Edgar Filing: CITIZENS INC

CIA-2015.3.31-10Q

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 March 31, 2015

¨ 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. ¨ Yes x 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 April 30, 2015, 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, March 31, 2015 (Unaudited) and December 31, 2014	2

		Consolidated Statements of Comprehensive Income, Three Months Ended March 31, 2015 and 2014 (Unaudited)	4

		Consolidated Statements of Cash Flows, Three Months Ended March 31, 2015 and 2014 (Unaudited)	5

		Notes to Consolidated Financial Statements	7

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44

	Item 4.	Controls and Procedures	45

Part II.	Other Information

	Item 1.	Legal Proceedings	46

	Item 1A.	Risk Factors	46

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58

	Item 3.	Defaults Upon Senior Securities	58

	Item 4.	Mine Safety Disclosures	58

	Item 5.	Other Information	58

	Item 6.	Exhibits	59

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

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



	March 31, 2015		December 31, 2014
Assets	(Unaudited)
Investments:
Fixed maturities available-for-sale, at fair value (cost: $687,694 and $667,966 in 2015 and 2014, respectively)	$	731,587	707,227
Fixed maturities held-to-maturity, at amortized cost (fair value: $242,791 and $232,891 in 2015 and 2014, respectively)	233,662		224,932
Equity securities available-for-sale, at fair value (cost: $68,641 and $68,787 in 2015 and 2014, respectively)	70,165		69,879
Mortgage loans on real estate	619		628
Policy loans	55,288		54,032
Real estate held for investment (less $1,612 and $1,575 accumulated depreciation in 2015 and 2014, respectively)	8,087		8,131
Other long-term investments	77		135
Total investments	1,099,485		1,064,964
Cash and cash equivalents	41,430		50,708
Accrued investment income	14,235		13,457
Reinsurance recoverable	4,251		4,425
Deferred policy acquisition costs	158,987		157,468
Cost of customer relationships acquired	22,858		23,542
Goodwill	17,255		17,255
Other intangible assets	973		976
Deferred tax asset	65,708		66,269
Property and equipment, net	6,283		6,352
Due premiums, net (less $1,322 and $1,364 allowance for doubtful accounts in 2015 and 2014, respectively)	10,492		10,777
Prepaid expenses	971		301
Other assets	1,144		1,061
Total assets	$	1,444,072	1,417,555

(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)



	March 31, 2015			December 31, 2014
Liabilities and Stockholders' Equity	(Unaudited)
Liabilities:
Policy liabilities:
Future policy benefit reserves:
Life insurance	$	936,747		920,149
Annuities	60,828			59,727
Accident and health	1,212			1,216
Dividend accumulations	16,554			15,974
Premiums paid in advance	42,201			39,712
Policy claims payable	10,916			9,560
Other policyholders' funds	7,530			7,551
Total policy liabilities	1,075,988			1,053,889
Commissions payable	2,481			3,284
Federal income tax payable	76,647			78,818
Payable for securities in process of settlement	5,463			—
Other liabilities	21,431			23,205
Total liabilities	1,182,010			1,159,196
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 2015 and 2014, including shares in treasury of 3,135,738 in 2015 and 2014	259,383			259,383
Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2015 and 2014	3,184			3,184
Accumulated deficit	(18,622		)	(19,047	)
Accumulated other comprehensive income:
Unrealized gains on securities, net of tax	29,128			25,850
Treasury stock, at cost	(11,011		)	(11,011	)
Total stockholders' equity	262,062			258,359
Total liabilities and stockholders' equity	$	1,444,072		1,417,555

See accompanying notes to consolidated financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Comprehensive Income Three Months Ended March 31, (In thousands, except per share amounts) (Unaudited)

	2015					2014
Revenues:
Premiums:
Life insurance			$	42,899				41,397
Accident and health insurance			375					351
Property insurance			1,292					1,265
Net investment income			11,069					9,906
Realized investment losses, net			(71		)			(56	)
Other income			296					169
Total revenues			55,860					53,032
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders			19,403					16,457
Increase in future policy benefit reserves			17,298					17,698
Policyholders' dividends			2,309					2,102
Total insurance benefits paid or provided			39,010					36,257
Commissions			9,859					9,910
Other general expenses			7,551					6,502
Capitalization of deferred policy acquisition costs			(6,856		)			(7,068	)
Amortization of deferred policy acquisition costs			5,299					5,209
Amortization of cost of customer relationships acquired			647					531
Total benefits and expenses			55,510					51,341
Income before federal income tax			350					1,691
Federal income tax (benefit) expense			(75		)			494
Net income			425					1,197
Per Share Amounts:
Basic earnings per share of Class A common stock	$	0.01				$	0.02
Basic earnings per share of Class B common stock	—					0.01
Diluted earnings per share of Class A common stock	0.01					0.02
Diluted earnings per share of Class B common stock	—					0.01
Other comprehensive income:
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during period			5,007					14,096
Reclassification adjustment for losses included in net income			36					32
Unrealized gains on available-for-sale securities, net			5,043					14,128
Income tax expense on unrealized gains on available-for-sale securities			1,765					4,954
Other comprehensive income			3,278					9,174
Comprehensive income			$	3,703				10,371

See accompanying notes to consolidated financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows Three Months Ended March 31, (In thousands) (Unaudited)


	2015			2014
Cash flows from operating activities:
Net income	$	425		1,197
Adjustments to reconcile net income to net cash provided by operating activities:
Realized losses on sale of investments and other assets	71			56
Net deferred policy acquisition costs	(1,557		)	(1,859	)
Amortization of cost of customer relationships acquired	647			531
Depreciation	199			323
Amortization of premiums and discounts on investments	2,655			2,230
Deferred federal income tax benefit	(1,204		)	(1,023	)
Change in:
Accrued investment income	(778		)	(471	)
Reinsurance recoverable	174			(220	)
Due premiums	285			822
Future policy benefit reserves	17,191			17,697
Other policyholders' liabilities	4,404			2,053
Federal income tax receivable	(2,171		)	1,496
Commissions payable and other liabilities	(2,577		)	(1,030	)
Other, net	(753		)	(1,293	)
Net cash provided by operating activities	17,011			20,509
Cash flows from investing activities:
Maturities and calls of fixed maturities, available-for-sale	8,257			16,900
Maturities and calls of fixed maturities, held-to-maturity	6,975			9,292
Purchase of fixed maturities, available-for-sale	(24,392		)	(36,161	)
Purchase of fixed maturities, held-to-maturity	(16,562		)	(6,347	)
Calls of equity securities, available-for-sale	150			100
Purchase of equity securities, available-for-sale	1			—
Principal payments on mortgage loans	9			12
Increase in policy loans, net	(1,256		)	(1,420	)
Sale of other long-term investments	58			1
Sale of property and equipment	—			(283	)
Purchase of property and equipment	(87		)	—
Net cash used in acquisition	—			(4,810	)
Net cash used in investing activities	(26,847		)	(22,716	)

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows, Continued Three Months Ended March 31, (In thousands) (Unaudited)

	2015			2014
Cash flows from financing activities:
Annuity deposits	$	2,121		1,489
Annuity withdrawals	(1,563		)	(1,568	)
Net cash provided by (used in) financing activities	558			(79	)
Net decrease in cash and cash equivalents	(9,278		)	(2,286	)
Cash and cash equivalents at beginning of year	50,708			54,593
Cash and cash equivalents at end of period	$	41,430		52,307
Supplemental disclosures of operating activities:
Cash paid during the period for income taxes, net	$	3,300		—

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

March 31, 2015

(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 March 31, 2015, and the consolidated statements of comprehensive income and cash flows for the three months ended March 31, 2015 and 2014 and cash flows for the three-month periods ended March 31, 2015 and 2014, 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 March 31, 2015 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, 2014. 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.

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

March 31, 2015

(Unaudited)

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 2014 Form 10-K Annual Report, which should be read in conjunction with these accompanying Consolidated Financial Statements.

(2) Accounting Pronouncements

Accounting Standards Recently Adopted

None.

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

March 31, 2015

(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
	March 31, 2015
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises		Consolidated
	(In thousands)
Revenues:
Premiums	$	32,979		11,587		—		44,566
Net investment income	7,231			3,464		374		11,069
Realized investment losses, net	(56		)	(15	)	—		(71	)
Other income	214			48		34		296
Total revenue	40,368			15,084		408		55,860
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	13,560			5,843		—		19,403
Increase in future policy benefit reserves	16,137			1,161		—		17,298
Policyholders' dividends	2,295			14		—		2,309
Total insurance benefits paid or provided	31,992			7,018		—		39,010
Commissions	6,026			3,833		—		9,859
Other general expenses	3,159			3,830		562		7,551
Capitalization of deferred policy acquisition costs	(5,343		)	(1,513	)	—		(6,856	)
Amortization of deferred policy acquisition costs	4,549			750		—		5,299
Amortization of cost of customer relationships acquired	200			447		—		647
Total benefits and expenses	40,583			14,365		562		55,510
Income (loss) before income tax expense	$	(215	)	719		(154	)	350

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2015

(Unaudited)



	Three Months Ended
	March 31, 2014
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises		Consolidated
	(In thousands)
Revenues:
Premiums	$	31,811		11,202		—		43,013
Net investment income	6,283			3,287		336		9,906
Realized investment gains (losses), net	(64		)	8		—		(56	)
Other income	143			1		25		169
Total revenue	38,173			14,498		361		53,032
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	10,815			5,642		—		16,457
Increase in future policy benefit reserves	16,976			722		—		17,698
Policyholders' dividends	2,086			16		—		2,102
Total insurance benefits paid or provided	29,877			6,380		—		36,257
Commissions	6,238			3,672		—		9,910
Other general expenses	2,840			3,169		493		6,502
Capitalization of deferred policy acquisition costs	(5,659		)	(1,409	)	—		(7,068	)
Amortization of deferred policy acquisition costs	4,407			802		—		5,209
Amortization of cost of customer relationships acquired	171			360		—		531
Total benefits and expenses	37,874			12,974		493		51,341
Income (loss) before income tax expense	$	299		1,524		(132	)	1,691

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2015

(Unaudited)

(4) Earnings Per Share

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



	Three Months Ended
	March 31, 2015		March 31, 2014
	(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net income	$	425	1,197
Net income allocated to Class A common stock	$	421	1,185
Net income allocated to Class B common stock	4		12
Net income	$	425	1,197
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	$	0.01	0.02
Basic earnings per share of Class B common stock	—		0.01
Diluted earnings per share of Class A common stock	0.01		0.02
Diluted earnings per share of Class B common stock	—		0.01

(5) Investments

The Company invests primarily in fixed maturity securities, which totaled 84.6% of total cash, cash equivalents and investments at March 31, 2015.



	March 31, 2015				December 31, 2014
	Carrying Value		% of Total Carrying Value		Carrying Value		% of Total Carrying Value
	($ In thousands)
Fixed maturity securities	$	965,249	84.6	%	$	932,159	83.6	%
Equity securities	70,165		6.1	%	69,879		6.3	%
Mortgage loans	619		0.1	%	628		0.1	%
Policy loans	55,288		4.8	%	54,032		4.8	%
Real estate and other long-term investments	8,164		0.7	%	8,266		0.7	%
Cash and cash equivalents	41,430		3.7	%	50,708		4.5	%
Total cash, cash equivalents and investments	$	1,140,915	100.0	%	$	1,115,672	100.0	%

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2015

(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.



	March 31, 2015
	Cost or Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
	(In thousands)
Fixed maturities:
Available-for-sale:
U.S. Treasury securities	$	10,041	3,126	—	13,167
U.S. Government-sponsored enterprises	38,085		1,919	—	40,004
States and political subdivisions	423,372		22,039	1,146	444,265
Foreign governments	104		32	—	136
Corporate	212,851		18,522	861	230,512
Commercial mortgage-backed	203		8	—	211
Residential mortgage-backed	3,038		255	1	3,292
Total available-for-sale securities	687,694		45,901	2,008	731,587
Held-to-maturity securities:
U.S. Government-sponsored enterprises	2,015		173	—	2,188
States and political subdivisions	201,716		9,117	426	210,407
Corporate	29,931		935	670	30,196
Total held-to-maturity securities	233,662		10,225	1,096	242,791
Total fixed maturities	$	921,356	56,126	3,104	974,378
Equity securities:
Stock mutual funds	$	16,007	1,878	33	17,852
Bond mutual funds	50,976		66	640	50,402
Common stock	65		1	15	51
Preferred stock	1,593		267	—	1,860
Total equity securities	$	68,641	2,212	688	70,165

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2015

(Unaudited)



	December 31, 2014
	Cost or Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
	(In thousands)
Fixed maturities:
Available-for-sale securities:
U.S. Treasury securities	$	10,056	2,924	—	12,980
U.S. Government-sponsored enterprises	38,312		1,937	—	40,249
States and political subdivisions	404,657		19,146	1,448	422,355
Foreign governments	104		31	—	135
Corporate	211,410		17,441	1,024	227,827
Commercial mortgage-backed	223		8	—	231
Residential mortgage-backed	3,204		249	3	3,450
Total available-for-sale securities	667,966		41,736	2,475	707,227
Held-to-maturity securities:
U.S. Government-sponsored enterprises	2,017		178	—	2,195
States and political subdivisions	192,875		7,782	388	200,269
Corporate	30,040		947	560	30,427
Total held-to-maturity securities	224,932		8,907	948	232,891
Total fixed maturity securities	$	892,898	50,643	3,423	940,118
Equity securities:
Stock mutual funds	$	16,005	1,657	66	17,596
Bond mutual funds	50,976		60	796	50,240
Common stock	65		—	14	51
Preferred stock	1,741		253	2	1,992
Total equity securities	$	68,787	1,970	878	69,879

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 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

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2015

(Unaudited)

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.

