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, 2017
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
citizenslogoa12.jpg
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 ¨
Emerging growth
company ¨
 
 
 
 
 
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
  
 
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 August 1, 2017, the Registrant had 49,080,114 shares of Class A common stock, no par value, outstanding and 1,001,714 shares of Class B common stock outstanding.
 





























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


1

Table of Contents

PART I.  FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Financial Position
(In thousands)
 
 
 
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
Assets
(Unaudited)
 
 
Investments:
 
 
 
Fixed maturities available-for-sale, at fair value (cost:  $902,939 and $860,473 in 2017 and 2016, respectively)
$
933,697

 
881,668

Fixed maturities held-to-maturity, at amortized cost (fair value:  $248,716 and $252,545 in 2017 and 2016, respectively)
241,644

 
247,004

Equity securities available-for-sale, at fair value (cost:  $15,620 and $17,765 in 2017 and 2016, respectively)
16,143

 
18,159

Mortgage loans on real estate
198

 
232

Policy loans
69,382

 
66,672

Real estate held for investment (less $1,133 and $1,083 accumulated depreciation in 2017 and 2016, respectively)
5,869

 
5,919

Real estate held for sale (less $1,008 accumulated depreciation in 2016)

 
1,939

Other long-term investments
37

 
38

Short-term investments

 
508

Total investments
1,266,970

 
1,222,139

Cash and cash equivalents
33,749

 
35,510

Accrued investment income
18,667

 
17,903

Reinsurance recoverable
3,817

 
3,862

Deferred policy acquisition costs
166,478

 
167,790

Cost of customer relationships acquired
18,350

 
19,415

Goodwill
17,255

 
17,255

Other intangible assets
964

 
966

Deferred tax asset
75,462

 
76,869

Property and equipment, net
8,400

 
7,890

Due premiums, net (less $1,471 and $1,600 allowance for doubtful accounts in 2017 and 2016, respectively)
11,655

 
12,852

Prepaid expenses
1,362

 
299

Other assets
1,043

 
918

Total assets
$
1,624,172

 
1,583,668


(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, 2017
 
December 31, 2016
Liabilities and Stockholders' Equity
(Unaudited)
 
 
Liabilities:
 
 
 
Policy liabilities:
 
 
 
Future policy benefit reserves:
 
 
 
Life insurance
$
1,090,835

 
1,059,722

Annuities
72,016

 
69,578

Accident and health
971

 
1,022

Dividend accumulations
22,099

 
20,897

Premiums paid in advance
52,289

 
48,198

Policy claims payable
7,739

 
9,538

Other policyholders' funds
8,388

 
7,744

Total policy liabilities
1,254,337

 
1,216,699

Commissions payable
2,223

 
3,540

Federal income tax payable
84,970

 
81,270

Payable for securities in process of settlement

 
3,061

Other liabilities
24,629

 
29,998

Total liabilities
1,366,159

 
1,334,568

Commitments and contingencies (Note 8)


 


Stockholders' equity:
 

 
 

Class A, no par value, 100,000,000 shares authorized, 52,215,852 shares issued and outstanding in 2017 and 2016, including shares in treasury of 3,135,738 in 2017 and 2016
259,383

 
259,383

Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2017 and 2016
3,184

 
3,184

Accumulated deficit
(13,620
)
 
(16,248
)
Accumulated other comprehensive income:
 

 
 

Unrealized gains on securities, net of tax
20,077

 
13,792

Treasury stock, at cost
(11,011
)
 
(11,011
)
Total stockholders' equity
258,013

 
249,100

Total liabilities and stockholders' equity
$
1,624,172

 
1,583,668



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)
 
2017
 
2016
Revenues:
 
 
 
Premiums:
 
 
 
 
 
Life insurance
 
 
$
46,155

 
 
 
47,351

Accident and health insurance
 
 
345

 
 
 
395

Property insurance
 
 
1,239

 
 
 
1,261

Net investment income
 
 
13,073

 
 
 
12,000

Realized investment losses, net
 
 
(117
)
 
 
 
(26
)
Other income
 
 
157

 
 
 
256

Total revenues
 
 
60,852

 
 
 
61,237

Benefits and expenses:
 
 
 

 
 
 
 

Insurance benefits paid or provided:
 
 
 
 
 
 
 
Claims and surrenders
 
 
18,952

 
 
 
20,969

Increase in future policy benefit reserves
 
 
17,820

 
 
 
17,372

Policyholders' dividends
 
 
1,501

 
 
 
1,816

Total insurance benefits paid or provided
 
 
38,273

 
 
 
40,157

Commissions
 
 
9,894

 
 
 
10,777

Other general expenses
 
 
9,355

 
 
 
8,566

Capitalization of deferred policy acquisition costs
 
 
(6,883
)
 
 
 
(8,103
)
Amortization of deferred policy acquisition costs
 
 
7,642

 
 
 
6,879

Amortization of cost of customer relationships acquired
 
 
475

 
 
 
402

Total benefits and expenses
 
 
58,756

 
 
 
58,678

Income before federal income tax
 
 
2,096

 
 
 
2,559

Federal income tax expense
 
 
1,524

 
 
 
1,077

Net income
 
 
572

 
 
 
1,482

Per Share Amounts:
 
 
 

 
 

 
 

Basic earnings per share of Class A common stock
$
0.01

 
 

 
0.03

 
 

Basic earnings per share of Class B common stock
0.01

 
 

 
0.01

 
 

Diluted earnings per share of Class A common stock
0.01

 
 

 
0.03

 
 

Diluted earnings per share of Class B common stock
0.01

 
 

 
0.01

 
 

Other comprehensive income:
 
 
 

 
 

 
 

Unrealized gains on available-for-sale securities:
 

 
 

 
 

 
 

Unrealized holding gains arising during period
 

 
4,573

 
 

 
16,374

Reclassification adjustment for (gains) losses included in net income
 

 
111

 
 

 
20

Unrealized gains on available-for-sale securities, net
 

 
4,684

 
 

 
16,394

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

 
1,639

 
 

 
5,738

Other comprehensive income
 

 
3,045

 
 

 
10,656

Comprehensive income
 

 
$
3,617

 
 

 
12,138

 
 
 
 
 
 
 
 



4

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)

 
2017
 
2016
Revenues:
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
Life insurance
 
 
$
89,959

 
 
 
90,124

Accident and health insurance
 
 
673

 
 
 
785

Property insurance
 
 
2,488

 
 
 
2,537

Net investment income
 
 
25,812

 
 
 
23,731

Realized investment gains (losses), net
 
 
1,146

 
 
 
(1,822
)
Other income
 
 
355

 
 
 
407

Total revenues
 
 
120,433

 
 
 
115,762

Benefits and expenses:
 
 
 

 
 
 
 

Insurance benefits paid or provided:
 
 
 

 
 
 
 

Claims and surrenders
 
 
40,676

 
 
 
39,974

Increase in future policy benefit reserves
 
 
32,356

 
 
 
33,098

Policyholders' dividends
 
 
2,805

 
 
 
3,365

Total insurance benefits paid or provided
 
 
75,837

 
 
 
76,437

Commissions
 
 
19,819

 
 
 
20,245

Other general expenses
 
 
19,511

 
 
 
17,740

Capitalization of deferred policy acquisition costs
 
 
(13,784
)
 
 
 
(14,367
)
Amortization of deferred policy acquisition costs
 
 
15,017

 
 
 
13,510

Amortization of cost of customer relationships acquired
 
 
994

 
 
 
947

Total benefits and expenses
 
 
117,394

 
 
 
114,512

Income before federal income tax
 
 
3,039

 
 
 
1,250

Federal income tax expense
 
 
411

 
 
 
2,159

Net income (loss)
 
 
2,628

 
 
 
(909
)
Per Share Amounts:
 
 
 

 
 

 
 

