10-Q
 
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, 2016
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 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 smaller reporting company. See the definition of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

As of April 29, 2016, 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.
 
 
 
 
 
 
 
Consolidated Statements of Financial Position, March 31, 2016 (Unaudited) and December 31, 2015
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income, Three Months Ended March 31, 2016 and 2015 (Unaudited) 
 
 
 
 
 
 
Consolidated Statements of Cash Flows, Three Months Ended March 31, 2016 and 2015 (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
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, 2016
 
December 31, 2015
Assets
(Unaudited)
 
 
Investments:
 
 
 
Fixed maturities available-for-sale, at fair value (cost:  $769,044 and $714,137 in 2016 and 2015, respectively)
$
803,729

 
735,648

Fixed maturities held-to-maturity, at amortized cost (fair value:  $265,186 and $264,966 in 2016 and 2015, respectively)
255,536

 
259,953

Equity securities available-for-sale, at fair value (cost:  $23,727 and $23,727 in 2016 and 2015, respectively)
23,548

 
23,438

Mortgage loans on real estate
587

 
594

Policy loans
62,011

 
60,166

Real estate held for investment (less $1,758 and $1,721 accumulated depreciation in 2016 and 2015, respectively)
7,913

 
7,956

Other long-term investments
75

 
75

Short-term investments

 
251

Total investments
1,153,399

 
1,088,081

Cash and cash equivalents
45,355

 
82,827

Accrued investment income
16,130

 
15,406

Reinsurance recoverable
3,939

 
4,166

Deferred policy acquisition costs
164,772

 
165,362

Cost of customer relationships acquired
20,815

 
21,585

Goodwill
17,255

 
17,255

Other intangible assets
970

 
971

Deferred tax asset
58,329

 
68,764

Property and equipment, net
6,322

 
6,338

Due premiums, net (less $1,362 and $1,490 allowance for doubtful accounts in 2016 and 2015, respectively)
10,838

 
11,819

Prepaid expenses
1,261

 
162

Other assets
1,340

 
1,304

Total assets
$
1,500,725

 
1,484,040


(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, 2016
 
December 31, 2015
Liabilities and Stockholders' Equity
(Unaudited)
 
 
Liabilities:
 
 
 
Policy liabilities:
 
 
 
Future policy benefit reserves:
 
 
 
Life insurance
$
1,011,285

 
995,972

Annuities
65,952

 
64,933

Accident and health
1,089

 
1,118

Dividend accumulations
18,858

 
18,465

Premiums paid in advance
44,989

 
43,220

Policy claims payable
8,813

 
9,653

Other policyholders' funds
7,239

 
7,518

Total policy liabilities
1,158,225

 
1,140,879

Commissions payable
2,236

 
2,757

Federal income tax payable
65,540

 
71,225

Payable for securities in process of settlement
874

 
2,457

Other liabilities
24,748

 
24,205

Total liabilities
1,251,623

 
1,241,523

Commitments and contingencies (Note 7)


 


Stockholders' equity:
 

 
 

Class A, no par value, 100,000,000 shares authorized, 52,215,852 shares issued and outstanding in 2015 and 2014, including shares in treasury of 3,135,738 in 2015 and 2014
259,383

 
259,383

Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2015 and 2014
3,184

 
3,184

Accumulated deficit
(24,575
)
 
(22,626
)
Accumulated other comprehensive income:
 

 
 

Unrealized gains on securities, net of tax
22,121

 
13,587

Treasury stock, at cost
(11,011
)
 
(11,011
)
Total stockholders' equity
249,102

 
242,517

Total liabilities and stockholders' equity
$
1,500,725

 
1,484,040



See accompanying notes to consolidated financial statements.


3

Table of Contents

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

 
2016
 
2015
Revenues:
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
Life insurance
 
 
$
42,773

 
 
 
42,899

Accident and health insurance
 
 
390

 
 
 
375

Property insurance
 
 
1,276

 
 
 
1,292

Net investment income
 
 
11,731

 
 
 
11,069

Realized investment losses, net
 
 
(1,796
)
 
 
 
(71
)
Other income
 
 
151

 
 
 
296

Total revenues
 
 
54,525

 
 
 
55,860

Benefits and expenses:
 
 
 

 
 
 
 

Insurance benefits paid or provided:
 
 
 

 
 
 
 

Claims and surrenders
 
 
19,005

 
 
 
19,403

Increase in future policy benefit reserves
 
 
15,990

 
 
 
17,298

Policyholders' dividends
 
 
1,549

 
 
 
2,309

Total insurance benefits paid or provided
 
 
36,544

 
 
 
39,010

Commissions
 
 
9,468

 
 
 
9,859

Other general expenses
 
 
9,318

 
 
 
7,551

Capitalization of deferred policy acquisition costs
 
 
(6,264
)
 
 
 
(6,856
)
Amortization of deferred policy acquisition costs
 
 
6,708

 
 
 
5,299

Amortization of cost of customer relationships acquired
 
 
545

 
 
 
647

Total benefits and expenses
 
 
56,319

 
 
 
55,510

(Loss) income before federal income tax
 
 
(1,794
)
 
 
 
350

Federal income tax expense (benefit)
 
 
155

 
 
 
(75
)
Net (loss) income
 
 
(1,949
)
 
 
 
425

Per Share Amounts:
 
 
 

 
 

 
 

Basic (losses) earnings per share of Class A common stock
$
(0.04
)
 
 

 
$
0.01

 
 

Basic (losses) earnings per share of Class B common stock
(0.02
)
 
 

 

 
 

Diluted (losses) earnings per share of Class A common stock
(0.04
)
 
 

 
0.01

 
 

Diluted (losses) earnings per share of Class B common stock
(0.02
)
 
 

 

 
 

Other comprehensive income:
 

 
 

 
 

 
 

Unrealized gains on available-for-sale securities:
 

 
 

 
 

 
 

Unrealized holding gains arising during period
 

 
11,333

 
 

 
5,007

Reclassification adjustment for losses included in net income
 

 
1,796

 
 

 
36

Unrealized gains on available-for-sale securities, net
 

 
13,129

 
 

 
5,043

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

 
4,595

 
 

 
1,765

Other comprehensive income
 

 
8,534

 
 

 
3,278

Comprehensive income
 

 
$
6,585

 
 

 
3,703

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)
 
 
 
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(1,949
)
 
425

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 

 
 

Realized losses on sale of investments and other assets
1,796

 
71

Net deferred policy acquisition costs
444

 
(1,557
)
Amortization of cost of customer relationships acquired
545

 
647

Depreciation
324

 
199

Amortization of premiums and discounts on investments
3,366

 
2,655

Deferred federal income tax (benefit)
5,840

 
(1,204
)
Change in:
 

 
 

Accrued investment income
(724
)
 
(778
)
Reinsurance recoverable
227

 
174

Due premiums
981

 
285

Future policy benefit reserves
15,908

 
17,191

Other policyholders' liabilities
1,043

 
4,404

Federal income tax payable
(5,685
)
 
(2,171
)
Commissions payable and other liabilities
22

 
(2,577
)
Other, net
(1,134
)
 
(751
)
Net cash provided by operating activities
21,004

 
17,013

Cash flows from investing activities:
 

 
 

Maturities and calls of fixed maturities, available-for-sale
7,876

 
8,257

Maturities and calls of fixed maturities, held-to-maturity
5,970

 
6,975

Purchase of fixed maturities, available-for-sale
(68,533
)
 
(24,392
)
Purchase of fixed maturities, held-to-maturity
(2,547
)
 
(16,562
)
Calls of equity securities, available-for-sale

 
150

Purchase of equity securities, available-for-sale

 
(1
)
Principal payments on mortgage loans
7

 
9

Increase in policy loans, net
(1,845
)
 
(1,256
)
Sale of other long-term investments

 
58

Purchase of property and equipment
(266
)
 
(87
)
Maturity of short-term investments
251

 

Net cash used in investing activities
(59,087
)
 
(26,849
)

5

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Three Months Ended March 31,
(In thousands)
(Unaudited)
 
2016
 
2015
Cash flows from financing activities:
 
 
 
Annuity deposits
$
1,891

 
2,121

Annuity withdrawals
(1,280
)
 
(1,563
)
Net cash provided by financing activities
611

 
558

Net decrease in cash and cash equivalents
(37,472
)
 
(9,278
)
Cash and cash equivalents at beginning of year
82,827

 
50,708

Cash and cash equivalents at end of period
$
45,355

 
41,430

Supplemental disclosures of operating activities:
 

 
 

Cash paid during the period for income taxes, net
$

 
3,300


Supplemental Disclosures of Non-Cash Investing Activities:
None.

See accompanying notes to consolidated financial statements.


6

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2016
(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 statement of financial position for March 31, 2016, and the consolidated statements of comprehensive income (loss) for the three months ended March 31, 2016 and 2015 and cash flows for the three-month periods ended March 31, 2016 and 2015, 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, 2016 and for comparative periods have been made.  The consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”).  Accordingly, the financial statements do not include all of the information and footnotes required for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended December 31, 2015.  Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

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

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

Use of Estimates

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

The most significant estimates include those used in the evaluation of other-than-temporary impairments on debt and equity securities and valuation allowances on investments, actuarially determined assets and liabilities and assumptions, goodwill impairment, valuation allowance on deferred tax assets, and contingencies relating to litigation and regulatory matters.  Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the consolidated financial statements.



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Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2016
(Unaudited)

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of the notes to consolidated financial statements included in our 2015 Form 10-K Annual Report, which should be read in conjunction with these accompanying consolidated financial statements.

(2) Accounting Pronouncements

Accounting Standards Recently Adopted

None.

Accounting Standards Not Yet Adopted

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle. ASU 2014-09 requires disclosures enabling users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, using one of two retrospective application methods. Early application is not permitted. The Company is currently evaluating the effect that the adoption of this ASU will have on its financial statements.


8

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2016
(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, 2016
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
32,848

 
11,591

 

 
44,439

Net investment income
7,954

 
3,414

 
363

 
11,731

Realized investment losses, net
(868
)
 
(928
)
 

 
(1,796
)
Other income
115

 
3

 
33

 
151

Total revenue
40,049

 
14,080

 
396

 
54,525

Benefits and expenses:
 
 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
13,464

 
5,541

 

 
19,005

Increase in future policy benefit reserves
14,844

 
1,146

 

 
15,990

Policyholders' dividends
1,536

 
13

 

 
1,549

Total insurance benefits paid or provided
29,844

 
6,700

 

 
36,544

Commissions
5,803

 
3,665

 

 
9,468

Other general expenses
4,084

 
4,190

 
1,044

 
9,318

Capitalization of deferred policy acquisition costs
(4,926
)
 
(1,338
)
 

 
(6,264
)
Amortization of deferred policy acquisition costs
5,881

 
827

 

 
6,708

Amortization of cost of customer relationships acquired
170

 
375

 

 
545

Total benefits and expenses
40,856

 
14,419

 
1,044

 
56,319

Loss before income tax expense
$
(807
)
 
(339
)
 
(648
)
 
(1,794
)




 


9

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2016
(Unaudited)

 
Three Months Ended
 
March 31, 2015
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
32,979

 
11,587

 

 
44,566

Net investment income
7,231

 
3,464

 
374

 
11,069

Realized investment losses, net
(56
)
 
(15
)
 

 
(71
)
Other income
214

 
48

 
34

 
296

Total revenue
40,368

 
15,084

 
408

 
55,860

Benefits and expenses:
 

 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
13,560

 
5,843

 

 
19,403

Increase in future policy benefit reserves
16,137

 
1,161

 

 
17,298

Policyholders' dividends
2,295

 
14

 

 
2,309

Total insurance benefits paid or provided
31,992

 
7,018

 

 
39,010

Commissions
6,026

 
3,833

 

 
9,859

Other general expenses
3,159

 
3,830

 
562

 
7,551

Capitalization of deferred policy acquisition costs
(5,343
)
 
(1,513
)
 

 
(6,856
)
Amortization of deferred policy acquisition costs
4,549

 
750

 

 
5,299

Amortization of cost of customer relationships acquired
200

 
447

 

 
647

Total benefits and expenses
40,583

 
14,365

 
562

 
55,510

Income (loss) before income tax expense
$
(215
)
 
719

 
(154
)
 
350





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Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2016
(Unaudited)


(4) Earnings Per Share

The following tables set forth the computation of basic and diluted earnings per share.
 
 
Three Months Ended
 
March 31, 2016
 
March 31, 2015
 
(In thousands,
except per share amounts)
Basic and diluted earnings per share:
 
 
 
Numerator:
 
 
 
Net (loss) income
$
(1,949
)
 
425

Net (loss) income allocated to Class A common stock
$
(1,929
)
 
421

Net (loss) income allocated to Class B common stock
(20
)
 
4

Net (loss) income
$
(1,949
)
 
425

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 (losses) earnings per share of Class A common stock
$
(0.04
)
 
0.01

Basic (losses) earnings per share of Class B common stock
(0.02
)
 

Diluted (losses) earnings per share of Class A common stock
(0.04
)
 
0.01

Diluted (losses) earnings per share of Class B common stock
(0.02
)
 


(5) Investments

The Company invests primarily in fixed maturity securities, which totaled 88.3% of total cash, cash equivalents and investments at March 31, 2016.
 
March 31, 2016
 
December 31, 2015
 
Carrying
Value
 
% of Total
Carrying Value
 
Carrying
Value
 
% of Total
Carrying Value
 
($ In thousands)
Fixed maturity securities
$
1,059,265

 
88.3

 
$
995,601

 
85.0

Equity securities
23,548

 
2.0

 
23,438

 
2.0

Mortgage loans
587

 

 
594

 
0.1

Policy loans
62,011

 
5.2

 
60,166

 
5.1

Real estate and other long-term investments
7,988

 
0.7

 
8,031

 
0.7

Short-term investments

 

 
251

 

Cash and cash equivalents
45,355

 
3.8

 
82,827

 
7.1

Total cash, cash equivalents and investments
$
1,198,754

 
100.0

 
$
1,170,908

 
100.0



11

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2016
(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, 2016
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
9,979

 
2,975

 

 
12,954

U.S. Government-sponsored enterprises
19,551

 
1,217

 

 
20,768

States and political subdivisions
513,752

 
22,792

 
2,233

 
534,311

Foreign governments
103

 
29

 

 
132

Corporate
223,005

 
13,171

 
3,481

 
232,695

Commercial mortgage-backed
118

 
5

 

 
123

Residential mortgage-backed
2,536

 
212

 
2

 
2,746

Total available-for-sale securities
769,044

 
40,401

 
5,716

 
803,729

Held-to-maturity securities:
 

 
 

 
 

 
 

U.S. Government-sponsored enterprises
2,008

 
101

 

 
2,109

States and political subdivisions
232,394

 
10,092

 
343

 
242,143

Corporate
21,134

 
1,137

 
1,337

 
20,934

Total held-to-maturity securities
255,536

 
11,330

 
1,680

 
265,186

Total fixed maturities
$
1,024,580

 
51,731

 
7,396

 
1,068,915

 
 
 
 
 
 
 
 
Short-term investments
$

 

 

 

 
 
 
 
 
 
 
 
Equity securities:
 

 
 

 
 

 
 

Stock mutual funds
$
3,270

 

 
195

 
3,075

Bond mutual funds
18,798

 
92

 
315

 
18,575

Common stock
65

 
3

 
25

 
43

Preferred stock
1,594

 
262

 
1

 
1,855

Total equity securities
$
23,727

 
357

 
536

 
23,548



12

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2016
(Unaudited)

 
December 31, 2015
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
U.S. Treasury securities
$
9,995

 
2,597

 

 
12,592

U.S. Government-sponsored enterprises
19,676

 
1,104

 

 
20,780

States and political subdivisions
470,319

 
15,815

 
3,085

 
483,049

Foreign governments
104

 
27

 

 
131

Corporate
211,245

 
9,683

 
4,847

 
216,081

Commercial mortgage-backed
140

 
5

 

 
145

Residential mortgage-backed
2,658

 
214

 
2

 
2,870

Total available-for-sale securities
714,137

 
29,445

 
7,934

 
735,648

Held-to-maturity securities:
 

 
 

 
 

 
 

U.S. Government-sponsored enterprises
2,010

 
110

 

 
2,120

States and political subdivisions
236,776

 
6,756

 
883

 
242,649

Corporate
21,167

 
530

 
1,500

 
20,197

Total held-to-maturity securities
259,953

 
7,396

 
2,383

 
264,966

Total fixed maturity securities
$
974,090

 
36,841

 
10,317

 
1,000,614

 
 
 
 
 
 
 
 
Short-term investments
$
251

 

 

 
251

 
 
 
 
 
 
 
 
Equity securities:
 

 
 

 
 

 
 

Stock mutual funds
$
3,270

 

 
237

 
3,033

Bond mutual funds
18,798

 
55

 
349

 
18,504

Common stock
65

 

 
22

 
43

Preferred stock
1,594

 
266

 
2

 
1,858

Total equity securities
$
23,727

 
321

 
610

 
23,438

 
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 other-than-temporary 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

13

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2016
(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.

Other-than-temporary impairments ("OTTI") were recognized during the three months ended March 31, 2016 totaling $1.9 million. No other-than-temporary impairments were recognized during the three months ended in 2015.


14

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2016
(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, 2016
 
Less than 12 months
 
Greater than 12 months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
(In thousands, except for # of securities)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
52,802

 
400

 
47

 
15,061

 
1,833

 
19

 
67,863

 
2,233

 
66

Corporate
48,931

 
2,309

 
50

 
4,861

 
1,172

 
8

 
53,792

 
3,481

 
58

Residential mortgage-backed
53

 
1

 
1

 
130

 
1

 
3

 
183

 
2

 
4

Total available-for-sale securities
101,786

 
2,710

 
98

 
20,052

 
3,006

 
30

 
121,838

 
5,716

 
128

Held-to-maturity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
9,813

 
115

 
15

 
10,136

 
228

 
10

 
19,949

 
343

 
25

Corporate
1,624

 
134

 
1

 
4,682

 
1,203

 
4

 
6,306

 
1,337

 
5

Total held-to-maturity securities
11,437

 
249

 
16

 
14,818

 
1,431

 
14

 
26,255

 
1,680

 
30

Total fixed maturities
$
113,223

 
2,959

 
114

 
34,870

 
4,437

 
44

 
148,093

 
7,396

 
158

Equity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Stock mutual funds
$
3,073

 
195

 
4

 
2

 

 
1

 
3,075

 
195

 
5

Bond mutual funds
10,196

 
280

 
2

 
105

 
35

 
1

 
10,301

 
315

 
3

Common stocks

 

 

 
16

 
25

 
2

 
16

 
25

 
2

   Preferred stocks

 

 

 

 
1

 
1

 

 
1

 
1

Total equities
$
13,269

 
475

 
6

 
123

 
61

 
5

 
13,392

 
536

 
11


As of March 31, 2016, the Company had 30 available-for-sale fixed maturity securities and 14 held-to-maturity fixed maturity securities that were in an unrealized loss position for greater than 12 months. We reported 5 common stock holdings in an unrealized loss position for greater than 12 months as of March 31, 2016.


15

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2016
(Unaudited)

 
December 31, 2015
 
Less than 12 months
 
Greater than 12 months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
(In thousands, except for # of securities)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
136,862

 
1,474

 
129

 
12,633

 
1,611

 
12

 
149,495

 
3,085

 
141

Corporate
70,081

 
4,330

 
69

 
3,308

 
517

 
3

 
73,389

 
4,847

 
72

Residential mortgage-backed
57

 
1

 
2

 
133

 
1

 
3

 
190

 
2

 
5

Total available-for-sale securities
207,000

 
5,805

 
200

 
16,074

 
2,129

 
18

 
223,074

 
7,934

 
218

Held-to-maturity securities:
 

 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
74,628

 
774

 
59

 
2,404

 
109

 
5

 
77,032

 
883

 
64

Corporate
4,585

 
641

 
4

 
2,160

 
859

 
2

 
6,745

 
1,500

 
6

Total held-to-maturity securities
79,213

 
1,415

 
63

 
4,564

 
968

 
7

 
83,777

 
2,383

 
70

Total fixed maturities
$
286,213

 
7,220

 
263

 
20,638

 
3,097

 
25

 
306,851

 
10,317

 
288

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock mutual funds
$
3,030

 
237

 
4

 
2

 

 
1

 
3,032

 
237

 
5

Bond mutual funds
10,158

 
318

 
2

 
108

 
31

 
1

 
10,266

 
349

 
3

Preferred stocks
101

 
1

 
1

 
1

 
1

 
1

 
102

 
2

 
2

Common stock
22

 
1

 
2

 
21

 
21

 
2

 
43

 
22

 
4

Total equities
$
13,311

 
557

 
9

 
132

 
53

 
5

 
13,443

 
610

 
14

 
We have reviewed these securities for the periods ended March 31, 2016 and December 31, 2015 and determined that no other-than-temporary impairment exists that have not been recognized based on our evaluation of the credit worthiness of the issuers and the fact that we do not intend to sell the investments nor is it likely that we will be required to sell the securities before recovery of their amortized cost bases which may be maturity.  We continue to monitor all securities on an on-going basis, and future information may become available which could result in other-than-temporary impairments being recorded.


16

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2016
(Unaudited)

The amortized cost and fair value of fixed maturity securities at March 31, 2016 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, 2016
 
Amortized
Cost
 
Fair
Value
 
(In thousands)
Available-for-sale securities:
 
 
 
Due in one year or less
$
39,255

 
39,635

Due after one year through five years
114,971

 
118,508

Due after five years through ten years
107,586

 
114,389

Due after ten years
507,232

 
531,197

Total available-for-sale securities
769,044

 
803,729

Held-to-maturity securities:
 

 
 

Due in one year or less
4,377

 
4,420

Due after one year through five years
38,617

 
40,966

Due after five years through ten years
52,955

 
55,963

Due after ten years
159,587

 
163,837

Total held-to-maturity securities
255,536

 
265,186

Total fixed maturities
$
1,024,580

 
1,068,915


The Company uses the specific identification method of the individual security to determine the cost basis used in the calculation of realized gains and losses related to security sales.  
 
There were no sales of available-for-sale securities for the three month periods ended March 31, 2016 or 2015. There were no securities sold from the held-to-maturity portfolio for the three months ended March 31, 2016 or 2015.


17

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2016
(Unaudited)

(6) Fair Value Measurements

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

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

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

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

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

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


18

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2016
(Unaudited)

The following tables set forth our assets and liabilities that are measured at fair value on a recurring basis as of the dates indicated.
 
March 31, 2016
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
$
12,954

 
20,768

 

 
33,722

States and political subdivisions

 
534,311

 

 
534,311

Corporate

 
232,695

 

 
232,695

Commercial mortgage-backed

 

 
123

 
123

Residential mortgage-backed

 
2,746

 

 
2,746

Foreign governments

 
132

 

 
132

Total fixed maturities
12,954

 
790,652

 
123

 
803,729

Equity securities:
 

 
 

 
 

 
 

Stock mutual funds
3,075

 

 

 
3,075

Bond mutual funds
18,575

 

 

 
18,575

Common stock
43

 

 

 
43

Preferred stock
1,855

 

 

 
1,855

Total equity securities
23,548

 

 

 
23,548

Total financial assets
$
36,502

 
790,652

 
123

 
827,277


 
December 31, 2015
Available-for-sale investments
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
 
(In thousands)
Financial assets:
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasury and U.S. Government-sponsored enterprises
$
12,592

 
20,780

 

 
33,372

States and political subdivisions

 
483,049

 

 
483,049

Corporate

 
216,081

 

 
216,081

Commercial mortgage-backed

 

 
145

 
145

Residential mortgage-backed

 
2,870

 

 
2,870

Foreign governments

 
131

 

 
131

Total fixed maturities
12,592

 
722,911

 
145

 
735,648

Equity securities:
 

 
 

 
 

 
 

Stock mutual funds
3,033

 

 

 
3,033

Bond mutual funds
18,504

 

 

 
18,504

Common stock
43

 

 

 
43

Preferred stock
1,858

 

 

 
1,858

Total equity securities
23,438

 

 

 
23,438

Total financial assets
$
36,030

 
722,911

 
145

 
759,086

 

19

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2016
(Unaudited)

Financial Instruments Valuation

Fixed maturity securities, available-for-sale.  At March 31, 2016, our fixed maturity securities, valued using a third-party pricing source, totaled $790.7 million for Level 2 assets and comprised 95.6% of total reported fair value of our financial assets.  The Level 1 and Level 2 valuations are reviewed and updated quarterly through random testing by comparisons to separate pricing models, other third-party pricing services, and back tested to recent trades.  In addition, we obtain information relative to the third-party pricing models and review model parameters for reasonableness.  Fair values for Level 3 assets are based upon unadjusted broker quotes that are non-binding, and consist of two private placement mortgage-backed securities with a total value of $0.1 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, 2016, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third party prices were changed from the values received.

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

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

March 31,
2016
 
December 31,
2015
 
(In thousands)
 
 
 
 
Balance at beginning of period
$
145

 
231

Total realized and unrealized gains (losses)


 
 

Included in net income

 

Included in other comprehensive income

 
(2
)
Principal paydowns
(22
)
 
(84
)
Transfer in and (out) of Level 3

 

Balance at end of period
$
123

 
145


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.


20

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2016
(Unaudited)

The carrying amount and fair value for the financial assets and liabilities on the consolidated balance sheets not otherwise disclosed for the periods indicated are as follows:
 
March 31, 2016
 
December 31, 2015
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(In thousands)
Financial assets:
 
 
 
 
 
 
 
Fixed maturities, held-to-maturity
$
255,536

 
265,186

 
259,953

 
264,966

Mortgage loans
587

 
608

 
594

 
617

Policy loans
62,011

 
62,011

 
60,166

 
60,166

Short-term investments

 

 
251

 
251

Cash and cash equivalents
45,355

 
45,355

 
82,827

 
82,827

Financial liabilities:
 

 
 

 
 

 
 

Annuity - investment contracts
47,943

 
50,234

 
47,222

 
46,905


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

Mortgage loans are secured principally by residential and commercial properties.  Weighted average interest rates for these loans were approximately 6.3% as of March 31, 2016 and December 31, 2015, with maturities ranging from 1 to 30 years.  Management estimated the fair value using an annual interest rate of 6.2% at March 31, 2016.  Our mortgage loans are considered Level 3 assets in the fair value hierarchy.

Policy loans had a weighted average annual interest rate of 7.7% as of March 31, 2016 and December 31, 2015, 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, 2016 using discounted cash flows based upon a swap rate curve with interest rates ranging from 1.60% to 5.71% based upon swap rates adjusted for various risk adjustments. The fair value of liabilities under all insurance contracts are taken into consideration in the overall management of interest rate risk, which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.


(7) Commitments and Contingencies

Qualification of Life Products


21

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2016
(Unaudited)

As of December 31, 2014, we determined that a portion of the life insurance policies issued by our subsidiary insurance companies failed to qualify for the favorable U.S. federal income tax treatment afforded by Sections 7702 of the Internal Revenue Code ("IRC") of 1986. This tax code section allows for qualifying products sold to clients to have favorable tax treatment such as the product's inside build up is not taxable. Because these policies were sold with the intention that they would qualify for this favorable tax treatment, holders of these policies and CICA may now be subject to additional tax liabilities. The policies at issue were sold most substantially to non-U.S. citizens residing abroad and to a lesser extent domestically. Based upon a review of the options available to the Company, we have determined we will not remediate our endowments and endowment-like products under IRC 7702 we have sold to non-U.S. citizens. We do intend to remediate the domestic products we have sold to U.S. citizens. In addition, as part of our continuing review, we determined in July 2015 that certain annuity contracts do not contain qualifying language under IRC 72(s) as intended that would have provided for favorable tax treatment of the annuities. This issue affects both our domestic and international contract holders. The Company has continued to refine the understanding of the tax failures as previously reported by preparing an individual policy calculation and has reflected the related exposure for the current reporting period as noted below. Failure of these policies to qualify under IRC Sections 7702 and 72(s) has resulted in additional liabilities and expenses as described below. The products have been and continue to be appropriately reported under U.S. GAAP for financial reporting.

The failure of these policies to qualify under Sections 7702 and 72(s) results in an estimated liability as of March 31, 2016 and December 31, 2015 of $14.6million, after tax, related to projected IRS toll charges and fees of $13.4million as well as claims liability for past claims and reserves increases to bring policies into compliance totaling $1.2 million. The range of financial estimates relative to this issue is $9.0 million to $45.5 million, after tax. This estimated range includes projected toll charges and fees payable to the IRS, as well as estimated increased payout obligations to current and former holders of non-compliant domestic life insurance policies expected to result from remediation of those policies. The estimated liability and the estimated range will be updated as we continue to refine our estimates. The amount of our liabilities and expenses depends on a number of uncertainties, including the number of prior tax years for which we may be liable to the IRS, the number of domestic life insurance policies we will be required to remediate, and the methodology applicable to the calculation of taxable benefits under non-compliant policies. Given the range of potential outcomes and the significant variables assumed in establishing our estimates, actual amounts incurred may exceed our reserve and also could exceed the high end of our estimated range of liabilities and expenses. To the extent the amount reserved by the Company is insufficient to meet the actual amount of our liability and expenses, or if our estimates of those liabilities and expenses change in the future, our financial condition and results of operation may be materially adversely affected. Management believes that based upon current information we have recorded the best estimate liability to date.

Accruals for loss contingencies are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. The process of determining our best estimate and the estimated range was a complex undertaking including insight from external consultants and involved management’s judgment based upon a variety of factors known at the time. We recorded additional general expenses of $2.0 million in 2015 related to our 7702 and 72(s) issues. Additional costs are being incurred in 2016 associated with these issues. We believe these costs could be $1.5 million to $2.0 million but due to the uncertainty of actions we cannot reasonably estimate the ultimate costs that will be incurred in 2016. Actual amounts incurred may exceed this estimate and will be recorded as they become probable and can be reasonably estimated.


Compliance

As part of our efforts to review and improve our compliance controls, we completed an internal risk assessment of our compliance with the Bank Secrecy Act ("BSA") anti-money laundering requirements.  We are in the process of enhancing our BSA compliance program with additional controls based on our risk assessment. Although we are not yet able to determine the extent of any potential loss, we cannot assure you that the impact of any non-compliance will not have a material impact upon the Company.

Unclaimed Property Contingencies

The Company has 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.

The external audit may result in additional payments to beneficiaries, additional escheatment of funds deemed abandoned under state laws, administrative penalties, interest, and changes to the Company's procedures for the identification and escheatment of abandoned property.  The Company believes additional escheatment of funds in Arkansas or Texas will not be material to our

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2016
(Unaudited)

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

Litigation

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


(8) Income Taxes

The effective tax rate was (8.6)% and (21.4)% for the three months ended of March 31, 2016 and 2015, respectively. Additionally there is $0.4 million of tax expense related to an uncertain tax position in the three months ended March 31, 2016. In most 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 bond income.

(9) Benefit Plans

The Company introduced a new employer-sponsored 401(k) plan to all eligible employees, effective March 1, 2016. This is an additional benefit offered to employees, which supplements the defined contribution profit-sharing plan which was already in existence.  Employees with one year of service can participate in the new plan.  Contributions are made by employees and the Company provides a matching contribution based upon the employee's level of contribution. The Company's expense related to the new 401(k) plan was not material to the Company's results of operations.

(10) 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, 2016.  In June 2015 CICA made a $1 million cash capital contribution to CNLIC. See our Annual Report on Form 10-K as of December 31, 2015 for a comprehensive discussion of related party transactions.


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
March 31, 2016

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 the application, interpretation or enforcement of foreign insurance laws that impact our business, which derives the majority of its revenues from residents of foreign countries;
Potential changes in amounts reserved for in connection with the noncompliance of a portion of our insurance policies with Sections 7702 under the Internal Revenue Code and the failure of certain annuity contracts to qualify under Section 72(s) of the Internal Revenue Code;
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 or regulatory oversight, 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 the Company's products;
The performance of our investment portfolio, which may be adversely affected by changes in interest rates, adverse developments and ratings of issuers whose debt securities we may hold, and other adverse macroeconomic events;
Results of litigation we may be involved in;
Changes in assumptions related to deferred acquisition costs and the value of any businesses we may acquire;
Regulatory, accounting or tax changes that may affect the cost of, or the demand for, the Company's products or services;