Edgar Filing: CITIZENS INC

CIA-2012.6.30-10Q

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 June 30, 2012

¨ 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 ¨ 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 ¨	Accelerated filer x	Non-accelerated filer ¨	Smaller reporting company ¨

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

As of August 3, 2012, the Registrant had 49,019,157 shares of Class A common stock, no par value, outstanding and 1,001,714 shares of Class B common stock outstanding.

THIS PAGE INTENTIONALLY LEFT BLANK

TABLE OF CONTENTS



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

		Consolidated Statements of Financial Position, June 30, 2012 (Unaudited) and December 31, 2011	2

		Consolidated Statements of Comprehensive Income, Three Months Ended June 30, 2012 and 2011 (Unaudited)	4

		Consolidated Statements of Comprehensive Income, Six Months Ended June 30, 2012 and 2011 (Unaudited)	5

		Consolidated Statements of Cash Flows, Six Months Ended June 30, 2012 and 2011 (Unaudited)	6

		Notes to Consolidated Financial Statements	8

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	29

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	49

	Item 4.	Controls and Procedures	50

Part II.	Other Information

	Item 1.	Legal Proceedings	50

	Item 1A.	Risk Factors	51

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51

	Item 3.	Defaults Upon Senior Securities	51

	Item 4.	Mine Safety Disclosures	51

	Item 5.	Other Information	51

	Item 6.	Exhibits	52

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Financial Position (In thousands)



	June 30, 2012		December 31, 2011
Assets	(Unaudited)		(As adjusted)
Investments:
Fixed maturities available-for-sale, at fair value (cost: $513,585 and $484,809 in 2012 and 2011, respectively)	$	551,076	514,253
Fixed maturities held-to-maturity, at amortized cost (fair value: $194,595 and $230,093 in 2012 and 2011, respectively)	189,821		227,500
Equity securities available-for-sale, at fair value (cost: $45,324 and $45,599 in 2012 and 2011, respectively)	46,409		46,137
Mortgage loans on real estate	1,535		1,557
Policy loans	41,114		39,090
Real estate held for investment (less $1,217 and $1,149 accumulated depreciation in 2012 and 2011, respectively)	8,565		8,539
Other long-term investments	94		105
Short-term investments	4,385		2,048
Total investments	842,999		839,229
Cash and cash equivalents	68,916		33,255
Accrued investment income	8,686		7,787
Receivable for securities in process of settlement	7,030		—
Reinsurance recoverable	9,086		9,562
Deferred policy acquisition costs	128,878		124,542
Cost of customer relationships acquired	26,560		27,945
Goodwill	17,160		17,160
Other intangible assets	892		906
Federal income tax receivable	81		901
Property and equipment, net	7,671		7,860
Due premiums, net (less $1,631 and $1,698 allowance for doubtful accounts in 2012 and 2011, respectively)	8,770		9,169
Prepaid expenses	1,946		396
Other assets	786		800
Total assets	$	1,129,461	1,079,512

(Continued)

See accompanying notes to consolidated financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Financial Position (In thousands, except share amounts)



	June 30, 2012			December 31, 2011
Liabilities and Stockholders' Equity	(Unaudited)			(As adjusted)
Liabilities:
Policy liabilities:
Future policy benefit reserves:
Life insurance	$	727,436		697,502
Annuities	49,369			47,060
Accident and health	5,521			5,612
Dividend accumulations	11,377			10,601
Premiums paid in advance	27,042			25,291
Policy claims payable	9,169			10,020
Other policyholders' funds	9,009			8,760
Total policy liabilities	838,923			804,846
Commissions payable	2,493			2,851
Deferred federal income tax	15,220			13,940
Payable for securities in process of settlement	8,701			—
Warrants outstanding	378			451
Other liabilities	8,323			9,382
Total liabilities	874,038			831,470
Commitments and contingencies (Note 7)
Stockholders' equity:
Class A, no par value, 100,000,000 shares authorized, 52,098,676 shares issued in 2012 and 52,089,189 shares issued in 2011, including shares in treasury of 3,135,738 in 2012 and 2011	258,616			258,548
Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2012 and 2011	3,184			3,184
Accumulated deficit	(19,936		)	(21,851	)
Accumulated other comprehensive income:
Unrealized gains on securities, net of tax	24,570			19,172
Treasury stock, at cost	(11,011		)	(11,011	)
Total stockholders' equity	255,423			248,042
Total liabilities and stockholders' equity	$	1,129,461		1,079,512

