it might be positive. It will be difficult to predict exactly how that will play out as that country transitions from one leadership -- strong leadership position to whatever it will be going forward. So we look forward to understanding and seeing how that transitions and what happens, but it's a little difficult to predict one way or the other what impact that will have on us. We don't expect it to have anything of material impact, but you never know. The first year sales in 2012 were up. We would like to see double-digit increases in that particular market, although we are pleased to see solid growth in our new sales coming out of the international market group. At the same time, we also are pleased to see the renewal premium growth that enhances the bottom-line profitability overtime, and we’ve continued --that’s been a continuing trend that we have had over the last several years with renewal premium growth and it’s good to see that continuing throughout 2012. Again, along that same line is persistency. We are thrilled to see persistency continuing to remain strong as that will continue to provide long-term profit potential for us. Citizens’ products carry a loan provision and those loan provisions actually provide with the rates that are in those contract loan rates will actually provide a better investment earnings during this low period than what we otherwise get. The utilization of that is not extensive as you might understand with low rates where they are, but we do see continued utilization of loans to pay premiums. Most of that is timing oriented where the premiums are delayed for whatever reasons and economic disruption and their own policy over situation that may go on for a period of time before they pick up and read and start making new cash premium payments back into the company. But at same time, that works to our benefit and we are happy to have -- be able to provide that loan provision to maintain stability and continuity of the business over the years. Endowment products remain as a sales leader during these economic times of uncertainty. The guarantees of the endowment products are what we believe are the most appealing dynamic in play. Over 81% of our first year premiums were coming from the endowment product element of our portfolio. Our portfolio has both whole life and endowment products. Both are priced similarly for long-term profitability and we expect that we’ll continue to see results in that international business segment on a level of stable basis going forward. The other aspect of our life insurance segment is the USA business, but the bulk of that business is driven from renewal premiums on books of business that we purchased over the last several decades. At the same time, we are adding to that in a very modest manner with production coming out of the Southern and Midwestern states of the United States, with Texas being strongest, which is where our home offices are located, being strongest producer in that area. We are seeing some encouraging results coming out of new group associates in Wyoming, so we hope that we go through 2013 we will see continued growth and expansion in that particular area. Kay, I’ll leave it and let you pick it up at this point.

Okay, thank you. I would again just point you to the 10K that we did file this morning for our in depth discussion. I'm just really going to highlight a few of the key items driving results. We really have seen consistency relative to what we've reported in prior quarters. So, as Rick indicated, our new sales first year premiums increased 6.1% year-to-date 2012 over 2011. But 2011 over 2010, new premiums were 6.6%, that is primarily driven from the life segment. Also, as he indicated, the yields on our investment income are a driver in our segments as we will discuss further. The life segment yield is 3.61% for year-to-date 2012 compared to 3.89% for 2011. Our mortality and surrender trends were within expected levels. Our death claims in the life segment did report an increase of 5.3% in the current year 2012, totaling $7.1 million compared to 2011. Surrenders are mostly related to policies that have been in force over 15 years and no longer have surrender charges. As Rick indicated, the low interest rate environment is impacting several key areas in our business. One of those is relative to our reserves and tax assumptions. Our contracts are long-term type contracts where we set assumptions based on best estimates and the low interest rate environment is the key driver in that. And we are seeing additional reserves added due to the low interest rate environment. Our endowment product design also has a reserve impact in that. They build up reserves at a faster pace than a whole life product. As Rick indicated, the endowment sales were 81.9% of first year premium in the current year compared to 69.4% in 2011. The other item I'll highlight is that our general expenses have reported a 7.5% decrease in 2012 compared to 2011, that's primarily driven by us working from an operations efficiency standpoint. We've been able to reduce actuarial and accounting related fees, as well as some of our employee benefit costs. With that, I think we will now turn to the Home Service segment.

With the Home Service segment, that particular division, marketing division and operational element of the company, contributed $44 million of premium. The modest growth year-over-year 1% to 2%, which is pretty normal or pretty standard for their operation. We did experience in our property and casualty dimension of that segment a Hurricane through the State of Louisiana, Hurricane Isaac, that did affect both top and bottom line results in the segment, although premium collections that were disrupted during the third quarter were effectively recouped during the fourth quarter. So we did feel like we had -- while we didn't have necessarily a 100% recoupment of all of that revenue, we felt like the disruption was more ancillary to our overall results in that segment and not particularly as far as premium collection is concerned, not particularly significant. We are reviewing potential rate increase for the P&C segment and we would say that is something that we do on an annual basis or regular basis. And we, at this point, don’t have a specific approval or movement in that but we expect that we will be evaluating based upon what happened through the results of 2012, whether or not an additional increase is warranted there. Premiums and other segment predominantly come out of Arkansas, Louisiana and Mississippi. We've expanded into the Mississippi a couple of years ago and we're seeing some consistent growth, although at a slower pace than what we really would prefer. We believe that there are a number of expansion opportunities in this particular segment and we do expect to see growth continuing in the segment as we go forward. I think, honestly, the most effective growth will -- may well come through acquisition opportunities as they present themselves going forward. With that, Kay, I will turn it back to you for little color.

