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Citizens, Inc. (NYSE:CIA)

Q1 2008 Earnings Call

May 9, 2008 11:00 am ET

Executives

Rick Riley - Vice Chairman, President and Chief Corporate Officer

Thomas Kopetic - Chief Financial Officer, Vice President and Treasurer

Analysts

Beth Malone

John Pauls

Rick Riley

Apologies for the confusion there in getting the conference setup; we are now just at going and we’ll carry forward. The home service back office operations are moving along well and the integration of that process is going well. There are some development items that we’ll be doing through the rest of this year to make that integration even more tight and more efficient and we expect to see improvements as we go through the year as far as the home service division by operation is working within the citizens operation.

Transition of our electronic systems from the current hardware over to an IBM Z-series architecture continues to progress. We expect that to go on for the better part of this year and we’ll have as a result of that particular change, a capacity increase that’ll be probably 10 fold over or allow us to continue to grow and expand operations nearly 10 fold of where we are today.

We introduced new products in the first quarter; actually it’s the beginning of the second quarter, the end of the first quarter. That probably increased a little bit for a while. There is some anticipations of the new product portfolio coming out. We did experience some decline in the first quarter as far as the sales levels but we except that that’s related to the introduction of this new portfolio. We are seeing a lot of excitement and a lot of -- actually we are seeing an up-tick in sales during the month of April regarding that new portfolio and so we are expecting that process to continue as we go through the year and we are anticipating a great year with the new portfolio.

We are also continuing our acquisition expiration. We are looking at a number of different situations. We have been in and out of a couple of different scenarios already. Some with nothing at this point that we can address or talk about with any specifics, but the acquisition fraud is something that we are still very much focused on and like I say we’d look at probably on average one per month since the beginning of this year.

We expect and anticipate that those things will continue as we go through the year and expect that somewhere in the balance of this year we will find an opportunity to move on an acquisition front, but at this point in time I’m going to turn it over to you and let you walk us through the financial details.

Thomas Kopetic

Good morning. We are here like we said to talk about Citizens first quarter results of operations. I’m going to try to highlight some of the specific financial and operational events for the quarter. We can always cover anything in more detail if requested. If you do have questions please hold on to the end and we’ll be happy to address them at that point.

Net income for the quarter was $2.7 million of which $2.3 million was applicable to common stock holders. Net income and net income applicable to common stock holders increased 12% and 15% over the first quarter of 2007 respectively. For the quarter favorable premium results as well as favorable investment income increased revenues by $1.5 million over 2007. Partially offsetting this increase was an increase to insurance policy related expenses of $900,000 mainly attributable to an increase in renewal commission and increased amortization expense.

During the quarter premium revenue increased 3.9% to $32.7 million which was $1.2 million over the first quarter of 2007. The increase was driven by renewal premium as the company continued to experience favorable persistency and this persistency on renewal business is significant not only in premium dollars but also in the reduction of expenses as a percent of premium.

First year premium in 2008 was down from fourth quarter which was accepted but it was also down from the first quarter of 2007. The unfavorable results in new business should be temporary. Management believes that it is attributable to the anticipation of our new products rollout that Rick had mentioned and we have seen indications that the new products are generating improved sales in April.

Investment income for the quarter was $7.5 million, 5.6% above first quarter 2007. During 2008, the company will continue to invest in high quality mutual funds to improve yields and help offset the falling interest rate. Although we have experienced some unrealized losses on these investments, the company considers these securities as long term investments and is confident of our ability to hold these securities until our position improves.

During the fourth quarter the company received dividend distributions of $2.1 million on these mutual funds. It should also be noted that the company’s conservative investment strategy including our significant holdings in US Treasury and government bonds and securities and our ability to buy and hold has somewhat isolated us against the volatility of current markets.

On the claims front claims expense and increases in policy holder benefits for the quarter were consistent with the first quarter of 2007. Due to the favorable persistency in premiums, the claims loss ratio improved to 50% from 52% in the first quarter of 2007.

Total operating expenses includes both general expenses and expenses related to acquisition of new business. As mentioned earlier expenses increase $900,000 to $14.1 million compared to $13.2 million in the first quarter 2007. The driving factors where increased renewal premiums which were not differed and an increase in our amortization expense. Additionally, first year commissions were lower than 2007 due to the lower than anticipated premium as with the related capitalization expense due to the short fall in new business.

The company does not expect this trend to continue nor does it consider it to be significant. On the positive side general operating expenses of $6.9 million were equal to the first quarter of 2007. The company continues to find economies a scale which improves the quarterly expense ratio by 80 basis points.

That’s all I had to cover and if anybody has any questions we will be glad to answer them now and if not I will turn it back over to Rick Riley.

Question-and-Answer Session

Beth Malone

This is Beth Malone, can I ask a question?

Thomas Kopetic

Yes okay.

Beth Malone

Okay, thank you. A couple of things; on the technology developments and implementations that you are doing, is there a way to quantify the expense days that you are anticipating and the timing of those days?

Rick Riley

Beth other than looking historically at the types of things that we have done with the electronics, it would be difficult to qualify with any specificity what that may be. It’s an ongoing kind of a process for us because we do, do our own development and our own enhancements of systems and so it’s kind of an ongoing process and a development process that we do routinely. The things that are related to home service clearly have been a new dimension for us and so we’ve had a considerable number of development things that we’ve been able to add to our base line system to support that particular division and that clearly was what we were referring to earlier. We expect and anticipate that enhanced automation that we’re been able to add to our integrated systems is going to give us continuing opportunity to profit from the efficient operations that we are generating in that particular segment.

Beth Malone

Okay thank you. A question on the premium levels; you indicated that they were down a little bit. Could you articulate -- is that in the home service domestic or is that in international or is that in some other run off book.

Rick Riley

The one we’ve seen, the majority of that impact is in the international market place where we are introducing the new portfolio. So we believe that of course the economic conditions around the world could be having some impact on that although we believe that from what we’re seeing the predominant impact is the introduction and the anticipation of the new portfolio. We began talking to the field operation, actually had some meeting with lead players in that international market place as early as December and so I think that in terms of anticipation and the word got out, plus the other things to understand is that in that particular, in the international market place the first quarter is always the -- it’s a cyclical type of a quarter but it’s always the weakest quarter in international sales. So it was one where we saw a weaker first quarter than what we had normally been seeing, but we attributed that predominantly to the introduction of a new portfolio that’s coming because we’ve seen good recovery here in April of the sales activity.

Beth Malone

So did you introduce the product in April then?

Rick Riley

Yes it became available in April, but the field became aware of it because of our top level meeting with international sales leadership in mid December. So I suspect that we are suspicious that at that point we may have gotten them more interested in what was coming than what they had at present to sell and that may be the biggest factor contributing to the decrease. It was not -- to me it was I think maybe 10%, is that right Tom? Of course with the amount and then we saw a 10% decrease in the first quarter comparatively but again we expect that to be really just a typical type of thing that would occur because of how we are transitioning portfolios.

Beth Malone

Is the new portfolio more profitable, have a better margin than the old or is it the same and it just has different bells and whistles.

Rick Riley

It’s going to be similar margin as far as the portfolio is concerned. What it’s got is some enhancements and commission for the agents in the field which makes them more interested in selling that product than the others. There were few of the products that we were able to amend and make some changes to that enhanced that. Then the other thing is there are some additional features and benefits to the client and to the product itself that enhances and makes it more feasible on the customer level. So with both of those changes and really a static or a level earnings or profitability out of the portfolio we don’t expect to see profits diminish at all as a result of what we’ve done, we expect to see it actually enhance as a result of the excitement that we are seeing relative to the new product.

Beth Malone

Okay, that’s helpful and when you talk about the integration of the home service business that that acquisition was made in 2004 is that right?

Rick Riley

Yes it was in the last quarter of 2004 and then of course hurricanes Katrina and Rita came in ’05 which really kind of set things back a little bit as far as the normal progression of events, but during ’06 and ’07 we saw considerable progress towards the integration and the transition of the system from the way they were doing business to the way we do business on our integrated system. We were able to make that conversion effective 12/31/07. We had a little bit of a rough quarter getting things kind of back logged and waiting to get caught up, but we are substantially complete with all of that and things are moving well although we still have work to do to support that operation as we go through the rest of this year.

Beth Malone

Okay and then one last question; on the acquisition front you mentioned you’re seeing acquisition opportunities or looking at books every month. Is that different from what it was a year ago and what conditions in the market place you think are changing to make the acquisition opportunities either improve or diminish?