No other-than-temporary impairments were recognized during the three months ended March 31, 2015 or 2014.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2015

(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.



	March 31, 2015
	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:
States and political subdivisions	$	34,614	189	34	23,089	957	12	57,703	1,146	46
Corporate	20,716		727	11	2,640	134	1	23,356	861	12
Residential mortgage-backed	115		1	3	—	—	—	115	1	3
Total available-for-sale securities	55,445		917	48	25,729	1,091	13	81,174	2,008	61
Held-to-maturity securities:
States and political subdivisions	29,230		242	17	7,949	184	9	37,179	426	26
Corporate	4,942		490	2	2,841	180	1	7,783	670	3
Total held-to-maturity securities	34,172		732	19	10,790	364	10	44,962	1,096	29
Total fixed maturities	$	89,617	1,649	67	36,519	1,455	23	126,136	3,104	90
Equity securities:
Stock mutual funds	$	5,257	33	4	—	—	—	5,257	33	4
Bond mutual funds	18,499		640	3	—	—	—	18,499	640	3
Common stocks	24		2	1	4	13	9	28	15	10
Total equities	$	23,780	675	8	4	13	9	23,784	688	17

As of March 31, 2015, the Company had 13 available-for-sale fixed maturity securities and 10 held-to-maturity fixed maturity securities that were in an unrealized loss position for greater than 12 months. We reported 9 common stock holding in an unrealized loss position for greater than 12 months as of March 31, 2015.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2015

(Unaudited)



	December 31, 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:
States and political subdivisions	$	43,776	318	47	33,716	1,130	24	77,492	1,448	71
Corporate	26,671		780	24	2,530	244	2	29,201	1,024	26
Residential mortgage-backed	159		2	5	33	1	1	192	3	6
Total available-for-sale securities	70,606		1,100	76	36,279	1,375	27	106,885	2,475	103
Held-to-maturity securities:
States and political subdivisions	21,233		74	16	15,429	314	21	36,662	388	37
Corporate	3,866		285	4	2,746	275	2	6,612	560	6
Total held-to-maturity securities	25,099		359	20	18,175	589	23	43,274	948	43
Total fixed maturities	$	95,705	1,459	96	54,454	1,964	50	150,159	3,423	146
Equity securities:
Stock mutual funds	$	5,224	66	4	—	—	—	5,224	66	4
Bond mutual funds	26,228		796	4	—	—	—	26,228	796	4
Preferred stocks	234		2	4	—			234	2	4
Common stock	46		1	2	4	13	9	50	14	11
Total equities	$	31,732	865	14	4	13	9	31,736	878	23

We have reviewed these securities for the periods ended March 31, 2015 and December 31, 2014 and determined that no other-than-temporary impairment exists that have not been recognized based on our evaluation of the credit worthiness of the issuers and the fact that we do not intend to sell the investments nor is it likely that we will be required to sell the securities before recovery of their amortized cost bases which may be maturity. We continue to monitor all securities on an on-going basis, and future information may become available which could result in impairments being recorded.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2015

(Unaudited)

The amortized cost and fair value of fixed maturity securities at March 31, 2015 by contractual maturity are shown in the table below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date have been reflected based upon final stated maturity.



	March 31, 2015
	Amortized Cost		Fair Value
	(In thousands)
Available-for-sale securities:
Due in one year or less	$	26,030	26,244
Due after one year through five years	130,179		137,207
Due after five years through ten years	97,362		104,197
Due after ten years	434,123		463,939
Total available-for-sale securities	687,694		731,587
Held-to-maturity securities:
Due in one year or less	13,943		14,047
Due after one year through five years	22,176		23,102
Due after five years through ten years	54,648		57,543
Due after ten years	142,895		148,099
Total held-to-maturity securities	233,662		242,791
Total fixed maturities	$	921,356	974,378

The Company uses the specific identification method of the individual security to determine the cost basis used in the calculation of realized gains and losses related to security sales. There were no proceeds and gross realized gains and losses from sales of securities for the three months ended March 31, 2015 or 2014.

There were no sales of available-for-sale securities for the three month period ended March 31, 2015 or 2014. There were no securities sold from the held-to-maturity portfolio for the three months ended March 31, 2015 or 2014.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2015

(Unaudited)

(6) Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We hold available-for-sale fixed maturity securities and equity securities, which are carried at fair value.

Fair value measurements are generally based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. All assets and liabilities carried at fair value are required to be classified and disclosed in one of the following three categories:


•	Level 1 - Quoted prices for identical instruments in active markets.


•	Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or whose significant value drivers are observable.


•	Level 3 - Instruments whose significant value drivers are unobservable.

Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as U.S. Treasury securities and actively traded mutual fund and stock investments.

Level 2 includes those financial instruments that are valued by independent pricing services or broker quotes. These models are primarily industry-standard models that consider various inputs, such as interest rates, credit spreads and foreign exchange rates for the underlying financial instruments. All significant inputs are observable, or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category primarily include corporate securities, U.S. Government-sponsored enterprise securities, municipal securities and certain mortgage and asset-backed securities.

Level 3 is comprised of financial instruments whose fair value is estimated based on non-binding broker prices utilizing significant inputs not based on or corroborated by readily available market information. This category consists of two private placement mortgage-backed securities.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2015

(Unaudited)

The following tables set forth our assets and liabilities that are measured at fair value on a recurring basis as of the dates indicated.



	March 31, 2015
Available-for-sale investments	Level 1		Level 2	Level 3	Total Fair Value
	(In thousands)
Financial assets:
Fixed maturities:
U.S. Treasury and U.S. Government-sponsored enterprises	$	13,167	40,004	—	53,171
States and political subdivisions	—		444,265	—	444,265
Corporate	—		230,512	—	230,512
Commercial mortgage-backed	—		—	211	211
Residential mortgage-backed	—		3,292	—	3,292
Foreign governments	—		136	—	136
Total fixed maturities	13,167		718,209	211	731,587
Equity securities:
Stock mutual funds	17,852		—	—	17,852
Bond mutual funds	50,402		—	—	50,402
Common stock	51		—	—	51
Preferred stock	1,860		—	—	1,860
Total equity securities	70,165		—	—	70,165
Total financial assets	$	83,332	718,209	211	801,752



	December 31, 2014
Available-for-sale investments	Level 1		Level 2	Level 3	Total Fair Value
	(In thousands)
Financial assets:
Fixed maturities:
U.S. Treasury and U.S. Government-sponsored enterprises	$	12,980	40,249	—	53,229
States and political subdivisions	—		422,355	—	422,355
Corporate	—		227,827	—	227,827
Commercial mortgage-backed	—		—	231	231
Residential mortgage-backed	—		3,450	—	3,450
Foreign governments	—		135	—	135
Total fixed maturities	12,980		694,016	231	707,227
Equity securities:
Stock mutual funds	17,596		—	—	17,596
Bond mutual funds	50,240		—	—	50,240
Common stock	51		—	—	51
Preferred stock	1,992		—	—	1,992
Total equity securities	69,879		—	—	69,879
Total financial assets	$	82,859	694,016	231	777,106

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2015

(Unaudited)

Financial Instruments Valuation

Fixed maturity securities, available-for-sale. At March 31, 2015, our fixed maturity securities, valued using a third-party pricing source, totaled $718.2 million for Level 2 assets and comprised 89.6% of total reported fair value of our financial assets. The Level 1 and Level 2 valuations are reviewed and updated quarterly through random testing by comparisons to separate pricing models, other third-party pricing services, and back tested to recent trades. In addition, we obtain information relative to the third-party pricing models and review model parameters for reasonableness. Fair values for Level 3 assets are based upon unadjusted broker quotes that are non-binding, and consist of two private placement mortgage-backed securities with a total value of $0.2 million. Our Level 3 assets are current relative to principal and interest payments and are considered immaterial to our financial statements. For the three months ended March 31, 2015, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third party prices were changed from the values received.

Equity securities, available-for-sale. Our available-for-sale equity securities are classified as Level 1 assets as their fair values are based upon quoted market prices.

The following table presents additional information about fixed maturity securities measured at fair value on a recurring basis that are classified as Level 3 assets and for which we have utilized significant unobservable inputs to determine fair value.



	March 31, 2015			December 31, 2014
	(In thousands)

Balance at beginning of period	$	231		309
Total realized and unrealized gains (losses)
Included in net income	—			—
Included in other comprehensive income	—			(1	)
Principal paydowns	(20		)	(77	)
Transfer in and (out) of Level 3	—			—
Balance at end of period	$	211		231

We review the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets. Such reclassifications are reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur. There were no transfers in or out of Level 1 or 2.

Financial Instruments not Carried at Fair Value

Estimates of fair values are made at a specific point in time, based on relevant market prices and information about the financial instruments. The estimated fair values of financial instruments presented below are not necessarily indicative of the amounts the Company might realize in actual market transactions.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2015

(Unaudited)

The carrying amount and fair value for the financial assets and liabilities on the consolidated balance sheets not otherwise disclosed for the periods indicated are as follows:



	March 31, 2015			December 31, 2014
	Carrying Value		Fair Value	Carrying Value	Fair Value
	(In thousands)
Financial assets:
Fixed maturities, held-to-maturity	$	233,662	242,791	224,932	232,891
Mortgage loans	619		642	628	652
Policy loans	55,288		55,288	54,032	54,032
Cash and cash equivalents	41,430		41,430	50,708	50,708
Financial liabilities:
Annuity - investment contracts	43,728		40,218	42,837	37,978

Fair values for fixed income securities, which are characterized as Level 2 assets in the fair value hierarchy, are based on quoted market prices for the same or similar securities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other assumptions, including a discount rate and estimates of future cash flows.

Mortgage loans are secured principally by residential and commercial properties. Weighted average interest rates for these loans were approximately 6.3% as of March 31, 2015 and December 31, 2014, with maturities ranging from 1 to 30 years. Management estimated the fair value using an annual interest rate of 6.25% at March 31, 2015. Our mortgage loans are considered Level 3 assets in the fair value hierarchy.

Policy loans had a weighted average annual interest rate of 7.7% as of March 31, 2015 and December 31, 2014, and no specified maturity dates. The aggregate fair value of policy loans approximates the carrying value reflected on the consolidated balance sheets. These loans typically carry an interest rate that is tied to the crediting rate applied to the related policy and contract reserves. Policy loans are an integral part of the life insurance policies we have in force, cannot be valued separately and are not marketable. Therefore, the fair value of policy loans approximates the carrying value and policy loans are considered Level 3 assets in the fair value hierarchy.

The fair value of short-term investments approximate carrying value due to their short-term nature. Our short-term investments are considered Level 2 assets in the fair value hierarchy.

The fair value of cash and cash equivalents approximate carrying value and are characterized as Level 1 assets in the fair value hierarchy.

The fair value of the Company's liabilities under annuity contract policies, which are considered Level 3 assets, was estimated at March 31, 2015 using discounted cash flows based upon a swap rate curve with interest rates ranging from 1.02% to 4.88% based upon swap rates adjusted for various risk adjustments. The fair value of liabilities under all insurance contracts are taken into consideration in the overall management of interest rate risk, which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.

(7) Commitments and Contingencies

Qualification of Life Products

In the first quarter of 2015, we announced that we identified that a substantial portion of the life insurance policies issued by our subsidiary insurance companies failed to qualify for the favorable U.S. federal income tax treatment afforded by Sections 7702

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2015

(Unaudited)

and 7702A of the Internal Revenue Code ("IRC") of 1986. This tax code section allows for qualifying products sold to clients to have favorable tax treatment such as the death benefit is not taxable. By identifying certain products that we have sold with the intention of this favorable tax treatment but in fact they do not qualify under the IRC rules, our policyholders may now be subject to additional tax liabilities. The policies at issue were primarily sold to non-U.S. citizens residing abroad. Based upon a review of the options available to the Company we have determined we will not remediate our endowments and endowment like products we have sold to non-U.S. citizens. We do intend to remediate the domestic products we have sold to U.S. citizens. Failure of these policies to qualify under Sections 7702 and 7702A has resulted in additional expenses as described below. The products have been and continue to be appropriately reported under U.S. GAAP for financial reporting.

The failure of these policies to qualify under Sections 7702 and 7702A resulted in additional expense recorded as of December 31, 2014 of $11.4 million, after tax, related to projected IRS toll charges and fees of $10.1 million as well as claims liability for past claims and reserves increases to bring policies into compliance totaling $1.3 million. The range of financial estimates relative to this issue is $11.4 million to $40.0 million, after tax. This estimated range includes projected toll charges and fees as well as increased claims liability for past claims, reserves increases to bring policies into compliance and other probable liabilities resulting from this tax compliance matter. Our estimated range reflects the uncertainties with respect to the required course of action and other matters unknown at this time. Currently, management believes there is not a specific estimable amount for these probable liabilities and expenses which is more likely than other specific amounts within our estimated range. The process of determining our estimated range was a complex undertaking and involved management’s judgment based upon a variety of factors known at the time. In addition, it is reasonably possible that we may incur additional costs associated with this issue in 2015 related to system remediation and consulting costs. We believe these costs could be $0.5 million to $0.8 million but due to the uncertainty of actions we cannot reasonably estimate these costs with any reliability. Actual amounts incurred may exceed this estimate and will be recorded as they become probable and can be reasonably estimated.

Compliance

As part of our efforts to review and improve our compliance controls, we discovered potential non-compliance with Treasury regulations such as Section 7702, described earlier, as well as unrelated applicable Bank Secrecy Act requirements. Although we are not yet able to determine the extent of any oversights or estimate any other potential loss, we cannot assure you that the impact of any non-compliance will not have a material impact upon the company.

Unclaimed Property Contingencies

The Company is currently performing an internal audit related to unclaimed property for all legal reporting entities. Based upon internal findings to date our exposure appears to be primarily in the state of Louisiana, related to conversion processes surrounding the SPLIC acquisition. The Company had been informed by the Louisiana Department of Treasury, Arkansas Auditor of State and the Texas State Comptroller, that they authorized an audit of Citizens, Inc. and its affiliates for compliance with unclaimed property laws. This audit is being conducted by Verus Financial LLC on behalf of the states.

These internal and external audits may result in additional payments to beneficiaries, additional escheatment of funds deemed abandoned under state laws, administrative penalties, interest, and changes to the Company's procedures for the identification and escheatment of abandoned property. The Company believes additional escheatment of funds in Arkansas or Texas will not be material to our financial condition or results. However, additional escheatment of funds in Louisiana, which may subsequently be deemed abandoned under the Louisiana Department of Treasury’s audit, could be substantial for SPLIC if the Louisiana Department of Treasury chooses to disregard recent unclaimed property litigation in favor of the insurance industry. At this time, the Company is not able to estimate any of these possible amounts. For more information about the risks related to these external unclaimed property audits please see the Risk Factor in Item 1A titled “We are a defendant in lawsuits, which may adversely affect our financial condition and detract from the time our management is able to devote to our business, and we are subject to risks related to litigation and regulatory matters.”

Litigation

From time to time we are subject to legal and regulatory actions relating to our business. We defend all claims vigorously. As a result, we incur defense costs, including attorneys' fees, other direct litigation costs and the expenditure of management time that otherwise would be devoted to our business.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2015

(Unaudited)

(8) Income Taxes

The effective tax rate was (21.4)% and 29.2% for the three months of 2015 and 2014, respectively. In periods where our effective tax rate is lower than the statutory tax rate of 35%, the difference is primarily due to tax-exempt state and local bonds. The effective tax rate in the current year is impacted by the low amount of income before taxes which is resulting in a lower effective rate from year to year while the tax-exempt amounts will remain level.

(9) Related Party Transactions

The Company has various routine related party transactions in conjunction with our holding company structure, such as a management service agreement related to costs incurred, a tax sharing agreement between entities, and inter-company dividends and capital contributions. There were no changes related to these relationships during the three months ended March 31, 2015. See our Annual Report on Form 10-K as of December 31, 2014 for a comprehensive discussion of related party transactions.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

March 31, 2015

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q are not statements of historical fact and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the "Act"), including, without limitation, statements specifically identified as forward-looking statements within this document. Many of these statements contain risk factors as well. In addition, certain statements in future filings by the Company with the Securities and Exchange Commission, in press releases, and in oral and written statements made by us or with the approval of the Company, which are not statements of historical fact, constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure, and other financial items, (ii) statements of our plans and objectives by our management or Board of Directors, including those relating to products or services, (iii) statements of future economic performance and (iv) statements of assumptions underlying such statements. Words such as "believes," "anticipates," "assumes," "estimates," "plans," "projects," "could," "expects," "intends," "targeted," "may," "will" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.

Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by the forward-looking statements. Factors that could cause the Company's future results to differ materially from expected results include, but are not limited to:


•	Changes in foreign and U.S. general economic, market, and political conditions, including the performance of financial markets and interest rates;


•	Changes in consumer behavior, which may affect the Company's ability to sell its products and retain business;


•	The timely development of and acceptance of new products of the Company and perceived overall value of these products and services by existing and potential customers;


•	Fluctuations in experience regarding current mortality, morbidity, persistency and interest rates relative to expected amounts used in pricing and actuarial valuation of the Company's products;


•	The performance of our investment portfolio, which may be adversely affected by changes in interest rates, adverse developments and ratings of issuers whose debt securities we may hold, and other adverse macroeconomic events;


•	Results of litigation we may be involved in;


•	Changes in assumptions related to deferred acquisition costs and the value of any businesses we may acquire;


•	Regulatory, accounting or tax changes that may affect the cost of, or the demand for, the Company's products or services;


•	Our concentration of business from persons residing in Latin America and the Pacific Rim;


•	Changes in tax laws;


•	Effects of acquisitions and restructuring, including possible difficulties in integrating and realizing the projected results of acquisitions;


•	Changes in statutory or U.S. GAAP accounting principles, policies or practices; and


•	Our success at managing risks involved in the foregoing; and


•	The risk factors discussed in "Part II. - Item 1A - Risk Factors." of this report

Such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.

We make available, free of charge, through our Internet website (http://www.citizensinc.com), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 Reports filed by officers and directors, news releases, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

March 31, 2015

Exchange Act of 1934, as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the Securities and Exchange Commission. We are not including any of the information contained on our website as part of, or incorporating it by reference into, this Quarterly Report on Form 10-Q.

Overview

Citizens is an insurance holding company serving the life insurance needs of individuals in the United States since 1969 and internationally since 1975. Through our insurance subsidiaries, we pursue a strategy of offering traditional insurance products in niche markets where we believe we are able to achieve competitive advantages. As of March 31, 2015, we had approximately $1.4 billion of total assets and approximately $5.0 billion of insurance in force. Our core insurance operations include issuing and servicing:


•	U.S. Dollar-denominated ordinary whole life insurance and endowment policies predominantly to high net worth, high income residents of foreign countries, principally in Latin America and the Pacific Rim through independent marketing consultants;


•	ordinary whole life insurance policies to middle income households concentrated in the Midwest and southern United States through independent marketing consultants; and


•	final expense and limited liability property policies to middle and lower income households in Louisiana, Arkansas and Mississippi through employee and independent agents in our home service distribution channel and funeral homes.

We were formed in 1969 by our Chairman, Harold E. Riley. Prior to our formation, Mr. Riley had many years of experience in the international and domestic life insurance business. Our Company has experienced significant growth through acquisitions in the domestic market and through market expansion in the international market. We seek to capitalize on the experience of our management team in marketing and operations as we strive to generate bottom line return using knowledge of our niche markets and our well-established distribution channels. We believe our underwriting processes, policy terms, pricing practices and proprietary administrative systems enable us to be competitive in our current markets, while protecting our shareholders and servicing our policyholders.

Current Financial Highlights

Financial highlights for the three month period ended March 31, 2015, compared to the same period in 2014 were:


•	Insurance premiums rose for the three month period ended March 31, 2015 to $44.6 million in 2015 from $43.0 million for the corresponding period in 2014, an increase of 3.6% driven primarily from first year and renewal premiums in our life insurance segment.


•	Net investment income increased 11.7% for the three month period ended March 31, 2015 compared to the corresponding period in 2014. The average yield on the consolidated portfolio as of the three months ended March 31, 2015 increased to an annualized rate of 4.26% up from 4.22% for the same period in 2014.


•	Claims and surrenders expense increased 17.9% for the three months ended in 2015 compared to 2014 as death benefits reported in both insurance segments increased and surrender benefits increased in the life segment in the current year compared to 2014 levels.


•	Changes in reserves resulted in liability increases due to the increased sales of endowment products that build up reserves at a faster pace than whole life longer-term mortality based products.


•	General expenses have increased due to accounting, actuarial and legal expenses associated with the tax compliance issue that was identified in the current year. Additional expenses incurred to date on a consolidated level totaled approximately$0.5 million.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

March 31, 2015

Our Operating Segments

Our business is comprised of three operating business segments, as detailed below.


•	Life Insurance


•	Home Service Insurance


•	Other Non-Insurance Enterprises

Our insurance operations are the primary focus of the Company, as those operations generate the majority of our income. See the discussion under Segment Operations for detailed analysis. The amount of insurance, number of policies, and average face amounts of ordinary life policies issued during the periods indicated are shown below.



	Three Months Ended March 31,
	2015					2014
	Amount of Insurance Issued		Number of Policies Issued	Average Policy Face Amount Issued		Amount of Insurance Issued		Number of Policies Issued	Average Policy Face Amount Issued
Life	$	81,070,779	1,426	$	56,852	$	80,526,319	1,238	$	65,045
Home Service	53,906,278		7,629	7,066