Okay, death claims did increase in this segment 19.8%, with more reported claims in the current year. As Rick indicated, the Hurricane Isaac property claims were an item that we want to highlight for you relative to our experience. We had approximately 796 claims submitted, 381 of those were declined or closed, primarily due to the Named Storm deductible. We do have a 5% named storm deductible. We anticipate, based on current projections, that we will pay a total of 400 claims relative to this storm, with an average claim cost of about $1,700. The commission expense for this segment are impacted by the compensation system for the route-based [ph] agents, and that is based on premium growth -- on monthly premium growth. The commission expense is down relative to that due to more lapses that we have seen in the third and fourth quarter, primarily due to Hurricane Isaac. We do -- have seen some strong sales in this first quarter already for 2013. So we anticipate that those premiums will be brought back through agent sales going forward. Those are the highlights, I think, for that segment. And now we will look to investments.

Investment income continues to rise in spite of the low interest rates. Our consolidated yield improved in the fourth quarter. While the overall year-to-date consolidated rates settled in around 3.81%, which was basically an 11 basis point decline over year end 2011. We continue to see investment opportunities limited in the space that we prefer, which is U.S. government bonds and notes. But so we continue to make our investments over in the mutual sets in the municipal market, primarily with essential service municipal entities that provide us an opportunity to get yields that are relatively safe and secure in better entities as far as ratings. But the overall opportunity there, we’re kind of cherry picking things and being very selective about which ones we take. We are continuing to focus on durational aspects of where we advanced. Predominantly, we continue to work with the probable securities where we will be able to get the funds back we believe, and if not, then we will have them locked up at a rate that's well above the 4% rate as a general rule, in the investments that we are making. There were cash balances of a relatively large nature at year end, that’s predominantly result of timing of investment activities in the latter part of the year, most of that was reinvested. We continue to see some call activity during the early part of 2013 but it’s not as robust or not as active as it has been in the years past. The new money rates that we are getting, it varies depending on duration obviously, but somewhere in terms of the target of 3% at 7 years and closer to the 4% at 15 years to 20 years. It’s hard to get the 4 in the 15 year space, which is what we've been doing historically over the last couple of years. We are going out a little longer on some of those investments to 20 year and even 25 year base. But when we are, we are usually above 4.5% to 5% and even sometimes upwards of 5.5% on those 20 to 25 years commitments that we are making. We have made some additional short term mutual fund investments in short term bond funds; those are geared toward low volatility as far as the rating and just the base there. Essentially we are using those as an alternative to money market accounts as a short term play on terms of where to park some of these funds for reinvestments as rates begin to move again. Those funds yield anywhere from roughly around 2% to just under 4%, as a general rule. We expect to see continued growth in the portfolio and the investment income as our premium and asset growth continues. That's pretty much what we've seen over the last couple of years as far as the investment income is concerned. As we've seen the rates become more stabilized, as far as the consolidated rates that we are experiencing. I don't know if we can say that we've necessarily hit bottom, but we certainly see it face toward that low bottom point. Certainly it seems to have slowed quite a bit and we believe we are closer to it now than we've been in the previous situations. Kay, with that I'll turn it back to you and let you review details.

Okay, as Rick had indicated I'll give you some highlights on the call volume. We had 327 million calls year-to-date, 46 million of that was in the fourth quarter. In addition, we do another temporary impairment review every quarter. Based on that review in the fourth quarter we did impair Ameren Energy. That security had actually been in mid-80s market value price in the first and second quarter and we were reviewing it and then went up to a 97 price at 9.30, but then at fourth quarter, it dropped to 72.50, due to some company specific issues and so we impaired that security. That resulted in a realized loss of $1.3 million in our financials recorded in this fourth quarter. That security was hailed in both the Home Service segment and the Life segment. We look and notice that our balance sheet still remains strong. We are continuing the business metrics that have been a longstanding attribute of Citizens, relative to its strong investment portfolio with low risk. We are very conservatively invested overall. We have seen our RBC ratios continue to remain strong for our life insurance entities. And with that, I think that sums up my remarks and I'll turn it over to Rick for closing comments.

Again, as Kay pointed out there, we are very pleased with the outlook and the positive results that we've seen. We understand that overall earnings growth is not what we would like for it to be, but at the same time we are in a unique period of time and with the conservative aspect of how we do, what we do, with our portfolio and our overall business metrics, we're pleased to see that the results of the operations continue to be sound and solid, and even though modest at best in terms of how the growth in the various areas are occurring. We do believe that in this environment we will continue to have acquisition opportunities that are likely going to be more robust than they have been in the past. The company is very healthy, very unique niche focused business and we continue to be focused on growing the book value of the business and that will continue to be the goal that we have. What 2013 will bring, Citizens remains interested in growth and growing through acquisitions, we believe will be an instrumental part of that. Although we expect that we will see the continued growth of the business segments as we've seen over the last periods that we've reviewed with you. With that, Rich, I will turn this back to you and we will take questions.

