Citizens, Inc. (CIA) Q3 2014 Earnings Report, Transcript and Summary

Welcome to the Citizens Incorporated Third Quarter 2014 Results Conference Call. Today's conference is being recorded. At this time, all participants are in a listen-only mode. After formal remarks there will be a question-and-answer session. (Operator Instructions). I will now turn the call over to Ms. Osbourn. You may begin.

Thank you, Doug. 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; Larry Carson, Financial Reporting and 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 filed our 10-Q, both are available on our website at citizensinc.com. Second, during the call today 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 party. Finally, reconciliation of our non-GAAP information as required by Regulation G was provided with the release and also available on our website. Rick?

Good morning. We're pleased to have the opportunity to report on our growth and progress year-to-date and through the third quarter of 2014. As noted in our news release yesterday we reflected double-digit increases in net income for the three month period as well as year-to-date. We're pleased to see that continuing improvement in the bottom-line; particularly we're seeing increased premium revenues primarily related to our life segment. The company continues to have strong premium renewals as a result of steady or good persistency and as well as increased new sales on a year-to-date basis contributing to that net income result. Investment yields continue to steadily recover from the low interest rate environment and we see steady progress there on the yields on investments. Thus revenues are up across the board. The downside during the third quarter was we had surrender expenses that were up and commissions were up slightly as a result of increased new sales those that kind of runs in tandem. However on the favourable side, debt and property claims experiences favourable and so with reduced claims and general expenses that also contributed to the improved net income. Again I will review all of these areas in a little more detail throughout the call. The Magnolia Guaranty Life acquisition that we made in the early part or that we closed in the early part of 2014 has been fully transitioned over into our back office operations today that got done during the third quarter. We're continuing to work through validation of those records and completion of some of that conversion process but all of that is going well and pretty much as expected. Let me start now with the life segment in the insurance operations, where this particular segment accounts for 75% of our year-to-date premiums. The international business positively growing and with new sales and the strong renewals we see sales growth on a annualized premium basis over 6% year-over-year. Steady production coming out of that international group. Endowment sales continue to drive be the predominant product in that market place, representing 83% of first year premiums year-to-date in that particular segment. Again persistency strongly evident in the renewal premium growth that we've seen and we're pleased to see that trend and that's continuing. On the domestic portion of this particular segment sales are comparable to what we have had in 2013 lagging slightly but essentially flat between the two years, the production coming predominantly from Mountain West and Texas producers is where the bulk of that production is coming. Kay?

I'm just going to highlight a few areas of focus in the life segment financials; since we have filed the full Form 10-Q I would point you there for the full Management Discussion & Analysis. In the life segment our insurance premium drove 7.8% and 6.2% for the three and nine months in 2014 compared to 2013, driven by an increase in first year and renewals premiums. Renewals accounted for over 85% of total premiums in 2014 and 2013 for the nine months ended respectfully. The top three international countries contributing to our premium increases are consistent with the 2013 performers. Death claims decreased for the three months ended September 30, 2014, by 13.2% due to lower reported claims but were up slightly year-to-date in 2014 compared to 2013. Surrender expense was up 19.8% and 9% for the three and nine months ended September 30, 2014, compared to 2013 levels for the same period. Our overall surrenders have remained at a level totalling approximately 0.6% of enforced with a large portion related to policies that have passed the surrender charge period which is typically 14 years. Commissions as a percent of premiums varied from period-to-period as we pay higher commissions on first year business than we do on renewal business but renewal business accounts for the majority of our premium revenue. First year premiums accounted for almost 15% of total premiums for the nine months in 2014 and 2013 but total first year premium increased 9.1% year-over-year. Other general expenses decreased 3.4% between 2014 and 2013 in this segment as overall all corporate expenses declined. And now, we will turn to the Home Service segment and earnings update.

In the Home Service segment, we saw those premiums up over 4% year-to-date, that's predominantly related to the Magnolia acquisition and the inclusion of their results in our numbers year-over-year. The Home Service sales growth within that particular segment was otherwise flat year-to-date, although they were up slightly. There were no adverse weather events like we had in 2013 so our property claims expenses are down in this segment. The mission and earlier the transitional work, I'll add -- my point here was I wanted to make sure that we communicated that the customer relationships that we've made and through the Magnolia acquisition have actually been retained effectively and we see good solid retention of the business and the operations there as we've transitioned them. Many times when you're doing that type of work it’s not uncommon to lose 10% of the business that you acquire, but we’re very pleased with what we’re seeing happen there in the Magnolia acquisition and that there seems to be a very steady consistent acceptance of our involvement in their operations going forward. And I think frankly with some of the things that we’ve done systems wise and back office wise, they’re seeing improvements already in field and that will continue to play well for us. We do anticipate additional growth opportunities there in Mississippi thorough Magnolia, as well as through our existing steady planned marketing operations already functioning there in the State of Mississippi. We -- the other thing I want to mention, we are relocating our training centre from -- into Donal -- we actually have relocated during 2014 into our Donaldsonville Service Centre in Donaldsonville, Louisiana. We are in the process of remodelling a recently purchased adjacent building there in the Donaldsonville, Downtown area for future training schools and conduct our training programs there in the Home Service marketplace out of our home office there in Donaldsonville. Thanks.

As Rick, indicated, the Home Service premiums increased over 5% for the three and nine months in 2012 compared to 2013, primarily due to the added premium associated with the Magnolia acquisition. Without these premiums the Home Service Segment had no real premium growth between 2014 and 2013. Death claims reported decrease for the three months but remained flat for the nine months ended in 2014, compared to 2013 amount. We did experience lower persistency in this block, which is impacting amortization of deferred acquisition costs which are up in the current period but still within expectations for this business. Property claims were lower in 2014, primarily due to weather related claims in 2013 that we have not experienced in the current year. And now, we will provide an investment performance overview.

Our investment income yields continue to improve. They're up to a level of 4.22%, that’s up from I think a bottom, somewhere down in the 3.6 range as we went through the low interest rate transition and transition away from U.S. government guaranteed instruments and securities over into the municipal world over the last two, three years. And so that yield improvement is certainly welcomed and we hope to see that trend continue as we move on end of the year and beginning into the 2015 timeframe. New money rates, they -- it varies by investment structure and depending on the terms of the security, the call, options, coupons, and the way we're dealing with taxable or tax free, we see a variety of different opportunities. Generally speaking, we're picking up opportunities that yield 1% to 3% yield in the -- under five years timeframe, 3.5% to 5% under a 15-year timeframe and 4.5% to 6% under 25-years. We are -- we would -- we do make investments out beyond 25 years, just not very often. Most of the time they will be in that same range 6% or 6 plus percent, if we do it. Again, we're focused as we continue to evolve the portfolio away from U.S. government guaranteed securities. Over the last several years we have been focused on higher quality, essential service either corporate utilities or municipal issues. And we continue to have -- we continue to see, apologize for the interruption there on the overhead page. I am not sure. All right, the other thing here was the -- other thing I wanted to make a note of was the Louisiana and Mississippi investments that we make. We do have a concentration in those states relative to those both Magnolia, the Magnolia Life Insurance Company that's there as well as the Security Plan Life Insurance Company. We do make concentrated sort of investments in those two states predominantly because of the premium tax savings that we get on the other side. So its tax planning, tax strategy oriented focus that we've got in that particular venue. The longer-term view for the portfolio is that we expect to see continued growth in the portfolio just through continued growth and development of premium revenues as we have been is the trend that we've been seeing here will continue. I do think that the yield rates will remain from what I understand where the market will likely track relative to interest rates that will remain challenged to achieve a lot greater yields than what we're already achieving but we believe that we should see and continue to see some improvement even though the low interest rate should exacerbate that situation somewhat. Kay?

There were other than temporary impairment charges recorded this quarter based on our review totalling $300,000 those are related to short duration bond funds that we no longer have an intent to hold and likely sell in the near-term. Our portfolio remains with over 96% of our holdings and investment quality rated triple B or better. We have increased our triple B rated holdings from year-end 2013 reported amount as we have invested primarily in state municipals and utility related corporates. Our double A rated investments have declined from 46.9% of our holdings at year-end 2013 to 45.7% at September 30, 2014. We are exposed to interest rate risk due to the significant amount of our investment portfolio invested in six maturity securities and as market rate changes our fair values of these investments will increase and decrease as the current market rate compares to the stated coupon rates. The net unrealized gains on our fixed maturity bond portfolio was $5.1 million at December 31, 2013, compared to a net unrealized gain of $40.2 million at September30, 2014, as rates decreased on the 10-year treasury from 3% to 2.5%. We typically hold our investments to maturity and have 73.8% classified as available for sale based upon amortized cost, which is reported at fair value with changes in market interest rates flowing through comprehensive income and 26.2% categorized as held-for-maturity and reported at amortize cost. Our equity portfolio represented 5.4% of total investments at September30, 2014, with 95.1% invested in diversified equity and bond mutual funds. Our balance sheets remain strong; there have been no significant changes in RBC ratios related to our insurance companies as they all remain well above their minimum. Rick?

Historically transactions or acquisitions and opportunities have been an integral part of Citizen's growth and we continue to work in that direction. There's not anything significant to report today although I can say that we do have ongoing dialogue and discussions that we maintain with potential opportunities. So we do almost throughout every quarter there is some opportunity of exploring situation here and there but currently nothing to report formally on any of that activity. As a conclusion, we continue to remain very positive; we were very pleased with the results that we saw through the third quarter of 2014. This company is very healthy and unique situation with marketing niches that we work in various markets where we target. We do operate very effectively in those market and we look forward to continuing to work to expand and grow and develop in those markets. We do have the capacity for acquisition transactions and we look forward to our next opportunity to make one of those or do that type of thing. But at this point operator, I'll turn, Doug, I'll turn the call over to you for questions.

Thank you. (Operator Instructions). And it appears that we have no questions at this time.

Thank you very much. We appreciate the opportunity on the call today and look forward to reporting again at the end of the year.

This concludes today's conference. Thank you for your participation.