Edgar Filing: CITIZENS INC

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

___________________

x Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2011

o Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the transition period from _____ to ____

Commission File Number: 000-16509

CITIZENS, INC.
(Exact name of registrant as specified in its charter)

	Colorado	84-0755371
	(State of other jurisdiction of incorporation or organization	I.R.S. Employer Identification No.)

	400 East Anderson Lane, Austin, TX	78752
	(Address of principal executive offices)	(Zip Code)

(512) 837-7100

(Registrant's telephone number, including area code

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. (Check one):

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

As of November 1, 2011, the Registrant had 48,946,546 shares of Class A common stock, no par value, outstanding and 1,001,714 shares of Class B common stock outstanding.

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TABLE OF CONTENTS

Part I.	Financial Information			Page Number
	Item 1.		Financial Statements

			Consolidated Statements of Financial Position, September 30, 2011 (Unaudited) and December 31, 2010	2

			Consolidated Statements of Operations, Three Months Ended September 30, 2011 and 2010 (Unaudited)	4

			Consolidated Statements of Operations, Nine Months Ended September 30, 2011 and 2010 (Unaudited)	5

			Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2011 and 2010 (Unaudited)	6

			Notes to Consolidated Financial Statements	8

	Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations	28

	Item 3.		Quantitative and Qualitative Disclosures about Market Risk	48

	Item 4.		Controls and Procedures	49

Part II.	Other Information

	Item 1.	Legal Proceedings		49

	Item 1A.	Risk Factors		50

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		50

	Item 3.	Defaults Upon Senior Securities		50

	Item 4.	(Reserved)		50

	Item 5.	Other Information		50

	Item 6.	Exhibits		51

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Financial Position

(In thousands)

Assets	September 30, 2011		December 31, 2010
	(Unaudited)
Investments:
Fixed maturities available-for-sale, at fair value (cost: $536,537 and $578,412 in 2011 and 2010, respectively)	$	564,269		575,737
Fixed maturities held-to-maturity, at amortized cost (fair value: $133,951 and $79,103 in 2011 and 2010, respectively)		131,820		80,232
Equity securities available-for-sale, at fair value (cost: $44,340 and $19,844 in 2011 and 2010, respectively)		45,366		23,304
Mortgage loans on real estate		1,453		1,489
Policy loans		38,075		35,585
Real estate held for investment (less $1,115 and $1,017 accumulated depreciation in 2011 and 2010, respectively)		9,126		9,200
Other long-term investments		141		148
Short-term investments		2,066		-
Total investments		792,316		725,695

Cash and cash equivalents		64,425		49,723
Accrued investment income		8,465		7,433
Reinsurance recoverable		9,890		9,729
Deferred policy acquisition costs		134,587		125,684
Cost of customer relationships acquired		29,108		31,631
Goodwill		17,160		17,160
Other intangible assets		913		1,019
Federal income tax receivable		344		1,914
Property and equipment, net		7,992		7,101
Due premiums, net (less $1,466 and $1,568 allowance for doubtful accounts in 2011 and 2010, respectively)		7,807		8,537
Prepaid expenses		1,027		474
Other assets		727		406
Total assets	$	1,074,761		986,506

See accompanying notes to consolidated financial statements

(Continued)

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Financial Position

(In thousands, except share amounts)

Liabilities and Stockholders' Equity	September 30, 2011			December 31, 2010
	(Unaudited)
Liabilities:
Policy liabilities:
Future policy benefit reserves:
Life insurance	$	679,257			637,140
Annuities		45,891			42,096
Accident and health		5,553			5,910
Dividend accumulations		10,291			9,498
Premiums paid in advance		25,360			23,675
Policy claims payable		9,517			10,540
Other policyholders' funds		8,489			8,191
Total policy liabilities		784,358			737,050

