Citizens, Inc. Q3 2008 Earnings Call Transcript

| About: Citizens, Inc. (CIA)

Citizens, Inc. (NYSE:CIA)

Q3 2008 Earnings Call Transcript

November 7, 2008, 11:00 am ET


Josh Arnold – Assistant VP, Investment Officer and Financial Analyst

Rick Riley – Vice Chairman and President

Tom Kopetic – CFO, VP and Treasurer


Beth Malone – KeyBanc Capital Markets

Josh Arnold

Welcome everybody. During today’s call, we will discuss the expected performance at Citizens, Inc. which will constitute forward-looking information within the meaning of the Private Securities Litigation Reform Act. Actual results may differ materially from any forward-looking information provided in this call and such information involves significant risk and uncertainties.

A complete disclaimer is included in Citizens, Inc.’s press release dated November 6, 2008, and 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 Rick Riley, our President.

Rick Riley

Good morning and welcome. We appreciate the opportunity to share with you the activities of last quarter and the results, and the things that we have been involved in lately. We, obviously as I am sure everyone will understand, the quarter has been – and actually the days following the quarter had been quite an interesting period of time for us. We have experienced really some, I guess, extraordinary experiences in the marketplace and yet where we are and where we are positioned we are excited what our future opportunities hold and where we were and will get into little more detail on that as we walk through the call.

During this period we have seen really a (inaudible), I think the portfolio that Citizens has maintained over the years and continues to keep as part of our investment philosophies have proven now through this downturn. We see now that the approach to maintaining government guarantee or government sponsored entities involved in the investments that we make has made a huge difference as the market is reevaluated and the credit markets are frozen [ph] up and things that occurred we have actually been pretty well insulated from a lot of that activity and of course, we believe with where we stand, I am not really trying to be (inaudible) about it but we really feel like a lot of what we have done over the years and certainly throughout my career that we have now been proven that the conservatism that we have operated with is in a positive thing, a negative thing.

The other activities during the last 60 to 90 days really the focus upon the short-trading and the things that have taken place in terms of short-trading rules and how that has affected and impacted us. We think that is again kind of a positive thing. So, we are exited too to see those kinds of adjustments and focus on the rules and how that will affect us going forward. We think that will again be a positive implication. We, as you may or may not understand or appreciate, we have always been not with I guess, (inaudible) we have not been a particular proponent of total return concept in our investing and as a result of that we have been insulated as I said earlier from the changes that have taken place here in the credit markets. We have always told folks individually we are going to deal with; our focus has been like the old Will Rogers. We are not so much concerned about the return on our money as we are concerned about return of our money. And fortunately that concept and that approach have proven to be the right approach in these days in this time frame.

We did go out in the last year, year-and-a-half with some investments in some equities through fund type investments we did from the board. Citizens’ Board limited that exposure to about 10% of invested assets. We did not really reach the full 10% over the last year’s period where we started doing some of that and our exposure in these markets over the volatile markets has actually been something less than 2.5% of the downturn in terms of our invested assets through this period. So, even though we did expose ourselves to some of the volatility it has been very nimble and very insignificant as a whole.

The other thing I wanted to address is we never did make a formal announcement that we completed the Ozark transaction but the transaction that we – the acquisition transaction that we generated in July of this year was actually approved by our (inaudible) department on October 23rd and within a couple of days they had it approved and then we had to close on October 27th. So, we are in the process of integrating and aggregating that particular operation into what we are doing and we will get to see the benefits and the results of that integration in our fourth quarter because that obviously was something that did not affect these particular results at the end of the third quarter.

We are – the other thing I would say is that we are seeing a rather abundant set of opportunities to expand in terms of acquisition situations. They are – as far as in my career I have never seen as many come as fast as they are coming in today’s market. So, we are turning it down faster, frankly as we can consider all of what we are getting to look at, but we are getting a number of opportunities and we are excited about that as far as our future prospects and the prognosis for where we are headed into the future on particular acquisition targets and opportunities there.

New business, we have still got a little bit of a lag year-to-date from where we have been, where we were at the same time last year. We are closing that gap a little bit from where we were in the second quarter. We were I think maybe at about 10% differential between where we were year-to-date at six months. That gap is closed a little bit and we are expecting that gap to continue to close as we go through the end of the year. So, we are not particularly concerned. Even though we are lagging a little and with all the disruption that we have seen, certainly it is in our focus but we are confident and comfortable at this point that we are going to see our new sales be reasonably close to what they were last year. If we don’t actually hit that target we are going to be close where we hit at the end of the year, we believe.

