Edgar Filing: CITIZENS INC

CIA-2012.9.30-10Q

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 September 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 November 5, 2012, the Registrant had 49,080,114 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, September 30, 2012 (Unaudited) and December 31, 2011	2

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

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

		Consolidated Statements of Cash Flows, Nine Months Ended September 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	30

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	51

	Item 4.	Controls and Procedures	52

Part II.	Other Information

	Item 1.	Legal Proceedings	53

	Item 1A.	Risk Factors	54

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54

	Item 3.	Defaults Upon Senior Securities	54

	Item 4.	Mine Safety Disclosures	54

	Item 5.	Other Information	54

	Item 6.	Exhibits	55

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

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



	September 30, 2012		December 31, 2011
Assets	(Unaudited)		(As adjusted)
Investments:
Fixed maturities available-for-sale, at fair value (cost: $549,205 and $484,809 in 2012 and 2011, respectively)	$	594,620	514,253
Fixed maturities held-to-maturity, at amortized cost (fair value: $209,580 and $230,093 in 2012 and 2011, respectively)	203,237		227,500
Equity securities available-for-sale, at fair value (cost: $42,812 and $45,599 in 2012 and 2011, respectively)	44,091		46,137
Mortgage loans on real estate	1,521		1,557
Policy loans	42,784		39,090
Real estate held for investment (less $1,252 and $1,149 accumulated depreciation in 2012 and 2011, respectively)	8,530		8,539
Other long-term investments	178		105
Short-term investments	2,356		2,048
Total investments	897,317		839,229
Cash and cash equivalents	39,830		33,255
Accrued investment income	10,178		7,787
Reinsurance recoverable	9,228		9,562
Deferred policy acquisition costs	132,206		124,542
Cost of customer relationships acquired	25,764		27,945
Goodwill	17,160		17,160
Other intangible assets	886		906
Federal income tax receivable	—		901
Property and equipment, net	7,450		7,860
Due premiums, net (less $1,275 and $1,698 allowance for doubtful accounts in 2012 and 2011, respectively)	9,693		9,169
Prepaid expenses	1,175		396
Other assets	832		800
Total assets	$	1,151,719	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)



	September 30, 2012			December 31, 2011
Liabilities and Stockholders' Equity	(Unaudited)			(As adjusted)
Liabilities:
Policy liabilities:
Future policy benefit reserves:
Life insurance	$	743,845		697,502
Annuities	50,125			47,060
Accident and health	5,496			5,612
Dividend accumulations	11,717			10,601
Premiums paid in advance	27,003			25,291
Policy claims payable	9,514			10,020
Other policyholders' funds	9,463			8,760
Total policy liabilities	857,163			804,846
Commissions payable	1,920			2,851
Federal income tax payable	1,188			—
Deferred federal income tax	17,545			13,940
Payable for securities in process of settlement	1,231			—
Warrants outstanding	137			451
Other liabilities	8,490			9,382
Total liabilities	887,674			831,470
Commitments and contingencies (Note 7)
Stockholders' equity:
Class A, no par value, 100,000,000 shares authorized, 52,203,365 shares issued in 2012 and 52,089,189 shares issued in 2011, including shares in treasury of 3,135,738 in 2012 and 2011	259,371			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	(17,025		)	(21,851	)
Accumulated other comprehensive income:
Unrealized gains on securities, net of tax	29,526			19,172
Treasury stock, at cost	(11,011		)	(11,011	)
Total stockholders' equity	264,045			248,042
Total liabilities and stockholders' equity	$	1,151,719		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 September 30, (In thousands, except per share amounts) (Unaudited)