Commissions payable		2,368			2,538
Deferred federal income tax		18,543			9,410
Payable for securities in process of settlement		6,654			-
Warrants outstanding		133			1,587
Other Liabilities		8,188			8,287
Total liabilities		820,244			758,872

Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock:
Class A, no par value, 100,000,000 shares authorized, 52,082,284 shares issued in 2011 and 51,822,497 shares issued in 2010, including shares in treasury of 3,135,738 in 2011 and 2010		258,496			256,703
Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2011 and 2010		3,184			3,184
Accumulated deficit		(15,337	)		(22,581	)
Accumulated other comprehensive income:
Unrealized gains on securities, net of tax		19,185			1,339
Treasury stock, at cost		(11,011	)		(11,011	)
Total stockholders' equity		254,517			227,634
Total liabilities and stockholders' equity	$	1,074,761			986,506

See accompanying notes to consolidated financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Operations

Three Months Ended September 30,

(In thousands, except share amounts)

(Unaudited)

	2011			2010
Revenues:
Premiums:
Life insurance	$	38,639			36,433
Accident and health insurance		383			392
Property insurance		1,277			1,230
Net investment income		7,693			7,272
Realized investment gains (losses), net		35			(103	)
Decrease in fair value of warrants		239			128
Other income		282			103
Total revenues		48,548			45,455
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders		14,803			15,739
Increase in future policy benefit reserves		14,365			11,398
Policyholders' dividends		2,169			1,977
Total insurance benefits paid or provided		31,337			29,114

Commissions		9,224			9,229
Other general expenses		6,857			6,587
Capitalization of deferred policy acquisition costs		(7,121	)		(6,973	)
Amortization of deferred policy acquisition costs		4,500			3,800
Amortization of cost of customer relationships acquired		708			719
Total benefits and expenses		45,505			42,476

Income before federal income tax		3,043			2,979
Federal income tax expense		820			1,313
Net income	$	2,223			1,666

Per Share Amounts:
Basic earnings per share of Class A common stock	$	0.05			0.03
Basic earnings per share of Class B common stock		0.02			0.02
Diluted earnings per share of Class A common stock		0.05			0.03
Diluted earnings per share of Class B common stock		0.02			0.02

See accompanying notes to consolidated financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Operations

Nine Months Ended September 30,

(In thousands, except per share amounts)

(Unaudited)

	2011			2010
Revenues:
Premiums:
Life insurance	$	112,481			105,114
Accident and health insurance		1,151			1,215
Property insurance		3,781			3,592
Net investment income		22,924			23,896
Realized investment gains, net		41			648
Decrease in fair value of warrants		1,454			380
Other income		509			602
Total revenues		142,341			135,447
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders		44,587			46,410
Increase in future policy benefit reserves		39,683			30,726
Policyholders' dividends		5,751			5,324
Total insurance benefits paid or provided		90,021			82,460

Commissions		28,226			26,385
Other general expenses		20,386			20,562
Capitalization of deferred policy acquisition costs		(22,170	)		(19,946	)
Amortization of deferred policy acquisition costs		13,249			13,962
Amortization of cost of customer relationships acquired		2,113			2,311
Total benefits and expenses		131,825			125,734

Income before federal income tax		10,516			9,713
Federal income tax expense		3,270			3,257
Net income	$	7,246			6,456

Per Share Amounts:
Basic earnings per share of Class A common stock	$	0.15			0.13
Basic earnings per share of Class B common stock		0.07			0.07
Diluted earnings per share of Class A common stock		0.15			0.13
Diluted earnings per share of Class B common stock		0.07			0.07

See accompanying notes to consolidated financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Cash Flows

Nine Months Ended September 30,

(In thousands)

(Unaudited)

