Edgar Filing: CITIZENS INC

CIA-2013.6.30-10Q

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, 2013

¨ 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 or 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 2, 2013, 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, June 30, 2013 (Unaudited) and December 31, 2012	2

		Consolidated Statements of Comprehensive Income, Three Months Ended June 30, 2013 and 2012 (Unaudited)	4

		Consolidated Statements of Comprehensive Income, Six Months Ended June 30, 2013 and 2012 (Unaudited)	5

		Consolidated Statements of Cash Flows, Six Months Ended June 30, 2013 and 2012 (Unaudited)	6

		Notes to Consolidated Financial Statements	8

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	48

	Item 4.	Controls and Procedures	49

Part II.	Other Information

	Item 1.	Legal Proceedings	50

	Item 1A.	Risk Factors	50

	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, 2013		December 31, 2012
Assets	(Unaudited)
Investments:
Fixed maturities available-for-sale, at fair value (cost: $630,177 and $559,736 in 2013 and 2012, respectively)	$	649,109	604,520
Fixed maturities held-to-maturity, at amortized cost (fair value: $161,012 and $193,739 in 2013 and 2012, respectively)	159,208		187,008
Equity securities available-for-sale, at fair value (cost: $52,392 and $52,744 in 2013 and 2012, respectively)	52,699		53,741
Mortgage loans on real estate	687		1,509
Policy loans	45,824		42,993
Real estate held for investment (less $1,357 and $1,287 accumulated depreciation in 2013 and 2012, respectively)	8,509		8,496
Other long-term investments	56		57
Short-term investments	—		2,340
Total investments	916,092		900,664
Cash and cash equivalents	41,013		56,299
Accrued investment income	11,378		10,304
Reinsurance recoverable	6,673		9,651
Deferred policy acquisition costs	140,787		135,569
Cost of customer relationships acquired	24,474		25,116
Goodwill	17,160		17,160
Other intangible assets	865		879
Federal income tax receivable	224		270
Property and equipment, net	7,138		7,383
Due premiums, net (less $1,346 and $1,345 allowance for doubtful accounts in 2013 and 2012, respectively)	10,443		10,527
Prepaid expenses	1,335		344
Other assets	962		782
Total assets	$	1,178,544	1,174,948

(Continued)

See accompanying notes to consolidated financial statements.

Table of Contents

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



	June 30, 2013			December 31, 2012
Liabilities and Stockholders' Equity	(Unaudited)
Liabilities:
Policy liabilities:
Future policy benefit reserves:
Life insurance	$	795,886		762,319
Annuities	53,223			51,750
Accident and health	2,712			5,491
Dividend accumulations	12,821			11,962
Premiums paid in advance	29,811			27,455
Policy claims payable	8,809			11,015
Other policyholders' funds	8,010			9,440
Total policy liabilities	911,272			879,432
Commissions payable	2,195			2,606
Deferred federal income tax	6,796			17,301
Payable for securities in process of settlement	179			2,358
Other liabilities	9,457			10,143
Total liabilities	929,899			911,840
Commitments and contingencies (Note 7)
Stockholders' equity:
Class A, no par value, 100,000,000 shares authorized, 52,215,852 shares issued and outstanding in 2013 and 2012, including shares in treasury of 3,135,738 in 2013 and 2012	259,383			259,383
Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2013 and 2012	3,184			3,184
Accumulated deficit	(15,172		)	(17,335	)
Accumulated other comprehensive income:
Unrealized gains on securities, net of tax	12,261			28,887
Treasury stock, at cost	(11,011		)	(11,011	)
Total stockholders' equity	248,645			263,108
Total liabilities and stockholders' equity	$	1,178,544		1,174,948

See accompanying notes to consolidated financial statements.

Table of Contents

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

	2013					2012
Revenues:
Premiums:
Life insurance			$	42,223			39,945
Accident and health insurance			406				417
Property insurance			1,205				1,234
Net investment income			9,265				7,612
Realized investment gains, net			82				246
Decrease in fair value of warrants			—				37
Other income			427				111
Total revenues			53,608				49,602
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders			16,660				16,109
Increase in future policy benefit reserves			17,896				16,751
Policyholders' dividends			2,235				2,281
Total insurance benefits paid or provided			36,791				35,141
Commissions			10,429				9,731
Other general expenses			7,342				6,342
Capitalization of deferred policy acquisition costs			(7,672		)		(7,044	)
Amortization of deferred policy acquisition costs			4,363				4,433
Amortization of cost of customer relationships acquired			560				660
Total benefits and expenses			51,813				49,263
Income before federal income tax			1,795				339
Federal income tax expense (benefit)			488				(64	)
Net income			1,307				403
Per Share Amounts:
Basic earnings per share of Class A common stock	$	0.03				0.01
Basic earnings per share of Class B common stock	0.01					—
Diluted earnings per share of Class A common stock	0.03					0.01
Diluted earnings per share of Class B common stock	0.01					—
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during period			(25,544		)		6,003
Reclassification adjustment for gains included in net income			(73		)		(121	)
Unrealized gains (losses) on available-for-sale securities, net			(25,617		)		5,882
Income tax expense (benefit) on unrealized gains (losses) on available-for-sale securities			(8,953		)		2,063
Other comprehensive income (loss)			(16,664		)		3,819
Comprehensive income (loss)			$	(15,357	)		4,222

See accompanying notes to consolidated financial statements.

Table of Contents

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

	2013					2012
Revenues:
Premiums:
Life insurance			$	81,637			77,351
Accident and health insurance			755				830
Property insurance			2,382				2,511
Net investment income			17,654				15,189
Realized investment gains, net			113				344
Decrease in fair value of warrants			—				73
Other income			613				209
Total revenues			103,154				96,507
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders			31,466				30,863
Increase in future policy benefit reserves			34,855				30,892
Policyholders' dividends			4,309				4,155
Total insurance benefits paid or provided			70,630				65,910
Commissions			19,487				18,395
Other general expenses			14,041				12,958
Capitalization of deferred policy acquisition costs			(14,034		)		(12,983	)
Amortization of deferred policy acquisition costs			8,989				8,559
Amortization of cost of customer relationships acquired			1,138				1,236
Total benefits and expenses			100,251				94,075
Income before federal income tax			2,903				2,432
Federal income tax expense			740				517
Net income			2,163				1,915
Per Share Amounts:
Basic earnings per share of Class A common stock	$	0.05				0.04
Basic earnings per share of Class B common stock	0.02					0.02
Diluted earnings per share of Class A common stock	0.05					0.04
Diluted earnings per share of Class B common stock	0.02					0.02
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during period			(25,448		)		8,564
Reclassification adjustment for gains included in net income			(104		)		(207	)
Unrealized gains (losses) on available-for-sale securities, net			(25,552		)		8,357
Income tax expense (benefit) on unrealized gains (losses) on available-for-sale securities			(8,926		)		2,959
Other comprehensive income (loss)			(16,626		)		5,398
Comprehensive income (loss)			$	(14,463	)		7,313

See accompanying notes to consolidated financial statements.

Table of Contents

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


	2013			2012
Cash flows from operating activities:
Net income	$	2,163		1,915
Adjustments to reconcile net income to net cash provided by operating activities:
Realized gains on sale of investments and other assets	(113		)	(344	)
Net deferred policy acquisition costs	(5,045		)	(4,424	)
Amortization of cost of customer relationships acquired	1,138			1,236
Decrease in fair value of warrants	—			(73	)
Depreciation	637			607
Amortization of premiums and discounts on investments	4,256			2,438
Deferred federal income tax benefit	(1,579		)	(1,679	)
Change in:
Accrued investment income	(1,074		)	(899	)
Reinsurance recoverable	2,978			476
Due premiums	84			399
Future policy benefit reserves	32,049			30,685
Other policyholders' liabilities	(421		)	1,925
Federal income tax receivable	46			820
Commissions payable and other liabilities	(1,097		)	(1,417	)
Other, net	(1,008		)	(1,515	)
Net cash provided by operating activities	33,014			30,150
Cash flows from investing activities:
Sale of fixed maturities, available-for-sale	58			503
Maturities and calls of fixed maturities, available-for-sale	33,943			105,077
Maturities and calls of fixed maturities, held-to-maturity	26,465			115,630
Purchase of fixed maturities, available-for-sale	(109,596		)	(118,558	)
Purchase of fixed maturities, held-to-maturity	—			(94,276	)
Calls of equity securities, available-for-sale	400			420
Principal payments on mortgage loans	822			22
Increase in policy loans, net	(2,831		)	(2,024	)
Sale of other long-term investments	1			4
Purchase of other long-term investments	(83		)	(94	)
Purchase of property and equipment	(321		)	(350	)
Maturity of short-term investments	2,841			—
Purchase of short-term investments	(531		)	(2,378	)
Net cash provided by (used in) investing activities	(48,832		)	3,976

Table of Contents

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

	2013			2012


Cash flows from financing activities:
Warrants exercised	$	—		68
Annuity deposits	2,815			3,425
Annuity withdrawals	(2,283		)	(1,958	)
Net cash provided by financing activities	532			1,535
Net increase (decrease) in cash and cash equivalents	(15,286		)	35,661
Cash and cash equivalents at beginning of year	56,299			33,255
Cash and cash equivalents at end of period	$	41,013		68,916
Supplemental disclosures of operating activities:
Cash paid during the period for income taxes, net	$	2,273		1,377

Supplemental Disclosures of Non-Cash Investing Activities:

None.

See accompanying notes to consolidated financial statements.

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2013

(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, 2013, and the consolidated statements of comprehensive income and cash flows for the three and six-month periods ended June 30, 2013 and 2012, 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, 2013 and for comparative periods have been made. The consolidated financial statements have been prepared in accordance with U.S. GAAP 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, 2012. 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.

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.

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2013

(Unaudited)

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements included in our 2012 Form 10-K Annual Report, which should be read in conjunction with these accompanying Consolidated Financial Statements.

(2) Accounting Pronouncements

Accounting Standards Recently Adopted

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”), which requires enhanced reporting of such amounts either on the face of the financial statements or in the notes to the financial statements. Under ASU 2013-02, the type of reclassification out of accumulated other comprehensive income, as defined under current GAAP, will dictate whether the disclosure must provide the effect of the reclassification on the respective financial statement line items or whether cross-referencing to other disclosures that provide additional detail about the reclassification will be required. The amendments in ASU 2013-02 are effective prospectively for reporting periods beginning after December 15, 2012. We have included the enhanced disclosures in the financial statements.

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2013

(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, 2013
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises		Consolidated
	(In thousands)
Revenues:
Premiums	$	32,850		10,984		—		43,834
Net investment income	5,584			3,341		340		9,265
Realized investment gains, net	81			1		—		82
Other income	351			46		30		427
Total revenue	38,866			14,372		370		53,608
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	11,429			5,231		—		16,660
Increase in future policy benefit reserves	17,047			849		—		17,896
Policyholders' dividends	2,216			19		—		2,235
Total insurance benefits paid or provided	30,692			6,099		—		36,791
Commissions	6,697			3,732		—		10,429
Other general expenses	2,928			3,225		1,189		7,342
Capitalization of deferred policy acquisition costs	(6,170		)	(1,502	)	—		(7,672	)
Amortization of deferred policy acquisition costs	3,870			493		—		4,363
Amortization of cost of customer relationships acquired	154			406		—		560
Total benefits and expenses	38,171			12,453		1,189		51,813
Income (loss) before income tax expense	$	695		1,919		(819	)	1,795

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2013

(Unaudited)



	Six Months Ended
	June 30, 2013
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises		Consolidated
	(In thousands)
Revenues:
Premiums	$	62,967		21,807		—		84,774
Net investment income	10,488			6,521		645		17,654
Realized investment gains, net	81			31		1		113
Other income	414			136		63		613
Total revenue	73,950			28,495		709		103,154
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	20,767			10,699		—		31,466
Increase in future policy benefit reserves	33,089			1,766		—		34,855
Policyholders' dividends	4,275			34		—		4,309
Total insurance benefits paid or provided	58,131			12,499		—		70,630
Commissions	12,276			7,211		—		19,487
Other general expenses	5,780			6,491		1,770		14,041
Capitalization of deferred policy acquisition costs	(11,256		)	(2,778	)	—		(14,034	)
Amortization of deferred policy acquisition costs	7,855			1,134		—		8,989
Amortization of cost of customer relationships acquired	321			817		—		1,138
Total benefits and expenses	73,107			25,374		1,770		100,251
Income (loss) before income tax expense	$	843		3,121		(1,061	)	2,903

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2013

(Unaudited)




	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

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2013

(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

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2013

(Unaudited)

(4) Earnings Per Share

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



	Three Months Ended
	June 30, 2013		June 30, 2012
	(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net income	$	1,307	403
Net income allocated to Class A common stock	$	1,293	399
Net income allocated to Class B common stock	14		4
Net income	$	1,307	403
Denominator:
Weighted average shares of Class A outstanding - basic	49,080		48,963
Weighted average shares of Class A outstanding - diluted	49,080		48,989
Weighted average shares of Class B outstanding - basic and diluted	1,002		1,002
Basic earnings per share of Class A common stock	$	0.03	0.01
Basic earnings per share of Class B common stock	0.01		—
Diluted earnings per share of Class A common stock	0.03		0.01
Diluted earnings per share of Class B common stock	0.01		—



	Six Months Ended
	June 30, 2013		June 30, 2012
	(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net income	$	2,163	1,915
Net income allocated to Class A common stock	$	2,141	1,895
Net income allocated to Class B common stock	22		20
Net income	$	2,163	1,915
Denominator:
Weighted average shares of Class A outstanding - basic	49,080		48,961
Weighted average shares of Class A outstanding - diluted	49,080		48,997
Weighted average shares of Class B outstanding - basic and diluted	1,002		1,002
Basic earnings per share of Class A common stock	$	0.05	0.04
Basic earnings per share of Class B common stock	0.02		0.02
Diluted earnings per share of Class A common stock	0.05		0.04
Diluted earnings per share of Class B common stock	0.02		0.02

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2013

(Unaudited)

(5) Investments

The Company invests primarily in fixed maturity securities, which totaled 84.4% of total investments and cash and cash equivalents at June 30, 2013.



	June 30, 2013				December 31, 2012
	Carrying Value		% of Total Carrying Value		Carrying Value		% of Total Carrying Value
	(In thousands)				(In thousands)
Fixed maturity securities	$	808,317	84.4	%	$	791,528	82.7	%
Equity securities	52,699		5.5	%	53,741		5.6	%
Mortgage loans	687		0.1	%	1,509		0.2	%
Policy loans	45,824		4.8	%	42,993		4.5	%
Real estate and other long-term investments	8,565		0.9	%	8,553		0.9	%
Short-term investments	—		—	%	2,340		0.2	%
Cash and cash equivalents	41,013		4.3	%	56,299		5.9	%
Total cash, cash equivalents and investments	$	957,105	100.0	%	$	956,963	100.0	%

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2013

(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.



	June 30, 2013
	Cost or Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
	(In thousands)
Fixed maturities:
Available-for-sale:
U.S. Treasury securities	$	10,139	2,856	—	12,995
U.S. Government-sponsored enterprises	63,300		2,069	97	65,272
States and political subdivisions	347,580		10,582	9,170	348,992
Foreign governments	104		29	—	133
Corporate	204,613		13,729	1,394	216,948
Commercial mortgage-backed	349		13	—	362
Residential mortgage-backed	4,092		317	2	4,407
Total available-for-sale securities	630,177		29,595	10,663	649,109
Held-to-maturity securities:
U.S. Government-sponsored enterprises	10,446		248	5	10,689
States and political subdivisions	118,327		2,801	1,764	119,364
Corporate	30,435		606	82	30,959
Total held-to-maturity securities	159,208		3,655	1,851	161,012
Total fixed maturities	$	789,385	33,250	12,514	810,121
Equity securities:
Stock mutual funds	$	10,463	719	—	11,182
Bond mutual funds	41,505		15	732	40,788
Common stock	17		—	4	13
Preferred stock	407		309	—	716
Total equity securities	$	52,392	1,043	736	52,699

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2013

(Unaudited)



	December 31, 2012
	Cost or Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
	(In thousands)
Fixed maturities:
Available-for-sale securities:
U.S. Treasury securities	$	10,170	3,773	—	13,943
U.S. Government-sponsored enterprises	81,788		3,815	22	85,581
States and political subdivisions	265,812		17,227	777	282,262
Foreign governments	105		36	—	141
Corporate	195,755		20,536	286	216,005
Commercial mortgage-backed	481		17	2	496
Residential mortgage-backed	5,625		469	2	6,092
Total available-for-sale securities	559,736		45,873	1,089	604,520
Held-to-maturity securities:
U.S. Government-sponsored enterprises	28,632		514	—	29,146
States and political subdivisions	125,634		5,435	378	130,691
Corporate	32,742		1,160	—	33,902
Total held-to-maturity securities	187,008		7,109	378	193,739
Total fixed maturity securities	$	746,744	52,982	1,467	798,259
Equity securities:
Stock mutual funds	$	10,463	250	28	10,685
Bond mutual funds	41,504		541	129	41,916
Common stock	17		—	2	15
Preferred stock	760		365	—	1,125
Total equity securities	$	52,744	1,156	159	53,741

At June 30, 2013, the Company had $4.4 million of mortgage-backed security holdings based on amortized cost, of which $4.1 million, or 93.2%, 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

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2013

(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 six months ended June 30, 2013 and 2012.

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2013

(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, 2013
	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	$	8,676	97	7	—	—	—	8,676	97	7
States and political subdivisions	192,682		8,438	214	7,875	732	8	200,557	9,170	222
Corporate	44,184		1,394	30	—	—	—	44,184	1,394	30
Residential mortgage-backed	3		—	1	48	2	1	51	2	2
Total available-for-sale securities	245,545		9,929	252	7,923	734	9	253,468	10,663	261
Held-to-maturity securities:
U.S. Government-sponsored enterprises	3,908		5	2	—	—	—	3,908	5	2
States and political subdivisions	53,296		1,764	47	—	—	—	53,296	1,764	47
Corporate	5,496		82	4	—	—	—	5,496	82	4
Total held-to-maturity securities	62,700		1,851	53	—	—	—	62,700	1,851	53
Total fixed maturities	$	308,245	11,780	305	7,923	734	9	316,168	12,514	314
Equity securities:
Bond mutual funds	$	34,028	607	5	2,875	125	1	36,903	732	6
Common stocks	—		—	—	13	4	1	13	4	1
Total equities	$	34,028	607	5	2,888	129	2	36,916	736	7

As of June 30, 2013, the Company had 9 fixed maturity available-for-sale securities and no held-to-maturity securities that were in an unrealized loss position for greater than 12 months. These securities consisted of municipals and mortgage-backed securities. There is 1 bond mutual fund that is now in a loss position for greater than 12 months. This is a diversified U.S. Government bond fund that has a large percentage of mortgage exposure in Pass Thru and CMO security types which have refinanced in the current interest rate environment. The fund is comprised of only U.S. Government bond assets.

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2013

(Unaudited)



	December 31, 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	$	10,603	22	9	—	—	—	10,603	22	9
States and political subdivisions	54,115		443	61	5,099	334	2	59,214	777	63
Corporate	22,316		286	16	—	—	—	22,316	286	16
Commercial mortgage-backed	94		2	1	—	—	—	94	2	1
Residential mortgage-backed	—		—	—	52	2	1	52	2	1
Total available-for-sale securities	87,128		753	87	5,151	336	3	92,279	1,089	90
Held-to-maturity securities:
States and political subdivisions	40,611		378	32	—	—	—	40,611	378	32
Total held-to-maturity securities	40,611		378	32	—	—	—	40,611	378	32
Total fixed maturities	$	127,739	1,131	119	5,151	336	3	132,890	1,467	122
Equity securities:
Stock mutual funds	<