Rick Riley

I would say that it’s probably not a lot different than what we’ve seen from a year ago although each acquisition situation is unique. I would say in my career, my history I’ve not seen any two that are alike thus far. They each have their own challenges and opportunities and uniqueness of integration challenges or profitability possibilities but the enhanced regulation that we see in the insurance industry continues to make, particularly small operations and we would love to find additional home service type situations; that’s one of the areas that we are focused on. We are not absolutely limit to that by any stretch, but we are looking at expanding and broadening the home service sector and a segment of our business and we’d love to find the opportunities in that sector but at the same time our interest is in ordinary whole life traditional type books of business that we understand how to put on the system that we have that’s fully integrated across all these different lines of like business and then operate them and kind of think, create the possibility out of how we run the back office.

Beth Malone

I don’t know how competitive -- I would take any acquisition or books of business is going to be competitive. There could be other people that would want to buy those same assets. What is it that you all provide that would give you a leg up in terms of competing for these books of business? Is it the willing to pay cash instead of stock or can you pay more because you can integrate them more efficiently? What’s your edge over some of these other competitors that might be looking to buy the same book?

Rick Riley

That’s a good question. I’m not sure -- the sellers are probably the ones that would be better qualified to answer that question but again each situation is unique. I would tell you that yes we probably have an ability to negotiate affectively; we’ve been doing this for a number of years. We have a team of people here who can go into a situation and evaluate and judge what the needs are and what the benefits are going to be quickly. It’s kind of like the old saying or the old adage that when a guy walks into a Blacksmith’s shop and picks up that horse shoe off the angle he drops it real quick; he asked him “why, what’s the matter? Is it hot” He says “no, it just doesn’t take me very long to look at a horse shoe” and frankly that’s where we are when we go into these companies. We have enough experience in the team that’s broad enough that we understand how to go look at what we need to look at, make a deal. We are in a position; with the capital structure that we have and with the earnings that we have to be able to go in and make offers and transactions in a very effective and efficient manner and I would tell you that our advantage is the nimbleness with which we are able to effect the transaction on negotiated basis. We do not bid on transaction, we don’t go into bidding situations, but we will negotiate with any buyer or any seller to make a deal and put the transaction together.

Thomas Kopetic

Beth, this is Tom Kopetic. Just one other comment on your very first question related to expenses. Our general operating expenses in 2007 were comparable to 2006 and as I indicated our first quarter is comparable to our first quarter of 2007, so although in 2007 we had a $15 million worth of revenue we held general expenses constant. So although we can’t quantify a lot of the savings, we have held expenses literally at the same place they have been since 2006 and we are now going to have additional savings in 2007. From the conversions in that we can shut off our AF 400 operations which were out of Donaldsonville, so it’s difficult to quantify, but certainly you can see it on the financial statements that we’ve got our holding expenses constant despite the environment that we are in today. Any other questions?

John Pauls

Yes, good morning. This is John Pauls, congratulations on another great quarter. The question I have for you regarding the new products and percentage wise; granted you just started releasing that in April or selling that in April could you characterize how well that’s doing as compared to last April?

Rick Riley

It’s up comparatively between months April-to-April, but in terms of specifics I don’t have those with me here this morning.

John Pauls

Well, that’s fine; just saying that comparatively speaking of, that’s good. Also the other question I have for you is your technology here switches to IBM; is that considered part of your operating expenses and if so would you say that that would be a reason why your operating expenses year-over-year are stable?

Rick Riley

Yes it is. We have a limited amount of capitalization of expense primarily related to some of the work that we’ve done on the home service development that we’ve done there, but as far as the transition on the IBM and the movement there that is something that’s been ongoing for really about three years in terms of making that transition. We are getting close to getting it all, wrapping it up. Hopefully that will occur during the year this year as far as close out or completion of a lot of those major objectives that we’ve had to get over on the IBM equipment but it is an ongoing thing. It has been an integral part of our operating expense, yes. I think another point to address the expenses is we’ve had flat expenses over three years and we talk about buying, acquiring companies and bringing them onto our company and running them more efficient and that’s what you see here, buying strategic plan related acquisition, putting them on our systems and running them more efficient than they did before. Therefore you increase premiums, but your expenses stay flat and I think that’s the core piece of our business model that’s coming through on the financials.

John Pauls

Great, thanks again guys.

Rick Riley

Any other questions, anything else we can answer while we got everybody on today? If not we thank you very much for the opportunity and we’ll talk to you guys next quarter.

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