CIA - NYSE

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

Thank you, Giovanni [ph]. Good morning and 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; Geoff Kolander, our Executive Vice President, Corporate Secretary and General Counsel; and Larry Carson, Financial Reporting and Tax. Before I turn the call over to Rick for our opening remarks, let me get a few formalities out of the way. First, yesterday we issued our earnings release and filed our 10-Q. Both are available on our website at 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 this call made by independent third parties. Finally, reconciliation of the non-GAAP information as required by Regulation G was provided with the release and also is available on our website. Rick?

Good morning, and welcome again. We appreciate the opportunity to share with you. It doesn’t seem like it’s been all that long since we last provided an update. But as we complete the first quarter, we want to share with you what insights we do have. The quarter really was a very smooth and simple quarter for us from just an execution and operation standpoint, probably had one of our most efficient and effective audit committee meeting yesterday that we've had it in quite some time in terms of just going through the process and reviewing with the audit committee all those details. But we continue to benefit as a result of our first quarter results, we see good strong benefit from our strong business foundation that we have in place. Assets revenue and book value all continue to grow steadily. The low interest rate environment continues to be a challenge as it is based across our industry, the life insurance industry continues to deal with it and it expects that as long as we stay in this mode, it will continue to have an impact upon us in this, what we hope to be a shorter term period than longer term. But it has already been longer than we had hoped for when we started the process. But any event, we continue to deal with those issues and you will see that the impact of that particular environment in several ways throughout the report here today. And at the same time and on the more positive front the net investment income was up 10% on the growth of the portfolio and an improved overall yield level that we have experienced. Let’s start now with the insurance operations for the life insurance segment, which accounted for $30.1 million of our 2013 first quarter premiums that’s about $73.6%. With those premiums being the primary growth driver that we are seeing. As you probably understand, most of that comes from our international dimension of the business. We've seen Venezuela now kind of take a top-tier leader position in the Latin American sales arena versus Columbia which has historically been that market’s leader. Venezuela came in with $6.4 million in direct premium and Columbia was following that with about $6 million. Then third, in line was Taiwan was $3.9 million. So all of those numbers are pretty much within expectation or anticipation, They’re tracking much like we saw all through the same period last year. We continue to see the product guarantees or the guarantees within our product offerings being the driver of the sales of our international sales being down with products continue to be the primary products of interest representing about 81% of first year premiums in this quarter. Just as a reminder both product lines that we promote in the international marketplace, whole life and in endowment products, are priced for similar long term returns. So while we may prefer just from a business operational point of view to be doing the whole life, we are certainly pleased to see some steady and continued growth in the international segment of our operation. The other contributing factor that’s been steady and consistent now for a number of periods is the strength of the persistency that will yield, we believe, long-term profit results. And we are pleased to see persistency continuing to remain strong as we deal with growth of our business and development of our business in this international marketplace. The one other element, I guess to talk about within that international arena, is the policy loan feature of the policies that we sell. Though, the policies develop these loans through a non-forfeiture process or on APL or automatic premium loan provision which is standard in all of our policies or whether these loans are taken directly by the clients as a result of the withdrawals on a temporary basis. What we do get from that is an average yield that’s really better than what we get in the general investment marketplace. All of that goes to our bottom line investment yield. Those will range somewhere in the 6% to 8% range as a general rule in that international product. And of course in the low interest rate environment just clearly that stands out as a very positive element of that marketplace. On the domestic side, we typically continue to see our domestic life insurance premiums are driven predominantly by renewal because of the many years of premium development that we've had. This book or all of these different books of premium began, really, I guess, are assembled primarily through a lot of different acquisitions. And the bulk of what we have on the books today has been that we acquired over the last 20 years. The main driver in the decline of the premiums in the domestic segment are attributable to the aging books of business that we have, but also, a major element in this particular quarter was recognition of the assumption of A&H premium that we had actually seeded back in 2004, with the expectation that the ultimate assumption would occur in a relatively short period of time over the last decade that really didn’t occur. And we are now seeing as we reach nearly 10 years in length the actual assumption of that. And so you will see the effect of that decline or change in that premium as has been assumed because of the recent approval by regulators. New sales in the domestic market are continuing be led by our Mountain West division. We are a Colorado domiciled company and have an established client base in that Mountain West area. So it's not surprising to see that take off and become a dominant area but it is one, I think we mentioned last time is, we are seeing some improvement in that area. We got some leadership that joined us last year in that Mountain West area that has been driving some of that growth and some of that success that we have seen there. Otherwise, the sales in the U.S. are followed then by those that occur here in Texas, or other U.S. southern states or mid-western states that are part of our make-up in acquisition history. So Kay I'll let you provide a little more depth and insight.