We have had some questions about what is going on, how the world instability is affecting us on a sales business. I would tell you that the cuts really both directions. Some of that is a positive and some of it is a negative. Certainly, the questioning and the instability and the concerns and the lack of confidence that is out there in the marketplace certainly we hear about it. We are hearing about it in our customer service area. We are hearing about it also out in the field when we are selling but we are not finding that it is a huge impediment. We are just seeing that it is on everybody’s minds and it is a great concern. So, we – to sit here and say that it is not affecting us probably is not a fair statement because I would expect that yes it is affecting us. It will be hard for it not to but in terms of having a material impact on us we don’t at this point see any major shift or change in what is going on as far as international sales and the strength of the US dollar and how that is affecting our business and what we do.

We are still viewed in the world economy as one of the strongest; the US dollar is viewed as one of the strongest currencies and therefore continuing to (inaudible) because the latest company has performed through this volatile period. We have been able to use it to our advantage in the international marketplace and demonstrate through our international clients that what we have been telling them all along is the factually correct and that they can rely and depend on us to their home and lead us in the future.

So, I would say that even though some of that is negative and there has been a lot of negative, we are seeing a lot of positives potential and possibility out of the situation. At this point, I want to turn it over to Tom Kopetic and let him take you through the financial details and bring you up-to-date on the quarter.

Tom Kopetic

Good morning. As Rick said, you will hear us talk about third quarter operating results and we will try to highlight some of the significant financial and operational events of the quarter and year-to-date through September.

We can cover anything in more detail as requested. But if you have questions, please hold them until the end, and we'll be happy to discuss them then.

Net income during the third quarter – during the third quarter we recorded a net loss of $814,000. Earnings per share were $0.14 lower than they were in the same quarter of 2007. For the year, net income is $4.9 million, which equates to earnings per share of $0.07 per share compared to $0.22, year-to-date September through September 2007.

The loss in the quarter is primarily due to expenses related to the two hurricanes that hit our Louisiana business totaling $1.3 million and expense related to the change in the liability of our loans on our preferred stock of $1.7 million. Those were the two big items. I will talk about some of the other items, you know, as we go through.

During the quarter premium revenue decreased slightly and that was mainly due to the hurricanes and disruption to our domestic business in Louisiana. International business, as Rick indicated was flat for the quarter. New business – new international business is down but it is offset by renewal business in which persistently exceeding expectations.

Our first year of production was down all three months in the quarter, but we had an upswing in October. Traditionally, the fourth quarter is our largest quarter for new business as our agents are trying to qualify for their sales convention and we have also initiated some extra sales incentives for the fourth quarter to start new sales.

For the year, premium revenue of $102 million is about 3.1% over prior year. Investment income for the quarter was $7.5 million, 2.6% above third quarter of last year. As Rick indicated during 2008 the company continued to invest in high-quality Mutual Funds to improve yields and help offset the fall in interest rates.

And although we experienced further unrealized losses in the second quarter; and really into the fourth quarter, the company considers these securities, long-term investments, and it is confident of our ability to hold this for recovery.

For the year, investment income of $22.5 million is 4.7% above prior year-to-date. Continued growth of our invested assets funded from operations is the main driver in the favorable results.

As I have indicated in previous calls and I think Rick did before, the company's conservative investment strategy, including our significant holdings of US Treasury and Government-sponsored securities, and our ability to buy and hold is somewhat isolated us against the volatility of the current markets and against the write-downs in some of our competitors have been forced to take.

The company did have one minor write-down during the quarter of $223,000 on our legal derivatives holding, and – but that was our only write-down.

Claims experience. Claims expense, increase in reserves and policy-owner dividends of $25.7 million for the quarter was $2.7 million over the third quarter of 2007. The unfavorable variance includes $741,000 in expense in reserves related to the two catastrophic storms, reserve increases of $10.2 million or $1.6 million over prior year. This increase includes $1.1 million, which relates to lapsed policies for houses that we lapsed in the second quarter and were paid currently in the third quarter. And it threw up [ph] in the second quarter manual reserve adjustments related to our policy conversion.

For the year, claims and other policy related expense was $71.2 million or $5 million over prior year. Again the unfavorable variance includes the hurricane expense from the quarter and in 2007 we have favorable reserve adjustments of $1.2 million. This was compounded by reserve expense in ’08 of just about $1 million. Additionally, internal [ph] expenses increased by just over $1 million from policy maturity. However, this expense was priced into the quarter and was reserved during the life of the policies.

Operating expenses include both general expenses and expenses related to the acquisition of new business and these have increased $2 million to $14.9 million compared to $12.9 million in third quarter of 2007. The driving factors are increased renewal commissions, which are not deferred, and an increase in amortization expense.

The unfavorable commission expense is mainly in our home service division, and was anticipated as part of our conversion – a part of that conversion to our policy administration system.

The increase in amortization expense was also anticipated as our deferred acquisition asset is growing and as it grows the amortization will grow with it.

