Edgar Filing: CITIZENS INC

Document

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, 2018

¨ 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	(I.R.S. Employer
incorporation or organization)	Identification No.)

2900 Esperanza Crossing, 2nd Floor
Austin, Texas	78758
(Address of principal executive offices)	(Zip Code)



	(Registrant's telephone number, including area code:) (512) 837-7100

(Former name, former address and former fiscal year, if changed since last report:) N/A

_______________________________________________________________________



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 o 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, a smaller reporting company or an emerging growth company. See the definition of "large accelerated filer", "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
	Large accelerated filer ¨	Accelerated filer x	Non-accelerated filer ¨	Smaller reporting company ¨	Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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 May 1, 2018, 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, 2018 and December 31, 2017 (Unaudited)	2

		Consolidated Statements of Comprehensive Income, Three Months Ended March 31, 2018 and 2017 (Unaudited)	4

		Consolidated Statements of Stockholders' Equity, Three Months Ended March 31, 2018 and 2017 (Unaudited)	5

		Consolidated Statements of Cash Flows, Three Months Ended March 31, 2018 and 2017 (Unaudited)	6

		Notes to Consolidated Financial Statements (Unaudited)	8

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	48

	Item 4.	Controls and Procedures	49

Part II.	Other Information

	Item 1.	Legal Proceedings	50

	Item 1A.	Risk Factors	51

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64

	Item 3.	Defaults Upon Senior Securities	64

	Item 4.	Mine Safety Disclosures	64

	Item 5.	Other Information	64

	Item 6.	Exhibits	65

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

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



	March 31, 2018		December 31, 2017
Assets
Investments:
Fixed maturities available-for-sale, at fair value (cost: $960,303 and $935,977 in 2018 and 2017, respectively)	$	981,095	974,609
Fixed maturities held-to-maturity, at amortized cost (fair value: $235,827 and $241,377 in 2018 and 2017, respectively)	230,705		233,961
Equity securities, at fair value (cost: $15,289 in 2017)	15,449		16,164
Mortgage loans on real estate	193		195
Policy loans	75,636		73,735
Real estate held for investment (less $5,562 and $5,479 accumulated depreciation in 2018 and 2017, respectively)	7,334		7,416
Other long-term investments	35		36
Total investments	1,310,447		1,306,116
Cash and cash equivalents	41,247		46,064
Accrued investment income	18,752		19,062
Reinsurance recoverable	3,780		3,715
Deferred policy acquisition costs	165,563		167,063
Cost of customer relationships acquired	16,925		17,499
Goodwill	12,624		12,624
Other intangible assets	960		961
Deferred tax asset	56,342		50,797
Property and equipment, net	6,330		6,624
Due premiums, net (less $1,370 and $1,611 allowance for doubtful accounts in 2018 and 2017, respectively)	10,895		12,765
Prepaid expenses	639		251
Other assets	955		912
Total assets	$	1,645,459	1,644,453

(Continued)

See accompanying notes to consolidated financial statements.

Table of Contents

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



	March 31, 2018			December 31, 2017
Liabilities and Stockholders' Equity
Liabilities:
Policy liabilities:
Future policy benefit reserves:
Life insurance	$	1,148,052		1,133,875
Annuities	74,806			73,688
Accident and health	937			990
Dividend accumulations	24,397			23,713
Premiums paid in advance	52,723			51,431
Policy claims payable	9,048			8,610
Other policyholders' funds	8,421			8,483
Total policy liabilities	1,318,384			1,300,790
Commissions payable	1,982			2,430
Federal income tax payable	97,716			93,365
Other liabilities	17,931			24,355
Total liabilities	1,436,013			1,420,940
Commitments and contingencies (Note 8)
Stockholders' equity:
Class A, no par value, 100,000,000 shares authorized, 52,215,852 shares issued and outstanding in 2018 and 2017, including shares in treasury of 3,135,738 in 2018 and 2017	259,383			259,383
Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2018 and 2017	3,184			3,184
Accumulated deficit	(58,500		)	(54,375	)
Accumulated other comprehensive income:
Unrealized gains on securities, net of tax	16,390			26,332
Treasury stock, at cost	(11,011		)	(11,011	)
Total stockholders' equity	209,446			223,513
Total liabilities and stockholders' equity	$	1,645,459		1,644,453

See accompanying notes to consolidated financial statements.