Thank you. As Rick indicated our business trends are comparable to the year-end trends we noted in March and at our last earning’s call. We are seeing death claims being reported in the life segment that are lower by 751,000 compared to the first 3 months of 2012. Our surrenders were consistent with 4 million reported for both 2013 and 2012 for the 3 months ended March 31. This represents 0.5% of in-force and has been consistent at that percentage for many years. It's primarily related to the policies that are over than 15 years and have passed the surrender charge period. We also are seeing, like Rick indicated, the impact of the low interest rate environment on our reserves. Also the endowment product designs. We've been selling mostly the most popular products over the 20 year endowment, and the endowment to age 65. Those are our top sellers. The endowment products do accumulate reserves faster due to their shorter duration than a whole life product which has a longer duration. The other elements are general expenses were in line with our expected operating levels. And those are really the highlights for the life segment. And now we will talk about our home service segment.

As we turn to the home service segment, let me observe, I guess, the premium income that is contributed was about $10.8 million. We have pretty well seen the effects of Hurricane Isaac that affected our property and casualty subsidiary there shrink up and really not have a lot more impact on us. We've come through that process with invading, I guess is the word I'm looking for, the first layer of our cat reinsurance which was a very limited minimal exposure on a catastrophic basis. But we did penetrate that layer. We did not go any further than that initial bottom layer. We do have fire premium increases that have been approved and will be implemented in a mid-year time frame. We are anticipating, if I'm not mistaken, I believe its July 1 implementation date for putting those into play and that would be early in right at the beginning or early in the hurricane season. So they should have a fairly, the fact that lot of when you do rate increases, you don’t know whether you are going to see a loss of business. Timing is there, it’s the beginning of the hurricane season should help to mitigate some of that loss of revenue that would occur if you were doing it in an off period. But exactly how that will play out? We are not certain. But it is a factor that you can expect to see impact the latter half of this year. Our development into other states, Mississippi in particular, continues to show some sales growth and overall development and improvement in that particular market. We expect that to continue to improve and look forward to seeing even better development and growth out of that particular state situation. Our Louisiana and Arkansas operations, that are the other part of this particular segment, have been relatively stable through the period. I guess the other comment or the other observation, I've made a note here, and I was trying to read my notes, the other thing I wanted to convey or communicate in this respect was that, although, we do see growth in our home service segment, that is little bit contrary to what our industry as a whole is seeing, but it's our focus on our niche markets that in the manner in which we do that, we believe is responsible for why we see a continuing trend to grow and develop and expand in these in the debit[ph] and final expense businesses. We do expect that the funeral homes and final expense aspect of this particular segment will be an additional growth opportunity and development possibility for this segment's growth. Kay?

Yes, the Home Service triggers are factors driving their result. Primarily, there is the death claim expense which was lower in 2012 for the 3 months ended due to a release of an incurred but not reported reserve of 500,000. Without that adjustment claims experience is comparable for 2013 and 2012. Property claims were 551,000 in 2013 compared to 364,000 in 2012. This increase is just driven due to weather related claims in the current year. There is no additional impact in the current quarter related to Hurricane Isaac as our estimate at year end was appropriate. The other driver is that general expenses had picked up a bit for this year in Home Service. That is due to an allocation of expenses that we do based on our time study, and we do an annual review of that allocation each year with those time study results. And the home service segment will be getting a higher percentage of expenses in 2013 compared to 2012. That doesn’t impact overall consolidated results. And with that we’ll go to investments.