	2012					2011
Revenues:						(As adjusted)
Premiums:
Life insurance			$	41,257			38,639
Accident and health insurance			414				383
Property insurance			1,281				1,277
Net investment income			8,114				7,478
Realized investment gains, net			763				35
Decrease in fair value of warrants			241				239
Other income			112				282
Total revenues			52,182				48,333
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders			15,627				14,803
Increase in future policy benefit reserves			16,901				14,365
Policyholders' dividends			2,600				2,169
Total insurance benefits paid or provided			35,128				31,337
Commissions			9,769				9,224
Other general expenses			6,055				6,642
Capitalization of deferred policy acquisition costs			(7,547		)		(6,531	)
Amortization of deferred policy acquisition costs			4,134				4,171
Amortization of cost of customer relationships acquired			598				708
Total benefits and expenses			48,137				45,551
Income before federal income tax			4,045				2,782
Federal income tax expense			1,134				729
Net income			2,911				2,053
Per Share Amounts:
Basic earnings per share of Class A common stock	$	0.06				0.04
Basic earnings per share of Class B common stock	0.03					0.02
Diluted earnings per share of Class A common stock	0.06					0.04
Diluted earnings per share of Class B common stock	0.03					0.02
Other comprehensive income:
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during period			8,542				15,431
Reclassification adjustment for gains included in net income			(708		)		—
Unrealized gains on available-for-sale securities, net			7,834				15,431
Income tax expense on unrealized gains on available-for-sale securities			2,878				5,460
Other comprehensive income			4,956				9,971
Comprehensive income			$	7,867			12,024

See accompanying notes to consolidated financial statements.

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

	2012					2011
Revenues:						(As adjusted)
Premiums:
Life insurance			$	118,608			112,481
Accident and health insurance			1,244				1,151
Property insurance			3,792				3,781
Net investment income			23,303				22,281
Realized investment gains, net			1,107				41
Decrease in fair value of warrants			314				1,454
Other income			321				509
Total revenues			148,689				141,698
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders			46,490				44,587
Increase in future policy benefit reserves			47,793				39,683
Policyholders' dividends			6,755				5,751
Total insurance benefits paid or provided			101,038				90,021
Commissions			28,164				28,226
Other general expenses			19,013				19,743
Capitalization of deferred policy acquisition costs			(20,530		)		(20,536	)
Amortization of deferred policy acquisition costs			12,693				12,480
Amortization of cost of customer relationships acquired			1,834				2,113
Total benefits and expenses			142,212				132,047
Income before federal income tax			6,477				9,651
Federal income tax expense			1,651				2,967
Net income			4,826				6,684
Per Share Amounts:
Basic earnings per share of Class A common stock	$	0.10				0.13
Basic earnings per share of Class B common stock	0.05					0.07
Diluted earnings per share of Class A common stock	0.10					0.13
Diluted earnings per share of Class B common stock	0.05					0.07
Other comprehensive income:
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during period			17,106				27,546
Reclassification adjustment for gains included in net income			(915		)		—
Unrealized gains on available-for-sale securities, net			16,191				27,546
Income tax expense on unrealized gains on available-for-sale securities			5,837				9,700
Other comprehensive income			10,354				17,846
Comprehensive income			$	15,180			24,530

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)


	2012			2011
Cash flows from operating activities:				(As adjusted)
Net income	$	4,826		6,684
Adjustments to reconcile net income to net cash provided by operating activities:
Realized gains on sale of investments and other assets	(1,107		)	(41	)
Net deferred policy acquisition costs	(7,837		)	(8,056	)
Amortization of cost of customer relationships acquired	1,834			2,113
Decrease in fair value of warrants	(314		)	(1,454	)
Depreciation	915			753
Amortization of premiums and discounts on investments	4,115			3,208
Deferred federal income tax benefit	(2,232		)	(870	)
Change in:
Accrued investment income	(2,391		)	(1,032	)
Reinsurance recoverable	334			(161	)
Due premiums	(524		)	730
Future policy benefit reserves	47,530			39,308
Other policyholders' liabilities	3,025			1,747
Federal income tax receivable	2,089			1,570
Commissions payable and other liabilities	(1,823		)	(269	)
Other, net	(846		)	(668	)
Net cash provided by operating activities	47,594			43,562
Cash flows from investing activities:
Sale of fixed maturities, available-for-sale	503			—
Maturities and calls of fixed maturities, available-for-sale	125,622			127,342
Maturities and calls of fixed maturities, held-to-maturity	154,630			52,900
Purchase of fixed maturities, available-for-sale	(184,728		)	(82,184	)
Purchase of fixed maturities, held-to-maturity	(138,756		)	(104,466	)
Sales of equity securities, available-for-sale	2,856			—
Calls of equity securities, available-for-sale	820			682
Purchase of equity securities, available-for-sale	—			(25,000	)
Principal payments on mortgage loans	36			36
Increase in policy loans, net	(3,694		)	(2,464	)
Sale of other long-term investments	4			5
Purchase of other long-term investments	(116		)	(25	)
Sale of property and equipment	—			2
Purchase of property and equipment	(402		)	(1,662	)
Maturity of short-term investments	2,000			—
Purchase of short-term investments	(2,378		)	(2,066	)
Proceeds from assumption reinsurance agreement	—			4,550
Net cash used in investing activities	(43,603		)	(32,350	)

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


	2012			2011
				(As adjusted)
Cash flows from financing activities:
Warrants exercised	$	822		1,791
Annuity deposits	4,769			4,818
Annuity withdrawals	(3,007		)	(3,119	)
Net cash provided by financing activities	2,584			3,490
Net increase in cash and cash equivalents	6,575			14,702
Cash and cash equivalents at beginning of year	33,255			49,723
Cash and cash equivalents at end of period	$	39,830		64,425
Supplemental disclosures of operating activities:
Cash paid during the period for income taxes, net	$	1,794		2,267

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

September 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 September 30, 2012, the consolidated statements of comprehensive income for the three and nine-month periods ended September 30, 2012 and 2011, and the consolidated statements of cash flows for the nine-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 September 30, 2012 and for comparative periods have been made. The consolidated financial statements have been prepared in accordance with U.S. GAAP accounting principles 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 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 nine month period ending September 30, 2012 that relate to prior reporting periods in the amount of $0.5 million, 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 $0.3 million, net of tax, for the nine 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.

Commissions Payable

The current period includes a reduction of approximately $0.4 million in commission expense for the three and nine months ended September 30, 2012 due to balances that were held pending validation that are no longer considered payable.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 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 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 Consolidated Financial Statements, Continued

September 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 September 30, 2011:
Capitalization of deferred policy acquisition costs	$	(7,121	)	590		(6,531	)
Amortization of deferred policy acquisition costs	4,500			(329	)	4,171
Federal income tax expense	820			(91	)	729
Net income	2,223			(170	)	2,053
Per share of Class A common stock:
Basic earnings per share	0.05			(0.01	)	0.04
Diluted earnings per share	0.05			(0.01	)	0.04
Nine months ended September 30, 2011:
Capitalization of deferred policy acquisition costs	$	(22,170	)	1,634		(20,536	)
Amortization of deferred policy acquisition costs	13,249			(769	)	12,480
Federal income tax expense	3,270			(303	)	2,967
Net income	7,246			(562	)	6,684
Per share of Class A common stock:
Basic earnings per share	0.15			(0.02	)	0.13
Diluted earnings per share	0.15			(0.02	)	0.13

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 other than providing a continuous statement of comprehensive income.

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 Consolidated Financial Statements, Continued

September 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
	September 30, 2012
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises	Consolidated
	(In thousands)
Revenues:
Premiums	$	31,876		11,076		—	42,952
Net investment income	4,538			3,273		303	8,114
Realized investment gains, net	720			43		—	763
Decrease in fair value of warrants	—			—		241	241
Other income	56			5		51	112
Total revenue	37,190			14,397		595	52,182
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	10,213			5,414		—	15,627
Increase in future policy benefit reserves	16,058			843		—	16,901
Policyholders' dividends	2,395			205		—	2,600
Total insurance benefits paid or provided	28,666			6,462		—	35,128
Commissions	6,115			3,654		—	9,769
Other general expenses	2,622			2,962		471	6,055
Capitalization of deferred policy acquisition costs	(6,090		)	(1,457	)	—	(7,547	)
Amortization of deferred policy acquisition costs	3,358			776		—	4,134
Amortization of cost of customer relationships acquired	164			434		—	598
Total benefits and expenses	34,835			12,831		471	48,137
Income before income tax expense	$	2,355		1,566		124	4,045

