Welcome to Citizens, Inc. 2012 First Quarter Conference Call. [Operator Instructions] I would like to now turn the call over to Ms. Osbourn. You may begin.

Thank you, Anthony. 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. 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 first quarter Form 10-Q. Both documents are available on our website at citizensinc.com. Second, during today's call, we will discuss the expected performance of Citizens, Inc., which will constitute forward-looking information within the meaning of the Private Securities Litigation Act. Actual results may differ materially from any forward-looking information provided in this call, since such information involves significant risk and uncertainties. A complete Safe Harbor disclaimer is included in Citizens, Inc.'s press release dated May 7, 2012, and is incorporated by reference into this call. We are not responsible for transcripts of this call made by independent third parties. Finally, reconciliation of non-GAAP information as required by Regulation G was provided with the release and also is available on our website. Rick?

Thank you, Kay. Good morning and welcome to the call. We appreciate the opportunity to visit with you and are pleased to be on the line today. We've had a fairly consistent, predictable quarter in the first quarter as far as consistent earnings and stable results. We again, pretty much within what we would have expected and not many surprises. The results are primarily driven by the Home Service operations and we'll get into those details here in just a minute. Our goal today will be to share with you the details of what we've seen here within the Citizens' operations, through this first quarter. Kay and I will work back and forth between the topics, as we cover insurance operations, investments and then we'll open the call for questions. The Life segment of the operation accounted for about 75% of the first quarter premiums, which also represented a 4.4% premium growth. And the international business, which makes up the majority of that segment, is the area where we've been serving foreign clients for more than 35 years, and policyholders continue to be focused upon products that are accumulation-oriented products rather than term or face amount. Of course, that's really what we sell and how we promote and therefore what we see in our results doesn't really surprise us in terms of how they're -- what clients are buying because that's what we're selling. The international dollar-denominated business can certainly be influenced by local economic challenges, but in our experience, over the past 3 decades, when a country becomes less stable economically and, or politically, economically such as Argentina, politically such as Venezuela, our products remain fairly popular, if not even in more demand when things are routine and normal. But we began seeing continued stable and routine activity in…

Yes, let me give you some of the primary drivers for the lower pretax income for the Life business. We did have some assumption changes in reserves, which were made in the fourth quarter of 2011 relating to new policy issuance, which resulted in a higher reserve liability due to the low interest rate environment. These reserve assumptions are reflected in the first quarter of 2012, but not in the comparable period a year ago. Our endowment products build up reserves at a faster rate than traditional whole life products, due to the shorter-term aspect of the endowment versus the mortality projection of a whole life policy. There were no changes relative to mortality or surrenders in the quarter from prior levels and expectations. Due to the higher percentage of premiums collected as renewals versus the prior year, where first year premiums were a larger component of the quarter premiums. We are seeing lower commissions paid in the current quarter. Commission rates are significantly higher on first year new business than on renewal premiums. We do have the explanation of the adoption of ASU 2010-26 in our 10-Q and I would request that you look to that document for details, but we did adopt that accounting pronouncement effective January 1, 2012, the prior year amounts have been adjusted to represent comparable figures. And so I'll turn it back to Rick for the Home Service segment.

Our Home Service segment, as we said earlier, actually led the way this quarter as far as performance. They contributed $10.9 million in premiums but and only represented 1% of the growth, however from a bottom line perspective, they provided the majority and significant portion of profitability coming from that particular segment. We had a positive impact quarter to year-over-year as a result of some acquired books of business that we made in the latter part of last year. So you'll see that in these Home Service segment numbers. We also had the positive effect of the rate increases on the Fire business that we talked about last year and we have not implemented any new rate increases in the current period, and currently don't have an immediate plan to do so. Although it is something that we monitor on an ongoing basis and would do so as soon as the reviews and the analysis indicate that, that would be appropriate to take that action. We do continue to see some economic impact from surrenders in that particular market, but again, that's going to be driven by what the local economies and the U.S. economic market is, in particular the Louisiana, Mississippi and Arkansas parts of the country. Kay, I'll let you take it from there.

As Rick indicated, this segment was really consistent relative to earnings comparable periods. We did have a benefit from a reserve release and lower property claims. We had an IBNR claims liability representing about $500,000 of the decrease in expenses. But really that was the only change relative to the performance for that segment from quarter to quarter. So we'll turn it back and talk about investments now.

We have been able to grow investment income in this low yield environment predominantly because of the growth of the portfolio. We, our yields have remained relatively stable, although we did see another movement downward in the overall consolidated yield for the first quarter. We were up, if you will recall, maybe, slightly at year end, and then we were down a little bit. So we do believe that we are finally seeking bottom here, as far as where that bottom end position will be, and we expect that as the economy and the rates in the market place changes. Although we do anticipate, based on what we, all indicators from the government, that will be a prolonged and extended period. It's not going to happen during 2012 or 2013, it doesn't sound like. But we are positioning ourselves, investment-wise, with shorter overall maturities as we have the opportunity to do that. We have seen a fairly significant or material shift in our durational positions, down to something under 7 years and approaching 5 years, I think, in terms of the overall average across the portfolio as a whole for the expected or anticipated durations. The investments that we're making continue to be in government guaranteed instruments, which are a challenge to get any kind of yield on a short-term basis out of, although we do in the secondary market, find opportunities to continue to make those investments. The majority of what we found or where we found yield most effectively, is we have been able to use some tax-free municipal investments in the holding company and the fire company and then some of the non-life subs. Gives us the ability to take advantage of those tax-free yields and give us a little bit better boost than what we would…

All right. Just to give you a couple of percentages to go with, what Rick has indicated? Our net investment income increased 3.8%, the average consolidated portfolio yield decreased to 3.76% from the quarter of 2012 compared to 3.94% in the first quarter of 2011. We did have an increase in unrealized gains in the quarter compared to December, 12/31/11. Those gains were primarily driven by our municipal securities. The market values in that segment increased as a whole and that was primarily the driver of the unrealized gains during the quarter. With that, I'll turn it back to Rick for conclusion.

All right. Again, we expected this call to be relatively brief, in that we didn't have a lot of new things to talk about. Things that we're dealing with are the things that we've been addressing now for several quarters. We are pleased, again, with how things are tracking. We expect that we're being, we're positioning ourselves quite well for the economic future. We continue to maintain focus on return of our principal, more so than the return -- I mean, excuse me, we stay focused on the return of our principal more so than the return on our principal, as we make our investments and we continue to stay focused in terms of sales and marketing, to continue to work the markets that we've been successful in. We are working to continue to work into new markets, nothing of any relevance there to speak to or talk about, of any great extent that's happening. But we are comfortable and happy with where we're seeing the company perform, and what the profitability has been, although we do expect and anticipate that things will improve as the economy and the investment environment improves. So we do have opportunities that we anticipate in the acquisition arena, nothing that we can speak to or address from a formal standpoint, but we do continue to look at those and expect and anticipate that we will have opportunities going forward as the market presents them. Randy, I guess at this point, from an operator's standpoint, we will let you open the call up for questions.

[Operator Instructions] Our first question is from Ed Shields.

So let's start off with the Agent Convention you guys held in April. Maybe you could talk about that. What's the, kind of your sense of the mood of the agents after the convention? And any new products announced there, and any expectations you can provide on production from the sales force? As you noted, the first quarter was a little light on a seasonal basis, but I think it was even a little light compared to year-over-year.

Well, it is and I think they're – some of that is, in terms of trying to explain it or address it, I've been real pleased with what we've seen and where we're seeing the production originate and what we're seeing in terms of the expansion of that operation, but let me address your specific question on the meetings and convention. The meetings were very positive, we introduced or I'd say introduced, we reiterated and trained on the product that we introduced in the latter half of last year and had a very strong, positive reaction to the training that we did and the work that we did in that regard. So I anticipate that we'll see even more significant results coming relative to that particular -- It's a product that's again, endowment-oriented, endowment-based, but geared towards the education market and there is still a lot of excitement and anticipation within the marketing [Audio Gap] forces or at least the leadership, that believes that we're going to see a fairly strong uptick in that market or in that particular product sale, as we go on into 2012. So I would expect that, that's going to be one of the positives that came out of that particular agent meeting. The meeting was well received, we -- it was not anything that was particularly elaborate, but it was very much enjoyed by all the participants, the energy and the excitement and the enthusiasm relative to the company and future of the -- at least these folks. Again, you've got to realize you're dealing with the top producing folks out of the, out of the marketplace, but they're all very pleased, very happy with how the sales meeting and the awards banquet and all was conducted. So each year you always have different challenges, when you go into those, because sometimes you end up with some negatives or some takeaways that you come back thinking you got things to work on and things you need to do. Out of this one, we really didn't come back with a lot of -- with really much of anything that we needed to do different than what we've been doing. We just need to stay focused, and working on what we are continuing down the path we're on. So I would tell you that it was a fairly successful and uneventful meeting.

Okay, that's good. Kind of sticking with the international. I mean, obviously there's been some news out of Argentina and Bolivia in particular about nationalization of some petroleum companies and oil and gas. Do these kind of takeovers have any influence on the local populations buying the products down there in Latin America, or the agents selling your products, is it a positive impact, negative impact, neutral, no effect?

Well, again, anytime you have instability within a country. And these, I don't know that these particular events are going to rise to a level that they're going to be noticeable within our production arenas. But sometimes, for me to sit here, Ed, and try to predict what one of those uprisings or one of those localized disturbances is going to create is difficult because I really, I'm not a particularly good -- I don't have a good crystal ball, I guess what I'm trying to say. But what I do, what I would tell you is as I led into the call today, it is not uncommon for instability within those countries, whether it be political or economic or otherwise, to create a greater, more intense interest in utilizing the safe haven of the U.S. for protection of assets and movement of funds out of those countries. So it would not be surprising to us to see those events create something, but I wouldn't begin to try to suggest that they are likely to. It's just typical Latin American economies and environments, and they are a little more eventful, I guess I should say, than some of what we typically see here in the U.S., but again, the world is a different stage today than it has been. As you can see how dramatic the European marketplace is having upon us, as a nation, U.S. nation and the markets here in the U.S., it's been, to me it's been far more dramatic than I thought justified and warranted. Although, I certainly understand the severity of the crisis that they're dealing with, and again, not altogether different than the one we are dealing with here in the U.S. ourselves.

We've had these nationalizations before and I was wondering, on a historical perspective, if there had been any kind of any uptick in sales at that time? I think it's probably kind of hard to distinguish it.

It's not –- not to overstep you there, but it's not something that we really try to maintain statistics or metrics relative to a particular economic event. That's just not something we do, so it's probably -- even if it was occurring something, it's not something we necessarily have tracked or be able to speak to with any particular relevance or detail.

Fair enough. Transitioning over to Home Service Segment, you noted that you had the $500,000 IBNR reserve development. Could you talk about that a little bit? I think from the 10-Q, it looked like it was in the Life Insurance business, but maybe just talk about what drove it and whether or not this is a trend or if it's just a one-time kind of an item?

Sure, I'll let Kay speak to that because she did that with the Audit Committee very eloquently. So I'll let her do it with you today.

Yes. Ed, we have obviously a claims liability calculation that we do for the incurred, but not reported. We did see, about 2 years ago, a change in the reporting of the claims. We actually use claim triangles to develop that estimate of our liability. The actuaries performed that calculation for us, and so we've been really been working out of that reportable change that occurred 2 years ago, and so that's what you're seeing come through the claims triangle metric and get released. And we don't anticipate that we'll have an adjustment for that going forward. We think it's completely worked its way through the clients triangle lag and we are using about a 21-month history of claims experience and so we feel like that, this slip you're seeing in this release is going to be it for getting that particular issue out of the claims triangle calculation.

Okay. One more comment on the U.S. Life business or a question, rather. What did you see in mortality in this quarter? Was it in line with historical trends, did it uptick at all? And the reason I'm asking is that a lot of your much larger U.S. life insurers noted a pretty meaningful uptick or increase in mortality this quarter.

No. Ours was absolutely flat. We did not see any change in our mortality experience.

That's interesting. Okay. Let's shift over to investments and then I'll let it go at that. The effective yield was down to 3.76%, you noted it's down 16 bps or so on a sequential basis. Could you quantify the impact that the call activity had on the yield in terms of bps? And then perhaps the dollar amount of call activity that happened in the first quarter? And then, kind of the last angle on this is what do you have for expectations for call activity going forward in 2012?

Yes, Ed, I really can't quantify that, in the decrease in the bps for you, but we did see that we have a larger amount of cash holdings that are waiting to be invested that we did note in our results, and that really is driving the calculation of that annualized yield. We are seeing the average assets increase, but the investment income stay at the same level. So it's really driving the calculation itself and so what you're seeing for the quarter is probably going to smooth out as we get more of a real year reflected in that calculation, but that's part of what we are seeing in. And I mean if you look at the cash flow in the Q, you can actually see the calls that we did experience. We had about $70 million of calls relating to available for sale securities and $22 million for the held to maturity portfolio. Those comparable numbers in the prior year was $8 million and $19 million. So we did see a pickup in calls, which is what is driving that cash balance increase in the quarter. But as that gets invested in, I anticipate that, that yield calculation will tick back up a little bit. But we do think, as Rick indicated, we're seeing that bottom out just below 4%.

Yes, you're not alone in the call activity, but any idea of how much more could be called this year or is it kind of working its way out now?

Well, we, Ed, we continue to utilize callable type instruments. So it is something that we expect to have continue through our whole experience. I don't know, you would think that when it gets to a 1% rate that you wouldn't get a call. But some of those things, we've been surprised by some of the calls. And I'm not sure I understand or appreciate fully why 1% or 1.5% will get called and a 2% or a 3% will be left laying, other than it's just somebody's speculation about what the future is going to do. Again, we're happy to have the churning that's going on because it's giving us the opportunity to shorten durations as a general rule. And so, to us we believe that it actually plays well for the future and what's coming, even though that future may be a more lengthy period of time than any of us would care to have.

Are you actually getting higher yields on new money from the called bonds than what's rolling off?

In some cases, we are, yes. So it's really, it's a interesting dynamic. Because of the extensiveness of our callable portfolio, we've had a wide variety of instruments in all different shapes, sizes and structures, in terms of deals. And we did that intentionally because we didn't want all one flavor. So we ended up with a lot of things concentrated out at a 15-year point of time, but with the calls and the churning and the re-investment opportunities that we get in the shorter maturities over the last year, we're actually seeing an overall improvement in the quality of the portfolio from a potential yield, future yield perspective, and that's what we're excited about.

[Operator Instructions] And there appear to be no further questions at this time.

Randy, thank you very much. We appreciate it, appreciate everyone on the call today. Thank you for joining us. We look forward to visiting with you again next quarter.

This concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.