Edgar Filing: CITIZENS INC

CIA-2014.9.30-10Q

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, 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 November 3, 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, September 30, 2014 (Unaudited) and December 31, 2013	2

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

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

		Consolidated Statements of Cash Flows, Nine Months Ended September 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	47

	Item 4.	Controls and Procedures	48

Part II.	Other Information

	Item 1.	Legal Proceedings	49

	Item 1A.	Risk Factors	49

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61

	Item 3.	Defaults Upon Senior Securities	61

	Item 4.	Mine Safety Disclosures	62

	Item 5.	Other Information	62

	Item 6.	Exhibits	62

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, 2014		December 31, 2013
Assets	(Unaudited)
Investments:
Fixed maturities available-for-sale, at fair value (cost: $647,257 and $595,944 in 2014 and 2013, respectively)	$	681,591	605,256
Fixed maturities held-to-maturity, at amortized cost (fair value: $236,165 and $223,533 in 2014 and 2013, respectively)	230,297		227,696
Equity securities available-for-sale, at fair value (cost: $53,906 and $45,883 in 2014 and 2013, respectively)	55,643		47,259
Mortgage loans on real estate	641		671
Policy loans	52,575		48,868
Real estate held for investment (less $1,539 and $1,429 accumulated depreciation in 2014 and 2013, respectively)	8,174		8,440
Other long-term investments	136		45
Total investments	1,029,057		938,235
Cash and cash equivalents	56,986		54,593
Accrued investment income	13,262		12,251
Reinsurance recoverable	4,330		4,394
Deferred policy acquisition costs	153,737		146,691
Cost of customer relationships acquired	24,182		23,374
Goodwill	17,306		17,160
Other intangible assets	976		851
Property and equipment, net	6,380		6,662
Due premiums, net (less $1,292 and $1,429 allowance for doubtful accounts in 2014 and 2013, respectively)	10,027		11,209
Prepaid expenses	1,152		95
Other assets	1,104		765
Total assets	$	1,318,499	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)



	September 30, 2014			December 31, 2013
Liabilities and Stockholders' Equity	(Unaudited)
Liabilities:
Policy liabilities:
Future policy benefit reserves:
Life insurance	$	894,885		834,269
Annuities	58,741			55,485
Accident and health	1,205			1,250
Dividend accumulations	15,381			13,662
Premiums paid in advance	37,432			32,560
Policy claims payable	8,534			9,488
Other policyholders' funds	6,892			7,982
Total policy liabilities	1,023,070			954,696
Commissions payable	2,563			2,562
Federal income tax payable	813			590
Deferred federal income tax	10,309			1,704
Payable for securities in process of settlement	3,787			—
Other liabilities	11,185			10,919
Total liabilities	1,051,727			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	(7,871		)	(12,542	)
Accumulated other comprehensive income:
Unrealized gains on securities, net of tax	23,087			6,795
Treasury stock, at cost	(11,011		)	(11,011	)
Total stockholders' equity	266,772			245,809
Total liabilities and stockholders' equity	$	1,318,499		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 September 30, (In thousands, except per share amounts) (Unaudited)


	2014					2013
Revenues:
Premiums:
Life insurance			$	45,234				42,091
Accident and health insurance			394					380
Property insurance			1,295					1,276
Net investment income			10,384					9,570
Realized investment gains (losses), net			(222		)			30
Other income			145					269
Total revenues			57,230					53,616
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders			17,326					16,763
Increase in future policy benefit reserves			19,307					17,398
Policyholders' dividends			2,573					2,362
Total insurance benefits paid or provided			39,206					36,523
Commissions			11,116					9,940
Other general expenses			6,029					6,163
Capitalization of deferred policy acquisition costs			(8,126		)			(7,067	)
Amortization of deferred policy acquisition costs			5,276					4,758
Amortization of cost of customer relationships acquired			453					681
Total benefits and expenses			53,954					50,998
Income before federal income tax			3,276					2,618
Federal income tax expense			952					794
Net income			2,324					1,824
Per Share Amounts:
Basic earnings per share of Class A common stock	$	0.04				$	0.03
Basic earnings per share of Class B common stock	0.03					0.02
Diluted earnings per share of Class A common stock	0.04					0.03
Diluted earnings per share of Class B common stock	0.03					0.02
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding losses arising during period			(1,628		)			(4,128	)
Reclassification adjustment for (gains) losses included in net income			227					(84	)
Unrealized gains (losses) on available-for-sale securities, net			(1,401		)			(4,212	)
Income tax benefit on unrealized losses on available-for-sale securities			(490		)			(1,474	)
Other comprehensive loss			(911		)			(2,738	)
Comprehensive income (loss)			$	1,413				(914	)

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)

	2014					2013
Revenues:
Premiums:
Life insurance			$	131,298				123,728
Accident and health insurance			1,135					1,135
Property insurance			3,832					3,658
Net investment income			30,373					27,224
Realized investment gains (losses), net			(351		)			143
Other income			477					882
Total revenues			166,764					156,770
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders			50,451					48,229
Increase in future policy benefit reserves			56,984					52,253
Policyholders' dividends			7,087					6,671
Total insurance benefits paid or provided			114,522					107,153
Commissions			31,429					29,427
Other general expenses			19,979					20,204
Capitalization of deferred policy acquisition costs			(22,617		)			(21,101	)
Amortization of deferred policy acquisition costs			15,378					13,747
Amortization of cost of customer relationships acquired			1,598					1,819
Total benefits and expenses			160,289					151,249
Income before federal income tax			6,475					5,521
Federal income tax expense			1,804					1,534
Net income			4,671					3,987
Per Share Amounts:
Basic earnings per share of Class A common stock	$	0.09				$	0.08
Basic earnings per share of Class B common stock	0.05					0.04
Diluted earnings per share of Class A common stock	0.09					0.08
Diluted earnings per share of Class B common stock	0.05					0.04
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during period			24,764					(29,576	)
Reclassification adjustment for (gains) losses included in net income			332					(188	)
Unrealized gains (losses) on available-for-sale securities, net			25,096					(29,764	)
Income tax expense (benefit) on unrealized gains (losses) on available-for-sale securities			8,804					(10,400	)
Other comprehensive income (loss)			16,292					(19,364	)
Comprehensive income (loss)			$	20,963				(15,377	)

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)


	2014			2013
Cash flows from operating activities:
Net income	$	4,671		3,987
Adjustments to reconcile net income to net cash provided by operating activities:
Realized (gains) losses on sale of investments and other assets	351			(143	)
Net deferred policy acquisition costs	(7,239		)	(7,354	)
Amortization of cost of customer relationships acquired	1,598			1,819
Depreciation	964			955
Amortization of premiums and discounts on investments	7,014			6,228
Deferred federal income tax benefit	(1,140		)	(2,384	)
Change in:
Accrued investment income	(915		)	(1,436	)
Reinsurance recoverable	64			5,161
Due premiums	1,182			533
Future policy benefit reserves	56,932			47,989
Other policyholders' liabilities	4,282			(84	)
Federal income tax receivable	201			685
Commissions payable and other liabilities	264			(1,045	)
Other, net	(1,373		)	(581	)
Net cash provided by operating activities	66,856			54,330
Cash flows from investing activities:
Sale of fixed maturities, available-for-sale	680			317
Maturities and calls of fixed maturities, available-for-sale	38,658			41,054
Maturities and calls of fixed maturities, held-to-maturity	10,523			37,213
Purchase of fixed maturities, available-for-sale	(88,860		)	(71,818	)
Purchase of fixed maturities, held-to-maturity	(12,158		)	(75,386	)
Sale of equity securities, available-for-sale	15,029			—
Calls of equity securities, available-for-sale	200			400
Purchase of equity securities, available-for-sale	(21,285		)	—
Principal payments on mortgage loans	30			829
Increase in policy loans, net	(3,707		)	(4,366	)
Sale of other long-term investments	1			1
Purchase of other long-term investments	(4		)	(86	)
Sale of property and equipment	5			—
Purchase of property and equipment	(388		)	(386	)
Maturity of short-term investments	531			2,841
Purchase of short-term investments	(531		)	(531	)
Net cash used in acquisition	(4,810		)	—
Net cash provided by (used in) investing activities	(66,086		)	(69,918	)

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

	2014			2013
Cash flows from financing activities:
Annuity deposits	$	5,479		4,293
Annuity withdrawals	(3,856		)	(3,317	)
Net cash provided by financing activities	1,623			976
Net increase (decrease) in cash and cash equivalents	2,393			(14,612	)
Cash and cash equivalents at beginning of year	54,593			56,299
Cash and cash equivalents at end of period	$	56,986		41,687
Supplemental disclosures of operating activities:
Cash paid during the period for income taxes, net	$	2,721		3,232

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, 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 September 30, 2014, and the consolidated statements of comprehensive income for the three and nine months ended September 30, 2014 and 2013 and cash flows for the nine-month periods ended September 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 September 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 and endowment 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 acquisition were $12.0 million, liabilities of $6.8 million and stockholders equity of $5.2 million. We recorded goodwill of $0.1 million related to this purchase. This entity is reported as part of our home service segment business with total revenues of $1.7 million and net income of $0.2 million as of September 30, 2014, and is a wholly owned subsidiary of SPLIC. We have converted the policy inforce data to our policy administration system and we are continuing the process of data validation and therefore our initial accounting is provisional. We anticipate the completion of our conversion efforts and final accounting will be reflected in our year end 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.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2014

(Unaudited)

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. 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.

Accounting Standards Not Yet Adopted

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

September 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
	September 30, 2014
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises	Consolidated
	(In thousands)
Revenues:
Premiums	$	35,359		11,564		—	46,923
Net investment income	6,660			3,389		335	10,384
Realized investment losses, net	(159		)	(63	)	—	(222	)
Other income	130			3		12	145
Total revenue	41,990			14,893		347	57,230
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	12,205			5,121		—	17,326
Increase in future policy benefit reserves	18,314			993		—	19,307
Policyholders' dividends	2,560			13		—	2,573
Total insurance benefits paid or provided	33,079			6,127		—	39,206
Commissions	7,351			3,765		—	11,116
Other general expenses	2,464			3,227		338	6,029
Capitalization of deferred policy acquisition costs	(6,708		)	(1,418	)	—	(8,126	)
Amortization of deferred policy acquisition costs	4,449			827		—	5,276
Amortization of cost of customer relationships acquired	163			290		—	453
Total benefits and expenses	40,798			12,818		338	53,954
Income before income tax expense	$	1,192		2,075		9	3,276

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2014

(Unaudited)



	Nine Months Ended
	September 30, 2014
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises		Consolidated
	(In thousands)
Revenues:
Premiums	$	101,739		34,526		—		136,265
Net investment income	19,409			9,958		1,006		30,373
Realized investment gains (losses), net	(271		)	(81	)	1		(351	)
Other income	406			7		64		477
Total revenue	121,283			44,410		1,071		166,764
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	34,183			16,268		—		50,451
Increase in future policy benefit reserves	54,139			2,845		—		56,984
Policyholders' dividends	7,043			44		—		7,087
Total insurance benefits paid or provided	95,365			19,157		—		114,522
Commissions	20,073			11,356		—		31,429
Other general expenses	8,269			9,895		1,815		19,979
Capitalization of deferred policy acquisition costs	(18,215		)	(4,402	)	—		(22,617	)
Amortization of deferred policy acquisition costs	13,061			2,317		—		15,378
Amortization of cost of customer relationships acquired	454			1,144		—		1,598
Total benefits and expenses	119,007			39,467		1,815		160,289
Income (loss) before income tax expense	$	2,276		4,943		(744	)	6,475

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2014

(Unaudited)




	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, 2014

(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, 2014

(Unaudited)

(4) Earnings Per Share

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




	Three Months Ended
	September 30, 2014		September 30, 2013
	(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net income	$	2,324	1,824
Net income allocated to Class A common stock	$	2,301	1,806
Net income allocated to Class B common stock	23		18
Net income	$	2,324	1,824
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	$	0.04	0.03
Basic earnings per share of Class B common stock	0.03		0.02
Diluted earnings per share of Class A common stock	0.04		0.03
Diluted earnings per share of Class B common stock	0.03		0.02