Year-to-date expenses are $44 million or $4.2 million over prior year and as with the quarter it is related both to lower capitalized expenses and higher than anticipated amortization.

If anybody has any questions, we'll be happy to answer them now, and if not I can turn it back over to Rick Riley.

Question-and-Answer Session

Rick Riley

All right the call is now open for questions or Q&A or anything that we can do to help provide additional insight. We are happy to do that?

Beth Malone – KeyBanc Capital Markets

Okay, this is Beth Malone.

Rick Riley

Hi Beth Malone.

Beth Malone – KeyBanc Capital Markets

Hi, how are you.

Rick Riley

Very well.

Beth Malone – KeyBanc Capital Markets

Just a couple of questions. On the dollar, the strength or weakness of the dollar and how important is that in your sales, I mean when we track demand by how the dollar is changing.

Rick Riley

Well it certainly was – the logic of it would imply that you could advance based on our experience over the years has been that is not been significant. I think once the Euro gets stronger than the dollar and things go up and down and you would expect that would have an impact on our international sales operation and certainly it generates more discussion and more interest of our sales operations sales folks, as well as types of things occur, but when it comes back to actually quantifying in terms of the direct impact on the sales. As I said earlier, I wouldn’t say that you couldn’t say it doesn’t affect us but we can’t quantify in a material way what that would be and I don’t think you could take a metric and track it and suggest that it does (inaudible) because frankly, we are not seeing in any of how we do, what we do in terms of one on one sales with our clients.

Beth Malone – KeyBanc Capital Markets

So, if that wasn’t the case and the slower sales is that more due to just the uncertainty that the world is experiencing right now.

Rick Riley

Generally yes, but I would also tell you that some of the lower sales have occurred just because of the transition that we made in the year from an older portfolio to a new portfolio. We did not launch that as cleanly or as efficiently as we should have and that is, I think we talked about that a little in the second quarter that we were lagging where we should have been or thought or though where were probably should have been in terms of sales because of that transition from the old portfolio to the new. The positive side of that is that the newer portfolio has been received well and has been adopted well in the field. We are just – the way we view the downturn this year, is it is more geared to what we have done in terms of product adjustment then it is in what is actually happening around the world economically.

Beth Malone – KeyBanc Capital Markets

Okay, thank you. And then on the acquisitions, with so many out there and the opportunity is expanding everyday, what limitations do you have on the capital perspective to be able to make new acquisitions?

Rick Riley

Well, currently there are some limits in terms of a debt limit because of the preferred holding that we have, has a $30 million debt limit cap in it. So we are working under those constraints currently. We have been in contact with the preferred holders about the possibility of relinquishing that or changing that dynamic but at this point, I would be – it wouldn’t be prudent to say one way or the other how it is working, but it is not. Well, I don’t expect to see that change short-term. I would expect it – that whole issue comes in the tiers in July 2009 and so that particular constraint that we have got is really a limited constraint less than 12 months in duration. Otherwise our limits are going to be just the capital available that we have got and what I would think is a bigger issue is going to be the condition that some of these entities are in. What we are seeing is that the downturn in the market has literally wiped out capital surplus [ph] of some companies because of their investment strategies. So, having the capital available to be able to go in and either merge them and absorb them without creating capital issues for yourself or having the capital available, raising the capital, to be able to go out and make additional acquisitions, those are all things we are looking at and things that we are entertaining as far as how we would position ourselves to go forward. We have had some capacity to do things. I would think it is the smaller type deals that we could easily do. If you get into 100 or 100 million plus deals, it becomes a little more challenging as far as what we think we are capable of doing.

Beth Malone – KeyBanc Capital Markets

Okay, and one last question, do you think given the condition of some of these companies that you can get some kind of help from the regulators as being a white knight on some of these or is that not allowed at all?

Rick Riley

It certainly would be a possibility. We are strongly capitalized, so we have some ability to do that but I can assure you the regulators are going to be looking on both sides of that and determining that on the back side, what you are going to look like after you do it and whether or not you are going to be as well positioned as you were going in terms of the transaction but certainly we could be considered in certain situations a white knight. We are not trying to do that as much as we are trying to assimilate and identify the best possible prospects and those are compatible with our business model that fit well with what we are doing so that we can continue to grow and build the company and generate the future profitability on the same basis that we have been working in the past.

Beth Malone – KeyBanc Capital Markets

Okay, thank you very much.

Rick Riley

You bet. Are there other questions? If not again we appreciate very much the opportunity to share with you where we are, and where we have come, and we look forward to talking with you again in the next quarter.

Tom Kopetic

We will also be filing our 10-Q this afternoon.

Rick Riley

Thank you.


The moderator has disconnected. The conference will now end.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!