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2012

(Unaudited)



	Nine Months Ended
	September 30, 2012
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises		Consolidated
	(In thousands)
Revenues:
Premiums	$	90,646		32,998		—		123,644
Net investment income	12,949			9,503		851		23,303
Realized investment gains, net	909			170		28		1,107
Decrease in fair value of warrants	—			—		314		314
Other income	188			17		116		321
Total revenue	104,692			42,688		1,309		148,689
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	30,912			15,578		—		46,490
Increase in future policy benefit reserves	45,477			2,316		—		47,793
Policyholders' dividends	6,525			230		—		6,755
Total insurance benefits paid or provided	82,914			18,124		—		101,038
Commissions	17,127			11,037		—		28,164
Other general expenses	7,953			8,932		2,128		19,013
Capitalization of deferred policy acquisition costs	(16,109		)	(4,421	)	—		(20,530	)
Amortization of deferred policy acquisition costs	10,758			1,935		—		12,693
Amortization of cost of customer relationships acquired	557			1,277		—		1,834
Total benefits and expenses	103,200			36,884		2,128		142,212
Income (loss) before income tax expense	$	1,492		5,804		(819	)	6,477

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2012

(Unaudited)



	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	4,094			3,178		206		7,478
Realized investment gains, net	25			4		6		35
Decrease in fair value of warrants	—			—		239		239
Other income	240			6		36		282
Total revenue	33,850			13,996		487		48,333
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	2,875			3,126		641		6,642
Capitalization of deferred policy acquisition costs	(5,026		)	(1,505	)	—		(6,531	)
Amortization of deferred policy acquisition costs	3,431			740		—		4,171
Amortization of cost of customer relationships acquired	206			502		—		708
Total benefits and expenses	32,121			12,789		641		45,551
Income (loss) before income tax expense	$	1,729		1,207		(154	)	2,782

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2012

(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	12,019			9,690		572	22,281
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	97,479			42,102		2,117	141,698
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	8,614			9,167		1,962	19,743
Capitalization of deferred policy acquisition costs	(15,763		)	(4,773	)	—	(20,536	)
Amortization of deferred policy acquisition costs	10,743			1,737		—	12,480
Amortization of cost of customer relationships acquired	705			1,408		—	2,113
Total benefits and expenses	93,559			36,526		1,962	132,047
Income before income tax expense	$	3,920		5,576		155	9,651

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Notes to Consolidated Financial Statements, Continued

September 30, 2012

(Unaudited)

(4) Earnings Per Share

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



	Three Months Ended
	September 30, 2012		September 30, 2011
	(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net income	$	2,911	2,053
Net income allocated to Class A common stock	$	2,881	2,032
Net income allocated to Class B common stock	30		21
Net income	$	2,911	2,053
Denominator:
Weighted average shares of Class A outstanding - basic	49,019		48,912
Weighted average shares of Class A outstanding - diluted	49,030		48,912
Weighted average shares of Class B outstanding - basic and diluted	1,002		1,002
Basic earnings per share of Class A common stock	$	0.06	0.04
Basic earnings per share of Class B common stock	0.03		0.02
Diluted earnings per share of Class A common stock	0.06		0.04
Diluted earnings per share of Class B common stock	0.03		0.02



	Nine Months Ended
	September 30, 2012		September 30, 2011
	(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net income	$	4,826	6,684
Net income allocated to Class A common stock	$	4,777	6,616
Net income allocated to Class B common stock	49		68
Net income	$	4,826	6,684
Denominator:
Weighted average shares of Class A outstanding - basic	48,962		48,762
Weighted average shares of Class A outstanding - diluted	48,972		48,764
Weighted average shares of Class B outstanding - basic and diluted	1,002		1,002
Basic earnings per share of Class A common stock	$	0.10	0.13
Basic earnings per share of Class B common stock	0.05		0.07
Diluted earnings per share of Class A common stock	0.10		0.13
Diluted earnings per share of Class B common stock	0.05		0.07

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 nine months ended September 30, 2012.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2012

(Unaudited)

(5) Investments

The Company invests primarily in fixed maturity securities, which totaled 85.1% of total investments and cash and cash equivalents at September 30, 2012.



	September 30, 2012				December 31, 2011
	Carrying Value		% of Total Carrying Value		Carrying Value		% of Total Carrying Value
	(In thousands)				(In thousands)
Fixed maturity securities	$	797,857	85.1	%	$	741,753	85.0	%
Equity securities	44,091		4.7	%	46,137		5.3	%
Mortgage loans	1,521		0.2	%	1,557		0.2	%
Policy loans	42,784		4.6	%	39,090		4.5	%
Real estate and other long-term investments	8,708		0.9	%	8,644		1.0	%
Short-term investments	2,356		0.3	%	2,048		0.2	%
Cash and cash equivalents	39,830		4.2	%	33,255		3.8	%
Total cash, cash equivalents and investments	$	937,147	100.0	%	$	872,484	100.0	%

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2012

(Unaudited)

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.



	September 30, 2012
	Cost or Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
	(In thousands)
Fixed maturities:
Available-for-sale:
U.S. Treasury securities	$	10,184	3,931	—	14,115
U.S. Government-sponsored enterprises	89,397		4,255	32	93,620
States and political subdivisions	233,712		16,678	748	249,642
Foreign governments	105		38	—	143
Corporate	209,153		21,397	669	229,881
Commercial mortgage-backed	547		19	1	565
Residential mortgage-backed	6,107		549	2	6,654
Total available-for-sale securities	549,205		46,867	1,452	594,620
Held-to-maturity securities:
U.S. Government-sponsored enterprises	51,136		622	4	51,754
States and political subdivisions	119,206		4,975	287	123,894
Corporate	32,895		1,054	17	33,932
Total held-to-maturity securities	203,237		6,651	308	209,580
Total fixed maturities	$	752,442	53,518	1,760	804,200
Equity securities:
Stock mutual funds	$	10,463	263	24	10,702
Bond mutual funds	31,503		649	19	32,133
Common stock	17		—	3	14
Preferred stock	829		413	—	1,242
Total equity securities	$	42,812	1,325	46	44,091

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Notes to Consolidated Financial Statements, Continued

September 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 September 30, 2012, the Company had $6.7 million of mortgage-backed security holdings based on amortized cost, of which $6.1 million, or 91.0%, 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

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2012

(Unaudited)

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 nine months ended September 30, 2012 and 2011.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 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.



	September 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	$	9,993	32	8	—	—	—	9,993	32	8
States and political subdivisions	44,391		408	40	5,095	340	2	49,486	748	42
Corporate	14,820		315	10	4,623	354	4	19,443	669	14
Commercial mortgage-backed	143		1	1	—	—	—	143	1	1
Residential mortgage-backed	—		—	—	55	2	1	55	2	1
Total available-for-sale securities	69,347		756	59	9,773	696	7	79,120	1,452	66
Held-to-maturity securities:
U.S. Government-sponsored enterprises	1,751		2	3	1,105	2	1	2,856	4	4
States and political subdivisions	37,322		287	32	—	—	—	37,322	287	32
Corporate	4,255		17	3	—	—	—	4,255	17	3
Total held-to-maturity securities	43,328		306	38	1,105	2	1	44,433	308	39
Total fixed maturities	$	112,675	1,062	97	10,878	698	8	123,553	1,760	105
Equity securities:
Stock mutual funds	$	—	—	—	976	24	1	976	24	1
Bond mutual funds	—		—	—	2,981	19	2	2,981	19	2
Common stocks	14		3	1	—	—	—	14	3	1
Total equities	$	14	3	1	3,957	43	3	3,971	46	4

As of September 30, 2012, the Company had 7 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 Consolidated Financial Statements, Continued

September 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