Table of Contents

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

	2018					2017
Revenues:
Premiums:
Life insurance			$	42,529			43,804
Accident and health insurance			291				328
Property insurance			1,209				1,249
Net investment income			13,771				12,739
Realized investment gains (losses), net			(575		)		1,263
Other income			208				198
Total revenues			57,433				59,581
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders			21,151				21,724
Increase in future policy benefit reserves			14,608				14,536
Policyholders' dividends			1,307				1,304
Total insurance benefits paid or provided			37,066				37,564
Commissions			8,959				9,925
Other general expenses			6,507				10,156
Capitalization of deferred policy acquisition costs			(5,963		)		(6,901	)
Amortization of deferred policy acquisition costs			7,606				7,375
Amortization of cost of customer relationships acquired			679				519
Total benefits and expenses			54,854				58,638
Income before federal income tax			2,579				943
Federal income tax expense (benefit)			2,542				(1,113	)
Net income			37				2,056
Per Share Amounts:
Basic and diluted earnings per share of Class A common stock	$	—				0.04
Basic and diluted earnings per share of Class B common stock	—					0.02
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale debt securities:
Unrealized holding gains (losses) arising during period			(18,098		)		5,137
Reclassification adjustment for losses (gains) included in net income			259				(152	)
Unrealized gains (losses) on available-for-sale debt securities, net			(17,839		)		4,985
Income tax expense (benefit) on unrealized gains (losses) on available-for-sale debt securities			(3,735		)		1,745
Other comprehensive income (loss)			(14,104		)		3,240
Total comprehensive income (loss)			$	(14,067	)		5,296

See accompanying notes to consolidated financial statements.

Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Three Months Ended March 31, 2018 and 2017
(In thousands)
(Unaudited)

	Common Stock			Accumulated deficit		Accumulated other comprehensive income (loss)		Treasury stock		Total Stockholders' equity
	Class A		Class B	Accumulated deficit		Accumulated other comprehensive income (loss)		Treasury stock		Total Stockholders' equity
Balance at December 31, 2016	$	259,383	3,184	(16,248	)	13,792		(11,011	)	249,100
Comprehensive income:
Net income	—		—	2,056		—		—		2,056
Unrealized investment gains, net	—		—	—		3,240		—		3,240
Total comprehensive income	—		—	2,056		3,240		—		5,296
Balance at March 31, 2017	$	259,383	3,184	(14,192	)	17,032		(11,011	)	254,396

Balance at December 31, 2017	$	259,383	3,184	(54,375	)	26,332		(11,011	)	223,513
Accounting standards adopted January 1, 2018	—		—	(4,162	)	4,162		—		—
Balance at January 1, 2018	259,383		3,184	(58,537	)	30,494		(11,011	)	223,513
Comprehensive loss:
Net income	—		—	37		—		—		37
Unrealized investment losses, net	—		—	—		(14,104	)	—		(14,104	)
Total comprehensive loss	—		—	37		(14,104	)	—		(14,067	)
Balance at March 31, 2018	$	259,383	3,184	(58,500	)	16,390		(11,011	)	209,446

See accompanying notes to consolidated financial statements.

Table of Contents

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

	2018			2017
Cash flows from operating activities:
Net income	$	37		2,056
Adjustments to reconcile net income to net cash provided by operating activities:
Realized (gains) losses on sale of investments and other assets	575			(1,263	)
Net deferred policy acquisition costs	1,643			474
Amortization of cost of customer relationships acquired	679			519
Depreciation	437			236
Amortization of premiums and discounts on investments	4,155			4,106
Deferred federal income tax benefit	(1,793		)	(3,895	)
Change in:
Accrued investment income	310			267
Reinsurance recoverable	(65		)	(47	)
Due premiums	1,870			1,589
Future policy benefit reserves	14,757			14,527
Other policyholders' liabilities	2,352			3,849
Federal income tax payable	4,335			6,155
Commissions payable and other liabilities	(6,872		)	(5,785	)
Other, net	(429		)	(1,158	)
Net cash provided by operating activities	21,991			21,630
Cash flows from investing activities:
Sale of fixed maturities, available-for-sale	—			508
Maturities and calls of fixed maturities, available-for-sale	16,501			18,111
Maturities and calls of fixed maturities, held-to-maturity	2,295			1,245
Purchase of fixed maturities, available-for-sale	(43,914		)	(41,076	)
Sale of equity securities, available-for-sale	—			1,940
Calls of equity securities, available-for-sale	—			300
Principal payments on mortgage loans	2			32
Increase in policy loans, net	(1,901		)	(944	)
Sale of other long-term investments and real estate	1			3,039
Purchase of property and equipment	(61		)	(433	)
Net cash used in investing activities	(27,077		)	(17,278	)

Table of Contents

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

	2018			2017
Cash flows from financing activities:
Annuity deposits	$	1,775		2,705
Annuity withdrawals	(1,506		)	(1,416	)
Net cash provided by financing activities	269			1,289
Net increase (decrease) in cash and cash equivalents	(4,817		)	5,641
Cash and cash equivalents at beginning of year	46,064			35,510
Cash and cash equivalents at end of period	$	41,247		41,151
Supplemental disclosures of operating activities:
Cash paid (received) during the period for income taxes, net	$	—		(3,372	)

Supplemental disclosures of noncash activities:

None.

See accompanying notes to consolidated financial statements.

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements

March 31, 2018

(Unaudited)

(1) Financial Statements

Basis of Presentation and Consolidation

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"), Insurance Investors, Inc. ("III") and CICA Life Ltd. Citizens and its wholly-owned subsidiaries are collectively referred to as "the Company," "we," "us" or "our."

The consolidated statements of financial position as of March 31, 2018, and the consolidated statements of comprehensive income for the three-months ended March 31, 2018 and March 31, 2017 and the consolidated statements of cash flows for the three-month periods ended March 31, 2018 and March 31, 2017, have been prepared by the Company without audit. In the opinion of management, all normal and recurring adjustments to present fairly the financial position, results of operations, and changes in cash flows at March 31, 2018 and for comparative periods have been made. The consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles ("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 included in our Annual Report on Form 10-K for the year ended December 31, 2017. 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. Until the end of 2016, CICA and CNLIC issued 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. Beginning January 1, 2017, CICA and CNLIC ceased selling life products domestically. The Company is developing a new product strategy domestically and plans to re-enter the life market in 2019. CICA primarily 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 is currently not active. We plan to dissolve III and merge it into Citizens. CICA Life Ltd. is a newly established Bermuda entity that plans to begin operations in mid-2018.

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, actuarially determined assets and liabilities and assumptions, tests of goodwill impairment, valuation allowance on deferred tax assets, valuation of uncertain tax positions 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.

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2018

(Unaudited)

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of the notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017, which should be read in conjunction with these accompanying consolidated financial statements.

(2) Accounting Pronouncements

Accounting Standards Recently Adopted

On February 14, 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. It allows a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings of the stranded tax effects that occurred due to the enactment of the Tax Cuts and Jobs Act of 2017 (the "New Tax Act"). The updated guidance is effective for reporting periods beginning after December 15, 2018 and is to be applied retrospectively to each period in which there are items impacted by the New Tax Act remaining in AOCI or at the beginning of the period of adoption. Early adoption is permitted. The Company adopted the updated guidance effective January 1, 2018 and elected to reclassify the income tax effects of the New Tax Act from AOCI to accumulated deficit as of January 1, 2018. This reclassification resulted in an increase in accumulated deficit of $4.7 million as of January 1, 2018 and an increase in AOCI by the same amount.

In January 2016, the FASB released ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The updated guidance requires equity investments, except those accounted for under the equity method of accounting, that have readily determinable fair value to be measured at fair value with any changes in fair value recognized in net income. Equity securities that do not have readily determinable fair values may be measured at estimated fair value or cost less impairment, if any, adjusted for subsequent observable price changes, with changes in the carrying value recognized in net income. A qualitative assessment for impairment is required for equity investments without readily determinable fair values. The updated guidance also eliminates the requirement to disclose the method and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet. The updated guidance was effective for the quarter ended March 31, 2018. The adoption of this guidance resulted in the recognition of $560,000 of net after-tax unrealized gains on equity investments as a cumulative effect adjustment that decreased retained deficit as of January 1, 2018 and decreased AOCI by the same amount. The Company elected to report changes in the fair value of equity investments in realized investment gains (losses), net. At December 31, 2017, equity investments were classified as available-for-sale on the Company's balance sheet. However, upon adoption, the updated guidance eliminated the available-for-sale balance sheet classification for equity investments.

Accounting Standards Not Yet Adopted

The FASB’s new lease accounting standard ASU 2016-02, Leases (Topic 842), was issued on February 25, 2016. The ASU will require organizations that lease assets, referred to as “lessees”, to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The accounting by organizations that own the assets leased by the lessee, also known as lessor accounting, will remain largely unchanged from current U.S. GAAP. However, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. The ASU on leases will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is assessing the impact of this new standard.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), with the main objective to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this ASU require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2018

(Unaudited)

present the net carrying value at the amount expected to be collected on the financial asset. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. Credit losses on available-for-sale debt securities should be measured in a manner similar to current U.S. GAAP; however, the credit losses are recorded through an allowance for credit losses rather than as a write-down. This approach is an improvement to current U.S. GAAP because an entity will be able to record reversals of credit losses (in situations in which the estimate of credit losses declines) in current period net income, which in turn should align the income statement recognition of credit losses with the reporting period in which changes occur. Current U.S. GAAP prohibits reflecting those improvements in current-period earnings. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is evaluating the impact this guidance will have on our consolidated financial statements, but it is not expected to have a significant impact on the Company's consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The Company has a large portfolio of callable debt securities purchased at a premium. As such, the Company had already been amortizing the premium to the earliest call date to reduce volatility in earnings by eliminating reporting large realized losses when debt securities are called. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

No other new accounting pronouncement issued or effective during the fiscal year had, or is expected to have, a material impact on our consolidated financial statements.

(3) Segment Information

The Company has two reportable segments: Life Insurance and Home Service Insurance. The Life Insurance and Home Service portions of the Company constitute separate businesses. In addition to the Life Insurance and Home Service business, the Company also operates other non-insurance ("Other Non-Insurance") portions of the Company, which primarily include the Company's IT and Corporate-support functions, which are included in the tables presented below to properly reconcile the segment information with the consolidated financial statements of the Company.

The accounting policies of the segments and other non-insurance enterprises 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 two reportable segments.

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2018

(Unaudited)

The Company's Other Non-Insurance enterprises are the only reportable difference between segments and consolidated operations.



	Three Months Ended
	March 31, 2018
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises		Consolidated
	(In thousands)
Revenues:
Premiums	$	32,360		11,669		—		44,029
Net investment income	10,130			3,302		339		13,771
Realized investment losses, net	(185		)	(352	)	(38	)	(575	)
Other income (loss)	209			(1	)	—		208
Total revenue	42,514			14,618		301		57,433
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	15,291			5,860		—		21,151
Increase in future policy benefit reserves	13,582			1,026		—		14,608
Policyholders' dividends	1,297			10		—		1,307
Total insurance benefits paid or provided	30,170			6,896		—		37,066
Commissions	5,228			3,731		—		8,959
Other general expenses ⁽¹⁾	(884		)	5,544		1,847		6,507
Capitalization of deferred policy acquisition costs	(4,640		)	(1,323	)	—		(5,963	)
Amortization of deferred policy acquisition costs	6,540			1,066		—		7,606
Amortization of cost of customer relationships acquired	152			527		—		679
Total benefits and expenses	36,566			16,441		1,847		54,854
Income (loss) before income tax expense	$	5,948		(1,823	)	(1,546	)	2,579

⁽¹⁾ During the three months ended March 31, 2018, the Company reduced its estimate of the liability accrued for policies that are not in compliance with Section 7702 of the Internal Revenue Code from $12.3 million to $5.1 million, as we continue to refine our estimates. The decrease is primarily related to the Life Insurance segment, which when offset by the impact of increased compliance costs, resulted in a negative amount reported for other general expenses for the Life Insurance segment for the three months ended March 31, 2018. For further information, refer to disclosures under the "Qualification of Life Products" heading within Note 8 in the Company's notes to consolidated financial statements.

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2018

(Unaudited)



	Three Months Ended
	March 31, 2017
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises		Consolidated
	(In thousands)
Revenues:
Premiums	$	33,563		11,818		—		45,381
Net investment income	9,131			3,259		349		12,739
Realized investment gains, net	77			1,186		—		1,263
Other income (loss)	118			(1	)	81		198
Total revenue	42,889			16,262		430		59,581
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	15,676			6,048		—		21,724
Increase in future policy benefit reserves	13,260			1,276		—		14,536
Policyholders' dividends	1,295			9		—		1,304
Total insurance benefits paid or provided	30,231			7,333		—		37,564
Commissions	6,007			3,918		—		9,925
Other general expenses	3,872			4,858		1,426		10,156
Capitalization of deferred policy acquisition costs	(5,378		)	(1,523	)	—		(6,901	)
Amortization of deferred policy acquisition costs	6,306			1,069		—		7,375
Amortization of cost of customer relationships acquired	172			347		—		519
Total benefits and expenses	41,210			16,002		1,426		58,638
Income (loss) before income tax expense	$	1,679		260		(996	)	943

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2018

(Unaudited)

(4) Earnings Per Share

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



	Three Months Ended
	March 31, 2018		March 31, 2017
	(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net income	$	37	2,056
Net income allocated to Class A common stock	$	37	2,035
Net income allocated to Class B common stock	—		21
Net income	$	37	2,056
Denominator:
Weighted average shares of Class A outstanding - basic and diluted	49,080		49,080
Weighted average shares of Class B outstanding - basic and diluted	1,002		1,002
Basic and diluted earnings per share of Class A common stock	$	—	0.04
Basic and diluted earnings per share of Class B common stock	—		0.02

(5) Investments

The Company invests primarily in fixed maturity securities, which totaled 89.7% of total cash, cash equivalents and investments at March 31, 2018. The Company's cash, cash equivalents and investments are listed below.