	2011			2010
Cash flows from operating activities:
Net income	$	7,246			6,456
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized gains on sale of investments and other assets		(41	)		(648	)
Net deferred policy acquisition costs		(8,921	)		(5,984	)
Amortization of cost of customer relationships acquired		2,113			2,332
Decrease in fair value of warrants		(1,454	)		(380	)
Depreciation		753			787
Amortization of premiums and discounts on fixed maturities and short-term investments		3,208			2,548
Deferred federal income tax benefit		(567	)		(61	)
Change in:
Accrued investment income		(1,032	)		(951	)
Reinsurance recoverable		(161	)		1,176
Due premiums and other receivables		730			1,736
Future policy benefit reserves		39,308			30,223
Other policyholders' liabilities		1,747			5,897
Federal income tax receivable		1,570			2,120
Commissions payable and other liabilities		(269	)		(4,754	)
Other, net		(668	)		(1,021	)
Net cash provided by operating activities		43,562			39,476
Cash flows from investing activities:
Sale of fixed maturities, available-for-sale		-			7,074
Maturity and calls of fixed maturities, available-for-sale		127,342			137,506
Maturity and calls of fixed maturities, held-to-maturity		52,900			150,350
Purchase of fixed maturities, available-for-sale		(82,184	)		(246,238	)
Purchase of fixed maturities, held-to-maturity		(104,466	)		(71,452	)
Sale of equity securities, available-for-sale		-			591
Calls of equity securities, available-for-sale		682			100
Purchase of equity securities, available-for-sale		(25,000	)		(205	)
Principal payments on mortgage loans		36			33
Increase in policy loans		(2,464	)		(2,874	)
Sale of other long-term investments		5			42
Purchase of other long-term investments		(25	)		(1,799	)
Sale of property and equipment		2			-
Purchase of property and equipment		(1,662	)		-
Maturity of short-term investments		-			2,500
Purchase of short-term investments		(2,066	)		-
Proceeds from assumption reinsurance agreement		4,550			-
Net cash used in investing activities		(32,350	)		(24,372	)

See accompanying notes to consolidated financial statements.

(Continued)

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Cash Flows, Continued

Nine Months Ended September 30,

(In thousands)

(Unaudited)

	2011			2010
Cash flows from financing activities:
Warrants exercised	$	1,791			-
Annuity deposits		4,818			4,041
Annuity withdrawals		(3,119	)		(2,404	)
Net cash provided by financing activities		3,490			1,637

Net increase in cash and cash equivalents		14,702			16,741
Cash and cash equivalents at beginning of year		49,723			48,625
Cash and cash equivalents at end of period	$	64,425			65,366
Supplemental disclosures of operating activities:
Cash paid during the period for income taxes	$	2,267			1,200

Supplemental Disclosures of Non-Cash Investing Activities:

In 2010, the Company sold a parcel of real estate and issued a mortgage loan for $102,000.

See accompanying notes to consolidated financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2011

(Unaudited)

(1) Financial Statements

Basis of Presentation and Consolidation

The accompanying consolidated financial statements of Citizens, Inc. and its wholly-owned subsidiaries have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. GAAP").

The consolidated financial statements include the accounts and operations of Citizens, Inc. ("Citizens"), a Colorado corporation, and its wholly-owned subsidiaries, CICA Life Insurance Company of America ("CICA"), Computing Technology, Inc. ("CTI"), Insurance Investors, Inc. ("III"), Citizens National Life Insurance Company ("CNLIC"), Security Plan Life Insurance Company ("SPLIC"), and Security Plan Fire Insurance Company ("SPFIC"). Integrity Capital Corporation and Integrity Capital Life Insurance Company were merged into CICA effective April 1, 2011. All significant inter-company accounts and transactions have been eliminated. Citizens and its wholly-owned subsidiaries are collectively referred to as "the Company," "we," "us" or "our."

The consolidated statements of financial position for September 30, 2011, the consolidated statements of operations for the three and nine-month periods ended September 30, 2011 and 2010, and the consolidated statements of cash flows for the nine-month periods then ended have been prepared by the Company without audit. In the opinion of management, all adjustments to present fairly the financial position, results of operations, and changes in cash flows at September 30, 2011, and for comparative periods have been made.

