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

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2015
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. ¨  Yes x 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 November 2, 2015, 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)
 
 
 
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
Assets
(Unaudited)
 
 
Investments:
 
 
 
Fixed maturities available-for-sale, at fair value (cost:  $706,667 and $667,966 in 2015 and 2014, respectively)
$
735,847

 
707,227

Fixed maturities held-to-maturity, at amortized cost (fair value:  $254,048 and $232,891 in 2015 and 2014, respectively)
247,829

 
224,932

Equity securities available-for-sale, at fair value (cost:  $66,855 and $68,787 in 2015 and 2014, respectively)
66,668

 
69,879

Mortgage loans on real estate
599

 
628

Policy loans
58,968

 
54,032

Real estate held for investment (less $1,685 and $1,575 accumulated depreciation in 2015 and 2014, respectively)
8,000

 
8,131

Other long-term investments
76

 
135

Short-term investments
254

 
—

Total investments
1,118,241

 
1,064,964

Cash and cash equivalents
42,831

 
50,708

Accrued investment income
15,220

 
13,457

Reinsurance recoverable
4,054

 
4,425

Deferred policy acquisition costs
163,713

 
157,468

Cost of customer relationships acquired
22,038

 
23,542

Goodwill
17,255

 
17,255

Other intangible assets
973

 
976

Deferred tax asset
71,454

 
66,269

Property and equipment, net
6,151

 
6,352

Due premiums, net (less $1,409 and $1,364 allowance for doubtful accounts in 2015 and 2014, respectively)
11,019

 
10,777

Prepaid expenses
750

 
301

Other assets
1,335

 
1,061

Total assets
$
1,475,034

 
1,417,555


(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)
 
 
 
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
Liabilities and Stockholders' Equity
(Unaudited)
 
 
Liabilities:
 
 
 
Policy liabilities:
 
 
 
Future policy benefit reserves:
 
 
 
Life insurance
$
974,796

 
920,149

Annuities
63,489

 
59,727

Accident and health
1,221

 
1,216

Dividend accumulations
17,554

 
15,974

Premiums paid in advance
42,812

 
39,712

Policy claims payable
10,402

 
9,560

Other policyholders' funds
7,516

 
7,551

Total policy liabilities
1,117,790

 
1,053,889

Commissions payable
2,587

 
3,284

Federal income tax payable
77,568

 
78,818

Payable for securities in process of settlement
3,566

 
—

Other liabilities
23,781

 
23,205

Total liabilities
1,225,292

 
1,159,196

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
(20,433
)
 
(19,047
)
Accumulated other comprehensive income:
 

 
 

Unrealized gains on securities, net of tax
18,619

 
25,850

Treasury stock, at cost
(11,011
)
 
(11,011
)
Total stockholders' equity
249,742

 
258,359

Total liabilities and stockholders' equity
$
1,475,034

 
1,417,555



See accompanying notes to consolidated financial statements.


3
Table of Contents

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


 
2015
 
2014
Revenues:
 
 
 
Premiums:
 
 
 
 
 
Life insurance
 
 
$
47,219

 
 
 
45,234

Accident and health insurance
 
 
387

 
 
 
394

Property insurance
 
 
1,302

 
 
 
1,295

Net investment income
 
 
11,325

 
 
 
10,384

Realized investment losses, net
 
 
(2,407
)
 
 
 
(222
)
Other income
 
 
298

 
 
 
145

Total revenues
 
 
58,124

 
 
 
57,230

Benefits and expenses:
 
 
 

 
 
 
 

Insurance benefits paid or provided:
 
 
 
 
 
 
 
Claims and surrenders
 
 
19,528

 
 
 
17,326

Increase in future policy benefit reserves
 
 
19,276

 
 
 
19,307

Policyholders' dividends
 
 
2,719

 
 
 
2,573

Total insurance benefits paid or provided
 
 
41,523

 
 
 
39,206

Commissions
 
 
11,388

 
 
 
11,116

Other general expenses
 
 
6,958

 
 
 
6,029

Capitalization of deferred policy acquisition costs
 
 
(8,482
)
 
 
 
(8,126
)
Amortization of deferred policy acquisition costs
 
 
6,271

 
 
 
5,276

Amortization of cost of customer relationships acquired
 
 
605

 
 
 
453

Total benefits and expenses
 
 
58,263

 
 
 
53,954

(Loss) income before federal income tax
 
 
(139
)
 
 
 
