Edgar Filing: CITIZENS INC

CIA-2014.6.30-10Q

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, 2014

¨ 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 August 1, 2014, 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, 2014 (Unaudited) and December 31, 2013	2

		Consolidated Statements of Comprehensive Income, Three Months Ended June 30, 2014 and 2013 (Unaudited)	4

		Consolidated Statements of Comprehensive Income, Six Months Ended June 30, 2014 and 2013 (Unaudited)	5

		Consolidated Statements of Cash Flows, Six Months Ended June 30, 2014 and 2013 (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	62

	Item 3.	Defaults Upon Senior Securities	63

	Item 4.	Mine Safety Disclosures	63

	Item 5.	Other Information	63

	Item 6.	Exhibits	63

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, 2014		December 31, 2013
Assets	(Unaudited)
Investments:
Fixed maturities available-for-sale, at fair value (cost: $628,591 and $595,944 in 2014 and 2013, respectively)	$	663,501	605,256
Fixed maturities held-to-maturity, at amortized cost (fair value: $234,415 and $223,533 in 2014 and 2013, respectively)	228,948		227,696
Equity securities available-for-sale, at fair value (cost: $54,075 and $45,883 in 2014 and 2013, respectively)	56,637		47,259
Mortgage loans on real estate	650		671
Policy loans	52,001		48,868
Real estate held for investment (less $1,502 and $1,429 accumulated depreciation in 2014 and 2013, respectively)	8,218		8,440
Other long-term investments	44		45
Total investments	1,009,999		938,235
Cash and cash equivalents	57,437		54,593
Accrued investment income	12,877		12,251
Reinsurance recoverable	4,730		4,394
Deferred policy acquisition costs	150,891		146,691
Cost of customer relationships acquired	24,624		23,374
Goodwill	17,306		17,160
Other intangible assets	976		851
Property and equipment, net	6,513		6,662
Due premiums, net (less $1,312 and $1,429 allowance for doubtful accounts in 2014 and 2013, respectively)	10,080		11,209
Prepaid expenses	1,995		95
Other assets	1,038		765
Total assets	$	1,298,466	1,216,280

(Continued)

See accompanying notes to consolidated financial statements.

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



	June 30, 2014			December 31, 2013
Liabilities and Stockholders' Equity	(Unaudited)
Liabilities:
Policy liabilities:
Future policy benefit reserves:
Life insurance	$	876,228		834,269
Annuities	56,489			55,485
Accident and health	1,217			1,250
Dividend accumulations	14,677			13,662
Premiums paid in advance	34,700			32,560
Policy claims payable	10,733			9,488
Other policyholders' funds	7,099			7,982
Total policy liabilities	1,001,143			954,696
Commissions payable	2,377			2,562
Federal income tax payable	645			590
Deferred federal income tax	10,501			1,704
Payable for securities in process of settlement	6,103			—
Other liabilities	12,338			10,919
Total liabilities	1,033,107			970,471
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 2014 and 2013, including shares in treasury of 3,135,738 in 2014 and 2013	259,383			259,383
Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2014 and 2013	3,184			3,184
Accumulated deficit	(10,195		)	(12,542	)
Accumulated other comprehensive income:
Unrealized gains on securities, net of tax	23,998			6,795
Treasury stock, at cost	(11,011		)	(11,011	)
Total stockholders' equity	265,359			245,809
Total liabilities and stockholders' equity	$	1,298,466		1,216,280

See accompanying notes to consolidated financial statements.

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


	2014					2013
Revenues:
Premiums:
Life insurance			$	44,667				42,223
Accident and health insurance			390					406
Property insurance			1,272					1,205
Net investment income			10,083					9,265
Realized investment gains (losses), net			(73		)			82
Other income			163					427
Total revenues			56,502					53,608
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders			16,668					16,660
Increase in future policy benefit reserves			19,979					17,896
Policyholders' dividends			2,412					2,235
Total insurance benefits paid or provided			39,059					36,791
Commissions			10,403					10,429
Other general expenses			7,448					7,342
Capitalization of deferred policy acquisition costs			(7,423		)			(7,672	)
Amortization of deferred policy acquisition costs			4,893					4,363
Amortization of cost of customer relationships acquired			614					560
Total benefits and expenses			54,994					51,813
Income before federal income tax			1,508					1,795
Federal income tax expense			358					488
Net income			1,150					1,307
Per Share Amounts:
Basic earnings per share of Class A common stock	$	0.03				$	0.03
Basic earnings per share of Class B common stock	0.01					0.01
Diluted earnings per share of Class A common stock	0.03					0.03
Diluted earnings per share of Class B common stock	0.01					0.01
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during period			12,296					(25,544	)
Reclassification adjustment for (gains) losses included in net income			73					(73	)
Unrealized gains (losses) on available-for-sale securities, net			12,369					(25,617	)
Income tax expense (benefit) on unrealized gains (losses) on available-for-sale securities			4,340					(8,953	)
Other comprehensive income (loss)			8,029					(16,664	)
Comprehensive income (loss)			$	9,179				(15,357	)

See accompanying notes to consolidated financial statements.

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

	2014					2013
Revenues:
Premiums:
Life insurance			$	86,064				81,637
Accident and health insurance			741					755
Property insurance			2,537					2,382
Net investment income			19,989					17,654
Realized investment gains (losses), net			(129		)			113
Other income			332					613
Total revenues			109,534					103,154
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders			33,125					31,466
Increase in future policy benefit reserves			37,677					34,855
Policyholders' dividends			4,514					4,309
Total insurance benefits paid or provided			75,316					70,630
Commissions			20,313					19,487
Other general expenses			13,950					14,041
Capitalization of deferred policy acquisition costs			(14,491		)			(14,034	)
Amortization of deferred policy acquisition costs			10,102					8,989
Amortization of cost of customer relationships acquired			1,145					1,138
Total benefits and expenses			106,335					100,251
Income before federal income tax			3,199					2,903
Federal income tax expense			852					740
Net income			2,347					2,163
Per Share Amounts:
Basic earnings per share of Class A common stock	$	0.05				$	0.05
Basic earnings per share of Class B common stock	0.02					0.02
Diluted earnings per share of Class A common stock	0.05					0.05
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			26,392					(25,448	)
Reclassification adjustment for (gains) losses included in net income			105					(104	)
Unrealized gains (losses) on available-for-sale securities, net			26,497					(25,552	)
Income tax expense (benefit) on unrealized gains (losses) on available-for-sale securities			9,294					(8,926	)
Other comprehensive income (loss)			17,203					(16,626	)
Comprehensive income (loss)			$	19,550				(14,463	)

See accompanying notes to consolidated financial statements.

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


	2014			2013
Cash flows from operating activities:
Net income	$	2,347		2,163
Adjustments to reconcile net income to net cash provided by operating activities:
Realized (gains) losses on sale of investments and other assets	129			(113	)
Net deferred policy acquisition costs	(4,389		)	(5,045	)
Amortization of cost of customer relationships acquired	1,145			1,138
Depreciation	745			637
Amortization of premiums and discounts on investments	4,505			4,256
Deferred federal income tax benefit	(1,438		)	(1,579	)
Change in:
Accrued investment income	(530		)	(1,074	)
Reinsurance recoverable	(336		)	2,978
Due premiums	1,129			84
Future policy benefit reserves	37,657			32,049
Other policyholders' liabilities	3,252			(421	)
Federal income tax receivable	33			46
Commissions payable and other liabilities	1,229			(1,097	)
Other, net	(2,055		)	(1,008	)
Net cash provided by operating activities	43,423			33,014
Cash flows from investing activities:
Sale of fixed maturities, available-for-sale	580			58
Maturities and calls of fixed maturities, available-for-sale	23,530			33,943
Maturities and calls of fixed maturities, held-to-maturity	8,374			26,465
Purchase of fixed maturities, available-for-sale	(47,239		)	(109,596	)
Purchase of fixed maturities, held-to-maturity	(11,586		)	—
Sale of equity securities, available-for-sale	11,105			—
Calls of equity securities, available-for-sale	200			400
Purchase of equity securities, available-for-sale	(17,283		)	—
Principal payments on mortgage loans	21			822
Increase in policy loans, net	(3,133		)	(2,831	)
Sale of other long-term investments	1			1
Purchase of other long-term investments	(4		)	(83	)
Purchase of property and equipment	(340		)	(321	)
Maturity of short-term investments	—			2,841
Purchase of short-term investments	—			(531	)
Net cash used in acquisition	(4,810		)	—
Net cash provided by (used in) investing activities	(40,584		)	(48,832	)

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

	2014			2013


Cash flows from financing activities:
Annuity deposits	2,587			2,815
Annuity withdrawals	(2,582		)	(2,283	)
Net cash provided by financing activities	5			532
Net increase (decrease) in cash and cash equivalents	2,844			(15,286	)
Cash and cash equivalents at beginning of year	54,593			56,299
Cash and cash equivalents at end of period	$	57,437		41,013
Supplemental disclosures of operating activities:
Cash paid during the period for income taxes, net	$	2,213		2,273

Supplemental Disclosures of Non-Cash Investing Activities:

None.

See accompanying notes to consolidated financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2014

(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"), Magnolia Guaranty Life Insurance Company ("MGLIC"), 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, 2014, and the consolidated statements of comprehensive income for the three and six months ended June 30, 2014 and 2013 and cash flows for the six-month periods ended June 30, 2014 and 2013, 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, 2014 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, 2013. 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, MGLIC 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. MGLIC provides industrial life policies through independent funeral homes in Mississippi.

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

In accordance with our purchase agreement dated October 7, 2013, we finalized the MGLIC stock acquisition on March 7, 2014 for approximately $5.2 million in cash consideration. The assets recorded as of June 30, 2014 were $12.7 million, liabilities of $7.1 million and stockholders equity of $5.6 million. We recorded goodwill of $0.1 million related to this purchase. This entity is reported as part of our home service segment business and is a wholly owned subsidiary of SPLIC. We are in the process of converting the policy inforce data to our policy administration system and anticipate the completion date to be prior to the third quarter reporting.

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

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2014

(Unaudited)

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. No individual amounts were material.

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements included in our 2013 Form 10-K Annual Report, which should be read in conjunction with these accompanying Consolidated Financial Statements.

(2) Accounting Pronouncements

Accounting Standards Recently Adopted

On January 1, 2014, we adopted Accounting Standards Update (ASU) ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” to eliminate diversity in practice. This ASU requires that companies net their unrecognized tax benefits against all same-jurisdiction net operating losses or tax credit carryforwards that would be used to settle the position with a tax authority. The adoption of this ASU did not have an effect on our consolidated financial statements.

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle. ASU 2014-09 requires disclosures enabling users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, using one of two retrospective application methods. Early application is not permitted. The Company is currently evaluating the effect that the adoption of this ASU will have on its financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2014

(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, 2014
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises		Consolidated
	(In thousands)
Revenues:
Premiums	$	34,569		11,760		—		46,329
Net investment income	6,466			3,282		335		10,083
Realized investment gains (losses), net	(48		)	(26	)	1		(73	)
Other income	133			3		27		163
Total revenue	41,120			15,019		363		56,502
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	11,163			5,505		—		16,668
Increase in future policy benefit reserves	18,849			1,130		—		19,979
Policyholders' dividends	2,397			15		—		2,412
Total insurance benefits paid or provided	32,409			6,650		—		39,059
Commissions	6,484			3,919		—		10,403
Other general expenses	2,965			3,499		984		7,448
Capitalization of deferred policy acquisition costs	(5,848		)	(1,575	)	—		(7,423	)
Amortization of deferred policy acquisition costs	4,205			688		—		4,893
Amortization of cost of customer relationships acquired	120			494		—		614
Total benefits and expenses	40,335			13,675		984		54,994
Income (loss) before income tax expense	$	785		1,344		(621	)	1,508

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2014

(Unaudited)



	Six Months Ended
	June 30, 2014
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises		Consolidated
	(In thousands)
Revenues:
Premiums	$	66,380		22,962		—		89,342
Net investment income	12,749			6,569		671		19,989
Realized investment gains (losses), net	(112		)	(18	)	1		(129	)
Other income	276			4		52		332
Total revenue	79,293			29,517		724		109,534
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	21,978			11,147		—		33,125
Increase in future policy benefit reserves	35,825			1,852		—		37,677
Policyholders' dividends	4,483			31		—		4,514
Total insurance benefits paid or provided	62,286			13,030		—		75,316
Commissions	12,722			7,591		—		20,313
Other general expenses	5,805			6,668		1,477		13,950
Capitalization of deferred policy acquisition costs	(11,507		)	(2,984	)	—		(14,491	)
Amortization of deferred policy acquisition costs	8,612			1,490		—		10,102
Amortization of cost of customer relationships acquired	291			854		—		1,145
Total benefits and expenses	78,209			26,649		1,477		106,335
Income (loss) before income tax expense	$	1,084		2,868		(753	)	3,199

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2014

(Unaudited)




	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

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2014

(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

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2014

(Unaudited)

(4) Earnings Per Share

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




	Three Months Ended
	June 30, 2014		June 30, 2013
	(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net income	$	1,150	1,307
Net income allocated to Class A common stock	$	1,138	1,293
Net income allocated to Class B common stock	12		14
Net income	$	1,150	1,307
Denominator:
Weighted average shares of Class A outstanding - basic	49,080		49,080
Weighted average shares of Class A outstanding - diluted	49,080		49,080
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	0.03
Basic earnings per share of Class B common stock	0.01		0.01
Diluted earnings per share of Class A common stock	0.03		0.03
Diluted earnings per share of Class B common stock	0.01		0.01



	Six Months Ended
	June 30, 2014		June 30, 2013
	(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net income	$	2,347	2,163
Net income allocated to Class A common stock	$	2,323	2,141
Net income allocated to Class B common stock	24		22
Net income	$	2,347	2,163
Denominator:
Weighted average shares of Class A outstanding - basic	49,080		49,080
Weighted average shares of Class A outstanding - diluted	49,080		49,080
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	0.05
Basic earnings per share of Class B common stock	0.02		0.02
Diluted earnings per share of Class A common stock	0.05		0.05
Diluted earnings per share of Class B common stock	0.02		0.02

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2014

(Unaudited)

(5) Investments

The Company invests primarily in fixed maturity securities, which totaled 83.6% of total investments and cash and cash equivalents at June 30, 2014.



	June 30, 2014				December 31, 2013
	Carrying Value		% of Total Carrying Value		Carrying Value		% of Total Carrying Value
	(In thousands)				(In thousands)
Fixed maturity securities	$	892,449	83.6	%	$	832,952	83.9	%
Equity securities	56,637		5.3	%	47,259		4.8	%
Mortgage loans	650		0.1	%	671		0.1	%
Policy loans	52,001		4.9	%	48,868		4.8	%
Real estate and other long-term investments	8,262		0.8	%	8,485		0.9	%
Cash and cash equivalents	57,437		5.3	%	54,593		5.5	%
Total cash, cash equivalents and investments	$	1,067,436	100.0	%	$	992,828	100.0	%

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2014

(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, 2014
	Cost or Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
	(In thousands)
Fixed maturities:
Available-for-sale:
U.S. Treasury securities	$	10,086	2,712	—	12,798
U.S. Government-sponsored enterprises	38,765		1,919	1	40,683
States and political subdivisions	363,443		14,413	2,490	375,366
Foreign governments	104		29	—	133
Corporate	212,432		18,168	116	230,484
Commercial mortgage-backed	262		9	—	271
Residential mortgage-backed	3,499		271	4	3,766
Total available-for-sale securities	628,591		37,521	2,611	663,501
Held-to-maturity securities:
U.S. Government-sponsored enterprises	5,815		246	—	6,061
States and political subdivisions	186,512		5,895	1,626	190,781
Corporate	36,621		1,031	79	37,573
Total held-to-maturity securities	228,948		7,172	1,705	234,415
Total fixed maturities	$	857,539	44,693	4,316	897,916
Equity securities:
Stock mutual funds	$	15,738	2,137	—	17,875
Bond mutual funds	35,869		250	88	36,031
Common stock	727		37	7	757
Preferred stock	1,741		233	—	1,974
Total equity securities	$	54,075	2,657	95	56,637

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2014

(Unaudited)



	December 31, 2013
	Cost or Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
	(In thousands)
Fixed maturities:
Available-for-sale securities:
U.S. Treasury securities	$	10,115	2,348	—	12,463
U.S. Government-sponsored enterprises	53,587		1,209	228	54,568
States and political subdivisions	341,673		6,242	11,449	336,466
Foreign governments	104		23	—	127
Corporate	186,671		12,289	1,399	197,561
Commercial mortgage-backed	300		9	—	309
Residential mortgage-backed	3,494		270	2	3,762
Total available-for-sale securities	595,944		22,390	13,078	605,256
Held-to-maturity securities:
U.S. Government-sponsored enterprises	8,877		197	3	9,071
States and political subdivisions	181,246		1,633	6,412	176,467
Corporate	37,573		771	349	37,995
Total held-to-maturity securities	227,696		2,601	6,764	223,533
Total fixed maturity securities	$	823,640	24,991	19,842	828,789
Equity securities:
Stock mutual funds	$	10,463	1,506	—	11,969
Bond mutual funds	35,080		—	417	34,663
Common stock	17		—	5	12
Preferred stock	323		292	—	615
Total equity securities	$	45,883	1,798	422	47,259

At June 30, 2014, the Company had $3.8 million of mortgage-backed security holdings based on amortized cost, of which $3.5 million, or 92.1%, 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

June 30, 2014

(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, 2014 and 2013.

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2014

(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, 2014
	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	$	160	1	1	—	—	—	160	1	1
States and political subdivisions	9,760		124	14	81,215	2,366	72	90,975	2,490	86
Corporate	10,634		73	8	6,081	43	4	16,715	116	12
Residential mortgage-backed	222		2	8	37	2	1	259	4	9
Total available-for-sale securities	20,776		200	31	87,333	2,411	77	108,109	2,611	108
Held-to-maturity securities:
States and political subdivisions	3,975		95	8	55,841	1,531	60	59,816	1,626	68
Corporate	2,490		57	2	3,001	22	2	5,491	79	4
Total held-to-maturity securities	6,465		152	10	58,842	1,553	62	65,307	1,705	72
Total fixed maturities	$	27,241	352	41	146,175	3,964	139	173,416	4,316	180
Equity securities:
Bond mutual funds	$	17,912	88	2	—	—	—	17,912	88	2
Common stocks	—		—	—	10	7	1	10	7	1
Preferred stocks	—		—	—	—	—	—	—	—	—
Total equities	$	17,912	88	2	10	7	1	17,922	95	3

As of June 30, 2014, the Company had 77 available-for-sale securities and 62 held-to-maturity securities that were in an unrealized loss position for greater than 12 months. We reported 1 common stock holding in an unrealized loss position for greater than 12 months as of June 30, 2014.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2014

(Unaudited)



	December 31, 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	$	14,032	228	12	—	—	—	14,032	228	12
States and political subdivisions	183,280		9,872	203	15,673	1,577	16	198,953	11,449	219
Corporate	35,789		1,048	25	2,426	351	2	38,215	1,399	27
Residential mortgage-backed	57		1	3	42	1	1	99	2	4
Total available-for-sale securities	233,158		11,149	243	18,141	1,929	19	251,299	13,078	262
Held-to-maturity securities:
U.S. Government-sponsored enterprises	2,997		3	1	—	—	—	2,997	3	1
States and political subdivisions	100,153		5,236	118	14,797	1,176	17	114,950	6,412	135
Corporate	5,225		349	4	—	—	—	5,225	349	4
Total held-to-maturity securities	108,375		5,588	123	14,797	1,176	17	123,172	6,764	140
Total fixed maturities	$	341,533	16,737	366	32,938	3,105	36	374,471	19,842	402
Equity securities: