Edgar Filing: CITIZENS INC

CIA-2013.9.30-10Q

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, 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 smaller 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 4, 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, September 30, 2013 (Unaudited) and December 31, 2012	2

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

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

		Consolidated Statements of Cash Flows, Nine Months Ended September 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	49

	Item 4.	Controls and Procedures	50

Part II.	Other Information

	Item 1.	Legal Proceedings	51

	Item 1A.	Risk Factors	51

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

	Item 3.	Defaults Upon Senior Securities	52

	Item 4.	Mine Safety Disclosures	52

	Item 5.	Other Information	52

	Item 6.	Exhibits	53

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, 2013		December 31, 2012
Assets	(Unaudited)
Investments:
Fixed maturities available-for-sale, at fair value (cost: $585,127 and $559,736 in 2013 and 2012, respectively)	$	599,379	604,520
Fixed maturities held-to-maturity, at amortized cost (fair value: $221,115 and $193,739 in 2013 and 2012, respectively)	223,339		187,008
Equity securities available-for-sale, at fair value (cost: $52,392 and $52,744 in 2013 and 2012, respectively)	53,067		53,741
Mortgage loans on real estate	680		1,509
Policy loans	47,359		42,993
Real estate held for investment (less $1,392 and $1,287 accumulated depreciation in 2013 and 2012, respectively)	8,477		8,496
Other long-term investments	56		57
Short-term investments	—		2,340
Total investments	932,357		900,664
Cash and cash equivalents	41,687		56,299
Accrued investment income	11,740		10,304
Reinsurance recoverable	4,490		9,651
Deferred policy acquisition costs	143,131		135,569
Cost of customer relationships acquired	23,901		25,116
Goodwill	17,160		17,160
Other intangible assets	858		879
Federal income tax receivable	—		270
Property and equipment, net	6,920		7,383
Due premiums, net (less $1,296 and $1,345 allowance for doubtful accounts in 2013 and 2012, respectively)	9,994		10,527
Prepaid expenses	875		344
Other assets	1,001		782
Total assets	$	1,194,114	1,174,948

(Continued)

See accompanying notes to consolidated financial statements.

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



	September 30, 2013			December 31, 2012
Liabilities and Stockholders' Equity	(Unaudited)
Liabilities:
Policy liabilities:
Future policy benefit reserves:
Life insurance	$	812,824		762,319
Annuities	54,178			51,750
Accident and health	1,245			5,491
Dividend accumulations	13,234			11,962
Premiums paid in advance	30,504			27,455
Policy claims payable	8,044			11,015
Other policyholders' funds	8,006			9,440
Total policy liabilities	928,035			879,432
Commissions payable	2,096			2,606
Federal income tax payable	415			—
Deferred federal income tax	4,517			17,301
Payable for securities in process of settlement	1,712			2,358
Other liabilities	9,608			10,143
Total liabilities	946,383			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	(13,348		)	(17,335	)
Accumulated other comprehensive income:
Unrealized gains on securities, net of tax	9,523			28,887
Treasury stock, at cost	(11,011		)	(11,011	)
Total stockholders' equity	247,731			263,108
Total liabilities and stockholders' equity	$	1,194,114		1,174,948

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)

	2013					2012
Revenues:
Premiums:
Life insurance			$	42,091			41,257
Accident and health insurance			380				414
Property insurance			1,276				1,281
Net investment income			9,570				8,114
Realized investment gains, net			30				763
Decrease in fair value of warrants			—				241
Other income			269				112
Total revenues			53,616				52,182
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders			16,763				15,627
Increase in future policy benefit reserves			17,398				16,901
Policyholders' dividends			2,362				2,600
Total insurance benefits paid or provided			36,523				35,128
Commissions			9,940				9,769
Other general expenses			6,163				6,055
Capitalization of deferred policy acquisition costs			(7,067		)		(7,547	)
Amortization of deferred policy acquisition costs			4,758				4,134
Amortization of cost of customer relationships acquired			681				598
Total benefits and expenses			50,998				48,137
Income before federal income tax			2,618				4,045
Federal income tax expense			794				1,134
Net income			1,824				2,911
Per Share Amounts:
Basic earnings per share of Class A common stock	$	0.03				0.06
Basic earnings per share of Class B common stock	0.02					0.03
Diluted earnings per share of Class A common stock	0.03					0.06
Diluted earnings per share of Class B common stock	0.02					0.03
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during period			(4,128		)		8,542
Reclassification adjustment for gains included in net income			(84		)		(708	)
Unrealized gains (losses) on available-for-sale securities, net			(4,212		)		7,834
Income tax expense (benefit) on unrealized gains (losses) on available-for-sale securities			(1,474		)		2,878
Other comprehensive income (loss)			(2,738		)		4,956
Comprehensive income (loss)			$	(914	)		7,867

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)

	2013					2012
Revenues:
Premiums:
Life insurance			$	123,728			118,608
Accident and health insurance			1,135				1,244
Property insurance			3,658				3,792
Net investment income			27,224				23,303
Realized investment gains, net			143				1,107
Decrease in fair value of warrants			—				314
Other income			882				321
Total revenues			156,770				148,689
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders			48,229				46,490
Increase in future policy benefit reserves			52,253				47,793
Policyholders' dividends			6,671				6,755
Total insurance benefits paid or provided			107,153				101,038
Commissions			29,427				28,164
Other general expenses			20,204				19,013
Capitalization of deferred policy acquisition costs			(21,101		)		(20,530	)
Amortization of deferred policy acquisition costs			13,747				12,693
Amortization of cost of customer relationships acquired			1,819				1,834
Total benefits and expenses			151,249				142,212
Income before federal income tax			5,521				6,477
Federal income tax expense			1,534				1,651
Net income			3,987				4,826
Per Share Amounts:
Basic earnings per share of Class A common stock	$	0.08				0.10
Basic earnings per share of Class B common stock	0.04					0.05
Diluted earnings per share of Class A common stock	0.08					0.10
Diluted earnings per share of Class B common stock	0.04					0.05
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during period			(29,576		)		17,106
Reclassification adjustment for gains included in net income			(188		)		(915	)
Unrealized gains (losses) on available-for-sale securities, net			(29,764		)		16,191
Income tax expense (benefit) on unrealized gains (losses) on available-for-sale securities			(10,400		)		5,837
Other comprehensive income (loss)			(19,364		)		10,354
Comprehensive income (loss)			$	(15,377	)		15,180

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)

	2013			2012
Cash flows from operating activities:
Net income	$	3,987		4,826
Adjustments to reconcile net income to net cash provided by operating activities:
Realized gains on sale of investments and other assets	(143		)	(1,107	)
Net deferred policy acquisition costs	(7,354		)	(7,837	)
Amortization of cost of customer relationships acquired	1,819			1,834
Decrease in fair value of warrants	—			(314	)
Depreciation	955			915
Amortization of premiums and discounts on investments	6,228			4,115
Deferred federal income tax benefit	(2,384		)	(2,232	)
Change in:
Accrued investment income	(1,436		)	(2,391	)
Reinsurance recoverable	5,161			334
Due premiums	533			(524	)
Future policy benefit reserves	47,989			47,530
Other policyholders' liabilities	(84		)	3,025
Federal income tax receivable	685			2,089
Commissions payable and other liabilities	(1,045		)	(1,823	)
Other, net	(581		)	(846	)
Net cash provided by operating activities	54,330			47,594
Cash flows from investing activities:
Sale of fixed maturities, available-for-sale	317			503
Maturities and calls of fixed maturities, available-for-sale	41,054			125,622
Maturities and calls of fixed maturities, held-to-maturity	37,213			154,630
Purchase of fixed maturities, available-for-sale	(71,818		)	(184,728	)
Purchase of fixed maturities, held-to-maturity	(75,386		)	(138,756	)
Sales of equity securities, available-for-sale	—			2,856
Calls of equity securities, available-for-sale	400			820
Principal payments on mortgage loans	829			36
Increase in policy loans, net	(4,366		)	(3,694	)
Sale of other long-term investments	1			4
Purchase of other long-term investments	(86		)	(116	)
Purchase of property and equipment	(386		)	(402	)
Maturity of short-term investments	2,841			2,000
Purchase of short-term investments	(531		)	(2,378	)
Net cash used in investing activities	(69,918		)	(43,603	)

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

	2013			2012


Cash flows from financing activities:
Warrants exercised	$	—		822
Annuity deposits	4,293			4,769
Annuity withdrawals	(3,317		)	(3,007	)
Net cash provided by financing activities	976			2,584
Net increase (decrease) in cash and cash equivalents	(14,612		)	6,575
Cash and cash equivalents at beginning of year	56,299			33,255
Cash and cash equivalents at end of period	$	41,687		39,830
Supplemental disclosures of operating activities:
Cash paid during the period for income taxes, net	$	3,232		1,794

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, 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 September 30, 2013, and the consolidated statements of comprehensive income for the three and nine month periods ended September 30, 2013 and 2012, and consolidated statement of cash flows for the nine-month periods ended September 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 September 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, endowments, 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.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 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.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 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
	September 30, 2013
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises	Consolidated
	(In thousands)
Revenues:
Premiums	$	32,800		10,947		—	43,747
Net investment income	5,924			3,309		337	9,570
Realized investment gains, net	23			2		5	30
Other income	261			(7	)	15	269
Total revenue	39,008			14,251		357	53,616
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	11,249			5,514		—	16,763
Increase in future policy benefit reserves	16,756			642		—	17,398
Policyholders' dividends	2,343			19		—	2,362
Total insurance benefits paid or provided	30,348			6,175		—	36,523
Commissions	6,282			3,658		—	9,940
Other general expenses	2,780			3,205		178	6,163
Capitalization of deferred policy acquisition costs	(5,685		)	(1,382	)	—	(7,067	)
Amortization of deferred policy acquisition costs	3,947			811		—	4,758
Amortization of cost of customer relationships acquired	171			510		—	681
Total benefits and expenses	37,843			12,977		178	50,998
Income before income tax expense	$	1,165		1,274		179	2,618

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2013

(Unaudited)



	Nine Months Ended
	September 30, 2013
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises		Consolidated
	(In thousands)
Revenues:
Premiums	$	95,767		32,754		—		128,521
Net investment income	16,412			9,830		982		27,224
Realized investment gains, net	104			33		6		143
Other income	675			129		78		882
Total revenue	112,958			42,746		1,066		156,770
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	32,016			16,213		—		48,229
Increase in future policy benefit reserves	49,845			2,408		—		52,253
Policyholders' dividends	6,618			53		—		6,671
Total insurance benefits paid or provided	88,479			18,674		—		107,153
Commissions	18,558			10,869		—		29,427
Other general expenses	8,560			9,696		1,948		20,204
Capitalization of deferred policy acquisition costs	(16,941		)	(4,160	)	—		(21,101	)
Amortization of deferred policy acquisition costs	11,802			1,945		—		13,747
Amortization of cost of customer relationships acquired	492			1,327		—		1,819
Total benefits and expenses	110,950			38,351		1,948		151,249
Income (loss) before income tax expense	$	2,008		4,395		(882	)	5,521

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2013

(Unaudited)



	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, 2013

(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, 2013

(Unaudited)

(4) Earnings Per Share

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



	Three Months Ended
	September 30, 2013		September 30, 2012
	(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net income	$	1,824	2,911
Net income allocated to Class A common stock	$	1,806	2,882
Net income allocated to Class B common stock	18		29
Net income	$	1,824	2,911
Denominator:
Weighted average shares of Class A outstanding - basic	49,080		49,019
Weighted average shares of Class A outstanding - diluted	49,080		49,030
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	0.06
Basic earnings per share of Class B common stock	0.02		0.03
Diluted earnings per share of Class A common stock	0.03		0.06
Diluted earnings per share of Class B common stock	0.02		0.03



	Nine Months Ended
	September 30, 2013		September 30, 2012
	(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net income	$	3,987	4,826
Net income allocated to Class A common stock	$	3,947	4,777
Net income allocated to Class B common stock	40		49
Net income	$	3,987	4,826
Denominator:
Weighted average shares of Class A outstanding - basic	49,080		48,962
Weighted average shares of Class A outstanding - diluted	49,080		48,972
Weighted average shares of Class B outstanding - basic and diluted	1,002		1,002
Basic earnings per share of Class A common stock	$	0.08	0.10
Basic earnings per share of Class B common stock	0.04		0.05
Diluted earnings per share of Class A common stock	0.08		0.10
Diluted earnings per share of Class B common stock	0.04		0.05

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 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 September 30, 2013.



	September 30, 2013				December 31, 2012
	Carrying Value		% of Total Carrying Value		Carrying Value		% of Total Carrying Value
	(In thousands)				(In thousands)
Fixed maturity securities	$	822,718	84.4	%	$	791,528	82.7	%
Equity securities	53,067		5.4	%	53,741		5.6	%
Mortgage loans	680		0.1	%	1,509		0.2	%
Policy loans	47,359		4.9	%	42,993		4.5	%
Real estate and other long-term investments	8,533		0.9	%	8,553		0.9	%
Short-term investments	—		—	%	2,340		0.2	%
Cash and cash equivalents	41,687		4.3	%	56,299		5.9	%
Total cash, cash equivalents and investments	$	974,044	100.0	%	$	956,963	100.0	%

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 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.



	September 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	$	10,124	2,679	—	12,803
U.S. Government-sponsored enterprises	62,949		1,510	152	64,307
States and political subdivisions	320,691		8,195	9,964	318,922
Foreign governments	104		27	—	131
Corporate	187,120		13,093	1,442	198,771
Commercial mortgage-backed	318		11	—	329
Residential mortgage-backed	3,821		297	2	4,116
Total available-for-sale securities	585,127		25,812	11,560	599,379
Held-to-maturity securities:
U.S. Government-sponsored enterprises	8,909		283	—	9,192
States and political subdivisions	176,686		2,461	5,407	173,740
Corporate	37,744		752	313	38,183
Total held-to-maturity securities	223,339		3,496	5,720	221,115
Total fixed maturities	$	808,466	29,308	17,280	820,494
Equity securities:
Stock mutual funds	$	10,463	1,022	—	11,485
Bond mutual funds	41,504		23	672	40,855
Common stock	17		—	3	14
Preferred stock	408		305	—	713
Total equity securities	$	52,392	1,350	675	53,067

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 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 September 30, 2013, the Company had $4.1 million of mortgage-backed security holdings based on amortized cost, of which $3.8 million, or 92.7%, 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, 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 nine months ended September 30, 2013 and 2012.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 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.



	September 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	$	11,609	152	8	—	—	—	11,609	152	8
States and political subdivisions	148,560		8,662	163	13,375	1,302	15	161,935	9,964	178
Corporate	39,735		1,098	25	2,434	344	2	42,169	1,442	27
Commercial mortgage-backed	4		—	1	46	2	1	50	2	2
Total available-for-sale securities	199,908		9,912	197	15,855	1,648	18	215,763	11,560	215
Held-to-maturity securities:
States and political subdivisions	88,943		4,453	106	14,394	954	17	103,337	5,407	123
Corporate	7,390		313	6	—	—	—	7,390	313	6
Total held-to-maturity securities	96,333		4,766	112	14,394	954	17	110,727	5,720	129
Total fixed maturities	$	296,241	14,678	309	30,249	2,602	35	326,490	17,280	344
Equity securities:
Bond mutual funds	$	30,904	307	4	6,058	365	2	36,962	672	6
Common stocks	—		—	—	13	3	1	13	3	1
Total equities	$	30,904	307	4	6,071	368	3	36,975	675	7

As of September 30, 2013, the Company had 18 fixed maturity available-for-sale securities and 17 held-to-maturity securities that were in an unrealized loss position for greater than 12 months. These securities consisted of municipals, corporates and mortgage-backed securities. There are two bond mutual funds and one common stock that are now in a loss position for greater than 12 months. These are diversified U.S. Government bond funds that have a large percentage of mortgage exposure in Pass Thru and CMO security types which have refinanced in the current interest rate environment. The funds are comprised of only U.S. Government bond assets.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 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	$	—	—	—	972	28	1	972	28