Our investment income continues to improve despite the low interest rates that is driven by a growth of the portfolio as well as just a shift in our investments away from things that are churning or going through a call process. A lot of that activity has slowed down and continued to remain less volatile for us. And I think most of it is just because we worked our way through a lot of those shorter term investments that we made or cushion type instruments that we had been purchasing in the anticipation that rates would move up. Because really the better part of last year we began to move away from that intermediate short-term perspective that rates would move up sooner than later and once we realized that we probably had a longer term lower interest rate environment, we began to go ahead and put, get away from some of the shorter type activities. So that shift away from short-term, short cushion type, paper or immediately callable type paper into the --especially service municipals have been the underlying driver, I believe, of the shift in early gain or the return back in the interest rate. The average return, we saw a 3.86% yield through this first quarter. That compares with a 3.76% year-over-year. We talked about where did we bottom out, we clearly have bottomed out and started back in another direction. We were 3.81 at year end. So we are seeing an improvement in that range mainly because of the shift in how the investment activities are taking place. Our focus has been durational maturities and call expectations, with credit and anticipated yield being the primary drivers of what we do and the investments that we make. We would still prefer to be in U.S. governments guaranteed instruments. But in today's market with our contractual commitments, that simply isn’t a feasible thing to be doing. So we stepped into the essential service municipals as an alternative during this period, while we are dealing with low interest rate environment. Our new money investment rates are generally between 3% and 5.5% depending on where the expected duration of the call would be or the maturities that we’re buying. The portfolios shift and change, really is driven by away from the U.S. agencies over into the muni world and also with some tax free, where we have been able to advantage of tax free investments in either some of our non-life subsidiaries or in the holding company that also has given us some additional overall yield opportunity as we've been able to take advantage of those situations or limited circumstances where we can make tax-free purchases without loss of yield or penalty in the life insurance arena. Primarily, we are being very opportunistic about how we do this. We are not limited in terms of, we don’t get in a big hurry to put the money back out just because it's been called. We really look very carefully and selectively for those investments opportunities that we believe are priced more favorably to us. And we just take our time and work through that as we have the opportunity. Now that plays into why the cash balances fluctuate as they do. You’ll see us over a quarter end, maybe have a large balance, we had a larger balance at year end, some of that timing of the calls in the investment activities, some of that’s just us being patient with how we put it back out. So the activities that you see in terms of cash balances are driven predominantly by our opportunistic investment approach. And we believe that it works better for us in the long-term to be limited and selected about how we do what we do investment-wise. But again focused primarily on credit and the quality of what we are buying, as well as trying to maintain a shorter overall yield expectancy because we do anticipate the rates will go up after we get beyond this period of time. We do expect continued portfolio growth through our premium revenues and just overall income revenues from the portfolio itself. We do think the yield trends will improve as rates improve and also as we replace some of these shorter durational investments that we've been holding over the last year or 2. With that Kay, I'll turn back and let you to provide a little investment detail.

Our investment portfolio quality remains consistent with that reported for year in 2012. We have 2.7% in below investment grade. Those are due to issuer downgrades that we've had. The company only invests in high quality issuers with ratings by nationally recognized statistical rating organizations of BBB or higher. And so for our fixed maturity portfolios that are investment quality of high grade securities represent 97% of the portfolio. The call activity, fixed maturity securities was approximately was $34.3 million for the 3 months ended March 31st, 2013 compared to $92.6 million in 2012. As Rick indicated that's a driver of the cash balances that we see and in the reinvestment activity. Our intra company balance sheet remains strong. Our BC ratios were well over the statutory control level percent of 200 and have not changed significantly from the amounts reported as of December 31st, 2012. With that, we’ll turn back to Rick for conclusion remarks.

Again we are pleased and happy with where we are. Our development, our growth, and our history is really one of consistency and stable operations. We continue to look forward to the future. Quite honestly with a lot of positive outlook because we know the rates will not stay where they are. I read an article this morning suggesting that we may see something in the order that happened in 1994, that there was a sudden unexpected rise in rates. Well, if it does occur, we will be thrilled to see that happen and look forward to having the opportunities to take advantage of that. At the same time, if it can steadily move back up rather than doing something radical, that would be our preference. Because we are really one of those who just works from a just a stable solid steady mode of operations. So, the volatility is not something we look forward to but certainly we’ll be prepared to deal with it if it comes. We have a very healthy, sound life insurance holding company with no debt on the books, and we are a business with a very unique niche market focused. We expect that we will continue to operate in that manner. We don’t see any reason to make changes down that particular path. The other thing I would describe or talk about are the acquisitions we have a need to, or desire to grow and expand our operations through acquisitions, we will continue to be focused on those. We do look at those on a regular ongoing basis and it's something that we are involved in routinely. We are recognized within the industry as one of those industries that does acquisitions. So they bring, we get a lot of things to look at, and we are happy to have it. We are probably in our history, best capitalized today because of the, just the accumulation of capital we have to actually make a transaction and do things. So we look forward to that opportunity when it comes. I think that covers everything that I wanted to say and Giovanni I’ll turn it back to you. We’ll open the floor for questions.

