form10-q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q
___________________

x   Quarterly Report Pursuant to Section 13 or 15(d)
 of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2011

or

o   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 of other jurisdiction of incorporation or organization
 
I.R.S. Employer Identification No.)
     
400 East Anderson Lane, Austin, TX
 
78752
(Address of principal executive offices)
 
(Zip Code)

(512) 837-7100
(Registrant's telephone number, including area code
 
N/A
(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes   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, or a small reporting company.  (Check one):

Large accelerated filer  o
Accelerated filer  x
Non-accelerated filer  o
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes   x No

As of August 4, 2011, the Registrant had 48,946,546 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
 
Part I.
Financial Information
Page
Number
       
       
 
Item 1.
Financial Statements
 
       
    2
       
    4
       
    5
       
    6
       
    8
       
 
Item 2.
26
       
 
Item 3.
44
       
 
Item 4.
46
       
Part II.
Other Information
 
     
 
Item 1.
46
       
 
Item 1A.
47
       
 
Item 2.
47
       
 
Item 3.
47
       
 
Item 4.
47
       
 
Item 5.
47
       
 
Item 6.
48
 
 
1


PART I.  FINANCIAL INFORMATION

Item 1.   FINANCIAL STATEMENTS
 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Financial Position
(In thousands)

Assets
 
June 30,
2011
   
December 31,
2010
 
   
(Unaudited)
       
Investments:
           
Fixed maturities available-for-sale, at fair value (cost:  $574,094 and $578,412 in 2011 and 2010, respectively)
  $ 583,108       575,737  
Fixed maturities held-to-maturity, at amortized cost (fair value:  $108,608 and $79,103 in 2011 and 2010, respectively)
    109,744       80,232  
Equity securities available-for-sale, at fair value (cost:  $20,551 and $19,844 in 2011 and 2010, respectively)
    24,593       23,304  
Mortgage loans on real estate
    1,466       1,489  
Policy loans
    36,919       35,585  
Real estate held for investment (less $1,082 and $1,017 accumulated depreciation in 2011 and 2010, respectively)
    9,152       9,200  
Other long-term investments
    144       148  
Total investments
    765,126       725,695  
                 
Cash and cash equivalents
    58,376       49,723  
Accrued investment income
    8,615       7,433  
Reinsurance recoverable
    9,440       9,729  
Deferred policy acquisition costs
    131,970       125,684  
Cost of customer relationships acquired
    30,083       31,631  
Goodwill
    17,160       17,160  
Other intangible assets
    970       1,019  
Federal income tax receivable
    847       1,914  
Property and equipment, net
    7,940       7,101  
Due premiums, net (less $1,489 and $1,568 allowance for doubtful accounts in 2011 and 2010, respectively)
    7,989       8,537  
Prepaid expenses
    1,463       474  
Other assets
    689       406  
Total assets
  $ 1,040,668       986,506  

 
See accompanying notes to consolidated financial statements.
(Continued)
 
 
2


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Financial Position
(In thousands, except share amounts)

Liabilities and Stockholders' Equity
 
June 30,
2011
   
December 31,
2010
 
   
(Unaudited)
       
Liabilities:
           
Policy liabilities:
       
 
 
Future policy benefit reserves:
           
Life insurance
  $ 661,534       637,140  
Annuities
    44,241       42,096  
Accident and health
    5,634       5,910  
Dividend accumulations
    10,028       9,498  
Premiums paid in advance
    25,282       23,675  
Policy claims payable
    9,507       10,540  
Other policyholders' funds
    8,137       8,191  
Total policy liabilities
    764,363       737,050  
                 
Commissions payable
    2,564       2,538  
Deferred federal income tax
    13,695       9,410  
Payable for securities in process of settlement
    10,078       -  
Warrants outstanding
    372       1,587  
Other liablities
    9,047       8,287  
Total liabilities
    800,119       758,872  
                 
Commitments and contingencies (Note 8)
               
Stockholders' equity:
               
Common stock:
               
Class A, no par value, 100,000,000 shares authorized, 51,825,079 shares isued in 2011 and 51,822,497 shares issued in 2010,including shares in treasury of 3,135,738 in 2011 and 2010
    256,720       256,703  
Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2011 and 2010
    3,184       3,184  
Accumulated deficit
    (17,558 )     (22,581 )
Accumulated other comprehensive income:
               
Unrealized gains on securities, net of tax
    9,214       1,339  
Treasury stock, at cost
    (11,011 )     (11,011 )
Total stockholders' equity
    240,549       227,634  
Total liabilities and stockholders' equity
  $ 1,040,668       986,506  

See accompanying notes to consolidated financial statements.

