CIA-2014.3.31-10Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
FORM 10-Q
___________________________

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2014
or
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from  _____ to _____
Commission File Number:  000-16509
CITIZENS, INC.
(Exact name of registrant as specified in its charter)
Colorado
84-0755371
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
400 East Anderson Lane, Austin, TX
78752
(Address of principal executive offices)
(Zip Code)
 
(512) 837-7100
 
(Registrant's telephone number, including area code)
 
N/A
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  (Check one):
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

As of May 1, 2014, the Registrant had 49,080,114 shares of Class A common stock, no par value, outstanding and 1,001,714 shares of Class B common stock outstanding.
 






























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TABLE OF CONTENTS
 
 
 
 
Page Number
Part I.
Financial Information
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
Part II.
Other Information
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.


1

Table of Contents

PART I.  FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Financial Position
(In thousands)
 
 
 
 
 
 
 
 
 
March 31, 2014
 
December 31, 2013
Assets
(Unaudited)
 
 
Investments:
 
 
 
Fixed maturities available-for-sale, at fair value (cost:  $621,480 and $595,944 in 2014 and 2013, respectively)
$
644,759

 
605,256

Fixed maturities held-to-maturity, at amortized cost (fair value:  $225,087 and $223,533 in 2014 and 2013, respectively)
223,586

 
227,696

Equity securities available-for-sale, at fair value (cost:  $48,133 and $45,883 in 2014 and 2013, respectively)
49,845

 
47,259

Mortgage loans on real estate
659

 
671

Policy loans
50,288

 
48,868

Real estate held for investment (less $1,465 and $1,429 accumulated depreciation in 2014 and 2013, respectively)
8,403

 
8,440

Other long-term investments
44

 
45

Total investments
977,584

 
938,235

Cash and cash equivalents
52,307

 
54,593

Accrued investment income
12,803

 
12,251

Receivable for securities
1,707

 

Reinsurance recoverable
4,614

 
4,394

Deferred policy acquisition costs
148,443

 
146,691

Cost of customer relationships acquired
25,488

 
23,374

Goodwill
17,160

 
17,160

Other intangible assets
976

 
851

Property and equipment, net
6,688

 
6,662

Due premiums, net (less $1,312 and $1,429 allowance for doubtful accounts in 2014 and 2013, respectively)
10,387

 
11,209

Prepaid expenses
1,311

 
95

Other assets
741

 
765

Total assets
$
1,260,209

 
1,216,280


(Continued)

See accompanying notes to consolidated financial statements.

2

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Financial Position
(In thousands, except share amounts)
 
 
 
 
 
 
 
 
 
March 31, 2014
 
December 31, 2013

Liabilities and Stockholders' Equity
(Unaudited)
 
 
Liabilities:
 
 
 
Policy liabilities:
 
 
 
Future policy benefit reserves:
 
 
 
Life insurance
$
856,915

 
834,269

Annuities
55,833

 
55,485

Accident and health
1,221

 
1,250

Dividend accumulations
14,129

 
13,662

Premiums paid in advance
34,037

 
32,560

Policy claims payable
10,120

 
9,488

Other policyholders' funds
7,498

 
7,982

Total policy liabilities
979,753

 
954,696

Commissions payable
2,238

 
2,562

Federal income tax payable
2,107

 
590

Deferred federal income tax
6,621

 
1,704

Payable for securities in process of settlement
2,977

 

Other liabilities
10,333

 
10,919

Total liabilities
1,004,029

 
970,471

Commitments and contingencies (Note 7)


 


Stockholders' equity:
 

 
 

Class A, no par value, 100,000,000 shares authorized, 52,215,852 shares issued and outstanding in 2014 and 2013, including shares in treasury of 3,135,738 in 2014 and 2013
259,383

 
259,383

Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2014 and 2013
3,184

 
3,184

Accumulated deficit
(11,345
)
 
(12,542
)
Accumulated other comprehensive income:
 

 
 

Unrealized gains on securities, net of tax
15,969

 
6,795

Treasury stock, at cost
(11,011
)
 
(11,011
)
Total stockholders' equity
256,180

 
245,809

Total liabilities and stockholders' equity
$
1,260,209

 
1,216,280



See accompanying notes to consolidated financial statements.


3

Table of Contents

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

 
2014
 
2013
Revenues:
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
Life insurance
 
 
$
41,397

 
 
 
39,414

Accident and health insurance
 
 
351

 
 
 
349

Property insurance
 
 
1,265

 
 
 
1,177

Net investment income
 
 
9,906

 
 
 
8,389

Realized investment gains (losses), net
 
 
(56
)
 
 
 
31

Other income
 
 
169

 
 
 
186

Total revenues
 
 
53,032

 
 
 
49,546

Benefits and expenses:
 
 
 

 
 
 
 

Insurance benefits paid or provided:
 
 
 

 
 
 
 

Claims and surrenders
 
 
16,457

 
 
 
14,806

Increase in future policy benefit reserves
 
 
17,698

 
 
 
16,959

Policyholders' dividends
 
 
2,102

 
 
 
2,074

Total insurance benefits paid or provided
 
 
36,257

 
 
 
33,839

Commissions
 
 
9,910

 
 
 
9,058

Other general expenses
 
 
6,502

 
 
 
6,699

Capitalization of deferred policy acquisition costs
 
 
(7,068
)
 
 
 
(6,362
)
Amortization of deferred policy acquisition costs
 
 
5,209

 
 
 
4,626

Amortization of cost of customer relationships acquired
 
 
531

 
 
 
578

Total benefits and expenses
 
 
51,341

 
 
 
48,438

Income before federal income tax
 
 
1,691

 
 
 
1,108

Federal income tax expense
 
 
494

 
 
 
252

Net income
 
 
1,197

 
 
 
856

Per Share Amounts:
 
 
 

 
 

 
 

Basic earnings per share of Class A common stock
$
0.02

 
 

 
0.02

 
 

Basic earnings per share of Class B common stock
0.01

 
 

 
0.01

 
 

Diluted earnings per share of Class A common stock
0.02

 
 

 
0.02

 
 

Diluted earnings per share of Class B common stock
0.01

 
 

 
0.01

 
 

Other comprehensive income:
 

 
 

 
 

 
 

Unrealized gains on available-for-sale securities:
 

 
 

 
 

 
 

Unrealized holding gains arising during period
 

 
14,096

 
 

 
96

Reclassification adjustment for gains (losses) included in net income
 

 
32

 
 

 
(31
)
Unrealized gains on available-for-sale securities, net
 

 
14,128

 
 

 
65

Income tax expense on unrealized gains on available-for-sale securities
 

 
4,954

 
 

 
27

Other comprehensive income
 

 
9,174

 
 

 
38

Comprehensive income
 

 
$
10,371

 
 

 
894

See accompanying notes to consolidated financial statements.

4

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended March 31,
(In thousands)
(Unaudited)
 
 
 
 
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
1,197

 
856

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Realized gains (losses) on sale of investments and other assets
56

 
(31
)
Net deferred policy acquisition costs
(1,859
)
 
(1,736
)
Amortization of cost of customer relationships acquired
531

 
578

Depreciation
323

 
320

Amortization of premiums and discounts on investments
2,230

 
2,297

Deferred federal income tax benefit
(1,023
)
 
(1,148
)
Change in:
 

 
 

Accrued investment income
(471
)
 
(608
)
Reinsurance recoverable
(220
)
 
2,822

Due premiums
822

 
296

Future policy benefit reserves
17,697

 
14,504

Other policyholders' liabilities
2,053

 
1,345

Federal income tax receivable
1,496

 
1,400

Commissions payable and other liabilities
(1,030
)
 
(1,408
)
Other, net
(1,293
)
 
(1,410
)
Net cash provided by operating activities
20,509

 
18,077

Cash flows from investing activities:
 

 
 

Sale of fixed maturities, available-for-sale

 
58

Maturities and calls of fixed maturities, available-for-sale
16,900

 
15,851

Maturities and calls of fixed maturities, held-to-maturity
9,292

 
18,465

Purchase of fixed maturities, available-for-sale
(36,161
)
 
(64,046
)
Purchase of fixed maturities, held-to-maturity
(6,347
)
 

Calls of equity securities, available-for-sale
100

 
200

Principal payments on mortgage loans
12

 
133

Increase in policy loans, net
(1,420
)
 
(1,879
)
Sale of other long-term investments
1

 
1

Purchase of other long-term investments

 
(42
)
Purchase of property and equipment
(283
)
 
(181
)
Purchase of short-term investments

 
(531
)
Net cash used in acquisition
(4,810
)
 

Net cash provided by (used in) investing activities
(22,716
)
 
(31,971
)

5

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Three Months Ended March 31,
(In thousands)
(Unaudited)
 
2014
 
2013
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
Annuity deposits
1,489

 
1,242

Annuity withdrawals
(1,568
)
 
(1,039
)
Net cash provided (used in) by financing activities
(79
)
 
203

Net decrease in cash and cash equivalents
(2,286
)
 
(13,691
)
Cash and cash equivalents at beginning of year
54,593

 
56,299

Cash and cash equivalents at end of period
$
52,307

 
42,608

Supplemental disclosures of operating activities:
 

 
 

Cash paid (received) during the period for income taxes, net
$

 


Supplemental Disclosures of Non-Cash Investing Activities:
None.

See accompanying notes to consolidated financial statements.


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Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2014
(Unaudited)


(1) Financial Statements

Basis of Presentation and Consolidation

The accompanying consolidated financial statements of Citizens, Inc. and its wholly-owned subsidiaries have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. GAAP").

The consolidated financial statements include the accounts and operations of Citizens, Inc. ("Citizens"), a Colorado corporation, and its wholly-owned subsidiaries, CICA Life Insurance Company of America ("CICA"), Security Plan Life Insurance Company ("SPLIC"), Security Plan Fire Insurance Company ("SPFIC"), Citizens National Life Insurance Company ("CNLIC"), Magnolia Guaranty Life Insurance Company ("MGLIC"), Computing Technology, Inc. ("CTI") and Insurance Investors, Inc. ("III").  Citizens and its wholly-owned subsidiaries are collectively referred to as "the Company," "we," "us" or "our."

The consolidated statements of financial position for March 31, 2014, and the consolidated statements of comprehensive income and cash flows for the three-month periods ended March 31, 2014 and 2013, have been prepared by the Company without audit.  In the opinion of management, all adjustments to present fairly the financial position, results of operations, and changes in cash flows at March 31, 2014 and for comparative periods have been made.  The consolidated financial statements have been prepared in accordance with U.S. GAAP accounting principles for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”).  Accordingly, the financial statements do not include all of the information and footnotes required for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended December 31, 2013.  Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

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

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

In accordance with our purchase agreement dated October 7, 2013, we finalized the MGLIC stock acquisition on March 7, 2014 for approximately $5.2 million in cash consideration. The assets recorded as of March 31, 2014 were $11.9 million, liabilities of $6.6 million and stockholders equity of $5.3 million. We believe the goodwill will be minimal relative to this company purchase. We are continuing to finalize the actuarial estimates and intangibles which may result in changes from the amounts reported in this quarterly report on Form 10-Q. This entity will be reported as part of our home service segment business and is a wholly owned subsidiary of SPLIC.

Use of Estimates

The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

The most significant estimates include those used in the evaluation of other-than-temporary impairments on debt and equity securities and valuation allowances on investments, actuarially determined assets and liabilities and assumptions, goodwill impairment, valuation allowance on deferred tax assets, and contingencies relating to litigation and regulatory matters.  Certain

7

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2014
(Unaudited)

of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the Consolidated Financial Statements.

Reclassification

Reclassifications have been made in the current year related to certain prior year reported amounts to provide consistent presentation. No individual amounts were material.

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements included in our 2013 Form 10-K Annual Report, which should be read in conjunction with these accompanying Consolidated Financial Statements.

(2) Accounting Pronouncements

Accounting Standards Recently Adopted

On January 1, 2014, we adopted Accounting Standards Update (ASU) ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” to eliminate diversity in practice. This ASU requires that companies net their unrecognized tax benefits against all same-jurisdiction net operating losses or tax credit carryforwards that would be used to settle the position with a tax authority. The adoption of this ASU did not have an effect on our consolidated financial statements.

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Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2014
(Unaudited)


(3) Segment Information

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

The Company has no reportable differences between segments and consolidated operations.
 
 
 
 
 
 
 
 
 
Three Months Ended
 
March 31, 2014
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
31,811

 
11,202

 

 
43,013

Net investment income
6,283

 
3,287

 
336

 
9,906

Realized investment gains (losses), net
(64
)
 
8

 

 
(56
)
Other income
143

 
1

 
25

 
169

Total revenue
38,173

 
14,498

 
361

 
53,032

Benefits and expenses:
 
 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
10,815

 
5,642

 

 
16,457

Increase in future policy benefit reserves
16,976

 
722

 

 
17,698

Policyholders' dividends
2,086

 
16

 

 
2,102

Total insurance benefits paid or provided
29,877

 
6,380

 

 
36,257

Commissions
6,238

 
3,672

 

 
9,910

Other general expenses
2,840

 
3,169

 
493

 
6,502

Capitalization of deferred policy acquisition costs
(5,659
)
 
(1,409
)
 

 
(7,068
)
Amortization of deferred policy acquisition costs
4,407

 
802

 

 
5,209

Amortization of cost of customer relationships acquired
171

 
360

 

 
531

Total benefits and expenses
37,874

 
12,974

 
493

 
51,341

Income (loss) before income tax expense
$
299

 
1,524

 
(132
)
 
1,691


 
 
 
 
 
 
 
 



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Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2014
(Unaudited)

 
Three Months Ended
 
March 31, 2013
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
30,117

 
10,823

 

 
40,940

Net investment income
4,904

 
3,180

 
305

 
8,389

Realized investment gains, net

 
30

 
1

 
31

Other income
63

 
90

 
33

 
186

Total revenue
35,084

 
14,123

 
339

 
49,546

Benefits and expenses:
 

 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
9,338

 
5,468

 

 
14,806

Increase in future policy benefit reserves
16,042

 
917

 

 
16,959

Policyholders' dividends
2,059

 
15

 

 
2,074

Total insurance benefits paid or provided
27,439

 
6,400

 

 
33,839

Commissions
5,579

 
3,479

 

 
9,058

Other general expenses
2,852

 
3,266

 
581

 
6,699

Capitalization of deferred policy acquisition costs
(5,086
)
 
(1,276
)
 

 
(6,362
)
Amortization of deferred policy acquisition costs
3,985

 
641

 

 
4,626

Amortization of cost of customer relationships acquired
167

 
411

 

 
578

Total benefits and expenses
34,936

 
12,921

 
581

 
48,438

Income (loss) before income tax expense
$
148

 
1,202

 
(242
)
 
1,108


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2014
(Unaudited)



(4) Earnings Per Share

The following tables set forth the computation of basic and diluted earnings per share.
 
 
 
 
 
Three Months Ended
 
March 31, 2014
 
March 31, 2013
 
(In thousands,
except per share amounts)
Basic and diluted earnings per share:
 
 
 
Numerator:
 
 
 
Net income
$
1,197

 
856

Net income allocated to Class A common stock
$
1,185

 
848

Net income allocated to Class B common stock
12

 
8

Net income
$
1,197

 
856

Denominator:
 
 
 
Weighted average shares of Class A outstanding - basic
49,080

 
49,080

Weighted average shares of Class A outstanding - diluted
49,080

 
49,080

Weighted average shares of Class B outstanding - basic and diluted
1,002

 
1,002

Basic earnings per share of Class A common stock
$
0.02

 
0.02

Basic earnings per share of Class B common stock
0.01

 
0.01

Diluted earnings per share of Class A common stock
0.02

 
0.02

Diluted earnings per share of Class B common stock
0.01

 
0.01


(5) Investments

The Company invests primarily in fixed maturity securities, which totaled 84.3% of total investments and cash and cash equivalents at March 31, 2014.
 
March 31, 2014
 
December 31, 2013
 
Carrying
Value
 
% of Total
Carrying Value
 
Carrying
Value
 
% of Total
Carrying Value
 
(In thousands)
 
 
 
(In thousands)
 
 
Fixed maturity securities
$
868,345

 
84.3
%
 
$
832,952

 
83.9
%
Equity securities
49,845

 
4.8
%
 
47,259

 
4.8
%
Mortgage loans
659

 
0.1
%
 
671

 
0.1
%
Policy loans
50,288

 
4.9
%
 
48,868

 
4.8
%
Real estate and other long-term investments
8,447

 
0.8
%
 
8,485

 
0.9
%
Cash and cash equivalents
52,307

 
5.1
%
 
54,593

 
5.5
%
Total cash, cash equivalents and investments
$
1,029,891

 
100.0
%
 
$
992,828

 
100.0
%


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Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2014
(Unaudited)


The following tables represent the cost, gross unrealized gains and losses and fair value for fixed maturities and equity securities as of the periods indicated.
 
March 31, 2014
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
10,101

 
2,539

 

 
12,640

U.S. Government-sponsored enterprises
43,076

 
1,718

 
30

 
44,764

States and political subdivisions
355,633

 
10,529

 
6,242

 
359,920

Foreign governments
104

 
27

 

 
131

Corporate
208,740

 
14,883

 
440

 
223,183

Commercial mortgage-backed
432

 
10

 

 
442

Residential mortgage-backed
3,394

 
287

 
2

 
3,679

Total available-for-sale securities
621,480

 
29,993

 
6,714

 
644,759

Held-to-maturity securities:
 

 
 

 
 

 
 

U.S. Government-sponsored enterprises
5,846

 
249

 

 
6,095

States and political subdivisions
183,868

 
3,975

 
3,400

 
184,443

Corporate
33,872

 
853

 
176

 
34,549

Total held-to-maturity securities
223,586

 
5,077

 
3,576

 
225,087

Total fixed maturities
$
845,066

 
35,070

 
10,290

 
869,846

Equity securities:
 

 
 

 
 

 
 

Stock mutual funds
$
10,463

 
1,737

 

 
12,200

Bond mutual funds
35,080

 
29

 
318

 
34,791

Common stock
810

 
10

 
7

 
813

Preferred stock
1,780

 
269

 
8

 
2,041

Total equity securities
$
48,133

 
2,045

 
333

 
49,845



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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2014
(Unaudited)

 
December 31, 2013
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
U.S. Treasury securities
$
10,115

 
2,348

 

 
12,463

U.S. Government-sponsored enterprises
53,587

 
1,209

 
228

 
54,568

States and political subdivisions
341,673

 
6,242

 
11,449

 
336,466

Foreign governments
104

 
23

 

 
127

Corporate
186,671

 
12,289

 
1,399

 
197,561

Commercial mortgage-backed
300

 
9

 

 
309

Residential mortgage-backed
3,494

 
270

 
2

 
3,762

Total available-for-sale securities
595,944

 
22,390

 
13,078

 
605,256

Held-to-maturity securities:
 

 
 

 
 

 
 

U.S. Government-sponsored enterprises
8,877

 
197

 
3

 
9,071

States and political subdivisions
181,246

 
1,633

 
6,412

 
176,467

Corporate
37,573

 
771

 
349

 
37,995

Total held-to-maturity securities
227,696

 
2,601

 
6,764

 
223,533

Total fixed maturity securities
$
823,640

 
24,991

 
19,842

 
828,789

Equity securities:
 

 
 

 
 

 
 

Stock mutual funds
$
10,463

 
1,506

 

 
11,969

Bond mutual funds
35,080

 

 
417

 
34,663

Common stock
17

 

 
5

 
12

Preferred stock
323

 
292

 

 
615

Total equity securities
$
45,883

 
1,798

 
422

 
47,259

 
At March 31, 2014, the Company had $3.8 million of mortgage-backed security holdings based on amortized cost, of which $3.4 million, or 89.5%, 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.

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

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2014
(Unaudited)

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 length of time to which the fair value has been less than the amortized cost of the security; and (e) the payment structure of the security.  The Company's best estimate of expected future cash flows used to determine the credit loss amount is a quantitative and qualitative process.  Quantitative review includes information received from third party sources such as financial statements, pricing and rating changes, liquidity and other statistical information.  Qualitative factors include judgments related to business strategies, economic impacts on the issuer and overall judgment related to estimates and industry factors.  The Company's best estimate of future cash flows involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings, and current delinquency rates.  These assumptions require the use of significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries, which may include estimating the underlying collateral value.  In addition, projections of expected future debt security cash flows may change based upon new information regarding the performance of the issuer.

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

The Company did not recognize any other-than-temporary impairments ("OTTI") during the three months ended March 31, 2014 and 2013.


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2014
(Unaudited)

The following tables present the fair values and gross unrealized losses of fixed maturities and equity securities that have remained in a continuous unrealized loss position for the periods indicated.
 
March 31, 2014
 
Less than 12 months
 
Greater than 12 months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
(In thousands, except for # of securities)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government-sponsored enterprises
$
1,285

 
9

 
6

 
830

 
21

 
1

 
2,115

 
30

 
7

States and political subdivisions
128,340

 
5,149

 
137

 
21,095

 
1,093

 
23

 
149,435

 
6,242

 
160

Corporate
38,641

 
286

 
34

 
2,623

 
154

 
2

 
41,264

 
440

 
36

Residential mortgage-backed
61

 
1

 
5

 
40

 
1

 
1

 
101

 
2

 
6

Total available-for-sale securities
168,327

 
5,445

 
182

 
24,588

 
1,269

 
27

 
192,915

 
6,714

 
209

Held-to-maturity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
74,114

 
3,031

 
87

 
11,710

 
369

 
18

 
85,824

 
3,400

 
105

Corporate
5,395

 
176

 
4

 

 

 

 
5,395

 
176

 
4

Total held-to-maturity securities
79,509

 
3,207

 
91

 
11,710

 
369

 
18

 
91,219

 
3,576

 
109

Total fixed maturities
$
247,836

 
8,652

 
273

 
36,298

 
1,638

 
45

 
284,134

 
10,290

 
318

Equity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Bond mutual funds
$
27,682

 
318

 
3

 

 

 

 
27,682

 
318

 
3

Common stocks
136

 
3

 
1

 
13

 
4

 
1

 
149

 
7

 
2

  Preferred stocks
338

 
8

 
8

 

 

 

 
338

 
8

 
8

Total equities
$
28,156

 
329

 
12

 
13

 
4

 
1

 
28,169

 
333

 
13


As of March 31, 2014, the Company had 27 available-for-sale securities and 18 held-to-maturity securities that were in an unrealized loss position for greater than 12 months. We reported 1 common stock holding in an unrealized loss position as of March 31, 2014.


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2014
(Unaudited)

 
December 31, 2013
 
Less than 12 months
 
Greater than 12 months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
(In thousands, except for # of securities)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government-sponsored enterprises
$
14,032

 
228

 
12

 

 

 

 
14,032

 
228

 
12

States and political subdivisions
183,280

 
9,872

 
203

 
15,673

 
1,577

 
16

 
198,953

 
11,449

 
219

Corporate
35,789

 
1,048

 
25

 
2,426

 
351

 
2

 
38,215

 
1,399

 
27

Residential mortgage-backed
57

 
1

 
3

 
42

 
1

 
1

 
99

 
2

 
4

Total available-for-sale securities
233,158

 
11,149

 
243

 
18,141

 
1,929

 
19

 
251,299

 
13,078

 
262

Held-to-maturity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Government-sponsored enterprises
2,997

 
3

 
1

 

 

 

 
2,997

 
3

 
1

States and political subdivisions
100,153

 
5,236

 
118

 
14,797

 
1,176

 
17

 
114,950

 
6,412

 
135

Corporate
5,225

 
349

 
4

 

 

 

 
5,225

 
349

 
4

Total held-to-maturity securities
108,375

 
5,588

 
123

 
14,797

 
1,176

 
17

 
123,172

 
6,764

 
140

Total fixed maturities
$
341,533

 
16,737

 
366

 
32,938

 
3,105

 
36

 
374,471

 
19,842

 
402

Equity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Bond mutual funds
$
34,663

 
417

 
7

 

 

 

 
34,663

 
417

 
7

Common stock
12

 
5

 
1

 

 

 

 
12

 
5

 
1

Total equities
$
34,675

 
422

 
8

 

 

 

 
34,675

 
422

 
8

 
We have reviewed these securities for the periods ended March 31, 2014 and December 31, 2013 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.


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2014
(Unaudited)

The amortized cost and fair value of fixed maturity securities at March 31, 2014 by contractual maturity are shown in the table below.  Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date have been reflected based upon final stated maturity.
 
March 31, 2014
 
Amortized
Cost
 
Fair
Value
 
(In thousands)
Available-for-sale securities:
 
 
 
Due in one year or less
$
15,507

 
15,818

Due after one year through five years
117,719

 
125,050

Due after five years through ten years
104,920

 
108,876

Due after ten years
383,334

 
395,015

Total available-for-sale securities
621,480

 
644,759

Held-to-maturity securities:
 

 
 

Due in one year or less
10,453

 
10,515

Due after one year through five years
31,897

 
32,581

Due after five years through ten years
43,214

 
44,633

Due after ten years
138,022

 
137,358

Total held-to-maturity securities
223,586

 
225,087

Total fixed maturities
$
845,066

 
869,846


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, 2014 and 2013 are summarized as follows.
 
 
Fixed Maturities, Available-for-sale
 
 
Equity Securities
 
 
Three Months Ended
 
 
Three Months Ended
 
 
March 31,
 
 
March 31,
 
 
2014
 
2013
 
 
2014
 
2013
 
(In thousands)
Proceeds
 
$

 
58

 
 

 

Gross realized gains
 
$

 
1

 
 

 

Gross realized losses
 
$

 

 
 

 

 
There were no securities sold at a loss during the three month period ended March 31, 2014 or 2013. There were no securities sold from the held-to-maturity portfolio for the three months ended March 31, 2014 or 2013.

(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

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2014
(Unaudited)

unobservable inputs.  All assets and liabilities carried at fair value are required to be classified and disclosed in one of the following three categories:

Level 1 - Quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or whose significant value drivers are observable.
Level 3 - Instruments whose significant value drivers are unobservable.

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

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

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

The following tables set forth our assets and liabilities that are measured at fair value on a recurring basis as of the dates indicated.
 
March 31, 2014
Available-for-sale investments
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
 
(In thousands)
Financial assets:
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasury and U.S. Government-sponsored enterprises
$
12,640

 
44,764

 

 
57,404

States and political subdivisions

 
359,920

 

 
359,920

Corporate

 
223,183

 

 
223,183

Commercial mortgage-backed

 
152

 
290

 
442

Residential mortgage-backed

 
3,679

 

 
3,679

Foreign governments

 
131

 

 
131

Total fixed maturities
12,640

 
631,829

 
290

 
644,759

Equity securities:
 

 
 

 
 

 
 

Stock mutual funds
12,200

 

 

 
12,200

Bond mutual funds
34,791

 

 

 
34,791

Common stock
813

 

 

 
813

Preferred stock
2,041

 

 

 
2,041

Total equity securities
49,845

 

 

 
49,845

Total financial assets
$
62,485

 
631,829

 
290

 
694,604



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Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2014
(Unaudited)

 
December 31, 2013
Available-for-sale investments
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
 
(In thousands)
Financial assets:
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasury and U.S. Government-sponsored enterprises
$
12,463

 
54,568

 

 
67,031

States and political subdivisions

 
336,466

 

 
336,466

Corporate

 
197,561

 

 
197,561

Commercial mortgage-backed

 

 
309

 
309

Residential mortgage-backed

 
3,762

 

 
3,762

Foreign governments

 
127

 

 
127

Total fixed maturities
12,463

 
592,484

 
309

 
605,256

Equity securities:
 

 
 

 
 

 
 

Stock mutual funds
11,969

 

 

 
11,969

Bond mutual funds
34,663

 

 

 
34,663

Common stock
12

 

 

 
12

Preferred stock
615

 

 

 
615

Total equity securities
47,259

 

 

 
47,259

Total financial assets
$
59,722

 
592,484

 
309

 
652,515

 
Financial Instruments Valuation

Fixed maturity securities, available-for-sale.  At March 31, 2014, our fixed maturity securities, valued using a third-party pricing source, totaled $631.8 million for Level 2 assets and comprised 91.0% of total reported fair value of our financial assets.  The Level 1 and Level 2 valuations are reviewed and updated quarterly through random testing by comparisons to separate pricing models, other third-party pricing services, and back tested to recent trades.  In addition, we obtain information relative to the third-party pricing models and review model parameters for reasonableness.  Fair values for Level 3 assets are based upon unadjusted broker quotes that are non-binding, and consist of two private placement mortgage-backed securities with a total value of $0.3 million.  Our Level 3 assets are current relative to principal and interest payments and are considered immaterial to our financial statements.  For the three months ended March 31, 2014, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third party prices were changed from the values received.

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


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2014
(Unaudited)

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

March 31,
2014
 
December 31,
2013
 
(In thousands)
 
 
 
 
Balance at beginning of period
$
309

 
387

Total realized and unrealized gains (losses)


 
 

Included in net income

 

Included in other comprehensive income

 
(7
)
Principal paydowns
(19
)
 
(71
)
Transfer in and (out) of Level 3

 

Balance at end of period
$
290

 
309


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

Financial Instruments not Carried at Fair Value

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

The carrying amount and fair value for the financial assets and liabilities on the consolidated balance sheets not otherwise disclosed for the periods indicated are as follows:
 
March 31, 2014
 
December 31, 2013
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(In thousands)
Financial assets:
 
 
 
 
 
 
 
Fixed maturities, held-to-maturity
$
223,586

 
225,087

 
227,696

 
223,533

Mortgage loans
659

 
684

 
671

 
695

Policy loans
50,288

 
50,288

 
48,868

 
48,868

Cash and cash equivalents
52,307

 
52,307

 
54,593

 
54,593

Financial liabilities:
 

 
 

 
 

 
 

Annuity - investment contracts
39,650

 
43,086

 
39,469

 
44,960


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

Mortgage loans are secured principally by residential and commercial properties.  Weighted average interest rates for these loans were approximately 6.4% as of March 31, 2014 and December 31, 2013, with maturities ranging from 1 to 30 years.  Management estimated the fair value using an annual interest rate of 6.25% at March 31, 2014.  Our mortgage loans are considered Level 3 assets in the fair value hierarchy.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2014
(Unaudited)


Policy loans had a weighted average annual interest rate of 7.7% as of March 31, 2014 and December 31, 2013, and no specified maturity dates.  The aggregate fair value of policy loans approximates the carrying value reflected on the consolidated balance sheets.  These loans typically carry an interest rate that is tied to the crediting rate applied to the related policy and contract reserves.  Policy loans are an integral part of the life insurance policies we have in force, cannot be valued separately and are not marketable.  Therefore, the fair value of policy loans approximates the carrying value and policy loans are considered Level 3 assets in the fair value hierarchy.
 
The fair value of short-term investments approximate carrying value due to their short-term nature.  Our short-term investments are considered Level 2 assets in the fair value hierarchy.
 
The fair value of cash and cash equivalents approximate carrying value and are characterized as Level 1 assets in the fair value hierarchy.
 
The fair value of the Company's liabilities under annuity contract policies, which are considered Level 3 assets, was estimated at March 31, 2014 using discounted cash flows based upon a swap rate curve with interest rates ranging from 0.24% to 4.03% based upon swap rates adjusted for various risk adjustments. The fair value of liabilities under all insurance contracts are taken into consideration in the overall management of interest rate risk, which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.

(7) Commitments and Contingencies

We are a defendant in a lawsuit filed on August 6, 1999, in the Texas District Court, Austin, Texas, now styled Delia Bolanos Andrade, et al., Plaintiffs, v. Citizens Insurance Company of America, et al., Defendants in which a class was originally certified by the trial court and reversed by the Texas Supreme Court in 2007 with an order to the trial court to conduct further proceedings consistent with its ruling.  The underlying lawsuit alleged that certain life insurance policies CICA made available to non-U.S. residents, when combined with a policy feature that allowed certain cash benefits to be assigned to two non-U.S. trusts for the purpose of accumulating ownership of our Class A common stock, along with allowing the policyholders to make additional contributions to the trusts, were actually offers and sales of securities that occurred in Texas by unregistered dealers in violation of the Texas securities laws.  The remedy sought was rescission and return of the insurance premium payments.  On December 9, 2009, the trial court denied the recertification of the class after conducting additional proceedings in accordance with the Texas Supreme Court's ruling.  The remaining plaintiffs must now proceed individually, and not as a class, if they intend to pursue their claims against us.  Since the December 9, 2009 trial court ruling, no individual cases have been further pursued by the plaintiffs.  The probability of the plaintiffs further pursuing their cases individually remains unknown.  An estimate of any possible loss or range of losses cannot be made at this time in regard to individuals pursuing claims.  However, should the plaintiffs further pursue their claims individually, we intend to vigorously defend any proceedings.

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

These internal and external audits may result in additional payments to beneficiaries, additional escheatment of funds deemed abandoned under state laws, administrative penalties, interest, and changes to the Company's procedures for the identification and escheatment of abandoned property.  At this time, the Company is not able to estimate any of these possible amounts, but such costs could be substantial for a company our size.

We defend all claims vigorously.  However, in doing so, we could incur significant defense costs, including attorneys' fees, other direct litigation costs and the expenditure of substantial amounts of management time that otherwise would be devoted to our business.  If we suffer an adverse judgment as a result of litigation claims, it could have a material adverse effect on our business, results of operations and financial condition.


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2014
(Unaudited)

(8) Income Taxes

The effective tax rate was 29.2% and 22.7% for the first quarter of 2014 and 2013, respectively.   In periods where our effective tax rate is lower than the statutory tax rate of 35%, the difference is primarily due to tax-exempt state and local bonds. The effective tax rate is higher in the current year compared to 2013 primarily due to higher book income in the current period compared to the prior period but approximately the same amount of tax-exempt income in both periods.

(9) Related Party Transactions

The Company has various routine related party transactions in conjunction with our holding company structure, such as a management service agreement related to costs incurred, a tax sharing agreement between entities, and inter-company dividends and capital contributions.  There were no changes related to these relationships during the three months ended March 31, 2014.  See our Annual Report on Form 10-K as of December 31, 2013 for a comprehensive discussion of related party transactions.


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
March 31, 2014



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

FORWARD-LOOKING STATEMENTS

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

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

Changes in foreign and U.S. general economic, market, and political conditions, including the performance of financial markets and interest rates;
Changes in consumer behavior, which may affect the Company's ability to sell its products and retain business;
The timely development of and acceptance of new products of the Company and perceived overall value of these products and services by existing and potential customers;
Fluctuations in experience regarding current mortality, morbidity, persistency and interest rates relative to expected amounts used in pricing and actuarial valuation of the Company's products;
The performance of our investment portfolio, which may be adversely affected by changes in interest rates, adverse developments and ratings of issuers whose debt securities we may hold, and other adverse macroeconomic events;
Results of litigation we may be involved in;
Changes in assumptions related to deferred acquisition costs and the value of any businesses we may acquire;
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