3,276

Federal income tax (benefit) expense
 
 
(242
)
 
 
 
952

Net income
 
 
103

 
 
 
2,324

Per Share Amounts:
 
 
 

 
 

 
 

Basic earnings per share of Class A common stock
$
—

 
 

 
0.04

 
 

Basic earnings per share of Class B common stock
—

 
 

 
0.03

 
 

Diluted earnings per share of Class A common stock
—

 
 

 
0.04

 
 

Diluted earnings per share of Class B common stock
—

 
 

 
0.03

 
 

Other comprehensive income (loss):
 
 
 

 
 

 
 

Unrealized losses on available-for-sale securities:
 

 
 

 
 

 
 

Unrealized holding losses arising during period
 

 
(1,803
)
 
 

 
(1,628
)
Reclassification adjustment for losses included in net income
 

 
2,405

 
 

 
227

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

 
602

 
 

 
(1,401
)
Income tax expense (benefit) on unrealized gains (losses) on available-for-sale securities
 

 
210

 
 

 
(490
)
Other comprehensive income (loss)
 

 
392

 
 

 
(911
)
Comprehensive income
 

 
$
495

 
 

 
1,413

 
 
 
 
 
 
 
 

4
Table of Contents


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

 
2015
 
2014
Revenues:
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
Life insurance
 
 
$
136,866

 
 
 
131,298

Accident and health insurance
 
 
1,183

 
 
 
1,135

Property insurance
 
 
3,885

 
 
 
3,832

Net investment income
 
 
33,595

 
 
 
30,373

Realized investment losses, net
 
 
(2,486
)
 
 
 
(351
)
Other income
 
 
1,020

 
 
 
477

Total revenues
 
 
174,063

 
 
 
166,764

Benefits and expenses:
 
 
 

 
 
 
 

Insurance benefits paid or provided:
 
 
 

 
 
 
 

Claims and surrenders
 
 
58,171

 
 
 
50,451

Increase in future policy benefit reserves
 
 
56,334

 
 
 
56,984

Policyholders' dividends
 
 
7,568

 
 
 
7,087

Total insurance benefits paid or provided
 
 
122,073

 
 
 
114,522

Commissions
 
 
32,052

 
 
 
31,429

Other general expenses
 
 
24,954

 
 
 
19,979

Capitalization of deferred policy acquisition costs
 
 
(23,374
)
 
 
 
(22,617
)
Amortization of deferred policy acquisition costs
 
 
17,217

 
 
 
15,378

Amortization of cost of customer relationships acquired
 
 
1,768

 
 
 
1,598

Total benefits and expenses
 
 
174,690

 
 
 
160,289

(Loss) income before federal income tax
 
 
(627
)
 
 
 
6,475

Federal income tax expense
 
 
759

 
 
 
1,804

Net (loss) income
 
 
(1,386
)
 
 
 
4,671

Per Share Amounts:
 
 
 

 
 

 
 

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

 
$
0.09

 
 

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

 
0.05

 
 

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

 
0.09

 
 

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

 
0.05

 
 

Other comprehensive (loss) income:
 

 
 

 
 

 
 

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

 
 

 
 

 
 

Unrealized holding (losses) gains arising during period
 

 
(13,574
)
 
 

 
24,764

Reclassification adjustment for losses included in net income
 

 
2,449

 
 

 
332

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

 
(11,125
)
 
 

 
25,096

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

 
(3,894
)
 
 

 
8,804

Other comprehensive (loss) income
 

 
(7,231
)
 
 

 
16,292

Comprehensive (loss) income
 

 
$
(8,617
)
 
 

 
20,963

See accompanying notes to consolidated financial statements.

5
Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30,
(In thousands)
(Unaudited)
 
 
 
 
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(1,386
)
 
4,671

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

 
 

Realized losses on sale of investments and other assets
2,486

 
351

Net deferred policy acquisition costs
(6,157
)
 
(7,239
)
Amortization of cost of customer relationships acquired
1,768

 
1,598

Depreciation
571

 
964

Amortization of premiums and discounts on investments
8,785

 
7,014

Deferred federal income tax (benefit)
(1,291
)
 
(1,140
)
Change in:
 

 
 

Accrued investment income
(1,763
)
 
(915
)
Reinsurance recoverable
371

 
64

Due premiums
(242
)
 
1,182

Future policy benefit reserves
56,185

 
56,932

Other policyholders' liabilities
5,487

 
4,282

Federal income tax payable
(1,250
)
 