 
3


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Operations
Three Months Ended June 30,
(In thousands, except share amounts)
(Unaudited)

   
2011
   
2010
 
Revenues:
           
Premiums:
           
Life insurance
  $ 38,231       35,085  
Accident and health insurance
    396       409  
Property insurance
    1,259       1,182  
Net investment income
    7,717       8,275  
Realized investment gains (losses), net
    (13 )     692  
Decrease in fair value of warrants
    816       366  
Other income
    104       151  
Total revenues
    48,510       46,160  
Benefits and expenses:
               
Insurance benefits paid or provided:
               
Claims and surrenders
    14,905       15,094  
Increase in future policy benefit reserves
    13,000       9,783  
Policyholders' dividends
    1,920       1,777  
Total insurance benefits paid or provided
    29,825       26,654  
                 
Commissions
    9,930       9,028  
Other general expenses
    6,919       7,122  
Capitalization of deferred policy acquisition costs
    (7,884 )     (6,978 )
Amortization of deferred policy acquisition costs
    4,229       5,218  
Amortization of cost of customer relationships acquired
    751       754  
Total benefits and expenses
    43,770       41,798  
                 
Income before federal income tax
    4,740       4,362  
Federal income tax expense (benefit)
    1,497       1,177  
Net income (loss)
  $ 3,243       3,185  
                 
Per Share Amounts:
               
Basic earnings per share of Class A common stock
  $ 0.07       0.07  
Basic earnings per share of Class B common stock
    0.03       0.03  
Diluted earnings per share of Class A common stock
    0.07       0.07  
Diluted earnings per share of Class B common stock
    0.03       0.03  

See accompanying notes to consolidated financial statements.

 
4


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Operations
Six Months Ended June 30,
(In thousands, except per share amounts)
(Unaudited)

   
2011
   
2010
 
Revenues:
           
Premiums:
           
Life insurance
  $ 73,842       68,681  
Accident and health insurance
    768       823  
Property insurance
    2,504       2,362  
Net investment income
    15,231       16,624  
Realized investment gains (losses), net
    6       751  
Decrease in fair value of warrants
    1,215       252  
Other income
    227       499  
Total revenues
    93,793       89,992  
Benefits and expenses:
               
Insurance benefits paid or provided:
               
Claims and surrenders
    29,784       30,671  
Increase in future policy benefit reserves
    25,318       19,328  
Policyholders' dividends
    3,582       3,347  
Total insurance benefits paid or provided
    58,684       53,346  
                 
Commissions
    19,002       17,156  
Other general expenses
    13,529       13,975  
Capitalization of deferred policy acquisition costs
    (15,049 )     (12,973 )
Amortization of deferred policy acquisition costs
    8,749       10,162  
Amortization of cost of customer relationships acquired
    1,405       1,592  
Total benefits and expenses
    86,320       83,258  
                 
Income before federal income tax
    7,473       6,734  
Federal income tax expense (benefit)
    2,450       1,944  
Net income (loss)
  $ 5,023       4,790  
                 
Per Share Amounts:
               
Basic earnings per share of Class A common stock
  $ 0.10       0.10  
Basic earnings per share of Class B common stock
    0.05       0.05  
Diluted earnings per share of Class A common stock
    0.08       0.10  
Diluted earnings per share of Class B common stock
    0.04       0.05  

See accompanying notes to consolidated financial statements.

