form10q.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 March 31, 2012

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 May 1, 2012, the Registrant had 48,962,938 shares of Class A common stock, no par value, outstanding and 1,001,714 shares of Class B common stock outstanding.



 
 

 



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TABLE OF CONTENTS
 
Part I. Financial Information
Page
Number
  Item 1.   Financial Statements  
         
     
2
         
     
4
         
     
5
         
     
7
         
 
Item 2.
 
25
         
 
Item 3.
 
43
         
 
Item 4.
 
44
         
Part II. Other Information  
         
  Item 1.   Legal Proceedings 44
         
  Item 1A.   Risk Factors 45 
         
  Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 45
         
  Item 3.   Defaults Upon Senior Securities 45
         
  Item 4.   Mine Safety Disclosures 45
         
  Item 5.   Other Information 45
         
  Item 6.   Exhibits 46
 
 
PART I.  FINANCIAL INFORMATION
 
Item 1.   FINANCIAL STATEMENTS
 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Financial Position
(In thousands)
 
   
March 31,
   
December 31,
 
Assets
 
2012
   
2011
 
   
(Unaudited)
   
(As adjusted)
 
Investments:
           
Fixed maturities available-for-sale, at fair value (cost:  $466,828 and $484,809 in 2012 and 2011, respectively)
  $ 497,977       514,253  
Fixed maturities held-to-maturity, at amortized cost (fair value:  $242,383 and $230,093 in 2012 and 2011, respectively)
    239,040       227,500  
Equity securities available-for-sale, at fair value (cost:  $45,397 and $45,599 in 2012 and 2011, respectively)
    46,723       46,137  
Mortgage loans on real estate
    1,546       1,557  
Policy loans
    40,170       39,090  
Real estate held for investment (less $1,184 and $1,149 accumulated depreciation in 2012 and 2011, respectively)
    8,574       8,539  
Other long-term investments
    112       105  
Short-term investments
    2,030       2,048  
Total investments
    836,172       839,229  
                 
Cash and cash equivalents
    61,096       33,255  
Accrued investment income
    8,853       7,787  
Reinsurance recoverable
    9,594       9,562  
Deferred policy acquisition costs
    126,333       124,542  
Cost of customer relationships acquired
    27,373       27,945  
Goodwill
    17,160       17,160  
Other intangible assets
    899       906  
Federal income tax receivable
    -       901  
Property and equipment, net
    7,810       7,860  
Due premiums, net (less $1,598 and $1,698 allowance for doubtful accounts in 2012 and 2011, respectively)
    8,671       9,169  
Prepaid expenses
    1,234       396  
Other assets
    852       800  
Total assets
  $ 1,106,047       1,079,512  

See accompanying notes to consolidated financial statements.
(Continued)

 
2

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


   
March 31,
   
December 31,
 
Liabilities and Stockholders' Equity
 
2012
   
2011
 
   
(Unaudited)
   
(As adjusted)
 
Liabilities:
           
Policy liabilities:
       
 
 
Future policy benefit reserves:
           
Life insurance
  $ 711,148       697,502  
Annuities
    48,119       47,060  
Accident and health
    5,556       5,612  
Dividend accumulations
    10,864       10,601  
Premiums paid in advance
    26,276       25,291  
Policy claims payable
    9,070       10,020  
Other policyholders' funds
    8,832       8,760  
Total policy liabilities
    819,865       804,846  
                 
Commissions payable
    2,442       2,851  
Current federal income tax payable
    396       -  
Deferred federal income tax
    14,201       13,940  
Payable for securities in process of settlement
    7,546       -  
Warrants outstanding
    415       451  
Other liabilities
    9,981       9,382  
Total liabilities
    854,846       831,470  
                 
Commitments and contingencies (Note 7)
               
Stockholders' equity:
               
Class A, no par value, 100,000,000 shares authorized, 52,098,676 shares issued in 2012 and 52,089,189 shares issued in 2011, including shares in treasury of 3,135,738 in 2012 and 2011
    258,616       258,548  
Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2012 and 2011
    3,184       3,184  
Accumulated deficit
    (20,339 )     (21,851 )
Accumulated other comprehensive income:
               
Unrealized gains on securities, net of tax
    20,751       19,172  
Treasury stock, at cost
    (11,011 )     (11,011 )
Total stockholders' equity
    251,201       248,042  
Total liabilities and stockholders' equity
  $ 1,106,047       1,079,512  
 
See accompanying notes to consolidated financial statements.