	March 31, 2018			December 31, 2017
	Carrying Value		% of Total Carrying Value	Carrying Value		% of Total Carrying Value
	(In thousands)			(In thousands)
Fixed maturity securities	$	1,211,800	89.7	$	1,208,570	89.3
Equity securities	15,449		1.1	16,164		1.2
Mortgage loans	193		—	195		—
Policy loans	75,636		5.6	73,735		5.5
Real estate and other long-term investments	7,369		0.5	7,452		0.6
Cash and cash equivalents	41,247		3.1	46,064		3.4
Total cash, cash equivalents and investments	$	1,351,694	100.0	$	1,352,180	100.0

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2018

(Unaudited)

The following tables represent the cost, gross unrealized gains and losses and fair value for fixed maturities as of the periods indicated.



	March 31, 2018
	Cost or Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
	(In thousands)
Fixed maturities:
Available-for-sale:
U.S. Treasury securities	$	9,842	1,651	—	11,493
U.S. Government-sponsored enterprises	3,565		807	—	4,372
States and political subdivisions	558,513		13,977	2,810	569,680
Foreign governments	103		18	—	121
Corporate	386,664		12,069	5,019	393,714
Residential mortgage-backed	1,616		102	3	1,715
Total available-for-sale securities	960,303		28,624	7,832	981,095
Held-to-maturity securities:
States and political subdivisions	210,623		5,759	722	215,660
Corporate	20,082		680	595	20,167
Total held-to-maturity securities	230,705		6,439	1,317	235,827
Total fixed maturities	$	1,191,008	35,063	9,149	1,216,922



	December 31, 2017
	Cost or Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
	(In thousands)
Fixed maturities:
Available-for-sale securities:
U.S. Treasury securities	$	9,860	1,948	—	11,808
U.S. Government-sponsored enterprises	3,570		926	—	4,496
States and political subdivisions	550,536		18,507	1,540	567,503
Foreign governments	103		18	—	121
Corporate	370,043		20,212	1,552	388,703
Residential mortgage-backed	1,865		118	5	1,978
Total available-for-sale securities	935,977		41,729	3,097	974,609
Held-to-maturity securities:
States and political subdivisions	213,054		7,585	629	220,010
Corporate	20,907		1,118	658	21,367
Total held-to-maturity securities	233,961		8,703	1,287	241,377
Total fixed maturity securities	$	1,169,938	50,432	4,384	1,215,986

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2018

(Unaudited)

The majority of the Company's equity securities are diversified stock and bond mutual funds.



	March 31, 2018		December 31, 2017
	Fair Value		Fair Value
	(In thousands)
Equity securities:
Stock mutual funds	$	3,117	3,217
Bond mutual funds	12,167		12,367
Common stock	21		24
Preferred stock	144		556
Total equity securities	$	15,449	16,164

The Company recognized $302,000 of net realized losses on equity securities still held as of March 31, 2018.

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. Equity securities are measured at fair value with the change in fair value recorded through net income pursuant to the adoption of ASU 2016-01 as described in Note 2.

The Company monitors all debt 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 other-than-temporary impairments ("OTTI") 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 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 fixed maturity 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

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2018

(Unaudited)

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.

Other-than-temporary impairment of $225,000 was recognized on one bond issuer and on one equity security totaling $17,000 during the three months ended March 31, 2018 and 2017, respectively.

The following tables present the fair values and gross unrealized losses of fixed maturity securities that have remained in a continuous unrealized loss position for the periods indicated.



	March 31, 2018
	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	$	152,198	1,298	140	44,902	1,512	41	197,100	2,810	181
Corporate	170,388		4,160	115	7,340	859	7	177,728	5,019	122
Residential mortgage-backed	—		—	2	154	3	4	154	3	6
Total available-for-sale securities	322,586		5,458	257	52,396	2,374	52	374,982	7,832	309
Held-to-maturity securities:
States and political subdivisions	23,109		153	24	8,905	569	16	32,014	722	40
Corporate	—		—	—	2,225	595	2	2,225	595	2
Total held-to-maturity securities	23,109		153	24	11,130	1,164	18	34,239	1,317	42
Total fixed maturities	$	345,695	5,611	281	63,526	3,538	70	409,221	9,149	351

As of March 31, 2018, the Company had 52 available-for-sale fixed maturity securities and 18 held-to-maturity fixed maturity securities that were in an unrealized loss position for greater than 12 months.

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2018

(Unaudited)



	December 31, 2017
	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	$	49,408	312	46	47,233	1,228	46	96,641	1,540	92
Corporate	61,071		732	39	7,651	820	10	68,722	1,552	49
Residential mortgage-backed	132		3	4	157	2	4	289	5	8
Total available-for-sale securities	110,611		1,047	89	55,041	2,050	60	165,652	3,097	149
Held-to-maturity securities:
States and political subdivisions	14,178		45	15	7,460	584	14	21,638	629	29
Corporate	—		—	—	2,169	658	2	2,169	658	2
Total held-to-maturity securities	14,178		45	15	9,629	1,242	16	23,807	1,287	31
Total fixed maturities	$	124,789	1,092	104	64,670	3,292	76	189,459	4,384	180
Equity securities:
Common stock	95		6	1	—	—	—	95	6	1
Total equity securities	$	95	6	1	—	—	—	95	6	1

We have reviewed these securities in an unrealized loss position for the periods ended March 31, 2018 and December 31, 2017 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 other-than-temporary impairments being recorded.

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2018

(Unaudited)

The amortized cost and fair value of fixed maturity securities at March 31, 2018 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, 2018
	Amortized Cost		Fair Value
	(In thousands)
Available-for-sale securities:
Due in one year or less	$	40,387	40,592
Due after one year through five years	111,478		114,927
Due after five years through ten years	146,207		150,234
Due after ten years	662,231		675,342
Total available-for-sale securities	960,303		981,095
Held-to-maturity securities:
Due in one year or less	20,392		20,437
Due after one year through five years	43,646		44,545
Due after five years through ten years	49,116		49,935
Due after ten years	117,551		120,910
Total held-to-maturity securities	230,705		235,827
Total fixed maturities	$	1,191,008	1,216,922

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.



	Fixed Maturities, Available-for-Sale			Equity Securities
	Three Months Ended			Three Months Ended
	March 31,			March 31,
	2018		2017	2018	2017
	(In thousands)

Proceeds	$	—	508	—	1,940
Gross realized gains	$	—	6	—	—
Gross realized losses	$	—	—	—	30

There were no sales of available-for-sale securities or equity securities for the three month period ended March 31, 2018. One available-for-sale fixed maturity security and one equity security were sold during the three month period ended March 31, 2017. There were no securities sold from the held-to-maturity portfolio for the three months ended March 31, 2018 or 2017.

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2018

(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, which are carried at fair value. We also report our equity securities at fair value with changes in fair value reported through the consolidated statements of comprehensive income.

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. There were no securities in this category at March 31, 2018.

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2018

(Unaudited)

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



	March 31, 2018
Financial Assets	Level 1		Level 2	Level 3	Total Fair Value
	(In thousands)
Available-for-sale investments
Fixed maturities:
U.S. Treasury and U.S. Government-sponsored enterprises	$	11,493	4,372	—	15,865
States and political subdivisions	—		569,680	—	569,680
Corporate	407		393,307	—	393,714
Residential mortgage-backed	—		1,715	—	1,715
Foreign governments	—		121	—	121
Total fixed maturities available-for-sale	11,900		969,195	—	981,095

Equity securities
Stock mutual funds	3,117		—	—	3,117
Bond mutual funds	12,167		—	—	12,167
Common stock	21		—	—	21
Non-redeemable preferred stock	144		—	—	144
Total equity securities	15,449		—	—	15,449
Total financial assets	$	27,349	969,195	—	996,544



	December 31, 2017
Financial Assets	Level 1		Level 2	Level 3	Total Fair Value
	(In thousands)
Available-for-sale investments
Fixed maturities:
U.S. Treasury and U.S. Government-sponsored enterprises	$	11,808	4,496	—	16,304
States and political subdivisions	—		567,503	—	567,503
Corporate	—		388,703	—	388,703
Residential mortgage-backed	—		1,978	—	1,978
Foreign governments	—		121	—	121
Total fixed maturities available-for-sale	11,808		962,801	—	974,609

Equity securities
Stock mutual funds	3,217		—	—	3,217
Bond mutual funds	12,367		—	—	12,367
Common stock	24		—	—	24
Preferred stock	556		—	—	556
Total equity securities	16,164		—	—	16,164
Total financial assets	$	27,972	962,801	—	990,773

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2018

(Unaudited)

Financial Instruments Valuation

Fixed maturity securities, available-for-sale. At March 31, 2018, our fixed maturity securities, valued using a third-party pricing source, totaled $969.2 million for Level 2 assets and comprised 97.3% 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 annually relative to the third-party pricing models and review model parameters for reasonableness. There were no Level 3 assets at March 31, 2018. For the three months ended March 31, 2018, 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. Our equity securities are classified as Level 1 assets as their fair values are based upon quoted market prices.

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 3.

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.

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, 2018			December 31, 2017
	Carrying Value		Fair Value	Carrying Value	Fair Value
	(In thousands)
Financial assets:
Fixed maturities, held-to-maturity	$	230,705	235,827	233,961	241,377
Mortgage loans	193		226	195	228
Policy loans	75,636		75,636	73,735	73,735
Cash and cash equivalents	41,247		41,247	46,064	46,064
Financial liabilities:
Annuity - investment contracts	55,821		55,109	55,035	57,575

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 properties. Weighted average interest rates for these loans were approximately 6.56% at March 31, 2018 and 6.60% at December 31, 2017. At March 31, 2018, maturities ranged from 20 to 24 years. Management estimated the fair value using an annual interest rate of 6.25% at March 31, 2018. 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, 2018 and December 31, 2017, 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 re

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2018

(Unaudited)

serves. 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 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, 2018 using discounted cash flows based upon spot rates ranging from 2.34% to 3.67% 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) Short Duration Contracts

The Company's short duration contracts consist of credit life and credit disability in the Life segment and property insurance in the Home Service segment. The following table presents information on changes in the liability for credit life, credit disability, and property policy and contract claims for the periods ended March 31, 2018 and March 31, 2017.



	March 31,
	2018			2017
	(In thousands)
Policy claims payable at January 1,	$	573		544
Less: reinsurance recoverable	—			—
Net balance at January 1,	573			544
Add claims incurred, related to:
Current year	497			673
Prior years	(111		)	(42	)
	386			631
Deduct claims paid, related to:
Current year	250			428
Prior years	262			300
	512			728
Net balance March 31,	447			447
Plus: reinsurance recoverable	—			—
Policy claims payable, March 31,	$	447		447

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2018

(Unaudited)

(8) Commitments and Contingencies

Qualification of Life Products

As of December 31, 2014, we determined that a 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 Section 7702 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 product's inside build up being not taxable unless distributions are made. Because these policies were sold with the intention that they would qualify for this favorable tax treatment, holders of these policies and the Company may now be subject to additional tax liabilities. The policies at issue were sold most substantially to non-U.S. citizens residing abroad and to a lesser extent domestically. Based upon a review of the options available to the Company, we have determined that we will not remediate our endowments and life products under IRC Section 7702 that we have sold to non-U.S. citizens but will propose an offer to the IRS to settle potential liabilities. We do intend to remediate the domestic products we have sold to U.S. citizens. Accordingly, we submitted an offer to enter into a Closing Agreement for CICA and CNLIC in May 2017. We have not received a response from the IRS on this submission. In addition, as part of our continuing review, we determined in July 2015 that certain annuity contracts do not contain qualifying language under IRC 72(s) as intended that would have provided for favorable tax treatment of the annuities. This issue affects both our domestic and international contract holders. We endorsed the majority of the affected domestic annuity contracts to comply with the IRC in December 2017 and intend to submit a Closing Agreement offer in 2018 to address past non-compliance. The Company has continued to refine the understanding of the tax failures as previously reported by preparing an individual policy calculation and has reflected the related exposure for the current reporting period as noted below. Failure of these policies to qualify under IRC Sections 7702 and 72(s) has resulted in additional liabilities and 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 72(s) results in an estimated liability as of March 31, 2018 of $5.1 million, after tax, related to projected IRS toll charges and fees reported in other general expenses of $4.7 million and reserves increases to bring policies into compliance totaling $0.4 million. The range of financial estimates relative to this issue is $4.2 million to $45.5 million, after tax. At December 31, 2017, the best estimate reserve liability was $12.3 million, net of tax and the probability weighted range of financial estimates relative to this issue was $5.9 million to $48.2 million, net of tax. Our liability and range disclosures are evaluated each reporting period and reflect our continued refinement of estimates and considerations as we prepare to submit offers to enter into closing agreements with the IRS related to these matters.

The estimated range includes projected toll charges and fees payable to the IRS, as well as any other costs attributed to remediation of non-compliant domestic life insurance policies. The estimated liability and the estimated range will be updated as we continue to refine our estimates. The amount of our liabilities and expenses depends on a number of uncertainties, including the number of prior tax years for which we may be liable to the IRS, the number of domestic life insurance policies we will be required to remediate, and the methodology applicable to the calculation of the toll charges for non-compliant policies. Given the range of potential outcomes and the significant variables assumed in establishing our estimates, actual amounts incurred may exceed our reserve and also could exceed the high end of our estimated range of liabilities and expenses. To the extent the amount reserved by the Company is insufficient to meet the actual amount of our liability and expenses, or if our estimates of those liabilities and expenses change in the future, our financial condition and results of operation may be materially adversely affected. Management believes that based upon current information we have recorded the best estimate liability to date.

Accruals for loss contingencies are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. The process of determining our best estimate and the estimated range was a complex undertaking including insight from external consultants and involved management’s judgment based upon a variety of factors known at the time. We expect to incur additional costs in 2018 associated with these issues. We believe these costs could be an additional $0.5 million to $1.5 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.

Unclaimed Property Contingencies

The Company was informed in 2012 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. This audit is not active and there has been no activity related to this audit for several years.

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2018

(Unaudited)

If the external audit was performed it could 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 of operations. 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 court decisions regarding unclaimed property litigation in favor of the insurance industry. At this time, the Company is not able to reasonably estimate any of these possible amounts.

Litigation

On or about March 16, 2017, Juan Gamboa filed a putative class action lawsuit against the Company and five of its current and former directors and executive officers in the United States District Court, Western District of Texas. The lawsuit alleges the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making false and/or misleading statements, as well as failing to disclose material adverse facts about the Company’s business, operations and prospects. On May 25, 2017, the court appointed lead plaintiffs, and on July 31, 2017, the lead plaintiffs filed an amended complaint. The amended complaint seeks an award of damages in an unspecified amount on behalf of a putative class consisting of persons who purchased the Company’s common stock between March 11, 2015 and March 8, 2017, inclusive. On September 28, 2017, we filed a motion to dismiss, which remains pending before the court. The Company believes that the lawsuit is without merit, and it intends to vigorously defend against all claims asserted. At this time, the Company is unable to reasonably determine the outcome of this 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. If we suffer an adverse judgment as a result of litigation claims, it could have a material adverse effect on our business, results of operations and financial condition.

(9) Income Taxes

The effective tax rate was 98.6% and (118.0)% for the three months ended March 31, 2018 and March 31, 2017, respectively. Additionally there were $0.7 million of tax expense and $0.8 million tax benefit related to interest expense on an uncertain tax position in the three months ended March 31, 2018 and March 31, 2017, respectively. The effective tax rate is affected by our tax compliance issues discussed in Note 8 "Commitments and Contingencies", as IRS toll charge penalties are not tax deductible and can move up or down depending on the net adjustment to our best estimate liability. In addition, we report the interest component of our uncertain tax positions in income tax expense, which can move up or down depending on the tax compliance issues as well as statute expirations. Absent the effect on our effective tax rate of our tax compliance issues, in prior years where our effective tax rate was lower than the statutory tax rate of 35%, the difference was primarily due to tax-exempt state and local bond income which reduce the effective tax rate.

Beginning in 2018, the statutory tax rate is 21%. In accordance with the SEC's Staff Accounting Bulletin No. 118 ("SAB 118"), the Company recorded provisional amounts related to the impacts of the New Tax Act as of December 31, 2017, including but not limited to the change in corporate tax rate and immediate expensing of certain capital assets. The amounts are considered provisional estimates due to complexities and ambiguities in New Tax Act which resulted in incomplete accounting for the tax effects of these provisions. Further guidance, either legislative or interpretive, and analysis will be required to complete the accounting for these items. A final determination is required to be made within a measurement period not to extend beyond one year from the enactment date of the New Tax Act. Upon further analysis of certain aspects of the Act during the three months ended March 31, 2018, we determined that no adjustment to our provisional amount recorded as of December 31, 2017 was required. We will continue our analysis of the New Tax Act and will record an update to our provisional amount if needed during the measurement period allowed by SAB 118.

For the three months ended March 31, 2018, our effective tax rate was significantly higher than the three months ended March 31, 2017, as the Company recorded a net reduction in the overall accrual for IRS toll charge penalties and a tax benefit on the Company's uncertain tax position interest accrual compared to a net increase for these items in the three months ended March 31, 2017.

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2018

(Unaudited)

(10) Benefit Plans

The Company has an employer-sponsored 401(k) plan available to all eligible employees. This is an additional benefit offered to employees, which supplements the defined contribution profit-sharing plan. Employees with one year of service can participate in the plan. Contributions are made by employees and the Company provides a matching contribution based upon the employee's level of contribution. The Company's expense related to contributions into the 401(k) plan totaled $187,000 and $177,000 for the three months ended March 31, 2018 and March 31, 2017, respectively.

(11) Stock Compensation

In January, 2018, the Company's Board of Directors approved awards of restricted stock units under the Citizens, Inc. Omnibus Incentive Plan for non-employee directors and the executive management team totaling $10,500 per director and $976,000 in total to the executive management team. The grant date was February 15, 2018 with a one-year vesting schedule for the directors and a two-year vesting schedule for the executive management team. In addition, the Board also approved equity grants for 2018 not to exceed $1.2 million for other employees with a delegation to the CEO to determine the value to be awarded.