 
5


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Cash Flows
Six Months Ended June 30,
(In thousands)
(Unaudited)

   
2011
   
2010
 
Cash flows from operating activities:
           
Net income
  $ 5,023       4,790  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Realized (gains) losses on sale of investments and other assets
    (6 )     (751 )
Net deferred policy acquisition costs
    (6,300 )     (2,811 )
Amortization of cost of customer relationships acquired
    1,405       1,592  
Increase (decrease) in fair value of warrants
    (1,215 )     (252 )
Depreciation
    451       524  
Amortization of premiums and discounts on fixed maturities and short-term investments
    2,243       1,377  
Deferred federal income tax expense (benefit)
    45       27  
Change in:
               
Accrued investment income
    (1,182 )     276  
Reinsurance recoverable
    289       1,185  
Due premiums and other receivables
    548       1,037  
Future policy benefit reserves
    24,942       18,903  
Other policyholders' liabilities
    1,050       2,833  
Federal income tax receivable
    1,067       746  
Commissions payable and other liabilities
    786       (3,492 )
Other, net
    (1,101 )     (1,945 )
Net cash provided by (used in) operating activities
    28,045       24,039  
Cash flows from investing activities:
               
Sale of fixed maturities, available-for-sale
    -       6,866  
Maturity and calls of fixed maturities, available-for-sale
    61,186       86,600  
Maturity and calls of fixed maturities, held-to-maturity
    27,000       51,250  
Purchase of fixed maturities, available-for-sale
    (51,507 )     (105,524 )
Purchase of fixed maturities, held-to-maturity
    (54,174 )     (31,140 )
Sale of equity securities, available-for-sale
    -       591  
Calls of equity securities, available-for-sale
    432       50  
Purchase of equity securities, available-for-sale
    (1,000 )     (136 )
Principal payments on mortgage loans
    23       24  
Increase in policy loans
    (1,334 )     (1,877 )
Sale of other long-term investments
    3       -  
Purchase of other long-term investments
    (17 )     (261 )
Purchase of property and equipment
    (1,342 )     (1,071 )
Maturity of short-term investments
    -       2,500  
Net cash provided by (used in) investing activities
    (20,730 )     7,872  

 
See accompanying notes to consolidated financial statements.
(Continued)


 
6


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Cash Flows, Continued
Six Months Ended June 30,
(In thousands)
(Unaudited)

   
2011
   
2010
 
Cash flows from financing activities:
           
Warrants exercised
  $ 17       -  
Annuity deposits
    3,162       2,458  
Annuity withdrawals
    (1,841 )     (1,669 )
Net cash provided by (used in) financing activities
    1,338       789  
                 
Net increase (decrease) in cash and cash equivalents
    8,653       32,700  
Cash and cash equivalents at beginning of year
    49,723       48,625  
Cash and cash equivalents at end of period
  $ 58,376       81,325  
Supplemental disclosures of operating activities:
               
Cash paid during the period for income taxes
  $ 1,338       1,171  
 
Supplemental Disclosures of Non-Cash Investing Activities:

In 2010, the Company sold a parcel of real estate and issued a mortgage loan for $102,000.

See accompanying notes to consolidated financial statements.

 
7


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2011
(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"), Computing Technology, Inc. ("CTI"), Insurance Investors, Inc. ("III"), Citizens National Life Insurance Company ("CNLIC"), Security Plan Life Insurance Company ("SPLIC"), and Security Plan Fire Insurance Company ("SPFIC").  Integrity Capital Corporation and Integrity Capital Life Insurance Company were merged into CICA effective April 1, 2011.  All significant inter-company accounts and transactions have been eliminated.  Citizens and its wholly-owned subsidiaries are collectively referred to as "the Company, "we," or "our."

The consolidated statements of financial position for June 30, 2011, the consolidated statements of operations for the three and six-month periods ended June 30, 2011 and 2010, and the consolidated statements of cash flows for the six-month period then ended have been prepared by the Company without audit.  In the opinion of management, all adjustments to present fairly the financial position, results of operations, and changes in cash flows at June 30, 2011, and for comparative periods have been made.

We provide primarily life insurance policies through three of our subsidiaries - CICA, SPLIC, and CNLIC, as well as a small amount of health insurance policies through CICA and CNLIC.  CICA and CNLIC issue ordinary whole-life policies, burial insurance, pre-need policies, and accident and health related policies, throughout the Midwest and southern United States.  CICA also issues ordinary whole-life policies to non-U.S. residents.  SPLIC offers final expense and home service life insurance in Louisiana, Arkansas and Mississippi and SPFIC, a wholly-owned subsidiary of SPLIC, writes a limited amount of property insurance in Louisiana.

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

The Company recorded adjustments in the first quarter of 2011 related to the reserve calculation of certain SPLIC policies as of December 31, 2010, that resulted in a pre-tax decrease in reserves of $0.2 million.  In addition, the Company utilized system-generated information to refine estimates from December 31, 2010, which resulted in a decrease of deferred acquisition costs of $0.3 million and a reserve decrease of $0.1 million reflected in the first quarter reporting period.  The resulting net income impact totaled $50,237 in the first three months of 2011.

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 liabilities and assumptions, goodwill impairment, valuation allowance on deferred tax assets, and contingencies relating to litigation and regulatory matters.  Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the Consolidated Financial Statements.

Reclassification

Reclassifications have been made in the current year related to certain prior year reported amounts to provide consistent presentation.  The Company recorded reclassifications related to DAC amounts capitalized and amortized to properly reflect the amount used to develop the DAC asset balance and to provide consistent presentation with the current year.  We recorded increases to DAC capitalized of $1.1 million and $1.7 million and an increase in amortization for the same amounts for the three months ended and the first six months of 2010.

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements included in our 2010 Form 10-K Annual Report, which should be read in conjunction with these accompanying Consolidated Financial Statements.

(2)           Accounting Pronouncements

Accounting Standards Not Yet Adopted

In October 2010, the FASB issued guidance modifying the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts.  The guidance specifies that the costs must be based on successful efforts.  The guidance also specifies that advertising costs should be included as deferred acquisition costs only when the direct-response advertising accounting criteria are met.  If application of the guidance would result in the capitalization of acquisition costs that had not been capitalized prior to adoption, the entity may elect not to capitalize those additional costs.  The new guidance is effective for reporting periods beginning after December 15, 2011, and should be applied prospectively, with retrospective application permitted.  The Company is in the process of evaluating the impact of adoption of the guidance on the results of operations and financial position.

Accounting Standards Recently Adopted

In December 2010, the FASB issued disclosure guidance for entities that enter into business combinations that are material.  The guidance specifies that if an entity presents comparative financial statements, the entity should disclose pro forma revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.  The guidance expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination.  The Company will apply the guidance to any business combinations entered into on or after January 1, 2011.

ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

(3)           Segment Information

The Company has three reportable segments:  Life Insurance, Home Service Insurance, and Other Non-Insurance enterprises.  The accounting policies of the segments are in accordance with U.S. GAAP and are the same as those used in the preparation of the consolidated financial statements.  The Company evaluates profit and loss performance based on U.S. GAAP income before federal income taxes for its three reportable segments.

The Company has no reportable differences between segments and consolidated operations.

   
Three Months Ended June 30, 2011
 
   
Life
Insurance
   
Home
Service
Insurance
   
Other
Non-Insurance
Enterprises
   
Consolidated
 
   
(In thousands)
 
Revenues:
       
 
             
Premiums
  $ 29,016       10,870       -       39,886  
Net investment income
    4,272       3,275       170       7,717  
Realized investment gains (losses), net
    4       (17 )     -       (13 )
Decrease in fair value of warrants
    -       -       816       816  
Other income
    77       6       21       104  
Total revenue
    33,369       14,134       1,007       48,510  
                                 
Benefits and expenses:
                               
Insurance benefits paid or provided:
                               
Claims and surrenders
    10,456       4,449       -       14,905  
Increase in future policy benefit reserves
    12,015       985       -       13,000  
Policyholders' dividends
    1,901       19       -       1,920  
Total insurance benefits paid or provided
    24,372       5,453       -       29,825  
                                 
Commissions
    6,058       3,872       -       9,930  
Other general expenses
    2,999       3,173       747       6,919  
Capitalization of deferred policy acquisition costs
    (6,060 )     (1,824 )     -       (7,884 )
Amortization of deferred policy acquisition costs
    3,772       457       -       4,229  
Amortization of cost of customer relationships acquired
    276       475       -       751  
Total benefits and expenses
    31,417       11,606       747       43,770  
Income (loss) before income tax expense
  $ 1,952       2,528       260       4,740  
 
   
Six Months Ended June 30, 2011
 
   
Life
Insurance
   
Home
Service
Insurance
   
Other
Non-Insurance
Enterprises
   
Consolidated
 
   
(In thousands)
 
Revenues:
       
 
             
Premiums
  $ 55,536       21,578       -       77,114  
Net investment income
    8,353       6,512       366       15,231  
Realized investment gains (losses), net
    4       2       -       6  
Decrease in fair value of warrants
    -       -       1,215       1,215  
Other income
    164       14       49       227  
Total revenue
    64,057       28,106       1,630       93,793  
                                 
Benefits and expenses:
                               
Insurance benefits paid or provided:
                               
Claims and surrenders
    19,857       9,927       -       29,784  
Increase in future policy benefit reserves
    23,824       1,494       -       25,318  
Policyholders' dividends
    3,544       38       -       3,582  
Total insurance benefits paid or provided
    47,225       11,459       -       58,684  
                                 
Commissions
    11,400       7,602       -       19,002  
Other general expenses
    5,953       6,255       1,321       13,529  
Capitalization of deferred policy acquisition costs
    (11,487 )     (3,562 )     -       (15,049 )
Amortization of deferred policy acquisition costs
    7,610       1,139       -       8,749  
Amortization of cost of customer relationships acquired
    499       906       -       1,405  
Total benefits and expenses
    61,200       23,799       1,321       86,320  
Income (loss) before income tax expense
  $ 2,857       4,307       309       7,473  
 
   
Three Months Ended June 30, 2010
 
   
Life Insurance
   
Home
Service
Insurance
   
Other
Non-Insurance Enterprises
   
Consolidated
 
   
(In thousands)
 
Revenues:
       
 
             
Premiums
  $ 26,081       10,595       -       36,676  
Net investment income
    4,635       3,475       165       8,275  
Realized investment gains (losses), net
    144       548       -       692  
Decrease in fair value of warrants
    -       -       366       366  
Other income
    132       4       15       151  
Total revenue
    30,992       14,622       546       46,160  
                                 
Benefits and expenses:
                               
Insurance benefits paid or provided:
                               
Claims and surrenders
    10,247       4,847       -       15,094  
Increase in future policy benefit reserves
    8,773       1,010       -       9,783  
Policyholders' dividends
    1,760       17       -       1,777  
Total insurance benefits paid or provided
    20,780       5,874       -       26,654  
                                 
Commissions
    5,239       3,789       -       9,028  
Other general expenses
    2,654       3,794       674       7,122  
Capitalization of deferred policy acquisition costs
    (5,219 )     (1,759 )     -       (6,978 )
Amortization of deferred policy acquisition costs
    5,001       217       -       5,218  
Amortization of cost of customer relationships acquired
    275       479       -       754  
Total benefits and expenses
    28,730       12,394       674       41,798  
Income (loss) before income tax expense
  $ 2,262       2,228       (128 )     4,362  
 
   
Six Months Ended June 30, 2010
 
   
Life Insurance
   
Home
Service
Insurance
   
Other
Non-Insurance Enterprises
   
Consolidated
 
   
(In thousands)
 
Revenues:
       
 
             
Premiums
  $ 50,850       21,016       -       71,866  
Net investment income
    9,346       7,007       271       16,624  
Realized investment gains (losses), net
    115       681       (45 )     751  
Decrease in fair value of warrants
    -       -       252       252  
Other income
    409       53       37       499  
Total revenue
    60,720       28,757       515       89,992  
                                 
Benefits and expenses:
                               
Insurance benefits paid or provided:
                               
Claims and surrenders
    20,146       10,525       -       30,671  
Increase in future policy benefit reserves
    17,435       1,893       -       19,328  
Policyholders' dividends
    3,302       45       -       3,347  
Total insurance benefits paid or provided
    40,883       12,463       -       53,346  
                                 
Commissions
    9,744       7,412       -       17,156  
Other general expenses
    5,631       7,435       909       13,975  
Capitalization of deferred policy acquisition costs
    (9,683 )     (3,290 )     -       (12,973 )
Amortization of deferred policy acquisition costs
    9,660       502       -       10,162  
Amoritzation of cost of customer relationships acquired
    605       987       -       1,592  
Total benefits and expenses
    56,840       25,509       909       83,258  
Income (loss) before income tax expense
  $ 3,880       3,248       (394 )     6,734  

(4)           Total Comprehensive Income

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(In thousands)
 
         
 
             
Net income (loss)
  $ 3,243       3,185       5,023       4,790  
Other comprehensive income (loss) net of effects of deferred acquisiton costs and taxes:
                               
Unrealized gains (losses) on available-for-sale securities
    10,508       3,815       12,115       10,266  
Tax (expense) benefit
    (3,678 )     (2,646 )     (4,240 )     (4,435 )
Other comprehensive income (loss)
    6,830       1,169       7,875       5,831  
Total comprehensive income (loss)
  $ 10,073       4,354       12,898       10,621  

 
13


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2011
  (Unaudited)

(5)
Earnings Per Share

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

   
Three Months Ended June 30,
 
   
2011
   
2010
 
   
(In thousands,
except per share amounts)
 
Basic and diluted earnings per share:
           
Numerator:
       
 
 
Net income
  $ 3,243       3,185  
                 
Net income allocated to Class A common stock
  $ 3,210       3,153  
Net income allocated to Class B common stock
    33       32  
Net income available to common stockholders
  $ 3,243       3,185  
Denominator:
               
Weighted average shares of Class A outstanding - basic and diluted
    48,689       48,687  
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
  $ 0.07       0.07  
Basic and diluted earnings per share of Class B common stock
    0.03       0.03  
 
   
Six Months Ended June 30,
 
   
2011
   
2010
 
   
(In thousands,
except per share amounts)
 
       
Basic and diluted earnings per share:
           
Numerator:
       
 
 
Net income
  $ 5,023       4,790  
                 
Net income allocated to Class A common stock
  $ 4,972       4,741  
Net income allocated to Class B common stock
    51       49  
Net income available to common stockholders
  $ 5,023       4,790  
Denominator:
               
Weighted average shares of Class A outstanding - basic
    48,688       48,687  
Weighted average shares of Class A outstanding - diluted
    48,704       48,687  
Weighted average shares of Class B outstanding - basic and diluted
    1,002       1,002  
                 
Basic earnings per share of Class A common stock
  $ 0.10       0.10  
Basic earnings per share of Class B common stock
    0.05       0.05  
Diluted earnings per share of Class A common stock
    0.08       0.10  
Diluted earnings per share of Class B common stock
    0.04       0.05  

The diluted earnings per share calculation has assumptions regarding the exercise of the warrants issued to investors of the Class A-1 and A-2 preferred stock.  For the three months ended June 30, 2011, the calculation assumes the issue of 1,282 additional shares, causing a reduction in net income of $35,000 as those shares would no longer be outstanding.  The calculation produces no change in earnings per share.  The calculation for the six months ended June 30, 2011, assumes the issue of 16,173 additional shares with a reduction in net income of $1.1 million.  This calculation results in dilution of $0.02 per share of Class A common stock and $0.01 per share of Class B common stock for earnings per share of $0.08 per share of Class A common stock and $0.04 per share of Class B common stock.

 
14


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2011
(Unaudited)

(6)
Investments

 
The Company invests primarily in fixed maturity securities, which totaled 84.1% of total investments and cash and cash equivalents at June 30, 2011.

   
June 30, 2011
   
December 31, 2010
 
   
Carrying
Value
   
% of Total
Carrying Value
   
Carrying
Value
   
% of Total
Carrying Value
 
   
(In thousands)
         
(In thousands)
       
                         
Fixed maturity securities
  $ 692,852       84.1     $ 655,969       84.6  
Equity securities
    24,593       3.0       23,304       3.0  
Mortage loans
    1,466       0.2       1,489       0.2  
Policy loans
    36,919       4.5       35,585       4.6  
Real estate
    9,152       1.1       9,200       1.2  
Other long-term investments
    144       -       148       -  
Cash and cash equivalents
    58,376       7.1       49,723       6.4  
Total cash, cash equivalents and investments
  $ 823,502       100.0     $ 775,418       100.0  

 
Cash balances fluctuate as excess available funds are pending investment into fixed maturity securities.
 
The following tables represent gross unrealized gains and losses for fixed maturities and equity securities as of the periods indicated.

   
June 30, 2011
 
   
Cost or
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In thousands)
 
Fixed maturities available-for-sale:
       
 
             
U.S. Treasury securities
  $ 10,455       2,040       -       12,495  
U.S. Government-sponsored enterprises
    262,470       696       2,850       260,316  
States of the United States and political subdivisions of the states
    132,740       3,104       2,701       133,143  
Foreign governments
    105       28       -       133  
Corporate
    158,250       8,860       782       166,328  
Securities not due at a single maturity date
    10,074       632       13       10,693  
Total fixed maturities available-for-sale
    574,094       15,360       6,346       583,108  
                                 
Fixed maturities held-to-maturity
                               
U.S. Government-sponsored enterprises
    80,734       206       779       80,161  
States of the United States and political subdivisions of the states
    29,010       3       566       28,447  
Total fixed maturities held-to-maturity
    109,744       209       1,345       108,608  
Total fixed maturities
  $ 683,838       15,569       7,691       691,716  
Total equity securities
  $ 20,551       4,042       -       24,593  


   
December 31, 2010
 
   
Cost or
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In thousands)
 
Fixed maturities available-for-sale:
       
 
             
U.S. Treasury securities
  $ 10,908       1,917       -       12,825  
U.S. Government-sponsored enterprises
    290,904       441       6,390       284,955  
States of the United States and political subdivisions of the states
    107,214       539       6,034       101,719  
Foreign governments
    106       26       -       132  
Corporate
    155,277       7,237       1,216       161,298  
Securities not due at a single maturity date
    14,003       833       28       14,808  
Total fixed maturities available-for-sale
    578,412       10,993       13,668       575,737  
                                 
Fixed maturities held-to-maturity
                               
U.S. Government-sponsored enterprises
    80,232       272       1,401       79,103  
Total fixed maturities
  $ 658,644       11,265       15,069       654,840  
Total equity securities
  $ 19,844       3,460       -       23,304  
 
Almost 92% or $9.2 million of the Company's mortgage-backed security holdings, based on amortized cost, totaling $10.1 million are residential U.S. Government-sponsored issues.  Mortgage-backed securities are also referred to as securities not due at a single maturity date throughout this report.  The majority of the Company's equity securities are diversified mutual funds.

Valuation of Investments in Fixed Maturity and Equity Securities

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 not more likely than not that the Company will 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 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 extent 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 issuers and overall judgment related to estimates and industry factors.  The Company's best estimate of future cash flows involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings, and current delinquency rates.  These assumptions require the use of significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries, which may include estimating the underlying collateral value.  In addition, projections of expected future debt security cash flows may change based upon new information regarding the performance of the issuer.

The primary factors considered in evaluating whether an impairment exists for an equity security include, but are not limited to:  (a) the length of time and the extent to which the fair value has been less than the cost of the security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether the issuer is current on contractually obligated payments, and (d) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery.

The Company did not recognize any other-than-temporary impairments ("OTTI") during the six months ended June 30, 2011, and June 30, 2010.
 
The tables below present the fair values and gross unrealized losses of fixed maturities and equity securities that have remained in a continuous unrealized loss position for the periods indicated.

   
June 30, 2011
 
   
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)
 
                                                       
Available-for-sale securities:
       
 
                                           
U.S. Treasury securities
  $ -       -       -       -       -       -       -       -       -  
U.S. Government-sponsored enterprises
    183,732       2,850       131       -       -       -       183,732       2,850       131  
Securities issued by states and political subdivisions
    25,695       454       24       10,139       2,247       8       35,834       2,701       32  
Corporate
    14,754       486       13       6,157       296       5       20,911       782       18  
Securities not due at a single maturity date
    -       -       -       187       13       4       187       13       4  
Total available-for-sale securities
    224,181       3,790       168       16,483       2,556       17       240,664       6,346       185  
Held to-maturity securities:
                                                                       
U.S. Government-sponsored enterprises
    58,920       779       28       -       -       -       58,920       779       28  
Securities issued by states and political subdivisions
    26,979       566       22       -       -       -       26,979       566       22  
Total held-to-maturity securities
    85,899       1,345       50       -       -       -       85,899       1,345       50  
Total fixed maturities
  $ 310,080       5,135       218       16,483       2,556       17       326,563       7,691       235  


   
December 31, 2010
 
   
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)
 
                                                       
Available-for-sale securities:
       
 
                                           
U.S. Government-sponsored enterprises
  $ 234,994       6,390       170       -       -       -       234,994       6,390       170  
Securities issued by states and political subdivisions
    66,836       3,270       60       9,626       2,764       8       76,462       6,034       68  
Corporate
    28,072       1,040       21       2,443       176       7       30,515       1,216       28  
Securities not due at a single maturity date
    569       8       2       201       20       5       770       28       7  
Total available-for-sale securities
    330,471       10,708       253       12,270       2,960       20       342,741       13,668       273  
Held to-maturity securities:
                                                                       
U.S. Government-sponsored enterprises
    45,699       1,401       18       -       -       -       45,699       1,401       18  
Total fixed maturities
  $ 376,170       12,109       271       12,270       2,960       20       388,440       15,069       291  

As of June 30, 2011 and December 31, 2010, there were no unrealized losses on the Company's equity securities.

As of June 30, 2011, the Company had 17 available-for-sale securities in an unrealized loss position for greater than 12 months, which were municipal, corporate and mortgage-backed securities.  The Company has reviewed these securities and determined that no other-than-temporary impairment exists based on our evaluations of the credit worthiness of the issuers and due to the fact that we do not intend to sell the investments, nor is it likely that we would be required to sell these investments before recovery of their amortized cost bases, which may be maturity.
 
The amortized cost and fair value of fixed maturity securities at June 30, 2011 by contractual maturity are shown 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.  The Company has experienced significant issuer calls over the past two years as a result of the declining interest rate environment.

   
June 30, 2011
 
   
Amortized
Cost
   
Fair
Value
 
   
(In thousands)
 
Available-for-sale securities:
           
Due in one year or less
  $ 4,770       4,919  
Due after one year through five years
    34,212       36,045  
Due after five years through ten years
    116,642       120,342  
Due after ten years
    408,396       411,109  
Total available-for-sale securities
    564,020       572,415  
Held-to-maturity securities:
               
Due after five years through ten years
    16,889       16,596  
Due after ten years
    92,855       92,012  
Total held-to-maturity securities
    109,744       108,608  
Securities not due at a single maturity date
    10,074       10,693  
Total fixed maturities
  $ 683,838       691,716  

The securities not due at a single maturity date are primarily mortgage-backed obligations of U.S. Government-sponsored enterprises and corporate securities.

The Company uses the specific identification method to determine the cost basis used in the calculation of realized gains and losses related to security sales.  Proceeds and gross realized gains from sales of securities for the three and six months ended June 30, 2011 and 2010 are summarized as follows.

   
Fixed Maturities Available-for-Sale
   
Equity Securities
 
   
Three Months
Ended June 30,
   
Six Months
Ended June 30,
   
Three Months
Ended June 30,
   
Six Months
Ended June 30,
 
 
 
2011
   
2010
   
2011
   
2010
   
2011
   
2010
   
2011
   
2010
 
   
(In thousands)
 
                                                 
Proceeds
  $ -       4,740       -       6,866       -       487       -       591  
Gross realized gains
  $ -       615       -       742       -       141       -       166  
 
No securities were sold for realized losses for the periods reported and there were no securities sold from the held-to-maturity portfolio during the three and six months ended June 30, 2011 and 2010.

 
19


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2011
(Unaudited)

(7)
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 stock and mutual fund 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 fixed maturity 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 where we cannot corroborate the significant valuation inputs with market observable data.
 
The following tables set forth our assets and liabilities that are measured at fair value on a recurring basis as of the dates indicated.

   
June 30, 2011