We provide primarily life insurance and a small amount of health insurance policies through our insurance subsidiaries: CICA, SPLIC, and CNLIC. CICA and CNLIC issue ordinary whole-life policies, burial insurance, pre-need policies, and accident and health related policies, throughout the Midwest and southern United States. CICA also issues ordinary whole-life policies to non-U.S. residents. SPLIC offers final expense and home service life insurance in Louisiana, Arkansas and Mississippi and SPFIC, a wholly-owned subsidiary of SPLIC, writes a limited amount of property insurance in Louisiana.

CTI provides data processing systems and services, as well as furniture and equipment, to the Company. III provides aviation transportation to the Company.

Use of Estimates

The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The most significant estimates include those used in the evaluation of other-than-temporary impairments on debt and equity securities and valuation allowances on investments, actuarially determined liabilities and assumptions, goodwill impairment, valuation allowance on deferred tax assets, and contingencies relating to litigation and regulatory matters. Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the Consolidated Financial Statements.

Acquisitions

On August 1, 2011, SPLIC entered into assumption reinsurance agreements with Escude Life Insurance Company in Rehabilitation, and Benton Life Insurance Company in Rehabilitation. At the time the agreements were executed, both companies were under receivership with the Louisiana Department of Insurance. In total, SPLIC assumed approximately $4.5 million in reserve liabilities and received approximately $4.6 million in cash, with a minimal reinsurance ceding commission being paid. These transactions are not deemed material.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2011

(Unaudited)

Reclassification

Reclassifications have been made in the current year related to certain prior year reported amounts to provide consistent presentation. The Company recorded reclassifications related to DAC amounts capitalized and amortized to properly reflect the amount used to develop the DAC asset balance and to provide consistent presentation with the current year. We recorded increases to DAC capitalized of $0.8 million and $2.5 million and an increase in amortization for the same amounts for the three and nine months ended September 30, 2010, respectively.

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements included in our 2010 Form 10-K Annual Report, which should be read in conjunction with these accompanying Consolidated Financial Statements.

(2) Accounting Pronouncements

Accounting Standards Not Yet Adopted

In October 2010, the Financial Accounting Standards Board ("FASB") issued guidance modifying the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. The guidance specifies that the costs must be based on successful efforts. The guidance also specifies that advertising costs should be included as deferred acquisition costs only when the direct-response advertising accounting criteria are met. If application of the guidance would result in the capitalization of acquisition costs that had not been capitalized prior to adoption, the entity may elect not to capitalize those additional costs. The new guidance is effective for reporting periods beginning after December 15, 2011, and should be applied prospectively, with retrospective application permitted. The Company is in the process of evaluating the impact of adoption of the guidance on the results of operations and financial position. Based upon its initial review of this guidance, the Company will adopt this standard on January 1, 2012, with a retrospective application. The financial impact is currently estimated to result in a reduction in the DAC asset upon implementation between $10.0 million and $13.0 million as a retrospective adjustment to beginning of year retained earnings at the date of adoption, and an estimated increase in pre-tax earnings of $0.5 million to $1.0 million.

In June 2011, the FASB amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The provisions of this new guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance will have no impact on our financial statements.

Accounting Standards Update ("ASU") 2011-04, “Fair Value Measurement ("Topic 820") – Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

Accounting Standards Recently Adopted

In December 2010, the FASB issued disclosure guidance for entities that enter into business combinations that are material. The guidance specifies that if an entity presents comparative financial statements, the entity should disclose pro forma revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. The guidance expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination. The Company will apply the guidance to any business combinations entered into on or after January 1, 2011.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2011

(Unaudited)

(3) Segment Information

The Company has three reportable segments: Life Insurance, Home Service Insurance, and Other Non-Insurance Enterprises. The accounting policies of the segments are in accordance with U.S. GAAP and are the same as those used in the preparation of the consolidated financial statements. The Company evaluates profit and loss performance based on U.S. GAAP income before federal income taxes for its three reportable segments.