 
3

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
Consolidated Statements of Comprehensive Income
Three Months Ended March 31,
(In thousands, except share amounts)
(Unaudited)
 
       
2012
       
2011
 
Revenues:
               
(As adjusted)
 
Premiums:
                   
Life insurance
      $ 37,406           35,611  
Accident and health insurance
        413           372  
Property insurance
        1,277           1,245  
Net investment income
        7,577           7,300  
Realized investment gains, net
        98           19  
Decrease in fair value of warrants
        36           399  
Other income
        98           123  
Total revenues
        46,905           45,069  
Benefits and expenses:
                       
Insurance benefits paid or provided:
                       
Claims and surrenders
        14,754           14,879  
Increase in future policy benefit reserves
        14,141           12,318  
Policyholders' dividends
        1,874           1,662  
Total insurance benefits paid or provided
        30,769           28,859  
                         
Commissions
        8,664           9,072  
Other general expenses
        6,616           6,403  
Capitalization of deferred policy acquisition costs
        (5,939 )         (6,641 )
Amortization of deferred policy acquisition costs
        4,126           4,238  
Amortization of cost of customer relationships acquired
        576           647  
Total benefits and expenses
        44,812           42,578  
                         
Income before federal income tax
        2,093           2,491  
Federal income tax expense
      581           869  
Net income
        1,512           1,622  
                         
Per Share Amounts:
           
 
         
Basic earnings per share of Class A common stock
  $ 0.03               0.03          
Basic earnings per share of Class B common stock
    0.02               0.02          
Diluted earnings per share of Class A common stock
    0.03               0.03          
Diluted earnings per share of Class B common stock
    0.02               0.01          
                                 
Other comprehensive income:
                               
Unrealized gains on available-for-sale securities:
                               
Unrealized holding gains arising during period
            2,561               1,626  
Reclassification adjustment for gains included in net income
            (86 )             (19 )
Unrealized gains on available-for-sale securities, net
            2,475               1,607  
Income tax expense on unrealized gains on available-for-sale securities
            (896 )             (562 )
Other comprehensive income
            1,579               1,045  
Comprehensive income
          $ 3,091               2,667  
 
See accompanying notes to consolidated financial statements.

 
4


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
Consolidated Statements of Cash Flows
Three Months Ended March 31,
(In thousands)
(Unaudited)
 
   
2012
   
2011
 
         
(As adjusted)
 
Cash flows from operating activities:
           
Net income
  $ 1,512       1,622  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Realized gains on sale of investments and other assets
    (98 )     (19 )
Net deferred policy acquisition costs
    (1,813 )     (2,403 )
Amortization of cost of customer relationships acquired
    576       647  
Decrease in fair value of warrants
    (36 )     (399 )
Depreciation
    299       205  
Amortization of premiums and discounts on fixed maturities and short-term investments
    1,015       1,240  
Deferred federal income tax benefit
    (636 )     (250 )
Change in:
               
Accrued investment income
    (1,066 )     (999 )
Reinsurance recoverable
    (32 )     332  
Due premiums and other receivables
    498       353  
Future policy benefit reserves
    14,026       12,100  
Other policyholders' liabilities
    370       1,212  
Federal income tax receivable
    1,297       2,042  
Commissions payable and other liabilities
    190       193  
Other, net
    (890 )     (1,547 )
Net cash provided by operating activities
    15,212       14,329  
Cash flows from investing activities:
               
Sale of fixed maturities, available-for-sale
    503       -  
Maturities and calls of fixed maturities, available-for-sale
    70,619       8,871  
Maturities and calls of fixed maturities, held-to-maturity
    22,000       19,000  
Purchase of fixed maturities, available-for-sale
    (37,650 )     (47,922 )
Purchase of fixed maturities, held-to-maturity
    (42,508 )     (5,973 )
Calls of equity securities, available-for-sale
    325       150  
Principal payments on mortgage loans
    11       11  
Increase in policy loans, net
    (1,080 )     (721 )
Sale of other long-term investments
    2       1  
Purchase of other long-term investments
    (69 )     -  
Purchase of property and equipment
    (215 )     (579 )
Net cash provided by (used in) investing activities
    11,938       (27,162 )

See accompanying notes to consolidated financial statements.
(Continued)

 
5


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


   
2012
   
2011
 
         
(As adjusted)
 
Cash flows from financing activities:
           
Warrants exercised
  $ 68       -  
Annuity deposits
    1,586       1,560  
Annuity withdrawals
    (963 )     (1,000 )
Net cash provided by financing activities
    691       560  
                 
Net increase (decrease) in cash and cash equivalents
    27,841       (12,273 )
Cash and cash equivalents at beginning of year
    33,255       49,723  
Cash and cash equivalents at end of period
  $ 61,096       37,450  
Supplemental disclosures of operating activities:
               
Cash received during the period for income taxes recovered
  $ (79 )     (923 )

Supplemental Disclosures of Non-Cash Investing Activities:

None.

See accompanying notes to consolidated financial statements.
 
 
6


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2012
(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").  Citizens and its wholly-owned subsidiaries are collectively referred to as "the Company," "we," "us" or "our."

The consolidated statements of financial position for March 31, 2012, the consolidated statements of comprehensive income for the three-month periods ended March 31, 2012 and 2011, and the consolidated statements of cash flows for the three-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 March 31, 2012 and for comparative periods have been made.  The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended December 31, 2011.  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, 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.

Reserves at March 31, 2012 include an adjustment resulting in a reserve decrease of $157,000 relating to system corrections in the life segment that were discovered during the detailed system validation as part of the implementation of the new deferred acquisition accounting standard.  In addition, we have a release of incurred but not reported liability of $500,000 related to the home service claims experience which is reducing claims expense in the current quarter.

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.
 
 
7

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2012
(Unaudited)
 
Reclassification

Reclassifications have been made in the current year related to certain prior year reported amounts to provide consistent presentation.

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements included in our 2011 Form 10-K Annual Report, which should be read in conjunction with these accompanying Consolidated Financial Statements.

(2)           Accounting Pronouncements

Accounting Standards Recently Adopted

Effective January 1, 2012, the Company retrospectively adopted the Financial Accounting Standards Board’s ("FASB") 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 specified 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.  The retrospective effect of the change in our deferred acquisition costs decreased the December 31, 2011 stockholders’ equity balance by $7.6 million, the DAC asset and deferred taxes decreased by $11.8 million and $4.1 million, respectively.

The following table provides the balance sheet and income statement accounts that were impacted by the change in accounting principle.

   
As Previously
Reported
   
Impact of
Change in
Accounting
Principle
   
As
Adjusted
 
   
(In thousands, except per share data)
 
Balance Sheet Accounts:
                 
As of December 31, 2011
 
 
   
 
       
Deferred acquisition costs
  $ 136,300       (11,758 )     124,542  
Deferred federal income taxes
    18,055       (4,115 )     13,940  
Accumulated deficit
    (14,208 )     (7,643 )     (21,851 )
                         
Statement of Operations:
                       
As of March 31, 2011
                       
Capitalization of deferred policy acquisition costs
  $ (7,165 )     524       (6,641 )
Amortization of deferred policy acquisition costs
    4,520       (282 )     4,238  
Federal income tax expense
    953       (84 )     869  
Net income
    1,780       (158 )     1,622  
Per share of Class A common stock:
                       
Basic earnings per share
  $ 0.04       (0.01 )     0.03  
Diluted earnings per share
  $ 0.03       -       0.03  

In June 2011, the FASB amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The provisions of this new guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance did not have any impact on our financial statements.
 
 
8


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2012
(Unaudited)
 
Accounting Standards Update ("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. GAAP and International Financial Reporting Standards (“IFRS”). 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 did not have any 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
March 31, 2012
 
   
Life
Insurance
   
Home
Service
Insurance
   
Other
Non-Insurance
Enterprises
   
Consolidated
 
   
(In thousands)
 
Revenues:
       
 
             
Premiums
  $ 28,169       10,927       -       39,096  
Net investment income
    4,158       3,155       264       7,577  
Realized investment gains, net
    2       87       9       98  
Decrease in fair value of warrants
    -       -       36       36  
Other income
    57       6       35       98  
Total revenue
    32,386       14,175       344       46,905  
                                 
Benefits and expenses:
                               
Insurance benefits paid or provided:
                               
Claims and surrenders
    9,927       4,827       -       14,754  
Increase in future policy benefit reserves
    13,218       923       -       14,141  
Policyholders' dividends
    1,862       12       -       1,874  
Total insurance benefits paid or provided
    25,007       5,762       -       30,769  
                                 
Commissions
    5,022       3,642       -       8,664  
Other general expenses
    2,920       2,964       732       6,616  
Capitalization of deferred policy acquisition costs
    (4,512 )     (1,427 )     -       (5,939 )
Amortization of deferred policy acquisition costs
    3,651       475       -       4,126  
Amortization of cost of customer relationships acquired
    209       367       -       576  
Total benefits and expenses
    32,297       11,783       732       44,812  
Income (loss) before income tax expense
  $ 89       2,392       (388 )     2,093  
 
 
9

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2012
(Unaudited)
 
   
Three Months Ended
March 31, 2011
 
   
Life
Insurance
   
Home
Service
Insurance
   
Other
Non-Insurance
Enterprises
   
Consolidated
 
   
(In thousands)
 
Revenues:
       
 
             
Premiums
  $ 26,520       10,708       -       37,228  
Net investment income
    3,867       3,237       196       7,300  
Realized investment gains, net
    -       19       -       19  
Decrease in fair value of warrants
    -       -       399       399  
Other income
    87       8       28       123  
Total revenue
    30,474       13,972       623       45,069  
                                 
Benefits and expenses:
                               
Insurance benefits paid or provided:
                               
Claims and surrenders
    9,401       5,478       -       14,879  
Increase in future policy benefit reserves
    11,809       509       -       12,318  
Policyholders' dividends
    1,643       19       -       1,662  
Total insurance benefits paid or provided
    22,853       6,006       -       28,859  
                                 
Commissions
    5,342       3,730       -       9,072  
Other general expenses
    2,854       2,975       574       6,403  
Capitalization of deferred policy acquisition costs
    (5,065 )     (1,576 )     -       (6,641 )
Amortization of deferred policy acquisition costs
    3,652       586       -       4,238  
Amortization of cost of customer relationships acquired
    216       431       -       647  
Total benefits and expenses
    29,852       12,152       574       42,578  
Income before income tax expense
  $ 622       1,820       49       2,491  
 
 
10

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2012
(Unaudited)
 
(4)
Earnings Per Share

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

   
Three Months Ended
March 31,
 
   
2012
   
2011
 
   
(In thousands,
except per share amounts)
 
Basic and diluted earnings per share:
           
Numerator:
       
 
 
Net income
  $ 1,512       1,622  
                 
Net income allocated to Class A common stock
  $ 1,497       1,606  
Net income allocated to Class B common stock
    15       16  
Net income available to common stockholders
  $ 1,512       1,622  
Denominator:
               
Weighted average shares of Class A outstanding - basic and diluted
    48,959       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
  $ 0.03       0.03  
Basic earnings per share of Class B common stock
    0.02       0.02  
Diluted earnings per share of Class A common stock
    0.03       0.03  
Diluted earnings per share of Class B common stock
    0.02       0.01  
 
The diluted earnings per share calculation has assumptions regarding the exercise of warrants issued to certain investors as discussed below in Note 8 - Convertible Preferred Stock: Warrants.  No dilution occurred for the three months ended March 31, 2012.

(5)
Investments

 
The Company invests primarily in fixed maturity securities, which totaled 82.1% of total investments and cash and cash equivalents at March 31, 2012.

   
March 31, 2012
   
December 31, 2011
 
   
Carrying
Value
   
% of Total
Carrying Value
   
Carrying
Value
   
% of Total
Carrying Value
 
   
(In thousands)
         
(In thousands)
       
                         
Fixed maturity securities
  $ 737,017       82.1     $ 741,753       85.0  
Equity securities
    46,723       5.2       46,137       5.3  
Mortgage loans
    1,546       0.2       1,557       0.2  
Policy loans
    40,170       4.5       39,090       4.5  
Real estate and other long-term investments
    8,686       1.0       8,644       1.0  
Short-term investments
    2,030       0.2       2,048       0.2  
Cash and cash equivalents
    61,096       6.8       33,255       3.8  
Total cash, cash equivalents and investments
  $ 897,268       100.0     $ 872,484       100.0  
 
 
11

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2012
(Unaudited)
 
The following tables represent the cost, gross unrealized gains and losses and fair value for fixed maturities and equity securities as of the periods indicated.

   
March 31, 2012
 
   
Cost or
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In thousands)
 
Fixed maturities:
                       
Fixed maturities available-for-sale:
       
 
             
U.S. Treasury securities
  $ 10,213       3,226       -       13,439  
U.S. Government-sponsored enterprises
    94,839       2,800       28       97,611  
States of the United States and political subdivisions of the states
    154,747       11,932       794       165,885  
Foreign governments
    105       33       -       138  
Corporate
    199,092       14,773       1,348       212,517  
Securities not due at a single maturity date
    7,832       559       4       8,387  
Total available-for-sale securities
    466,828       33,323       2,174       497,977  
                                 
Held-to-maturity securities:
                               
U.S. Government-sponsored enterprises
    154,425       542       226       154,741  
States of the United States and political subdivisions of the states
    58,293       2,808       29       61,072  
Corporate
    26,322       293       45       26,570  
Total held-to-maturity securities
    239,040       3,643       300       242,383  
Total fixed maturities
  $ 705,868       36,966       2,474       740,360  
                                 
Equity securities:
                               
Stock mutual funds
  $ 12,686       656       97       13,245  
Bond mutual funds
    31,504       267       59       31,712  
Common stock
    17       4       -       21  
Preferred stock
    1,190       555       -       1,745  
Total equity securities
  $ 45,397       1,482       156       46,723  

 
12

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2012
(Unaudited)
 
   
December 31, 2011
 
   
Cost or
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In thousands)
 
Fixed maturities:
                       
Available-for-sale securities:
       
 
             
U.S. Treasury securities
  $ 10,228       3,730       -       13,958  
U.S. Government-sponsored enterprises
    143,684       3,198       65       146,817  
States of the United States and political subdivisions of the states
    151,058       10,275       1,391       159,942  
Foreign governments
    105       37       -       142  
Corporate
    171,462       14,576       1,493       184,545  
Securities not due at a single maturity date
    8,272       585       8       8,849  
Total available-for-sale securities
    484,809       32,401       2,957       514,253  
                                 
Held-to-maturity securities:
                               
U.S. Government-sponsored enterprises
    160,411       742       12       161,141  
States of the United States and political subdivisions of the states
    56,260       1,941       84       58,117  
Corporate
    10,829       49       43       10,835  
Total held-to-maturity securities
    227,500       2,732       139       230,093  
Total fixed maturity securities
  $ 712,309       35,133       3,096       744,346  
                                 
Equity securities:
                               
Stock mutual funds
  $ 12,686       415       376       12,725  
Bond mutual funds
    31,504       27       117       31,414  
Common stock
    17       7       -       24  
Preferred stock
    1,392       582       -       1,974  
Total equity securities
  $ 45,599       1,031       493       46,137  
 
 
At March 31, 2012, the Company had $7.8 million of mortgage-backed security holdings based on amortized cost, of which $7.2 million, or 91.3%, were residential U.S. Government-sponsored issues.  Mortgage-backed securities are also referred to as securities not due at a single maturity date throughout this report.  The majority of the Company's equity securities are diversified stock and bond mutual funds.
 
Valuation of Investments in Fixed Maturity and Equity Securities

Held-to-maturity securities are reported in the financial statements at amortized cost and available-for-sale securities are reported at fair value.

The Company monitors all debt and equity securities on an on-going basis relative to changes in credit ratings, market prices, earnings trends and financial performance, in addition to specific region or industry reviews.  The assessment of whether impairments have occurred is based on a case-by-case evaluation of underlying reasons for the decline in fair value.  The Company determines other-than-temporary impairment by reviewing relevant evidence related to the specific security issuer as well as the Company's intent to sell the security, or if it is more likely than not that the Company would be required to sell a security before recovery of its amortized cost.

 
13

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2012
(Unaudited)
 
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 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 issuer and overall judgment related to estimates and industry factors.  The Company's best estimate of future cash flows involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings, and current delinquency rates.  These assumptions require the use of significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries, which may include estimating the underlying collateral value.  In addition, projections of expected future debt security cash flows may change based upon new information regarding the performance of the issuer.

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

The Company did not recognize any other-than-temporary impairments ("OTTI") during the three months ended March 31, 2012 and 2011.
 
 
14

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2012
(Unaudited)
 
The following tables present the fair values and gross unrealized losses of fixed maturities and equity securities that have remained in a continuous unrealized loss position for the periods indicated.

   
March 31, 2012
 
   
Less than 12 months
   
Greater than 12 months
   
Total
 
   
Fair
Value
   
Unrealized
Losses
   
# of
Securities
   
Fair
Value
   
Unrealized
Losses
   
# of
Securities
   
Fair
Value
   
Unrealized
Losses
   
# of
Securities
 
   
(In thousands, except for # of securities)
 
                                                       
Fixed maturities:
       
 
                                           
Available-for-sale securities:
                                                     
U.S. Government-sponsored enterprises
  $ 6,233       26       5       1,001       2       1       7,234       28       6  
States of the United States  and political subdivisions of the states
    8,192       91       9       6,417       703       3       14,609       794       12  
Corporate
    46,239       503       34       8,544       845       6       54,783       1,348       40  
Securities not due at a single maturity date
    237       1       1       66       3       2       303       4       3  
Total available-for-sale securities
    60,901       621       49       16,028       1,553       12       76,929       2,174       61  
Held-to-maturity securities:
                                                                       
U.S. Government-sponsored enterprises
    53,043       215       27       1,112       11       1       54,155       226       28  
States of the United States  and political subdivisions of the states
    7,462       29       5       -       -       -       7,462       29       5  
Corporate
    12,458       45       9       -       -       -       12,458       45       9  
Total held-to-maturity securities
    72,963       289       41       1,112       11       1       74,075       300       42  
Total fixed maturities
  $ 133,864       910       90       17,140       1,564       13       151,004       2,474       103  
                                                                         
Equity securities:
                                                                       
Stock mutual funds
  $ 7,437       97       2       -       -       -       7,437       97       2  
Bond mutual funds
    6,364       59       3       -       -       -       6,364       59       3  
Total equities
  $ 13,801       156       5       -       -       -       13,801       156       5  

 
As of March 31, 2012, the Company had 12 available-for-sale securities and 1 held-to-maturity security that were in an unrealized loss position for greater than 12 months.  These securities consisted of U.S. Government-sponsored enterprises, municipals, corporate and mortgage-backed securities.
 
 
15

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2012
(Unaudited)
 
   
December 31, 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)
 
                                                       
Fixed maturities:
       
 
                                           
Available-for-sale securities:
                                                     
U.S. Government-sponsored enterprises
  $ -       -       -       3,718       65       2       3,718       65       2  
States of the United States  and political subdivisions of the states
    1,965       29       4       11,777       1,362       9       13,742       1,391       13  
Corporate
    27,239       976       30       8,886       517       6       36,125       1,493       36  
Securities not due at a single maturity date
    536       4       1       67       4       2       603       8       3  
Total available-for-sale securities
    29,740       1,009       35       24,448       1,948       19       54,188       2,957       54  
Held-to-maturity securities:
                                                                       
U.S. Government-sponsored enterprises
    6,997       2       4       1,121       10       1       8,118       12       5  
States of the United States  and political subdivisions of the states
    8,345       84       7       -       -       -       8,345       84       7  
Corporate
    6,706       43       4       -       -       -       6,706       43       4  
Total held-to-maturity securities
    22,048       129       15       1,121       10       1       23,169       139       16  
Total fixed maturities
  $ 51,788       1,138       50       25,569       1,958       20       77,357       3,096       70  
                                                                         
Equity securities:
                                                                       
Stock mutual funds
  $ 7,158       376       2       -       -       -       7,158       376       2  
Bond mutual funds
    25,387       117       10       -       -       -       25,387       117       10  
Total equities
  $ 32,545       493       12       -       -       -       32,545       493       12  
 
 
We have reviewed these securities for the periods ended March 31, 2012 and December 31, 2011 and determined that no other-than-temporary impairment exists based on our evaluation of the credit worthiness of the issuers and the fact that we do not intend to sell the investments nor is it likely that we will be required to sell the securities before recovery of their amortized cost bases which may be maturity.  We continue to monitor all securities on an on-going basis, and future information may become available which could result in impairments being recorded.
 
 
16


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2012
(Unaudited)
 
 
The amortized cost and fair value of fixed maturity securities at March 31, 2012 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.

   
March 31, 2012
 
   
Amortized
Cost
   
Fair
Value
 
   
(In thousands)
 
Available-for-sale securities:
           
Due in one year or less
  $ 7,339       7,450  
Due after one year through five years
    52,579       54,785  
Due after five years through ten years
    108,692       115,135  
Due after ten years
    290,386       312,220  
Total available-for-sale securities
    458,996       489,590  
Held-to-maturity securities:
               
Due in one year or less
    4,975       4,969  
Due after one year through five years
    15,091       15,129  
Due after five years through ten years
    35,939       37,418  
Due after ten years
    183,035       184,867  
Total held-to-maturity securities
    239,040       242,383  
Securities not due at a single maturity date
    7,832       8,387  
Total fixed maturities
  $ 705,868       740,360  

 
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 of the individual security 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 months ended March 31, 2012 and 2011 are summarized as follows.

   
Three Months Ended
March 31,
 
   
Fixed Maturities Available-for-Sale
   
Equity Securities
 
   
2012
   
2011
   
2012
   
2011
 
   
(In thousands)
 
                         
Proceeds
  $ 503       -       -       -  
Gross realized gains
  $ 1       -       -       -  
 
During the three months ended March 31, 2012 and 2011, no securities were sold for realized losses nor were there any securities sold from the held-to-maturity portfolio.
 
 
17

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2012
(Unaudited)
 
(6)           Fair Value Measurements

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

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

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

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