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

I'm going to start off with the property insurance segment, and then I'll probably hit international and a couple of other things as well. So premiums look to be a little light this quarter, is there easing happening on retention that more people are dropping off than previously or anything of that sort?

Not that we are aware of , Ed, and we don’t really have anything to give us a trigger for anything like that. So nothings known.

So I means it wasn't a huge number difference of course, it's been right around $1.2 million of premiums and this quarter is under $1.2 million so just kind of curious as to what drove it first time since what like second quarter 2010. So it looks a little anomalous. So second thing is what were the weather events that drove the claims for the first quarter, it was located in a particular state.

As I say it would be Louisiana, that’s mainly just typical weather activity wind and hail primarily that occur through I think some tornado activity scattered. It wasn’t any time it was really concentrated it was just a multiple of storm activity that affected that particular-- I mean most of that property casually is concentrated in the one state of Louisiana. So any of the weather activity that you see within Louisiana are contributors to any of that type of impact that you are seeing.

I kinda figured it would be out in Louisiana because that's the majority of the business. Another question here on the reinsurance layer that you went into on in Q1 on hurricane Isaac claims. Were there any reinsurance reinstatement premium there? I'm guessing not.

Yes, I believe in that first layer, we did have a small component of reinstatement premium but it was because we didn’t go any deeper than that into that cat and it was relatively minimal.

$75,000

$75,000 I think here.

Yes that’s pretty small. At what point does the reinsurance kick in? I’ve forgotten that.

Actually it’s $500,000, when you get up to that level that cat coverage begins to take effect or begins to protect you or insulate you little bit from strong large adverse storms. None of that was a part of any of what we've experienced in the first quarter, we’ll all this other stuff was scattered in and individualized forms that really didn’t amount to anything of any one storm of any magnitude.

Yea it was in a single of that. So the reinsurance covers, we've seen at $500,000 and where did it go up to the coverage?

$10 million, okay that should be good.

On the international side, I'm going to go ahead and ask you again, I think I'm a little early but any updates on products pricing or commission. I think your last quarter you said you’d probably impacted that for.

Yes we indicated last quarter that we were undertaking some reviews, we are in that process, I think we expected or anticipated that we would have that completed during the second quarter. I don’t know as we sit right now whether it will be in a position to talk about it just a third-- in August when we have our second quarter call or not whether we will have done what we need to do to speak meaningfully at that point. But certainly before the year is over with I think we’ll have a pretty good understanding of how to provide some insight to that -- that review and that process. Our hope would be that we will know enough to be able to communicate effectively in the next quarter’s call. But I'm not sure that I could promise anything in that either, It's where we are in a process which is fairly meticulous and explore-- involved process just to be clear and thorough and what we do in making sure we know what we are talking about and know what we're dealing with.

Secondary to that or related to that is in your comments you mentioned that endowments and whole life on the international side are priced for the same returns. So what are the returns that products were priced to? ROE internal rate of return anything you give me here.

The truth, Ed, it varies by product. Our-- the best indicator I can give you is it is double digits but that’s really - and in terms of giving specifics or down to individual levels it would be something we'd have to get into the details because a lot more of the color and it’s not something that we're comfortable...

That’s fair and I understand that obviously is useful. Another one here, do you know how many shares are in the policy holder trusts on the international side?

Let’s see anybody in the room got an idea? You are talking about the Gala?

Yes.

[indiscernible]What I would say is that the 13(d) [ph] filing that's on file would give you that number specifically. I can't quote it to you. That 13(d) filing will give you what you are looking for.

Yes fair enough. Now I saw on the 10-Q there were some disclosure on Louisiana road home litigation. Can you add anything to that besides what’s in the 10-Q.

I don’t think so, that disclosure is what we felt like was the most effective way to communicate those details, there are some limitations on what we can say. I think what you saw there is what we've gotten cleared, so taking it any further than that probably isn’t prudent for us to do.

I'm going to fish for one more. Did this put the whole situation kind of into the rear view mirror and no longer a forward issue?

On the road home litigation?