See accompanying notes to consolidated financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Comprehensive Income Three Months Ended June 30, (In thousands, except share amounts) (Unaudited)

	2012					2011
Revenues:						(As adjusted)
Premiums:
Life insurance			$	39,945			38,231
Accident and health insurance			417				396
Property insurance			1,234				1,259
Net investment income			7,612				7,503
Realized investment gains (losses), net			246				(13	)
Decrease in fair value of warrants			37				816
Other income			111				104
Total revenues			49,602				48,296
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders			16,109				14,905
Increase in future policy benefit reserves			16,751				13,000
Policyholders' dividends			2,281				1,920
Total insurance benefits paid or provided			35,141				29,825
Commissions			9,731				9,930
Other general expenses			6,342				6,698
Capitalization of deferred policy acquisition costs			(7,044		)		(7,364	)
Amortization of deferred policy acquisition costs			4,433				4,071
Amortization of cost of customer relationships acquired			660				758
Total benefits and expenses			49,263				43,918
Income before federal income tax			339				4,378
Federal income tax expense (benefit)			(64		)		1,369
Net income			403				3,009
Per Share Amounts:
Basic earnings per share of Class A common stock	$	0.01				0.06
Basic earnings per share of Class B common stock	—					0.03
Diluted earnings per share of Class A common stock	0.01					0.04
Diluted earnings per share of Class B common stock	—					0.03
Other comprehensive income:
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during period			6,003				10,495
Reclassification adjustment for (gains) losses included in net income			(121		)		13
Unrealized gains on available-for-sale securities, net			5,882				10,508
Income tax expense on unrealized gains on available-for-sale securities			2,063				3,678
Other comprehensive income			3,819				6,830
Comprehensive income			$	4,222			9,839

See accompanying notes to consolidated financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Comprehensive Income Six Months Ended June 30, (In thousands, except share amounts) (Unaudited)

	2012					2011
Revenues:						(As adjusted)
Premiums:
Life insurance			$	77,351			73,842
Accident and health insurance			830				768
Property insurance			2,511				2,504
Net investment income			15,189				14,803
Realized investment gains, net			344				6
Decrease in fair value of warrants			73				1,215
Other income			209				227
Total revenues			96,507				93,365
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders			30,863				29,784
Increase in future policy benefit reserves			30,892				25,318
Policyholders' dividends			4,155				3,582
Total insurance benefits paid or provided			65,910				58,684
Commissions			18,395				19,002
Other general expenses			12,958				13,101
Capitalization of deferred policy acquisition costs			(12,983		)		(14,005	)
Amortization of deferred policy acquisition costs			8,559				8,309
Amortization of cost of customer relationships acquired			1,236				1,405
Total benefits and expenses			94,075				86,496
Income before federal income tax			2,432				6,869
Federal income tax expense			517				2,238
Net income			1,915				4,631
Per Share Amounts:
Basic earnings per share of Class A common stock	$	0.04				0.09
Basic earnings per share of Class B common stock	0.02					0.05
Diluted earnings per share of Class A common stock	0.04					0.07
Diluted earnings per share of Class B common stock	0.02					0.04
Other comprehensive income:
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during period			8,564				12,121
Reclassification adjustment for gains included in net income			(207		)		(6	)
Unrealized gains on available-for-sale securities, net			8,357				12,115
Income tax expense on unrealized gains on available-for-sale securities			2,959				4,240
Other comprehensive income			5,398				7,875
Comprehensive income			$	7,313			12,506

See accompanying notes to consolidated financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows Six Months Ended June 30, (In thousands) (Unaudited)