The Company has no reportable differences between segments and consolidated operations.

	Three Months Ended September 30, 2011
	Life Insurance			Home Service Insurance			Other Non-Insurance Enterprises			Consolidated
	(In thousands)
Revenues:
Premiums	$	29,491			10,808			-			40,299
Net investment income		4,309			3,178			206			7,693
Realized investment gains, net		25			4			6			35
Decrease in fair value of warrants		-			-			239			239
Other income		240			6			36			282
Total revenue		34,065			13,996			487			48,548

Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders		9,834			4,969			-			14,803
Increase in future policy benefit reserves		13,133			1,232			-			14,365
Policyholders' dividends		2,152			17			-			2,169
Total insurance benefits paid or provided		25,119			6,218			-			31,337

Commissions		5,516			3,708			-			9,224
Other general expenses		2,983			3,233			641			6,857
Capitalization of deferred policy acquisition costs		(5,484	)		(1,637	)		-			(7,121	)
Amortization of deferred policy acquisition costs		3,680			820			-			4,500
Amortization of cost of customer relationships acquired		206			502			-			708
Total benefits and expenses		32,020			12,844			641			45,505
Income (loss) before income tax expense	$	2,045			1,152			(154	)		3,043

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2011

(Unaudited)

	Nine Months Ended September 30, 2011
	Life Insurance			Home Service Insurance			Other Non-Insurance Enterprises		Consolidated
	(In thousands)
Revenues:
Premiums	$	85,027			32,386			-		117,413
Net investment income		12,662			9,690			572		22,924
Realized investment gains, net		29			6			6		41
Decrease in fair value of warrants		-			-			1,454		1,454
Other income		404			20			85		509
Total revenue		98,122			42,102			2,117		142,341

Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders		29,691			14,896			-		44,587
Increase in future policy benefit reserves		36,957			2,726			-		39,683
Policyholders' dividends		5,696			55			-		5,751
Total insurance benefits paid or provided		72,344			17,677			-		90,021

Commissions		16,916			11,310			-		28,226
Other general expenses		8,936			9,488			1,962		20,386
Capitalization of deferred policy acquisition costs		(16,971	)		(5,199	)		-		(22,170	)
Amortization of deferred policy acquisition costs		11,290			1,959			-		13,249
Amortization of cost of customer relationships acquired		705			1,408			-		2,113
Total benefits and expenses		93,220			36,643			1,962		131,825
Income before income tax expense	$	4,902			5,459			155		10,516

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2011

(Unaudited)

	Three Months Ended September 30, 2010
	Life Insurance			Home Service Insurance			Other Non-Insurance Enterprises			Consolidated
	(In thousands)
Revenues:
Premiums	$	27,514			10,541			-			38,055
Net investment income		3,893			3,244			135			7,272
Realized investment gains (losses), net		1			(96	)		(8	)		(103	)
Decrease in fair value of warrants		-			-			128			128
Other income		78			10			15			103
Total revenue		31,486			13,699			270			45,455

Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders		10,498			5,241			-			15,739
Increase in future policy benefit reserves		10,688			710			-			11,398
Policyholders' dividends		1,965			12			-			1,977
Total insurance benefits paid or provided		23,151			5,963			-			29,114

Commissions		5,572			3,657			-			9,229
Other general expenses		2,603			3,529			455			6,587
Capitalization of deferred policy acquisition costs		(5,414	)		(1,559	)		-			(6,973	)
Amortization of deferred policy acquisition costs		3,448			352			-			3,800
Amortization of cost of customer relationships acquired		232			487			-			719
Total benefits and expenses		29,592			12,429			455			42,476
Income (loss) before income tax expense	$	1,894			1,270			(185	)		2,979