Basic earnings (losses) per share of Class A common stock
$
0.05

 
 

 
$
(0.02
)
 
 

Basic earnings (losses) per share of Class B common stock
0.03

 
 

 
(0.01
)
 
 

Diluted earnings (losses) per share of Class A common stock
0.05

 
 

 
(0.02
)
 
 

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

 
 

 
(0.01
)
 
 

Other comprehensive income:
 

 
 

 
 

 
 

Unrealized gains on available-for-sale securities:
 

 
 

 
 

 
 

Unrealized holding gains arising during period
 

 
9,710

 
 

 
27,707

Reclassification adjustment for (gains) losses included in net income
 

 
(41
)
 
 

 
1,816

Unrealized gains on available-for-sale securities, net
 

 
9,669

 
 

 
29,523

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

 
3,384

 
 

 
10,333

Other comprehensive income
 

 
6,285

 
 

 
19,190

Comprehensive income
 

 
$
8,913

 
 

 
18,281


See accompanying notes to consolidated financial statements.

5

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30,
(In thousands)
(Unaudited)
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income (loss)
$
2,628

 
(909
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Realized (gains) losses on sale of investments and other assets
(1,146
)
 
1,822

Net deferred policy acquisition costs
1,233

 
(857
)
Amortization of cost of customer relationships acquired
994

 
947

Depreciation
504

 
405

Amortization of premiums and discounts on investments
8,283

 
6,966

Deferred federal income tax benefit
(1,977
)
 
(2,184
)
Change in:
 

 
 

Accrued investment income
(764
)
 
(1,313
)
Reinsurance recoverable
45

 
98

Due premiums
1,197

 
334

Future policy benefit reserves
32,335

 
31,890

Other policyholders' liabilities
4,138

 
2,316

Federal income tax payable
3,700

 
3,005

Commissions payable and other liabilities
(6,686
)
 
1,556

Other, net
(1,061
)
 
(1,031
)
Net cash provided by operating activities
43,423

 
43,045

Cash flows from investing activities:
 

 
 

Sale of fixed maturities, available-for-sale
508

 

Maturities and calls of fixed maturities, available-for-sale
43,755

 
37,625

Maturities and calls of fixed maturities, held-to-maturity
3,390

 
6,275

Purchase of fixed maturities, available-for-sale
(96,279
)
 
(109,613
)
Purchase of fixed maturities, held-to-maturity

 
(5,507
)
Sale of equity securities, available-for-sale
1,940

 
403

Calls of equity securities, available-for-sale
300

 
273

Principal payments on mortgage loans
34

 
126

Increase in policy loans, net
(2,710
)
 
(2,991
)
Sale of other long-term investments and real estate
3,040

 

Purchase of property and equipment
(952
)
 
(527
)
Maturity of short-term investments
500

 
250

Purchase of short-term investments

 
(522
)
Net cash used in investing activities
(46,474
)
 
(74,208
)
 
 
 
 

6

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Six Months Ended June 30,
(In thousands)
(Unaudited)
 
 
 
 
 
2017
 
2016
Cash flows from financing activities:
 
 
 
Annuity deposits
$
4,365

 
3,980

Annuity withdrawals
(3,075
)
 
(2,707
)
Net cash provided by financing activities
1,290

 
1,273

Net decrease in cash and cash equivalents
(1,761
)
 
(29,890
)
Cash and cash equivalents at beginning of year
35,510

 
82,827

Cash and cash equivalents at end of period
$
33,749

 
52,937

Supplemental disclosures of operating activities:
 

 
 

Cash paid (received) during the period for income taxes, net
$
(1,312
)
 
1,339


Supplemental Disclosures of Non-Cash Investing Activities:
None.

See accompanying notes to consolidated financial statements.


7

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2017
(Unaudited)


(1) Financial Statements

Basis of Presentation and Consolidation

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, 2017, and the consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2017 and 2016 and cash flows for the six-month periods ended June 30, 2017 and 2016, 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, 2017 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, 2016.  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.  Until the end of 2016, CICA and CNLIC issued 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.  Beginning January 1, 2017, CICA and CNLIC ceased selling products domestically as the products failed to qualify for the favorable U.S. federal income tax treatment afforded by Section 7702 of the Internal Revenue Code ("IRC") of 1986. The Company is developing Section 7702 compliant products and will resume sales domestically once the products receive regulatory approval. CICA primarily 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 provided aviation transportation to the Company, until the corporate plane was sold in the third quarter of 2017. As III's sole purpose was to provide aviation transportation to the Company, we plan to dissolve III and merge it into Citizens.

Immaterial Error Correction Related to Prior Interim Periods

In the course of preparing its consolidated financial statements for the year ended December 31, 2016, the Company identified immaterial errors in its previously filed financial statements. The errors were in the Company’s accounting for DAC and future policy benefits in the life insurance segment and several other immaterial errors in our other two segments. Corrections of those errors for the three months ended June 30, 2016 increased the Company's net income by $163,000, while the basic income per share of class A common stock remained unchanged. Corrections of those errors for the six months ended June 30, 2016 increased the Company's net loss by $279,000 and increased the basic loss per share of class A common stock by $0.01.

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Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2017
(Unaudited)


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.

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of the notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016, 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 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. We have evaluated the effect the guidance will have on our consolidated financial statements. We do not expect that any portion of our revenue will be affected by the new standard, primarily as the new guidance does not apply to revenue from insurance contracts and our non-insurance subsidiaries do not receive revenues from customers.

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 is assessing the impact of this new standard, but currently the Company does not lease assets, so the new standard is not expected to have any effect on the Company's financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2017
(Unaudited)


In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), with the main objective to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this ASU require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. Credit losses on available-for-sale debt securities should be measured in a manner similar to current GAAP; however, the credit losses are recorded through an allowance for credit losses rather than as a write-down. This approach is an improvement to current GAAP because an entity will be able to record reversals of credit losses (in situations in which the estimate of credit losses declines) in current period net income, which in turn should align the income statement recognition of credit losses with the reporting period in which changes occur. Current GAAP prohibits reflecting those improvements in current-period earnings. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is evaluating the impact this guidance will have on our consolidated financial statements, but it is not expected to have a significant impact on the Company's financial statements compared with the previous guidance, except for potential reversals of previous credit losses which were not allowed under prior guidance.

In January 2017, the FASB issued Accounting Standards Update ("ASU") No. 2017-04, Simplifying the Test for Goodwill Impairment. An entity will no longer perform a hypothetical purchase price allocation to measure impairment, eliminating step 2 of the goodwill impairment test. Instead, impairment will be measured using the difference of the carrying amount to the fair value of the reporting unit. The ASU is effective prospectively for annual and interim periods in fiscal year beginning after December 15, 2019, but early adoption is permitted for goodwill impairment tests with measurement dates after January 1, 2017. The Company is not planning on early adoption of this ASU and has not yet quantified any potential impact of the ASU on the Company's financial statements.

In March 2017, the FASB issued Accounting Standards Update ("ASU") No. 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The Company has a large portfolio of callable debt securities purchased at a premium. As such, the Company had already been amortizing the premium to the earliest call date to reduce volatility in earnings by eliminating reporting large realized losses when debt securities are called. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

(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.


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2017
(Unaudited)

The Company has no reportable differences between segments and consolidated operations.
 
Three Months Ended
 
June 30, 2017
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
35,960

 
11,779

 

 
47,739

Net investment income
9,496

 
3,250

 
327

 
13,073

Realized investment gains (losses), net
(141
)
 
24

 

 
(117
)
Other income
177

 
3

 
(23
)
 
157

Total revenue
45,492

 
15,056

 
304

 
60,852

Benefits and expenses:
 
 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
13,842

 
5,110

 

 
18,952

Increase in future policy benefit reserves
16,513

 
1,307

 

 
17,820

Policyholders' dividends
1,490

 
11

 

 
1,501

Total insurance benefits paid or provided
31,845

 
6,428

 

 
38,273

Commissions
5,866

 
4,028

 

 
9,894

Other general expenses
4,327

 
4,299

 
729

 
9,355

Capitalization of deferred policy acquisition costs
(5,223
)
 
(1,660
)
 

 
(6,883
)
Amortization of deferred policy acquisition costs
6,613

 
1,029

 

 
7,642

Amortization of cost of customer relationships acquired
144

 
331

 

 
475

Total benefits and expenses
43,572

 
14,455

 
729

 
58,756

Income (loss) before income tax expense
$
1,920

 
601

 
(425
)
 
2,096


11

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2017
(Unaudited)

 
Six Months Ended
 
June 30, 2017
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
69,523

 
23,597

 

 
93,120

Net investment income
18,627

 
6,509

 
676

 
25,812

Realized investment gains (losses), net
(64
)
 
1,210

 

 
1,146

Other income
295

 
2

 
58

 
355

Total revenue
88,381

 
31,318

 
734

 
120,433

Benefits and expenses:
 
 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
29,518

 
11,158

 

 
40,676

Increase in future policy benefit reserves
29,773

 
2,583

 

 
32,356

Policyholders' dividends
2,785

 
20

 

 
2,805

Total insurance benefits paid or provided
62,076

 
13,761

 

 
75,837

Commissions
11,873

 
7,946

 

 
19,819

Other general expenses
8,199

 
9,157

 
2,155

 
19,511

Capitalization of deferred policy acquisition costs
(10,601
)
 
(3,183
)
 

 
(13,784
)
Amortization of deferred policy acquisition costs
12,919

 
2,098

 

 
15,017

Amortization of cost of customer relationships acquired
316

 
678

 

 
994

Total benefits and expenses
84,782

 
30,457

 
2,155

 
117,394

Income (loss) before income tax expense
$
3,599

 
861

 
(1,421
)
 
3,039


12

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2017
(Unaudited)

 
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
15,976

 
1,396

 

 
17,372

Policyholders' dividends
1,802

 
14

 

 
1,816

Total insurance benefits paid or provided
32,935

 
7,222

 

 
40,157

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
6,114

 
765

 

 
6,879

Amortization of cost of customer relationships acquired
130

 
272

 

 
402

Total benefits and expenses
43,496

 
14,214

 
968

 
58,678

Income (loss) before income tax expense
$
2,186

 
953

 
(580
)
 
2,559


13

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2017
(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
30,516

 
2,582

 

 
33,098

Policyholders' dividends
3,338

 
27

 

 
3,365

Total insurance benefits paid or provided
62,475

 
13,962

 

 
76,437

Commissions
12,571

 
7,674

 

 
20,245

Other general expenses
8,125

 
7,747

 
1,868

 
17,740

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

 
(14,367
)
Amortization of deferred policy acquisition costs
11,918

 
1,592

 

 
13,510

Amortization of cost of customer relationships acquired
300

 
647

 

 
947

Total benefits and expenses
83,971

 
28,673

 
1,868

 
114,512

Income (loss) before income tax expense
$
1,760

 
574

 
(1,084
)
 
1,250



14

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2017
(Unaudited)

(4) Earnings Per Share

The following tables set forth the computation of basic and diluted earnings per share.
 
Three Months Ended
 
June 30, 2017
 
June 30, 2016
 
(In thousands,
except per share amounts)
Basic and diluted earnings per share:
 
 
 
Numerator:
 
 
 
 Net income
$
572

 
1,482

 Net income allocated to Class A common stock
566

 
1,467

 Net income allocated to Class B common stock
6

 
15

 Net income
$
572

 
1,482

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

 
49,080

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

 
49,080

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

 
1,002

Basic earnings per share of Class A common stock
$
0.01

 
0.03

Basic earnings per share of Class B common stock
0.01

 
0.01

Diluted earnings per share of Class A common stock
0.01

 
0.03

Diluted earnings per share of Class B common stock
0.01

 
0.01

 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
(In thousands,
except per share amounts)
Basic and diluted earnings per share:
 
 
 
Numerator:
 
 
 
Net income (loss)
$
2,628

 
(909
)
Net income (loss) allocated to Class A common stock
$
2,601

 
(900
)
Net income (loss) allocated to Class B common stock
27

 
(9
)
Net income (loss)
$
2,628

 
(909
)
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
$
0.05

 
(0.02
)
Basic earnings (losses) per share of Class B common stock
0.03

 
(0.01
)
Diluted earnings (losses) per share of Class A common stock
0.05

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

 
(0.01
)


15

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2017
(Unaudited)

(5) Investments

The Company invests primarily in fixed maturity securities, which totaled 90.4% of total cash, cash equivalents and investments at June 30, 2017.
 
June 30, 2017
 
December 31, 2016
 
Carrying
Value
 
% of Total
Carrying Value
 
Carrying
Value
 
% of Total
Carrying Value
 
(In thousands)
 
 
 
(In thousands)
 
 
Fixed maturity securities
$
1,175,341

 
90.4

 
$
1,128,672

 
89.7

Equity securities
16,143

 
1.2

 
18,159

 
1.6

Mortgage loans
198

 

 
232

 
0.0

Policy loans
69,382

 
5.3

 
66,672

 
5.3

Real estate and other long-term investments
5,906

 
0.5

 
7,896

 
0.6

Short-term investments

 

 
508

 

Cash and cash equivalents
33,749

 
2.6

 
35,510

 
2.8

Total cash, cash equivalents and investments
$
1,300,719

 
100.0

 
$
1,257,649

 
100.0



16

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2017
(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, 2017
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
9,895

 
2,249

 

 
12,144

U.S. Government-sponsored enterprises
3,582

 
966

 

 
4,548

States and political subdivisions
564,289

 
17,400

 
3,162

 
578,527

Foreign governments
103

 
22

 

 
125

Corporate
323,014

 
15,308

 
2,176

 
336,146

Commercial mortgage-backed
8

 

 

 
8

Residential mortgage-backed
2,048

 
153

 
2

 
2,199

Total available-for-sale securities
902,939

 
36,098

 
5,340

 
933,697

Held-to-maturity securities:
 

 
 

 
 

 
 

States and political subdivisions
220,674

 
7,819

 
740

 
227,753

Corporate
20,970

 
852

 
859

 
20,963

Total held-to-maturity securities
241,644

 
8,671

 
1,599

 
248,716

Total fixed maturities
$
1,144,583

 
44,769

 
6,939

 
1,182,413

 
 
 
 
 
 
 
 
Equity securities:
 

 
 

 
 

 
 

Stock mutual funds
$
2,867

 
211

 

 
3,078

Bond mutual funds
12,071

 
377

 
114

 
12,334

Common stock
22

 

 
2

 
20

Redeemable preferred stock
660

 
51

 

 
711

Total equity securities
$
15,620

 
639

 
116

 
16,143



17

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2017
(Unaudited)

 
December 31, 2016
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
U.S. Treasury securities
$
9,929

 
2,261

 

 
12,190

U.S. Government-sponsored enterprises
7,639

 
863

 

 
8,502

States and political subdivisions
563,279

 
15,017

 
5,022

 
573,274

Foreign governments
103

 
23

 

 
126

Corporate
277,226

 
12,095

 
4,222

 
285,099

Commercial mortgage-backed
50

 
1

 

 
51

Residential mortgage-backed
2,247

 
181

 
2

 
2,426

Total available-for-sale securities
860,473

 
30,441

 
9,246

 
881,668

Held-to-maturity securities:
 

 
 

 
 

 
 

U.S. Government-sponsored enterprises
2,003

 
28

 

 
2,031

States and political subdivisions
223,966

 
6,916

 
1,599

 
229,283

Corporate
21,035

 
888

 
692

 
21,231

Total held-to-maturity securities
247,004

 
7,832

 
2,291

 
252,545

Total fixed maturity securities
$
1,107,477

 
38,273

 
11,537

 
1,134,213

 
 
 
 
 
 
 
 
Short-term investments
$
508

 

 

 
508

 
 
 
 
 
 
 
 
Equity securities:
 

 
 

 
 

 
 

Stock mutual funds
$
2,867

 
79

 

 
2,946

Bond mutual funds
14,040

 
265

 
108

 
14,197

Common stock
39

 
3

 
17

 
25

Redeemable preferred stock
819

 
174

 
2

 
991

Total equity securities
$
17,765

 
521

 
127

 
18,159

 
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

18

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2017
(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") on one equity security totaling $17,000 were recognized during the six months ended June 30, 2017 and OTTI of $2.3 million was recognized during the six months ended June 30, 2016 related to one available-for-sale fixed maturity security. No OTTI was recorded for either the three months ended June 30, 2017 or June 30, 2016.


19

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2017
(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, 2017
 
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
$
138,043

 
1,686

 
112

 
9,127

 
1,476

 
10

 
147,170

 
3,162

 
122

Corporate
70,235

 
1,561

 
51

 
1,576

 
615

 
6

 
71,811

 
2,176

 
57

Residential mortgage-backed
107

 
1

 
3

 
103

 
1

 
2

 
210

 
2

 
5

Total available-for-sale securities
208,385

 
3,248

 
166

 
10,806

 
2,092

 
18

 
219,191

 
5,340

 
184

Held-to-maturity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
22,373

 
457

 
31

 
1,342

 
283

 
2

 
23,715

 
740

 
33

Corporate

 

 

 
1,979

 
859

 
2

 
1,979

 
859

 
2

Total held-to-maturity securities
22,373

 
457

 
31

 
3,321

 
1,142

 
4

 
25,694

 
1,599

 
35

Total fixed maturities
$
230,758

 
3,705

 
197

 
14,127

 
3,234

 
22

 
244,885

 
6,939

 
219

Equity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Bond mutual funds
$
8,183

 
114

 
1

 

 

 

 
8,183

 
114

 
1

Common stocks
21

 
2

 
2

 

 

 

 
21

 
2

 
2

 
$
8,204

 
116

 
3

 

 

 

 
8,204

 
116

 
3


As of June 30, 2017, the Company had 18 available-for-sale fixed maturity securities and 4 held-to-maturity fixed maturity securities that were in an unrealized loss position for greater than 12 months. There were no equity securities in an unrealized loss position for greater than 12 months as of June 30, 2017.


20

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2017
(Unaudited)

 
December 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
$
202,788

 
3,513

 
184

 
8,018

 
1,509

 
8

 
210,806

 
5,022

 
192

Corporate
91,527

 
3,578

 
70

 
6,102

 
644

 
8

 
97,629

 
4,222

 
78

Residential mortgage-backed
116

 
1

 
4

 
105

 
1

 
2

 
221

 
2

 
6

Total available-for-sale securities
294,431

 
7,092

 
258

 
14,225

 
2,154

 
18

 
308,656

 
9,246

 
276

Held-to-maturity securities:
 

 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
43,659

 
1,562

 
47

 
509

 
37

 
1

 
44,168

 
1,599

 
48

Corporate
3,587

 
12

 
3

 
2,171

 
680

 
2

 
5,758

 
692

 
5

Total held-to-maturity securities
47,246

 
1,574

 
50

 
2,680

 
717

 
3

 
49,926

 
2,291

 
53

Total fixed maturities
$
341,677

 
8,666

 
308

 
16,905

 
2,871

 
21

 
358,582

 
11,537

 
329

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bond mutual funds
$
10,160

 
108

 
2

 

 

 

 
10,160

 
108

 
2

Common stock

 

 

 

 
17

 
1

 

 
17

 
1

Redeemable preferred stocks
201

 
2

 
2