	2012			2011
Cash flows from operating activities:				(As adjusted)
Net income	$	1,915		4,631
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Realized gains on sale of investments and other assets	(344		)	(6	)
Net deferred policy acquisition costs	(4,424		)	(5,696	)
Amortization of cost of customer relationships acquired	1,236			1,405
Decrease in fair value of warrants	(73		)	(1,215	)
Depreciation	607			451
Amortization of premiums and discounts on fixed maturities and short-term investments	2,438			2,243
Deferred federal income tax benefit	(1,679		)	(167	)
Change in:
Accrued investment income	(899		)	(1,182	)
Reinsurance recoverable	476			289
Due premiums	399			548
Future policy benefit reserves	30,685			24,942
Other policyholders' liabilities	1,925			1,050
Federal income tax receivable	820			1,067
Commissions payable and other liabilities	(1,417		)	786
Other, net	(1,515		)	(1,101	)
Net cash provided by operating activities	30,150			28,045
Cash flows from investing activities:
Sale of fixed maturities, available-for-sale	503			—
Maturities and calls of fixed maturities, available-for-sale	105,077			61,186
Maturities and calls of fixed maturities, held-to-maturity	115,630			27,000
Purchase of fixed maturities, available-for-sale	(118,558		)	(51,507	)
Purchase of fixed maturities, held-to-maturity	(94,276		)	(54,174	)
Calls of equity securities, available-for-sale	420			432
Purchase of equity securities, available-for-sale	—			(1,000	)
Principal payments on mortgage loans	22			23
Increase in policy loans, net	(2,024		)	(1,334	)
Sale of other long-term investments	4			3
Purchase of other long-term investments	(94		)	(17	)
Purchase of property and equipment	(350		)	(1,342	)
Purchase of short-term investments	(2,378		)	—
Net cash provided by (used in) investing activities	3,976			(20,730	)

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows, Continued Six Months Ended June 30, (In thousands) (Unaudited)


	2012			2011
				(As adjusted)
Cash flows from financing activities:
Warrants exercised	$	68		17
Annuity deposits	3,425			3,162
Annuity withdrawals	(1,958		)	(1,841	)
Net cash provided by financing activities	1,535			1,338
Net increase in cash and cash equivalents	35,661			8,653
Cash and cash equivalents at beginning of year	33,255			49,723
Cash and cash equivalents at end of period	$	68,916		58,376
Supplemental disclosures of operating activities:
Cash paid during the period for income taxes, net	$	1,377		1,338

Supplemental Disclosures of Non-Cash Investing Activities:

None.

See accompanying notes to consolidated financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2012

(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"), Security Plan Life Insurance Company ("SPLIC"), Security Plan Fire Insurance Company ("SPFIC"), Citizens National Life Insurance Company ("CNLIC"), Computing Technology, Inc. ("CTI") and Insurance Investors, Inc. ("III"). Citizens and its wholly-owned subsidiaries are collectively referred to as "the Company," "we," "us" or "our."

The consolidated statements of financial position for June 30, 2012, the consolidated statements of comprehensive income for the three and six-month periods ended June 30, 2012 and 2011, and the consolidated statements of cash flows for the six-month period 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 June 30, 2012 and for comparative periods have been made. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended December 31, 2011. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

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, credit life and disability, 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.

Deferred Policy Acquisition Costs ("DAC")

The Company has recognized adjustments in the three and six month periods ending June 30, 2012 that relate to prior reporting periods in the amount of $0.4 million and $0.5 million, respectively, net of tax, reducing DAC and increasing DAC amortization. These adjustments relate to actuarial modifications for a plan set up issue in the Life segment that was discovered during a routine process review and an adjustment related to ungrouping certain prior issue year reserve models in the Home Service segment as experience showed differing characteristics.

Benefit Reserves

The Company recorded adjustments to decrease reserves in the amount of $0.2 million and $0.3 million, net of tax, for the three and six months in 2012 that related to prior periods. These adjustments resulted from the ungrouping of certain prior issue year reserve models as noted above in the DAC discussion of adjustments as well as adjustments identified by operational controls that resulted in corrections to Life segment policy values.

Although the DAC and Benefit Reserves adjustments are material to the three and six months periods ending June 30. 2012, they are not expected to be material to the year ended December 31, 2012, nor are they material to any year preceding December 31, 2012.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Financial Statements, Continued

June 30, 2012

(Unaudited)

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 assets and 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.

Reclassification

Reclassifications have been made in the current year related to certain prior year reported amounts to provide consistent presentation.

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements included in our 2011 Form 10-K Annual Report, which should be read in conjunction with these accompanying Consolidated Financial Statements.

(2) Accounting Pronouncements

Accounting Standards Recently Adopted

Effective January 1, 2012, the Company retrospectively adopted the Financial Accounting Standards Board’s ("FASB") 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 specified 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. The retrospective effect of the change in our deferred acquisition costs decreased the December 31, 2011 the DAC asset by $11.8 million, deferred taxes by $4.1 million and stockholders’ equity balance by $7.6 million.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Financial Statements, Continued

June 30, 2012

(Unaudited)

The following table provides the balance sheet and income statement accounts that were impacted by the change in accounting principle.



	As Previously Reported			Impact of Change in Accounting Principle		As Adjusted
	(In thousands, except per share data)
Balance Sheet Accounts:
As of December 31, 2011:
Deferred acquisition costs	$	136,300		(11,758	)	124,542
Deferred federal income taxes	18,055			(4,115	)	13,940
Accumulated deficit	(14,208		)	(7,643	)	(21,851	)
Statement of Operations:
Three months ended June 30, 2011:
Capitalization of deferred policy acquisition costs	$	(7,884	)	520		(7,364	)
Amortization of deferred policy acquisition costs	4,229			(158	)	4,071
Federal income tax expense	1,497			(128	)	1,369
Net income	3,243			(234	)	3,009
Per share of Class A common stock:
Basic earnings per share	0.07			(0.01	)	0.06
Diluted earnings per share	0.07			(0.03	)	0.04
Six months ended June 30, 2011:
Capitalization of deferred policy acquisition costs	$	(15,049	)	1,044		(14,005	)
Amortization of deferred policy acquisition costs	8,749			(440	)	8,309
Federal income tax expense	2,450			(212	)	2,238
Net income	5,023			(392	)	4,631
Per share of Class A common stock:
Basic earnings per share	0.10			(0.01	)	0.09
Diluted earnings per share	0.08			(0.01	)	0.07

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 did not have any 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 (“IFRS”). 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 did not have any impact on the Company’s financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Financial Statements, Continued

June 30, 2012

(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
	June 30, 2012
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises		Consolidated
	(In thousands)
Revenues:
Premiums	$	30,601		10,995		—		41,596
Net investment income	4,253			3,075		284		7,612
Realized investment gains, net	187			40		19		246
Decrease in fair value of warrants	—			—		37		37
Other income	75			6		30		111
Total revenue	35,116			14,116		370		49,602
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	10,772			5,337		—		16,109
Increase in future policy benefit reserves	16,201			550		—		16,751
Policyholders' dividends	2,268			13		—		2,281
Total insurance benefits paid or provided	29,241			5,900		—		35,141
Commissions	5,990			3,741		—		9,731
Other general expenses	2,411			3,006		925		6,342
Capitalization of deferred policy acquisition costs	(5,507		)	(1,537	)	—		(7,044	)
Amortization of deferred policy acquisition costs	3,749			684		—		4,433
Amortization of cost of customer relationships acquired	184			476		—		660
Total benefits and expenses	36,068			12,270		925		49,263
Income (loss) before income tax expense	$	(952	)	1,846		(555	)	339

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Financial Statements, Continued

June 30, 2012

(Unaudited)



	Six Months Ended
	June 30, 2012
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises		Consolidated
	(In thousands)
Revenues:
Premiums	$	58,770		21,922		—		80,692
Net investment income	8,411			6,230		548		15,189
Realized investment gains, net	189			127		28		344
Decrease in fair value of warrants	—			—		73		73
Other income	132			12		65		209
Total revenue	67,502			28,291		714		96,507
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	20,699			10,164		—		30,863
Increase in future policy benefit reserves	29,419			1,473		—		30,892
Policyholders' dividends	4,130			25		—		4,155
Total insurance benefits paid or provided	54,248			11,662		—		65,910
Commissions	11,012			7,383		—		18,395
Other general expenses	5,331			5,970		1,657		12,958
Capitalization of deferred policy acquisition costs	(10,019		)	(2,964	)	—		(12,983	)
Amortization of deferred policy acquisition costs	7,400			1,159		—		8,559
Amortization of cost of customer relationships acquired	393			843		—		1,236
Total benefits and expenses	68,365			24,053		1,657		94,075
Income (loss) before income tax expense	$	(863	)	4,238		(943	)	2,432

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Financial Statements, Continued

June 30, 2012

(Unaudited)



	Three Months Ended
	June 30, 2011
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises	Consolidated
	(In thousands)
Revenues:
Premiums	$	29,016		10,870		—	39,886
Net investment income	4,058			3,275		170	7,503
Realized investment gains (losses), net	4			(17	)	—	(13	)
Decrease in fair value of warrants	—			—		816	816
Other income	77			6		21	104
Total revenue	33,155			14,134		1,007	48,296
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	10,456			4,449		—	14,905
Increase in future policy benefit reserves	12,015			985		—	13,000
Policyholders' dividends	1,901			19		—	1,920
Total insurance benefits paid or provided	24,372			5,453		—	29,825
Commissions	6,058			3,872		—	9,930
Other general expenses	2,885			3,066		747	6,698
Capitalization of deferred policy acquisition costs	(5,672		)	(1,692	)	—	(7,364	)
Amortization of deferred policy acquisition costs	3,660			411		—	4,071
Amortization of cost of customer relationships acquired	283			475		—	758
Total benefits and expenses	31,586			11,585		747	43,918
Income before income tax expense	$	1,569		2,549		260	4,378

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Financial Statements, Continued

June 30, 2012

(Unaudited)



	Six Months Ended
	June 30, 2011
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises	Consolidated
	(In thousands)
Revenues:
Premiums	$	55,536		21,578		—	77,114
Net investment income	7,925			6,512		366	14,803
Realized investment gains, net	4			2		—	6
Decrease in fair value of warrants	—			—		1,215	1,215
Other income	164			14		49	227
Total revenue	63,629			28,106		1,630	93,365
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	19,857			9,927		—	29,784
Increase in future policy benefit reserves	23,824			1,494		—	25,318
Policyholders' dividends	3,544			38		—	3,582
Total insurance benefits paid or provided	47,225			11,459		—	58,684
Commissions	11,400			7,602		—	19,002
Other general expenses	5,739			6,041		1,321	13,101
Capitalization of deferred policy acquisition costs	(10,737		)	(3,268	)	—	(14,005	)
Amortization of deferred policy acquisition costs	7,312			997		—	8,309
Amortization of cost of customer relationships acquired	499			906		—	1,405
Total benefits and expenses	61,438			23,737		1,321	86,496
Income before income tax expense	$	2,191		4,369		309	6,869

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Financial Statements, Continued

June 30, 2012

(Unaudited)

(4) Earnings Per Share

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



	Three Months Ended
	June 30, 2012		June 30, 2011
	(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net income	$	403	3,009
Net income allocated to Class A common stock	$	399	2,978
Net income allocated to Class B common stock	4		31
Net income	$	403	3,009
Denominator:
Weighted average shares of Class A outstanding - basic	48,963		48,689
Weighted average shares of Class A outstanding - diluted	48,989		48,690
Weighted average shares of Class B outstanding - basic and diluted	1,002		1,002
Basic earnings per share of Class A common stock	$	0.01	0.06
Basic earnings per share of Class B common stock	—		0.03
Diluted earnings per share of Class A common stock	0.01		0.04
Diluted earnings per share of Class B common stock	—		0.03



	Six Months Ended
	June 30, 2012		June 30, 2011
	(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net income	$	1,915	4,631
Net income allocated to Class A common stock	$	1,895	4,584
Net income allocated to Class B common stock	20		47
Net income	$	1,915	4,631
Denominator:
Weighted average shares of Class A outstanding - basic	48,961		48,688
Weighted average shares of Class A outstanding - diluted	48,997		48,704
Weighted average shares of Class B outstanding - basic and diluted	1,002		1,002
Basic earnings per share of Class A common stock	$	0.04	0.09
Basic earnings per share of Class B common stock	0.02		0.05
Diluted earnings per share of Class A common stock	0.04		0.07
Diluted earnings per share of Class B common stock	0.02		0.04

The diluted earnings per share calculation has assumptions regarding the exercise of warrants issued to certain investors as discussed below in Note 8 - Convertible Preferred Stock: Warrants. Dilution was immaterial for the three and six months ended June 30, 2012.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Financial Statements, Continued

June 30, 2012

(Unaudited)

(5) Investments

The Company invests primarily in fixed maturity securities, which totaled 81.2% of total investments and cash and cash equivalents at June 30, 2012.



	June 30, 2012				December 31, 2011
	Carrying Value		% of Total Carrying Value		Carrying Value		% of Total Carrying Value
	(In thousands)				(In thousands)
Fixed maturity securities	$	740,897	81.2	%	$	741,753	85.0	%
Equity securities	46,409		5.1	%	46,137		5.3	%
Mortgage loans	1,535		0.2	%	1,557		0.2	%
Policy loans	41,114		4.5	%	39,090		4.5	%
Real estate and other long-term investments	8,659		0.9	%	8,644		1.0	%
Short-term investments	4,385		0.5	%	2,048		0.2	%
Cash and cash equivalents	68,916		7.6	%	33,255		3.8	%
Total cash, cash equivalents and investments	$	911,915	100.0	%	$	872,484	100.0	%

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



	June 30, 2012
	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	$	10,198	3,949	—	14,147
U.S. Government-sponsored enterprises	91,422		3,600	16	95,006
States and political subdivisions	192,446		14,558	937	206,067
Foreign governments	105		38	—	143
Corporate	212,140		17,206	1,438	227,908
Commercial mortgage-backed	610		22	1	631
Residential mortgage-backed	6,664		517	7	7,174
Total available-for-sale securities	513,585		39,890	2,399	551,076
Held-to-maturity securities:
U.S. Government-sponsored enterprises	79,401		622	24	79,999
States and political subdivisions	77,373		3,964	111	81,226
Corporate	33,047		404	81	33,370
Total held-to-maturity securities	189,821		4,990	216	194,595
Total fixed maturities	$	703,406	44,880	2,615	745,671
Equity securities:
Stock mutual funds	$	12,686	624	284	13,026
Bond mutual funds	31,504		256	49	31,711
Common stock	17		—	—	17
Preferred stock	1,117		538	—	1,655
Total equity securities	$	45,324	1,418	333	46,409

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Financial Statements, Continued

June 30, 2012

(Unaudited)



	December 31, 2011
	Cost or Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
	(In thousands)
Fixed maturities:
Available-for-sale securities:
U.S. Treasury securities	$	10,228	3,730	—	13,958
U.S. Government-sponsored enterprises	143,684		3,198	65	146,817
States and political subdivisions	151,058		10,275	1,391	159,942
Foreign governments	105		37	—	142
Corporate	171,462		14,576	1,493	184,545
Commercial mortgage-backed	736		23	—	759
Residential mortgage-backed	7,536		562	8	8,090
Total available-for-sale securities	484,809		32,401	2,957	514,253
Held-to-maturity securities:
U.S. Government-sponsored enterprises	160,411		742	12	161,141
States and political subdivisions	56,260		1,941	84	58,117
Corporate	10,829		49	43	10,835
Total held-to-maturity securities	227,500		2,732	139	230,093
Total fixed maturity securities	$	712,309	35,133	3,096	744,346
Equity securities:
Stock mutual funds	$	12,686	415	376	12,725
Bond mutual funds	31,504		27	117	31,414
Common stock	17		7	—	24
Preferred stock	1,392		582	—	1,974
Total equity securities	$	45,599	1,031	493	46,137

At June 30, 2012, the Company had $7.3 million of mortgage-backed security holdings based on amortized cost, of which $6.7 million, or 91.8%, 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

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Financial Statements, Continued

June 30, 2012

(Unaudited)

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.

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 length of time 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 six months ended June 30, 2012 and 2011.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Financial Statements, Continued

June 30, 2012

(Unaudited)

The following tables 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.



	June 30, 2012
	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	$	19,217	16	11	—	—	—	19,217	16	11
States and political subdivisions	36,039		328	40	6,510	609	3	42,549	937	43
Corporate	46,647		620	33	6,445	818	5	53,092	1,438	38
Commercial mortgage-backed	189		1	1	—	—	—	189	1	1
Residential mortgage-backed	493		4	1	62	3	2	555	7	3
Total available-for-sale securities	102,585		969	86	13,017	1,430	10	115,602	2,399	96
Held-to-maturity securities:
U.S. Government-sponsored enterprises	12,281		19	8	1,110	5	1	13,391	24	9
States and political subdivisions	15,045		111	14	—	—	—	15,045	111	14
Corporate	15,087		81	11	—	—	—	15,087	81	11
Total held-to-maturity securities	42,413		211	33	1,110	5	1	43,523	216	34
Total fixed maturities	$	144,998	1,180	119	14,127	1,435	11	159,125	2,615	130
Equity securities:
Stock mutual funds	$	7,250	284	2	—	—	—	7,250	284	2
Bond mutual funds	6,375		49	3	—	—	—	6,375	49	3
Total equities	$	13,625	333	5	—	—	—	13,625	333	5

As of June 30, 2012, the Company had 10 available-for-sale securities and 1 held-to-maturity security that were in an unrealized loss position for greater than 12 months. These securities consisted of U.S. Government-sponsored enterprises, municipals, corporate and mortgage-backed securities.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Financial Statements, Continued

June 30, 2012

(Unaudited)

December 31, 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

—