	Nine Months Ended
	September 30, 2014		September 30, 2013
	(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net income	$	4,671	3,987
Net income allocated to Class A common stock	$	4,624	3,947
Net income allocated to Class B common stock	47		40
Net income	$	4,671	3,987
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	$	0.09	0.08
Basic earnings per share of Class B common stock	0.05		0.04
Diluted earnings per share of Class A common stock	0.09		0.08
Diluted earnings per share of Class B common stock	0.05		0.04

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2014

(Unaudited)

(5) Investments

The Company invests primarily in fixed maturity securities, which totaled 84.0% of total cash, cash equivalents and investments at September 30, 2014.



	September 30, 2014				December 31, 2013
	Carrying Value		% of Total Carrying Value		Carrying Value		% of Total Carrying Value
	($ In thousands)
Fixed maturity securities	$	911,888	84.0	%	$	832,952	83.9	%
Equity securities	55,643		5.1	%	47,259		4.8	%
Mortgage loans	641		0.1	%	671		0.1	%
Policy loans	52,575		4.8	%	48,868		4.8	%
Real estate and other long-term investments	8,310		0.8	%	8,485		0.9	%
Cash and cash equivalents	56,986		5.2	%	54,593		5.5	%
Total cash, cash equivalents and investments	$	1,086,043	100.0	%	$	992,828	100.0	%

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 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.



	September 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	$	10,071	2,656	—	12,727
U.S. Government-sponsored enterprises	38,539		1,817	1	40,355
States and political subdivisions	384,239		15,344	2,422	397,161
Foreign governments	104		29	—	133
Corporate	210,715		17,063	417	227,361
Commercial mortgage-backed	243		8	—	251
Residential mortgage-backed	3,346		260	3	3,603
Total available-for-sale securities	647,257		37,177	2,843	681,591
Held-to-maturity securities:
U.S. Government-sponsored enterprises	5,783		212	—	5,995
States and political subdivisions	189,125		6,072	1,098	194,099
Corporate	35,389		924	242	36,071
Total held-to-maturity securities	230,297		7,208	1,340	236,165
Total fixed maturities	$	877,554	44,385	4,183	917,756
Equity securities:
Stock mutual funds	$	15,738	1,801	30	17,509
Bond mutual funds	35,704		—	280	35,424
Common stock	723		21	11	733
Preferred stock	1,741		236	—	1,977
Total equity securities	$	53,906	2,058	321	55,643

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 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

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 entire difference between the investment's cost and its fair value at the balance sheet date. If the Company does not intend to sell

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2014

(Unaudited)

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 recognized other-than-temporary impairments during the three and nine months ended September 30, 2014 of $0.3 million based upon the fact that there is no longer an intent to hold these securities. No other-than-temporary impairments were recognized during the three and nine months ended in 2013.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 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.



	September 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	$	159	1	1	—	—	—	159	1	1
States and political subdivisions	46,146		508	50	58,380	1,914	50	104,526	2,422	100
Corporate	22,950		324	21	2,681	93	2	25,631	417	23
Residential mortgage-backed	169		2	7	82	1	2	251	3	9
Total available-for-sale securities	69,424		835	79	61,143	2,008	54	130,567	2,843	133
Held-to-maturity securities:
States and political subdivisions	14,143		93	13	43,699	1,005	45	57,842	1,098	58
Corporate	2,368		178	2	2,958	64	2	5,326	242	4
Total held-to-maturity securities	16,511		271	15	46,657	1,069	47	63,168	1,340	62
Total fixed maturities	$	85,935	1,106	94	107,800	3,077	101	193,735	4,183	195
Equity securities:
Stock mutual funds	$	1,970	30	2	—	—	—	1,970	30	2
Bond mutual funds	15,720		280	2	—	—	—	15,720	280	2
Common stocks	—		—	—	6	11	1	6	11	1
Preferred stocks	—		—	—	—	—	—	—	—	—
Total equities	$	17,690	310	4	6	11	1	17,696	321	5

As of September 30, 2014, the Company had 54 available-for-sale securities and 47 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 September 30, 2014.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 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: