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

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 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 July 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, June 30, 2016 (Unaudited) and December 31, 2015
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income, Three Months Ended June 30, 2016 and 2015 (Unaudited) 
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income, Six Months Ended June 30, 2016 and 2015 (Unaudited) 
 
 
 
 
 
 
Consolidated Statements of Cash Flows, Six Months Ended June 30, 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)
 
 
 
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
Assets
(Unaudited)
 
 
Investments:
 
 
 
Fixed maturities available-for-sale, at fair value (cost:  $784,934 and $714,137 in 2016 and 2015, respectively)
$
835,473

 
735,648

Fixed maturities held-to-maturity, at amortized cost (fair value:  $270,051 and $264,966 in 2016 and 2015, respectively)
256,165

 
259,953

Equity securities available-for-sale, at fair value (cost:  $22,729 and $23,727 in 2016 and 2015, respectively)
23,234

 
23,438

Mortgage loans on real estate
468

 
594

Policy loans
63,157

 
60,166

Real estate held for investment (less $1,795 and $1,721 accumulated depreciation in 2016 and 2015, respectively)
7,869

 
7,956

Other long-term investments
75

 
75

Short-term investments
521

 
251

Total investments
1,186,962

 
1,088,081

Cash and cash equivalents
52,937

 
82,827

Accrued investment income
16,719

 
15,406

Receivable for securities
653

 

Reinsurance recoverable
4,068

 
4,166

Deferred policy acquisition costs
165,860

 
165,362

Cost of customer relationships acquired
20,173

 
21,585

Goodwill
17,255

 
17,255

Other intangible assets
969

 
971

Deferred tax asset
60,874

 
68,764

Property and equipment, net
6,546

 
6,338

Due premiums, net (less $1,446 and $1,490 allowance for doubtful accounts in 2016 and 2015, respectively)
11,485

 
11,819

Prepaid expenses
1,215

 
162

Other assets
1,286

 
1,304

Total assets
$
1,547,002

 
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)
 
 
 
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
Liabilities and Stockholders' Equity
(Unaudited)
 
 
Liabilities:
 
 
 
Policy liabilities:
 
 
 
Future policy benefit reserves:
 
 
 
Life insurance
$
1,026,980

 
995,972

Annuities
67,200

 
64,933

Accident and health
1,075

 
1,118

Dividend accumulations
19,362

 
18,465

Premiums paid in advance
45,180

 
43,220

Policy claims payable
9,400

 
9,653

Other policyholders' funds
7,230

 
7,518

Total policy liabilities
1,176,427

 
1,140,879

Commissions payable
2,424

 
2,757

Federal income tax payable
73,473

 
71,225

Payable for securities in process of settlement
7,363

 
2,457

Other liabilities
26,238

 
24,205

Total liabilities
1,285,925

 
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
(23,256
)
 
(22,626
)
Accumulated other comprehensive income:
 

 
 

Unrealized gains on securities, net of tax
32,777

 
13,587

Treasury stock, at cost
(11,011
)
 
(11,011
)
Total stockholders' equity
261,077

 
242,517

Total liabilities and stockholders' equity
$
1,547,002

 
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 June 30,
(In thousands, except per share amounts)
(Unaudited)

 
2016
 
2015
Revenues:
 
 
 
Premiums:
 
 
 
 
 
Life insurance
 
 
$
47,351

 
 
 
46,748

Accident and health insurance
 
 
395

 
 
 
421

Property insurance
 
 
1,261

 
 
 
1,291

Net investment income
 
 
12,000

 
 
 
11,201

Realized investment losses, net
 
 
(26
)
 
 
 
(8
)
Other income
 
 
256

 
 
 
426

Total revenues
 
 
61,237

 
 
 
60,079

Benefits and expenses:
 
 
 

 
 
 
 

Insurance benefits paid or provided:
 
 
 
 
 
 
 
Claims and surrenders
 
 
20,969

 
 
 
19,240

Increase in future policy benefit reserves
 
 
17,675

 
 
 
19,760

Policyholders' dividends
 
 
1,816

 
 
 
2,540

Total insurance benefits paid or provided
 
 
40,460

 
 
 
41,540

Commissions
 
 
10,777

 
 
 
10,805

Other general expenses
 
 
8,566

 
 
 
10,445

Capitalization of deferred policy acquisition costs
 
 
(8,103
)
 
 
 
(8,036
)
Amortization of deferred policy acquisition costs
 
 
6,827

 
 
 
5,647

Amortization of cost of customer relationships acquired
 
 
402

 
 
 
516

Total benefits and expenses
 
 
58,929

 
 
 
60,917

Income (loss) before federal income tax
 
 
2,308

 
 
 
(838
)
Federal income tax expense
 
 
989

 
 
 
1,076

Net income (loss)
 
 
1,319

 
 
 
(1,914
)
Per Share Amounts:
 
 
 

 
 

 
 

Basic earnings per share of Class A common stock
$
0.03

 
 

 
(0.04
)
 
 

Basic earnings per share of Class B common stock
0.01

 
 

 
(0.02
)
 
 

Diluted earnings per share of Class A common stock
0.03

 
 

 
(0.04
)
 
 

Diluted earnings per share of Class B common stock
0.01

 
 

 
(0.02
)
 
 

Other comprehensive income (loss):
 
 
 

 
 

 
 

Unrealized gains (losses) on available-for-sale securities:
 

 
 

 
 

 
 

Unrealized holding gains (losses) arising during period
 

 
16,374

 
 

 
(16,778
)
Reclassification adjustment for losses included in net income
 

 
20

 
 

 
8

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

 
16,394

 
 

 
(16,770
)
Income tax expense (benefit) on unrealized gains (losses) on available-for-sale securities
 

 
5,738

 
 

 
(5,869
)
Other comprehensive income (loss)
 

 
10,656

 
 

 
(10,901
)
Comprehensive income (loss)
 

 
$
11,975

 
 

 
(12,815
)
 
 
 
 
 
 
 
 

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Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Six Months Ended June 30,
(In thousands, except per share amounts)
(Unaudited)

 
2016
 
2015
Revenues:
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
Life insurance
 
 
$
90,124

 
 
 
89,647

Accident and health insurance
 
 
785

 
 
 
796

Property insurance
 
 
2,537

 
 
 
2,583

Net investment income
 
 
23,731

 
 
 
22,270

Realized investment losses, net
 
 
(1,822
)
 
 
 
(79
)
Other income
 
 
407

 
 
 
722

Total revenues
 
 
115,762

 
 
 
115,939

Benefits and expenses:
 
 
 

 
 
 
 

Insurance benefits paid or provided:
 
 
 

 
 
 
 

Claims and surrenders
 
 
39,974

 
 
 
38,643

Increase in future policy benefit reserves
 
 
33,665

 
 
 
37,058

Policyholders' dividends
 
 
3,365

 
 
 
4,849

Total insurance benefits paid or provided
 
 
77,004

 
 
 
80,550

Commissions
 
 
20,245

 
 
 
20,664

Other general expenses
 
 
17,884

 
 
 
17,996

Capitalization of deferred policy acquisition costs
 
 
(14,367
)
 
 
 
(14,892
)
Amortization of deferred policy acquisition costs
 
 
13,535

 
 
 
10,946

Amortization of cost of customer relationships acquired
 
 
947

 
 
 
1,163

Total benefits and expenses
 
 
115,248

 
 
 
116,427

Income (loss) before federal income tax
 
 
514

 
 
 
(488
)
Federal income tax expense
 
 
1,144

 
 
 
1,001

Net loss
 
 
(630
)
 
 
 
(1,489
)
Per Share Amounts:
 
 
 

 
 

 
 

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

 
$
(0.03
)
 
 

Basic losses per share of Class B common stock
(0.01
)
 
 

 
(0.02
)
 
 

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

 
(0.03
)
 
 

Diluted losses per share of Class B common stock
(0.01
)
 
 

 
(0.02
)
 
 

Other comprehensive income (loss):
 

 
 

 
 

 
 

Unrealized gains (losses) on available-for-sale securities:
 

 
 

 
 

 
 

Unrealized holding gains (losses) arising during period
 

 
27,707

 
 

 
(11,771
)
Reclassification adjustment for losses included in net income
 

 
1,816

 
 

 
44

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

 
29,523

 
 

 
(11,727
)
Income tax expense (benefit) on unrealized gains on available-for-sale securities
 

 
10,333

 
 

 
(4,104
)
Other comprehensive income (loss)
 

 
19,190

 
 

 
(7,623
)
Comprehensive income (loss)
 

 
$
18,560

 
 

 
(9,112
)
See accompanying notes to consolidated financial statements.

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Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30,
(In thousands)
(Unaudited)
 
 
 
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net loss
$
(630
)
 
(1,489
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Realized losses on sale of investments and other assets
1,822

 
79

Net deferred policy acquisition costs
(832
)
 
(3,946
)
Amortization of cost of customer relationships acquired
947

 
1,163

Depreciation
405

 
386

Amortization of premiums and discounts on investments
6,966

 
5,583

Deferred federal income tax expense (benefit)
(2,442
)
 
957

Change in:
 

 
 

Accrued investment income
(1,313
)
 
(970
)
Reinsurance recoverable
98

 
63

Due premiums
334

 
(367
)
Future policy benefit reserves
32,457

 
36,925

Other policyholders' liabilities
2,316

 
5,385

Federal income tax payable
2,248

 
(3,256
)
Commissions payable and other liabilities
1,700

 
554

Other, net
(1,031
)
 
(1,244
)
Net cash provided by operating activities
43,045

 
39,823

Cash flows from investing activities:
 

 
 

Maturities and calls of fixed maturities, available-for-sale
37,625

 
19,024

Maturities and calls of fixed maturities, held-to-maturity
6,275

 
9,975

Purchase of fixed maturities, available-for-sale
(109,613
)
 
(57,065
)
Purchase of fixed maturities, held-to-maturity
(5,507
)
 
(22,959
)
Sale of equity securities, available-for-sale
403

 

Calls of equity securities, available-for-sale
273

 
150

Purchase of equity securities, available-for-sale

 
(602
)
Principal payments on mortgage loans
126

 
18

Increase in policy loans, net
(2,991
)
 
(2,620
)
Sale of other long-term investments

 
58

Purchase of property and equipment
(527
)
 
(123
)
Maturity of short-term investments
250

 

Purchase of short-term investments
(522
)
 

Net cash used in investing activities
(74,208
)
 
(54,144
)

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Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Six Months Ended June 30,
(In thousands)
(Unaudited)
 
2016
 
2015
Cash flows from financing activities:
 
 
 
Annuity deposits
$
3,980

 
3,995

Annuity withdrawals
(2,707
)
 
(2,562
)
Net cash provided by financing activities
1,273

 
1,433

Net decrease in cash and cash equivalents
(29,890
)
 
(12,888
)
Cash and cash equivalents at beginning of year
82,827

 
50,708

Cash and cash equivalents at end of period
$
52,937

 
37,820

Supplemental disclosures of operating activities:
 

 
 

Cash paid during the period for income taxes, net
$
1,339

 
3,300


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
June 30, 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 June 30, 2016, and the consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2016 and 2015 and cash flows for the six-month periods ended June 30, 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 June 30, 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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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 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") Accounting Standards Update ("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.

On May 21, 2015, the FASB issued ASU 2015-09, Disclosures about Short-Duration Contracts, addressing enhanced disclosure requirements for insurers relating to short-duration insurance contract claims and the unpaid claims liability rollforward for long and short-duration contracts. The disclosures are intended to provide users of financial statements with more transparent information about an insurance entity’s initial claim estimates and subsequent adjustments to those estimates, the methodologies and judgments used to estimate claims, and the timing, frequency, and severity of claims. The new disclosures may require the accumulation and reporting of new and different groupings of claims data by insurers from what is currently captured for U.S. statutory and other reporting purposes. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. The Company is currently assessing the new disclosure requirements related to short-duration contracts.

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

On June 10, 2016, the National Association of Insurance Commissioners (“NAIC”) Executive Committee and Plenary voted to adopt a recommendation for January 1, 2017 as the operative date for the implementation of Principles-Based Reserves (“PBR”) as a national standard for life insurance products. Although this NAIC standard does not change the reserving requirements under U.S. GAAP, it can be significant for many life insurers. PBR replaces the current formulaic approach to determining policy reserves with an approach that more closely reflects the risks of highly complex products. Companies will be expected to develop “right-sized” reserves that better align with their specific product features, their observed actuarial experience, and their overall risk

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2016
(Unaudited)

management procedures. There is a three-year transition period where PBR is optional until PBR becomes required on January 1, 2020. The Company has begun to assess the impact that this standard will have on its statutory reserving.




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Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 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
 
June 30, 2016
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
37,111

 
11,896

 

 
49,007

Net investment income
8,107

 
3,505

 
388

 
12,000

Realized investment gains (losses), net
208

 
(234
)
 

 
(26
)
Other income
256

 

 

 
256

Total revenue
45,682

 
15,167

 
388

 
61,237

Benefits and expenses:
 
 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
15,157

 
5,812

 

 
20,969

Increase in future policy benefit reserves
16,319

 
1,356

 

 
17,675

Policyholders' dividends
1,802

 
14

 

 
1,816

Total insurance benefits paid or provided
33,278

 
7,182

 

 
40,460

Commissions
6,768

 
4,009

 

 
10,777

Other general expenses
4,041

 
3,557

 
968

 
8,566

Capitalization of deferred policy acquisition costs
(6,492
)
 
(1,611
)
 

 
(8,103
)
Amortization of deferred policy acquisition costs
6,062

 
765

 

 
6,827

Amortization of cost of customer relationships acquired
130

 
272

 

 
402

Total benefits and expenses
43,787

 
14,174

 
968

 
58,929

Income (loss) before income tax expense
$
1,895

 
993

 
(580
)
 
2,308


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2016
(Unaudited)

 
Six Months Ended
 
June 30, 2016
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
69,959

 
23,487

 

 
93,446

Net investment income
16,061

 
6,919

 
751

 
23,731

Realized investment losses, net
(660
)
 
(1,162
)
 

 
(1,822
)
Other income
371

 
3

 
33

 
407

Total revenue
85,731

 
29,247

 
784

 
115,762

Benefits and expenses:
 
 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
28,621

 
11,353

 

 
39,974

Increase in future policy benefit reserves
31,163

 
2,502

 

 
33,665

Policyholders' dividends
3,338

 
27

 

 
3,365

Total insurance benefits paid or provided
63,122

 
13,882

 

 
77,004

Commissions
12,571

 
7,674

 

 
20,245

Other general expenses
8,125

 
7,747

 
2,012

 
17,884

Capitalization of deferred policy acquisition costs
(11,418
)
 
(2,949
)
 

 
(14,367
)
Amortization of deferred policy acquisition costs
11,943

 
1,592

 

 
13,535

Amortization of cost of customer relationships acquired
300

 
647

 

 
947

Total benefits and expenses
84,643

 
28,593

 
2,012

 
115,248

Income (loss) before income tax expense
$
1,088

 
654

 
(1,228
)
 
514






12

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2016
(Unaudited)

 
Three Months Ended
 
June 30, 2015
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
36,707

 
11,753

 

 
48,460

Net investment income
7,387

 
3,441

 
373

 
11,201

Realized investment losses, net
(2
)
 
(6
)
 

 
(8
)
Other income
160

 
22

 
244

 
426

Total revenue
44,252

 
15,210

 
617

 
60,079

Benefits and expenses:
 

 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
13,465

 
5,775

 

 
19,240

Increase in future policy benefit reserves
18,490

 
1,270

 

 
19,760

Policyholders' dividends
2,527

 
13

 

 
2,540

Total insurance benefits paid or provided
34,482

 
7,058

 

 
41,540

Commissions
6,815

 
3,990

 

 
10,805

Other general expenses
4,872

 
4,459

 
1,114

 
10,445

Capitalization of deferred policy acquisition costs
(6,423
)
 
(1,613
)
 

 
(8,036
)
Amortization of deferred policy acquisition costs
4,941

 
706

 

 
5,647

Amortization of cost of customer relationships acquired
122

 
394

 

 
516

Total benefits and expenses
44,809

 
14,994

 
1,114

 
60,917

Income (loss) before income tax expense
$
(557
)
 
216

 
(497
)
 
(838
)


13

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2016
(Unaudited)

 
Six Months Ended
 
June 30, 2015
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
69,686

 
23,340

 

 
93,026

Net investment income
14,618

 
6,905

 
747

 
22,270

Realized investment losses, net
(58
)
 
(21
)
 

 
(79
)
Other income
374

 
70

 
278

 
722

Total revenue
84,620

 
30,294

 
1,025

 
115,939

Benefits and expenses:
 

 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
27,025

 
11,618

 

 
38,643

Increase in future policy benefit reserves
34,627

 
2,431

 

 
37,058

Policyholders' dividends
4,822

 
27

 

 
4,849

Total insurance benefits paid or provided
66,474

 
14,076

 

 
80,550

Commissions
12,841

 
7,823

 

 
20,664

Other general expenses
8,031

 
8,289

 
1,676

 
17,996

Capitalization of deferred policy acquisition costs
(11,766
)
 
(3,126
)
 

 
(14,892
)
Amortization of deferred policy acquisition costs
9,490

 
1,456

 

 
10,946

Amortization of cost of customer relationships acquired
322

 
841

 

 
1,163

Total benefits and expenses
85,392

 
29,359

 
1,676

 
116,427

Income (loss) before income tax expense
$
(772
)
 
935

 
(651
)
 
(488
)




14

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2016
(Unaudited)


(4) Earnings Per Share

The following tables set forth the computation of basic and diluted earnings per share.
 
Three Months Ended
 
June 30, 2016
 
June 30, 2015
 
(In thousands,
except per share amounts)
Basic and diluted earnings per share:
 
 
 
Numerator:
 
 
 
 Net income (loss)
$
1,319

 
(1,914
)
 Net income (loss) allocated to Class A common stock
$
1,305

 
(1,895
)
 Net income (loss) allocated to Class B common stock
14

 
(19
)
 Net income (loss)
$
1,319

 
(1,914
)
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 (losses) per share of Class A common stock
$
0.03

 
(0.04
)
Basic earnings (losses) per share of Class B common stock
0.01

 
(0.02
)
Diluted earnings (losses) per share of Class A common stock
0.03

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

 
(0.02
)
 
Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
(In thousands,
except per share amounts)
Basic and diluted earnings per share:
 
 
 
Numerator:
 
 
 
Net loss
$
(630
)
 
(1,489
)
Net loss allocated to Class A common stock
$
(624
)
 
(1,474
)
Net loss allocated to Class B common stock
(6
)
 
(15
)
Net loss
$
(630
)
 
(1,489
)
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 per share of Class A common stock
$
(0.01
)
 
(0.03
)
Basic losses per share of Class B common stock
(0.01
)
 
(0.02
)
Diluted losses per share of Class A common stock
(0.01
)
 
(0.03
)
Diluted losses per share of Class B common stock
(0.01
)
 
(0.02
)


15

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2016
(Unaudited)

(5) Investments

The Company invests primarily in fixed maturity securities, which totaled 88.0% of total cash, cash equivalents and investments at June 30, 2016.
 
June 30, 2016
 
December 31, 2015
 
Carrying
Value
 
% of Total
Carrying Value
 
Carrying
Value
 
% of Total
Carrying Value
 
($ In thousands)
Fixed maturity securities
$
1,091,638

 
88.0

 
$
995,601

 
85.0

Equity securities
23,234

 
1.9

 
23,438

 
2.0

Mortgage loans
468

 

 
594

 
0.1

Policy loans
63,157

 
5.1

 
60,166

 
5.1

Real estate and other long-term investments
7,944

 
0.7

 
8,031

 
0.7

Short-term investments
521

 

 
251

 

Cash and cash equivalents
52,937

 
4.3

 
82,827

 
7.1

Total cash, cash equivalents and investments
$
1,239,899

 
100.0

 
$
1,170,908

 
100.0



16

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 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.
 
June 30, 2016
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
9,962

 
3,151

 

 
13,113

U.S. Government-sponsored enterprises
7,701

 
1,328

 

 
9,029

States and political subdivisions
514,576

 
30,297

 
1,522

 
543,351

Foreign governments
103

 
31

 

 
134

Corporate
250,041

 
18,334

 
1,310

 
267,065

Commercial mortgage-backed
103

 
5

 

 
108

Residential mortgage-backed
2,448

 
228

 
3

 
2,673

Total available-for-sale securities
784,934

 
53,374

 
2,835

 
835,473

Held-to-maturity securities:
 

 
 

 
 

 
 

U.S. Government-sponsored enterprises
2,006

 
84

 

 
2,090

States and political subdivisions
233,058

 
13,708

 
96

 
246,670

Corporate
21,101

 
1,043

 
853

 
21,291

Total held-to-maturity securities
256,165

 
14,835

 
949

 
270,051

Total fixed maturities
$
1,041,099

 
68,209

 
3,784

 
1,105,524

 
 
 
 
 
 
 
 
Short-term investments
$
521

 

 

 
521

 
 
 
 
 
 
 
 
Equity securities:
 

 
 

 
 

 
 

Stock mutual funds
$
2,867

 

 
1

 
2,866

Bond mutual funds
18,451

 
301

 

 
18,752

Common stock
39

 
4

 
17

 
26

Preferred stock
1,372

 
218

 

 
1,590

Total equity securities
$
22,729

 
523

 
18

 
23,234



17

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 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

18

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2016
(Unaudited)

security before recovery of its amortized cost basis, the other-than-temporary impairment is recognized in earnings equal to the entire difference between the investment's cost and its fair value at the balance sheet date.  If the Company does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security before recovery of its amortized cost basis, the other-than-temporary impairment is separated into the following: (a) the amount representing the credit loss; and (b) the amount related to all other factors.  The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings.  The amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable taxes.  The previous amortized cost basis less the other-than-temporary impairment recognized in earnings becomes the new amortized cost basis of the investment.  The new amortized cost basis is not adjusted for subsequent recoveries in fair value.

The Company evaluates whether a credit impairment exists for debt securities by considering primarily the following factors: (a) changes in the financial condition of the security's underlying collateral; (b) whether the issuer is current on contractually obligated interest and principal payments; (c) changes in the financial condition, credit rating and near-term prospects of the issuer; (d) the 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 on investment securities during the three and six months ended June 30, 2016 totaling $0.4 million and$2.3 million, respectively. No other-than-temporary impairments were recognized during the three and six months ended June 30, 2015.


19

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 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.
 
June 30, 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
$
14,100

 
72

 
13

 
$
13,314

 
1,450

 
11

 
$
27,414

 
1,522

 
24

Corporate
28,313

 
445

 
28

 
10,125

 
865

 
16

 
38,438

 
1,310

 
44

Residential mortgage-backed
101

 
2

 
2

 
108

 
1

 
2

 
209

 
3

 
4

Total available-for-sale securities
42,514

 
519

 
43

 
23,547

 
2,316

 
29

 
66,061

 
2,835

 
72

Held-to-maturity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
5,963

 
66

 
4

 
3,683

 
30

 
5

 
9,646

 
96

 
9

Corporate

 

 

 
5,027

 
853

 
4

 
5,027

 
853

 
4

Total held-to-maturity securities
5,963

 
66

 
4

 
8,710

 
883

 
9

 
14,673

 
949

 
13

Total fixed maturities
$
48,477

 
585

 
47

 
$
32,257

 
3,199

 
38

 
$
80,734

 
3,784

 
85

Equity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Stock mutual funds
$
999

 
1

 
1

 
$

 

 

 
$
999

 
1

 
1

Common stocks

 

 

 
18

 
17

 
1

 
18

 
17

 
1

Total equities
$
999

 
1

 
1

 
$
18

 
17

 
1

 
$
1,017

 
18

 
2


As of June 30, 2016, the Company had 29 available-for-sale fixed maturity securities and 9 held-to-maturity fixed maturity securities that were in an unrealized loss position for greater than 12 months. We reported 1 equity security holding in an unrealized loss position for greater than 12 months as of June 30, 2016.


20

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 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