Yes. Is that the expectation anyways? Okay.

I believe that it does but until all of it is signed, sealed and delivered I'm not sure whether you can make a statement that’s really meaningful there. So it is a work in progress and that’s why we've done what we've done to be as fully disclosed as we believe we could be. But that’s where we stand at the moment.

And then, a couple of questions on investments. Is there any potential call activity going forward and if so can you quantify that related to the agency?

It really has been relatively minor. Normally, did anybody here have those, Larry you have a specific insight of it.

Kay said that it was 4.3 in the first quarter I'm just wondering if we are looking at a small number than that going forward so it’s kind of di minimis.

The best way I can answer that at the moment would be expect it to track in a similar fashion in the second quarter as it did the first but that’s the really the best I could give you. I don't know of any reason or anything that would make that do anything be any different than what you are seeing there. The trend overall for over the last several periods would probably be as good or strong an indicator as to what we understand or what we are aware of I guess at this point going forward in that.

And I will go with one last one here if I may. Why is CICA domiciled in Colorado? Maybe you can talk about the background of the company being domiciled in Colorado a little bit.

Well it comes through historical experience with the state of Colorado and the fact that when my dad was with the former company they had done business there and they were domiciled in Colorado. So he had that experience and that background back in the late 80s when we made an acquisition of a Colorado company. He has the opportunity to reaffiliate or reconnect back in that domiciled arena where had worked before and had a great reputation and a great history. And so when we went into those departments leading with that acquisition, we explored the possibility of re-domesticating an existing Texas Company through merger into the Colorado, it’s just inches a part of this. Well I would tell you it’s an evolutionary type of a thing that occurs when you are an acquisition-oriented company. But it also occurred primarily because of his history and background and comfort with that particular department of insurance and the strong working relationship and business support that, that department had provided over the years. And this goes back 40 years ago. It’s an experience that even though we didn’t become Colorado domiciled until that 20 or 25 years ago, his experience reaches all the way back into the 1960s. So that’s the answer to your question in terms of just giving the colors and perspective of, why did we evolve there? It really proves just what I would call an ordinary process of growth in acquisition over our 40 plus years of existence.

You were talking about the policy loans having yields of between 6% to 8% or so during your comments. And I did notice that policy loans picked up pretty significantly in the first quarter. Looks like it’s increased about 4% quarter-over-quarter. Is there anything in particular that’s driving the policy loans to increase like that?

It is not anything that I can point to specifically that would drive that.

It’s just our normal growth in our block.

Yes the normal growth of premiums or I mean of business, contributes to that as we continue to expand renewals. Our renewal business then that certainly facilitates and any of those automatic pre-loan provisions certainly play into the premium renewals that we see and the persistency of the premium. And some of that really is a timing differential of getting the money in the client. We will see those loans. But the driver, why is it growing? It’s predominantly just a growth of business that drives that. We will see it go up and down just depending on how the money flows in.

Yes I get the whole in-force is growing with the sales overseas. So it just seems to be a little outsized, I was wondering maybe for a chance there might be something correlated with the endowments in particular that was helping to drive that.

Not necessarily. It would be more significant to the endowments today but only because the endowments have been the major growing element and as it expands certainly those loans in that particular line would be expanding but it’s not because of endowments or at least not from our perspective it wouldn’t have anything to do with the line of business that’s driving it. It would just simply be normal course of business and normal routine change in the business mix.

If it's yielding 6%, 8%, I'm sure you are not too disappointed with it getting larger?

Not at all. It's one of those things we are happy to have it because it does. But at the same time clients are, if it’s a factor of anything the other dynamic could be the just the availability of funds and restrictions that you might see in a foreign country where they are not as readily available to be moved out. I remember my comments that I had thought about bringing into this discussion had to do with Venezuelan politics down there and the fact is we talked about last quarter of Venezuela, the death of Chavez of what impact that might have on us. Well, as a result of what happened here with the political change and the election of the preferred or selected president behind Chavez, we are viewing that is same old, same old and that’s been good for us because that volatility in that particular country actually has been good for our business. So, we anticipate that the change in leadership and the shift that’s taken place there probably is a positive for us but time will tell more specifically as that country settles back down after the change of leadership.

Thank you and there are no further questions at this time.

I think we are through and we appreciate everybody’s participation in the call today. And we look forward to bringing you another update in about 3 months. Thank you very much.