[Operator Instructions] Our first question comes from Ed Shield.

Got a couple of small questions and then I’ve got a kind of larger question I want to hit first. So last quarter I asked about the goodwill testing. I know that’s a fourth quarter event. Is there any update on that, I didn’t see anything in the 10-K?

We did do goodwill impairment review, we do that regularly. As we indicated, our typical review time period is 12-31, but if we do have triggering events during the year then we will review it, as needed. But our 12-31 review turned out as expected, our goodwill is not impaired and we had no issues relative to our valuations.

Okay. That’s what I thought since there was nothing in 10-K. Very simple question, how many employees are at Citizens right now?

Ed, when we speak about employees, we have to think in terms of the different locations where we have people, but we have a little over 100 to 110 people here in the Austin home office and then we’ve got another 70 or so people in the district office and service center administration throughout Louisiana for the Home Service segment. I said Louisiana, I guess Louisiana, Arkansas and Mississippi, to be precise. And then beyond that, as a part of our overall employee base as it currently is configured, there are 350 or so collection associates that are working in the field to make a total population of somewhere close to 500, the total employee base.

Is that about even with prior years or adjusting for the recent acquisitions?

It is about the same, if not, maybe diminished somewhat. As we find more and create better efficiency from these acquisitions, we find that we do have an ability to reduce staffing. Most of that significant staffing reductions have occurred in years past, because we have not had any material staff of -- acquisitions that had staffing integrated in them. Most of the more recent acquisitions were very limited in terms of scope of employees, usually just a handful of people. But most all of those have been eliminated and/or integrated back into the Austin office. And then the Austin office has remained in this 100 to 110 range now for several years. We have not really changed that over the last, probably 3 or 4 years.

Okay, what is the unit -- how did you get into the Wyoming business from your comments?

We actually had a former associate that had relocated into the state of Wyoming connect with us, that’s an associate that came out of one of our Midwest acquisitions back, I am going to say early 2000. He and his family had relocated themselves into state of Wyoming and had been working in business opportunities over there and had a change, and we got a phone call and we picked up on it, and he was interested in coming back to work for us and we put him to work right where he was.

Interesting. So the bigger question I’ve got relates to the endowment sales. As you noted, roughly 82% of first year premiums in 2012 were related to the endowment products internationally. And given how reserving for endowments work, I am just wondering if the pricing levels or the commission levels for the endowment products are as efficient as possible. That is to say, is there going to be pricing increase this year just given how much the endowment product you are selling versus the whole life product, anything you need to do there?

What I'd say to you is that whether you say it as efficient as possible, in my opinion nothing’s ever as efficient as possible. We are always looking for opportunities to enhance and improve those efficiencies. But certainly in this environment, we expect to be doing some more in depth reviews and analysis of our endowment product. But really, I would tell you that we are going to look at our portfolio overall and we will be looking at both the whole life as well as the endowment products as we do our analysis and review and look deeper in -- look for opportunities frankly, to change those dynamics somewhat. We are –- it’s premature to say that we've got anything that we can speak to that we would be doing or got to do but certainly we are, during 2013 one of our primary objectives will be a portfolio analysis and scrubbing.

So that's going to be a full year kind of process, maybe hear something later in the year or second half of the year?

I think it’d be later in the year when we'd be able to speak to it, yes. So we need to do the leg work and the analytical and we will be doing that really short-term, but we will know more and have a better plan that we can talk about as we get later into the year.

And then second part of this relates specifically to Venezuela. Obviously with the situation going on there, there is, I suppose in certain scenarios, the potential that you could have a surge in sales, I guess, if there's lot of uncertainty there. Do you have any ability to limit sales volume in any individual country or are there steps that you have to take in order to limit sales, so you don't get too much at one time?

We generally don't have enough material fluctuation to have to do that. I would tell you that frankly, because of the turmoil or the nature of the leadership that's been there in Venezuela over the last decade, you've already seen that a material amount of that fluctuation take place. We've noticed and been able to see that the production coming out of that particular country certainly has been inflated or increasing, and is probably at one of its highest levels in our history that it’s been. But we don't expect there to be any major surge or shift other than what we see. Again, I was speaking earlier, I don't know how to predict what the impact of the change in leadership in Venezuela will have. We expect that the fact that it’s still anticipated to be a government similar to what's been there before and therefore somewhat [Audio Gap] Again, if we see any adverse fluctuations in where we get surges or get -- we just don't see that as a general rule. But if we were to see that and we were to experience something of that nature, we would look at it and determine what. We do have opportunities and things that we could do to address that, although I wouldn't want to get into that in this call.

There are no further questions at this time.

Alright, again, we appreciate the opportunity to share with you and look forward to visiting with you again at the end of the first quarter.