201

Commissions payable and other liabilities
(121
)
 
264

Other, net
(717
)
 
(1,373
)
Net cash provided by operating activities
62,726

 
66,856

Cash flows from investing activities:
 

 
 

Sale of fixed maturities, available-for-sale
—

 
680

Maturities and calls of fixed maturities, available-for-sale
46,723

 
38,658

Maturities and calls of fixed maturities, held-to-maturity
15,755

 
10,523

Purchase of fixed maturities, available-for-sale
(88,107
)
 
(88,860
)
Purchase of fixed maturities, held-to-maturity
(41,291
)
 
(12,158
)
Sale of equity securities, available-for-sale
—

 
15,029

Calls of equity securities, available-for-sale
150

 
200

Purchase of equity securities, available-for-sale
(602
)
 
(21,285
)
Principal payments on mortgage loans
29

 
30

Increase in policy loans, net
(4,936
)
 
(3,707
)
Sale of other long-term investments
59

 
1

Purchase of other long-term investments
—

 
(4
)
Sale of property and equipment
—

 
5

Purchase of property and equipment
(240
)
 
(388
)
Maturity of short-term investments
—

 
531

Purchase of short-term investments
(254
)
 
(531
)
Net cash used in acquisition
—

 
(4,810
)
Net cash used in investing activities
(72,714
)
 
(66,086
)

6
Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Nine Months Ended September 30,
(In thousands)
(Unaudited)
 
2015
 
2014
Cash flows from financing activities:
 
 
 
Annuity deposits
$
6,077

 
5,479

Annuity withdrawals
(3,966
)
 
(3,856
)
Net cash provided by financing activities
2,111

 
1,623

Net (decrease) increase in cash and cash equivalents
(7,877
)
 
2,393

Cash and cash equivalents at beginning of year
50,708

 
54,593

Cash and cash equivalents at end of period
$
42,831

 
56,986

Supplemental disclosures of operating activities:
 

 
 

Cash paid during the period for income taxes, net
$
3,300

 
2,721


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
September 30, 2015
(Unaudited)


(1) Financial Statements

Basis of Presentation and Consolidation

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

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

The consolidated statements of financial position for September 30, 2015, and the consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2015 and 2014 and cash flows for the nine-month periods ended September 30, 2015 and 2014, 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 September 30, 2015 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, 2014.  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.



8
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2015
(Unaudited)

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of the notes to consolidated financial statements included in our 2014 Form 10-K Annual Report, which should be read in conjunction with these accompanying consolidated financial statements.

(2) Accounting Pronouncements

Accounting Standards Recently Adopted

None.

Accounting Standards Not Yet Adopted

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle. ASU 2014-09 requires disclosures enabling users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, 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.


9
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2015
(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
 
September 30, 2015
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
37,213

 
11,695

 
—

 
48,908

Net investment income
7,512

 
3,436

 
377

 
11,325

Realized investment losses, net
(1,901
)
 
(506
)
 
—

 
(2,407
)
Other income
217

 
8

 
73

 
298

Total revenue
43,041

 
14,633

 
450

 
58,124

Benefits and expenses:
 
 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
13,727

 
5,801

 
—

 
19,528

Increase in future policy benefit reserves
18,337

 
939

 
—

 
19,276

Policyholders' dividends
2,708

 
11

 
—

 
2,719

Total insurance benefits paid or provided
34,772

 
6,751

 
—

 
41,523

Commissions
7,609

 
3,779

 
—

 
11,388

Other general expenses
3,026

 
3,391

 
541

 
6,958

Capitalization of deferred policy acquisition costs
(7,050
)
 
(1,432
)
 
—

 
(8,482
)
Amortization of deferred policy acquisition costs
5,359

 
912

 
—

 
6,271

Amortization of cost of customer relationships acquired
171

 
434

 
—

 
605

Total benefits and expenses
43,887

 
13,835

 
541

 
58,263

Income (loss) before income tax expense
$
(846
)
 
$
798

 
$
(91
)
 
$
(139
)

10
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2015
(Unaudited)


 
Nine Months Ended
 
September 30, 2015
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
106,899

 
35,035

 
—

 
141,934

Net investment income
22,130

 
10,341

 
1,124

 
33,595

Realized investment losses, net
(1,959
)
 
(527
)
 
—

 
(2,486
)
Other income
591

 
78

 
351

 
1,020

Total revenue
127,661

 
44,927

 
1,475

 
174,063

Benefits and expenses:
 
 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
40,752

 
17,419

 
—

 
58,171

Increase in future policy benefit reserves
52,964

 
3,370

 
—

 
56,334

Policyholders' dividends
7,530

 
38

 
—

 
7,568

Total insurance benefits paid or provided
101,246

 
20,827

 
—

 
122,073

Commissions
20,450

 
11,602

 
—

 
32,052

Other general expenses
11,057

 
11,680

 
2,217

 
24,954

Capitalization of deferred policy acquisition costs
(18,816
)
 
(4,558
)
 
—

 
(23,374
)
Amortization of deferred policy acquisition costs
14,849

 
2,368

 
—

 
17,217

Amortization of cost of customer relationships acquired
493

 
1,275

 
—

 
1,768

Total benefits and expenses
129,279

 
43,194

 
2,217

 
174,690

Income (loss) before income tax expense
$
(1,618
)
 
1,733

 
(742
)
 
(627
)





11
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2015
(Unaudited)

 
Three Months Ended
 
September 30, 2014
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
35,359

 
11,564

 
—

 
46,923

Net investment income
6,660

 
3,389

 
335

 
10,384

Realized investment losses, net
(159
)
 
(63
)
 
—

 
(222
)
Other income
130

 
3

 
12

 
145

Total revenue
41,990

 
14,893

 
347

 
57,230

Benefits and expenses:
 

 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
12,205

 
5,121

 
—

 
17,326

Increase in future policy benefit reserves
18,314

 
993

 
—

 
19,307

Policyholders' dividends
2,560

 
13

 
—

 
2,573

Total insurance benefits paid or provided
33,079

 
6,127

 
—

 
39,206

Commissions
7,351

 
3,765

 
—

 
11,116

Other general expenses
2,464

 
3,227

 
338

 
6,029

Capitalization of deferred policy acquisition costs
(6,708
)
 
(1,418
)
 
—

 
(8,126
)
Amortization of deferred policy acquisition costs
4,449

 
827

 
—

 
5,276

Amortization of cost of customer relationships acquired
163

 
290

 
—

 
453

Total benefits and expenses
40,798

 
12,818

 
338

 
53,954

Income before income tax expense
$
1,192

 
2,075

 
9

 
3,276



12
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2015
(Unaudited)

 
Nine Months Ended
 
September 30, 2014
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
101,739

 
34,526

 
—

 
136,265

Net investment income
19,409

 
9,958

 
1,006

 
30,373

Realized investment gains (losses), net
(271
)
 
(81
)
 
1

 
(351
)
Other income
406

 
7

 
64

 
477

Total revenue
121,283

 
44,410

 
1,071

 
166,764

Benefits and expenses:
 

 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
34,183

 
16,268

 
—

 
50,451

Increase in future policy benefit reserves
54,139

 
2,845

 
—

 
56,984

Policyholders' dividends
7,043

 
44

 
—

 
7,087

Total insurance benefits paid or provided
95,365

 
19,157

 
—

 
114,522

Commissions
20,073

 
11,356

 
—

 
31,429

Other general expenses
8,269

 
9,895

 
1,815

 
19,979

Capitalization of deferred policy acquisition costs
(18,215
)
 
(4,402
)
 
—

 
(22,617
)
Amortization of deferred policy acquisition costs
13,061

 
2,317

 
—

 
15,378

Amortization of cost of customer relationships acquired
454

 
1,144

 
—

 
1,598

Total benefits and expenses
119,007

 
39,467

 
1,815

 
160,289

Income (loss) before income tax expense
$
2,276

 
4,943

 
(744
)
 
6,475





13
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2015
(Unaudited)


(4) Earnings Per Share

The following tables set forth the computation of basic and diluted earnings per share.
 
Three Months Ended
 
September 30, 2015
 
September 30, 2014
 
(In thousands,
except per share amounts)
Basic and diluted earnings per share:
 
 
 
Numerator:
 
 
 
 Net income
$
103

 
2,324

 Net income allocated to Class A common stock
102

 
2,301

 Net income allocated to Class B common stock
1

 
23

 Net income
$
103

 
2,324

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
$
—

 
0.04

Basic earnings per share of Class B common stock
—

 
0.03

Diluted earnings per share of Class A common stock
—

 
0.04

Diluted earnings per share of Class B common stock
—

 
0.03


 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
(In thousands,
except per share amounts)
Basic and diluted earnings per share:
 
 
 
Numerator:
 
 
 
Net (loss) income
$
(1,386
)
 
4,671

Net (loss) income allocated to Class A common stock
$
(1,372
)
 
4,624

Net (loss) income allocated to Class B common stock
(14
)
 
47

Net (loss) income
$
(1,386
)
 
4,671

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

 
49,080

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

 
49,080

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

 
1,002

Basic (losses) earnings per share of Class A common stock
$
(0.03
)
 
0.09

Basic (losses) earnings per share of Class B common stock
(0.02
)
 
0.05

Diluted (losses) earnings per share of Class A common stock
(0.03
)
 
0.09

Diluted (losses) earnings per share of Class B common stock
(0.02
)
 
0.05



14
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2015
(Unaudited)

(5) Investments

The Company invests primarily in fixed maturity securities, which totaled 84.7% of total cash, cash equivalents and investments at September 30, 2015.
 
September 30, 2015
 
December 31, 2014
 
Carrying
Value
 
% of Total
Carrying Value
 
Carrying
Value
 
% of Total
Carrying Value
 
($ In thousands)
Fixed maturity securities
$
983,676

 
84.7
%
 
$
932,159

 
83.6
%
Equity securities
66,668

 
5.7
%
 
69,879

 
6.3
%
Mortgage loans
599

 
0.1
%
 
628

 
0.1
%
Policy loans
58,968

 
5.1
%
 
54,032

 
4.8
%
Real estate and other long-term investments
8,076

 
0.7
%
 
8,266

 
0.7
%
Short-term investments
254

 
—
%
 
—

 
—
%
Cash and cash equivalents
42,831

 
3.7
%
 
50,708

 
4.5
%
Total cash, cash equivalents and investments
$
1,161,072

 
100.0
%
 
$
1,115,672

 
100.0
%


15
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2015
(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.
 
September 30, 2015
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
10,010

 
2,892

 
—

 
12,902

U.S. Government-sponsored enterprises
36,364

 
1,359

 
—

 
37,723

States and political subdivisions
455,494

 
18,018

 
2,937

 
470,575

Foreign governments
104

 
30

 
—

 
134

Corporate
201,760

 
12,994

 
3,408

 
211,346

Commercial mortgage-backed
162

 
7

 
—

 
169

Residential mortgage-backed
2,773

 
227

 
2

 
2,998

Total available-for-sale securities
706,667

 
35,527

 
6,347

 
735,847

Held-to-maturity securities:
 

 
 

 
 

 
 

U.S. Government-sponsored enterprises
2,012

 
137

 
—

 
2,149

States and political subdivisions
223,084

 
7,741

 
708

 
230,117

Corporate
22,733

 
672

 
1,623

 
21,782

Total held-to-maturity securities
247,829

 
8,550

 
2,331

 
254,048

Total fixed maturities
954,496

 
44,077

 
8,678

 
989,895

 
 
 
 
 
 
 
 
Short-term investments
$
254

 
—

 
—

 
254

 
 
 
 
 
 
 
 
Equity securities:
 

 
 

 
 

 
 

Stock mutual funds
$
16,007

 
189

 
67

 
16,129

Bond mutual funds
49,189

 
6

 
534

 
48,661

Common stock
65

 
—

 
23

 
42

Preferred stock
1,594

 
243

 
1

 
1,836

Total equity securities
$
66,855

 
438

 
625

 
66,668



16
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2015
(Unaudited)

 
December 31, 2014
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
U.S. Treasury securities
$
10,056

 
2,924

 
—

 
12,980

U.S. Government-sponsored enterprises
38,312

 
1,937

 
—

 
40,249

States and political subdivisions
404,657

 
19,146

 
1,448

 
422,355

Foreign governments
104

 
31

 
—

 
135

Corporate
211,410

 
17,441

 
1,024

 
227,827

Commercial mortgage-backed
223

 
8

 
—

 
231

Residential mortgage-backed
3,204

 
249

 
3

 
3,450

Total available-for-sale securities
667,966

 
41,736

 
2,475

 
707,227

Held-to-maturity securities:
 

 
 

 
 

 
 

U.S. Government-sponsored enterprises
2,017

 
178

 
—

 
2,195

States and political subdivisions
192,875

 
7,782

 
388

 
200,269

Corporate
30,040

 
947

 
560

 
30,427

Total held-to-maturity securities
224,932

 
8,907

 
948

 
232,891

Total fixed maturity securities
$
892,898

 
50,643

 
3,423

 
940,118

Equity securities:
 

 
 

 
 

 
 

Stock mutual funds
$
16,005

 
1,657

 
66

 
17,596

Bond mutual funds
50,976

 
60

 
796

 
50,240

Common stock
65

 
—

 
14

 
51

Preferred stock
1,741

 
253

 
2

 
1,992

Total equity securities
$
68,787

 
1,970

 
878

 
69,879

 
The majority of the Company's equity securities are diversified stock and bond mutual funds.
 
Valuation of Investments in Fixed Maturity and Equity Securities

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

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

When an other-than-temporary impairment has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis.  If the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis, the other-than-temporary impairment is recognized in earnings equal to the 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

17
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2015
(Unaudited)

(b) the amount related to all other factors.  The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings.  The amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable taxes.  The previous amortized cost basis less the other-than-temporary impairment recognized in earnings becomes the new amortized cost basis of the investment.  The new amortized cost basis is not adjusted for subsequent recoveries in fair value.

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

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

Other-than-temporary impairments ("OTTI") were recognized during the three and nine months ended September 30, 2015 totaling $2.4 million. No other-than-temporary impairments were recognized during the three and nine months ended in 2014.


18
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2015
(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.
 
September 30, 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
$
86,825

 
980

 
85

 
17,392

 
1,957

 
13

 
104,217

 
2,937

 
98

Corporate
45,786

 
2,678

 
53

 
5,085

 
730

 
5

 
50,871

 
3,408

 
58

Residential mortgage-backed
67

 
1

 
2

 
136

 
1

 
3

 
203

 
2

 
5

Total available-for-sale securities
132,678

 
3,659

 
140

 
22,613

 
2,688

 
21

 
155,291

 
6,347

 
161

Held-to-maturity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
37,472

 
615

 
31

 
2,430

 
93

 
5

 
39,902

 
708

 
36

Corporate
2,744

 
728

 
3

 
4,664

 
895

 
4

 
7,408

 
1,623

 
7

Total held-to-maturity securities
40,216

 
1,343

 
34

 
7,094

 
988

 
9

 
47,310

 
2,331

 
43

Total fixed maturities
$
172,894

 
5,002

 
174

 
29,707

 
3,676

 
30

 
202,601

 
8,678

 
204

Equity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Stock mutual funds
$
8,736

 
67

 
3

 
—

 
—

 
—

 
8,736

 
67

 
3

Bond mutual funds
31,668

 
505

 
2

 
110

 
29

 
1

 
31,778

 
534

 
3

Common stocks
41

 
6

 
3

 
—

 
17

 
1

 
41

 
23

 
4

   Preferred stocks
—

 
1

 
1

 
—

 
—

 
—

 
—

 
1

 
1

Total equities
$
40,445

 
579

 
9

 
110

 
46

 
2

 
40,555

 
625

 
11


As of September 30, 2015, the Company had 21 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 2 common stock holding in an unrealized loss position for greater than 12 months as of September 30, 2015.


19
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2015
(Unaudited)

 
December 31, 2014
 
Less than 12 months
 
Greater than 12 months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
(In thousands, except for # of securities)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
43,776

 
318

 
47

 
33,716

 
1,130

 
24

 
77,492

 
1,448

 
71

Corporate
26,671

 
780

 
24

 
2,530

 
244

 
2

 
29,201

 
1,024

 
26

Residential mortgage-backed
159

 
2

 
5

 
33

 
1

 
1

 
192

 
3

 
6

Total available-for-sale securities
70,606

 
1,100

 
76

 
36,279

 
1,375

 
27

 
106,885

 
2,475

 
103

Held-to-maturity securities:
 

 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
21,233

 
74

 
16

 
15,429

 
314

 
21

 
36,662

 
388

 
37

Corporate
3,866

 
285

 
4

 
2,746

 
275

 
2

 
6,612

 
560

 
6

Total held-to-maturity securities
25,099

 
359

 
20

 
18,175

 
589

 
23

 
43,274

 
948

 
43

Total fixed maturities
$
95,705

 
1,459

 
96

 
54,454

 
1,964

 
50

 
150,159

 
3,423

 
146

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock mutual funds
$
5,224

 
66

 
4

 
—

 
—

 
—

 
5,224

 
66

 
4

Bond mutual funds
26,228

 
796

 
4

 
—

 
—

 
—

 
26,228