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2011

(Unaudited)

	Nine Months Ended September 30, 2010
	Life Insurance			Home Service Insurance			Other Non-Insurance Enterprises			Consolidated
	(In thousands)
Revenues:
Premiums	$	78,364			31,557			-			109,921
Net investment income		13,239			10,251			406			23,896
Realized investment gains (losses), net		116			585			(53	)		648
Decrease in fair value of warrants		-			-			380			380
Other income		487			63			52			602
Total revenue		92,206			42,456			785			135,447

Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders		30,644			15,766			-			46,410
Increase in future policy benefit reserves		28,123			2,603			-			30,726
Policyholders' dividends		5,267			57			-			5,324
Total insurance benefits paid or provided		64,034			18,426			-			82,460

Commissions		15,316			11,069			-			26,385
Other general expenses		8,234			10,964			1,364			20,562
Capitalization of deferred policy acquisition costs		(15,097	)		(4,849	)		-			(19,946	)
Amortization of deferred policy acquisition costs		13,108			854			-			13,962
Amoritzation of cost of customer relationships acquired		837			1,474			-			2,311
Total benefits and expenses		86,432			37,938			1,364			125,734
Income (loss) before income tax expense	$	5,774			4,518			(579	)		9,713

(4)Total Comprehensive Income

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(In thousands)

Net income	$	2,223			1,666			7,246			6,456
Other comprehensive income net of effects of deferred acquisiton costs and taxes:
Unrealized gains on available-for-sale securities		15,431			11,288			27,546			21,554
Tax expense		(5,460	)		(2,700	)		(9,700	)		(7,135	)
Other comprehensive income		9,971			8,588			17,846			14,419
Total comprehensive income	$	12,194			10,254			25,092			20,875

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(5)	Earnings Per Share

The following tables set forth the computation of basic and diluted earnings per share.

	Three Months Ended September 30,
	2011		2010
	(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net income	$	2,223		1,666

Net income allocated to Class A common stock	$	2,200		1,649
Net income allocated to Class B common stock		23		17
Net income available to common stockholders	$	2,223		1,666
Denominator:
Weighted average shares of Class A outstanding - basic and diluted		48,912		48,687
Weighted average shares of Class B outstanding - basic and diluted		1,002		1,002

Basic and diluted earnings per share of Class A common stock	$	0.05		0.03
Basic and diluted earnings per share of Class B common stock		0.02		0.02

	Nine Months Ended September 30,
	2011		2010
	(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net income	$	7,246		6,456

Net income allocated to Class A common stock	$	7,172		6,390
Net income allocated to Class B common stock		74		66
Net income available to common stockholders	$	7,246		6,456
Denominator:
Weighted average shares of Class A outstanding - basic		48,762		48,687
Weighted average shares of Class A outstanding - diluted		48,764		48,687
Weighted average shares of Class B outstanding - basic and diluted		1,002		1,002

Basic earnings per share of Class A common stock	$	0.15		0.13
Basic earnings per share of Class B common stock		0.07		0.07
Diluted earnings per share of Class A common stock		0.15		0.13
Diluted earnings per share of Class B common stock		0.07		0.07

The diluted earnings per share calculation has assumptions regarding the exercise of warrants issued to certain investors as discussed below in Note 9 - Convertible Preferred Stock: Warrants. For the three months ended September 30, 2011, no dilution occurred. The calculation for the nine months ended September 30, 2011 assumes the issue of 1,851 additional shares with a reduction in net income of $0.1 million.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2011

(Unaudited)

(6)	Investments

The Company invests primarily in fixed maturity securities, which totaled 81.2% of total investments and cash and cash equivalents at September 30, 2011.

	September 30, 2011				December 31, 2010
	Carrying Value		% of Total Carrying Value		Carrying Value		% of Total Carrying Value
	(In thousands)				(In thousands)

Fixed maturity securities	$	696,089		81.2	$	655,969		84.6
Equity securities		45,366		5.3		23,304		3.0
Mortgage loans		1,453		0.2		1,489		0.2
Policy loans		38,075		4.4		35,585		4.6
Real estate		9,126		1.1		9,200		1.2
Other long-term investments		141		-		148		-
Short-term investments		2,066		0.3		-		-
Cash and cash equivalents		64,425		7.5		49,723		6.4
Total cash, cash equivalents and investments	$	856,741		100.0	$	775,418		100.0

During the nine months ended September 30, 2011, we reinvested $24.0 million of proceeds received from calls and prepayments of bonds in bond mutual funds. This resulted in a decrease of our fixed maturity holdings and an increase of our equity securities holdings as a percentage of total investments. Our cash balances fluctuate until excess available funds are invested.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2011

(Unaudited)

The following tables represent gross unrealized gains and losses for fixed maturities and equity securities as of the periods indicated.

	September 30, 2011
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Fixed maturities:
Fixed maturities available-for-sale:
U.S. Treasury securities	$	10,241		3,654		-		13,895
U.S. Government-sponsored enterprises		206,139		3,256		61		209,334
States of the United States and political subdivisions of the states		139,253		9,424		1,660		147,017
Foreign governments		105		39		-		144
Corporate		171,472		14,221		1,732		183,961
Securities not due at a single maturity date		9,327		598		7		9,918
Total available-for-sale securities		536,537		31,192		3,460		564,269

Held-to-maturity securities:
U.S. Government-sponsored enterprises		84,588		426		43		84,971
States of the United States and political subdivisions of the states		47,232		1,862		114		48,980
Total held-to-maturity securities		131,820		2,288		157		133,951
Total fixed maturities	$	668,357		33,480		3,617		698,220

Equity securities:
Stock mutual funds	$	18,931		1,295		815		19,411
Bond mutual funds		24,000		-		68		23,932
Common stock		17		10		-		27
Preferred stock		1,392		604		-		1,996
Total equity securities	$	44,340		1,909		883		45,366

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2011

(Unaudited)

	December 31, 2010
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Fixed maturities:
Available-for-sale securities:
U.S. Treasury securities	$	10,908		1,917		-		12,825
U.S. Government-sponsored enterprises		290,904		441		6,390		284,955
States of the United States and political subdivisions of the states		107,214		539		6,034		101,719
Foreign governments		106		26		-		132
Corporate		155,277		7,237		1,216		161,298
Securities not due at a single maturity dates		14,003		833		28		14,808
Total available-for-sale securities		578,412		10,993		13,668		575,737

Held-to-maturity securities:
U.S. Government-sponsored enterprises		80,232		272		1,401		79,103
Total fixed maturities	$	658,644		11,265		15,069		654,840

Equity securities:
Stock mutual funds	$	17,931		2,566		19		20,478
Common stock		17		29		-		46
Preferred stock		1,896		884		-		2,780
Total equity securities	$	19,844		3,479		19		23,304

At September 30, 2011, the Company had $9.3 million of mortgage-backed security holdings based on amortized cost, of which $8.5 million, or 91.4%, were residential U.S. Government-sponsored issues. Mortgage-backed securities are also referred to as securities not due at a single maturity date throughout this report. The majority of the Company's equity securities are diversified stock and bond mutual funds.

Valuation of Investments in Fixed Maturity and Equity Securities

Held-to-maturity securities are reported in the financial statements at amortized cost and available-for-sale securities are reported at fair value.

The Company monitors all debt and equity securities on an on-going basis relative to changes in credit ratings, market prices, earnings trends and financial performance, in addition to specific region or industry reviews. The assessment of whether impairments have occurred is based on a case-by-case evaluation of underlying reasons for the decline in fair value. The Company determines other-than-temporary impairment by reviewing relevant evidence related to the specific security issuer as well as the Company's intent to sell the security, or if it is more likely than not that the Company would be required to sell a security before recovery of its amortized cost.

When an other-than-temporary impairment has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis, the other-than-temporary impairment is recognized in earnings equal to the entire difference between the investment's cost and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security before recovery of its amortized cost basis, the other-than-temporary impairment is separated into the following: (a) the amount representing the credit loss; and (b) the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the other-than-temporary impairment recognized in earnings becomes the new amortized cost basis of the investment. The new amortized cost basis is not adjusted for subsequent recoveries in fair value.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2011

(Unaudited)

The Company evaluates whether a credit impairment exists for debt securities by considering primarily the following factors: (a) changes in the financial condition of the security's underlying collateral; (b) whether the issuer is current on contractually obligated interest and principal payments; (c) changes in the financial condition, credit rating and near-term prospects of the issuer; (d) the extent to which the fair value has been less than the amortized cost of the security; and (e) the payment structure of the security. The Company's best estimate of expected future cash flows used to determine the credit loss amount is a quantitative and qualitative process. Quantitative review includes information received from third party sources such as financial statements, pricing and rating changes, liquidity and other statistical information. Qualitative factors include judgments related to business strategies, economic impacts on the issuer and overall judgment related to estimates and industry factors. The Company's best estimate of future cash flows involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings, and current delinquency rates. These assumptions require the use of significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries, which may include estimating the underlying collateral value. In addition, projections of expected future debt security cash flows may change based upon new information regarding the performance of the issuer.

The primary factors considered in evaluating whether an impairment exists for an equity security include, but are not limited to: (a) the length of time and the extent to which the fair value has been less than the cost of the security; (b) changes in the financial condition, credit rating and near-term prospects of the issuer; (c) whether the issuer is current on contractually obligated payments; and (d) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery.

The Company did not recognize any other-than-temporary impairments ("OTTI") during the nine months ended September 30, 2011 and September 30, 2010.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2011

(Unaudited)

The tables below present the fair values and gross unrealized losses of fixed maturities and equity securities that have remained in a continuous unrealized loss position for the periods indicated.

	September 30, 2011
	Less than 12 months						Greater than 12 months						Total
	Fair Value		Unrealized Losses		# of Securities		Fair Value		Unrealized Losses		# of Securities		Fair Value		Unrealized Losses		# of Securities
	(In thousands, except for # of securities)

Fixed maturities:
Available-for-sale securities:
U.S. Government-sponsored enterprises	$	15,955		46		15		1,005		15		1		16,960		61		16
Securities issued by states and political subdivisions		4,653		54		7		10,778		1,606		8		15,431		1,660		15
Corporate		30,327		1,235		31		5,998		497		6		36,325		1,732		37
Securities not due at a single maturity date		563		2		1		70		5		2		633		7		3
Total available-for-sale securities		51,498		1,337		54		17,851		2,123		17		69,349		3,460		71
Held-to-maturity securities:
U.S. Government-sponsored enterprises		21,164		28		10		1,124		15		1		22,288		43		11
Securities issued by states and political subdivisions		5,783		114		6		-		-		-		5,783		114		6
Total held-to-maturity securities		26,947		142		16		1,124		15		1		28,071		157		17
Total fixed maturities	$	78,445		1,479		70		18,975		2,138		18		97,420		3,617		88

Equity securities:
Stock mutual funds	$	9,649		815		3		-		-		-		9,649		815		3
Bond mutual funds		23,932		68		10		-		-		-		23,932		68		10
Total equity securities	$	33,581		883		13		-		-		-		33,581		883		13

December 31, 2010

Less than 12 months

Greater than 12 months

Total

Fair

Value

Unrealized

Losses

# of

Securities

Fair

Value

Unrealized

Losses

# of

Securities

Fair

Value

Unrealized

Losses

# of

Securities

(In thousands, except for # of securities)

Fixed maturities:

Available-for-sale securities: