10-K 1 cia-20141231x10k.htm 10-K CIA-2014.12.31-10K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

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)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Class A Common Stock
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  
o Yes  ý No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  o Yes   
ý No

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.  o Yes   ý 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).  ý Yes   o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K). ý

Indicate by check mark whether the registrant is a large accelerated file, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer o    Accelerated filer ý  Non-accelerated filer o    Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  o Yes   ý No

As of June 30, 2014, the aggregate market value of the Class A common stock held by non-affiliates of the registrant was approximately $339,097,119.

Number of shares of common stock outstanding as of March 31, 2015.
Class A:  49,080,114
Class B:    1,001,714

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Report incorporates by reference certain portions of the definitive proxy materials to be delivered to stockholders in connection with the 2015 Annual Meeting of Shareholders.































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TABLE OF CONTENTS
 
PART I
 
Page
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
 
 
Item 15.
 
 
 
 




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

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

Changes in foreign and U.S. general economic, market, and political conditions, including the performance of financial markets and interest rates;
Changes in consumer behavior or regulatory oversight, which may affect the Company's ability to sell its products and retain business;
The timely development of and acceptance of new products of the Company and perceived overall value of these products and services by existing and potential customers;
Fluctuations in experience regarding current mortality, morbidity, persistency and interest rates relative to expected amounts used in pricing the Company's products;
The performance of our investment portfolio, which may be adversely affected by changes in interest rates, adverse developments and ratings of issuers whose debt securities we may hold, and other adverse macroeconomic events;
Results of litigation we may be involved in;
Changes in assumptions related to deferred acquisition costs and the value of any businesses we may acquire;
Regulatory, accounting or tax changes that may affect the cost of, or the demand for, the Company's products or services;
Our concentration of business from persons residing in Latin America and the Pacific Rim;
Changes in tax laws;
Effects of acquisitions and restructuring, including possible difficulties in integrating and realizing the projected results of acquisitions;
Changes in statutory or U.S. Generally Accepted Accounting Principles ("U.S. GAAP"), policies or practices;
Our success at managing risks involved in the foregoing; and
The risk factors discussed in "Part 1.-Item 1A- Risk Factors" of this report.

Such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.

We make available, free of charge, through our Internet website (http://www.citizensinc.com), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 Reports filed by officers and directors, news releases, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the Securities and Exchange Commission.  We are not including any of the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K.



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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

PART I

Item 1.   BUSINESS

Overview

Citizens, Inc. (“Citizens”) is an insurance holding company serving the life insurance needs of individuals in the United States since 1969 and internationally since 1975. Through our insurance subsidiaries, we pursue a strategy of offering traditional insurance products in niche markets where we believe we are able to achieve competitive advantages.  We had approximately $1.4 billion of assets at December 31, 2014 and approximately $4.7 billion of insurance in force.  Our core insurance operations include issuing and servicing:

U.S. Dollar-denominated ordinary whole life insurance and endowment policies predominantly to high net worth, high income foreign residents, located principally in Latin America and the Pacific Rim, through independent marketing consultants;
ordinary whole life insurance policies to middle income households concentrated in the Midwest, Mountain West and southern United States through independent marketing consultants; and
final expense and limited liability property policies to middle and lower income households in Louisiana, Mississippi and Arkansas through employee and independent agents in our home service distribution channel.

We were formed in 1969 by our Chairman, Harold E. Riley.  Prior to our formation, Mr. Riley had many years of experience in the international and domestic life insurance business.  Our Company has experienced growth through acquisitions in the domestic market and through market expansion in the international market.  We seek to capitalize on the experience of our management team in marketing and operations as we strive to generate bottom line return using knowledge of our niche markets and our well-established distribution channels.  We believe our underwriting processes, policy terms, pricing practices and proprietary administrative systems enable us to be competitive in our current markets, while protecting our shareholders and serving our policyholders.

Our business has grown, both internationally and domestically, in recent years.  Revenues rose from $190.3 million in 2010 to $230.2 million in 2014.  During the five years ended December 31, 2014, our assets grew from $974.6 million to $1.4 billion.  Total stockholders' equity increased from $219.9 million at December 31, 2010 to $258.4 million at December 31, 2014.  See Item 6.  "Selected Financial Data" in this Report.

The following pages describe the operations of our three business segments:  Life Insurance, Home Service and Other Non-Insurance Enterprises.  Revenues derived from any single customer did not exceed 10% of consolidated revenues in any of the last three years.

Life Insurance

Our Life Insurance segment issues ordinary whole life insurance domestically and in U.S. Dollar-denominated amounts to foreign residents.  These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured.  Additionally, endowment contracts are issued by the Company, which are principally accumulation contracts that incorporate an element of life insurance protection.  For the majority of our business, we retain only the first $100,000 of risk on any one life, reinsuring the remainder of the risk.  We operate this segment through our subsidiaries:  CICA Life Insurance Company of America ("CICA") and Citizens National Life Insurance Company ("CNLIC").

International Sales

We focus our sales of U.S. Dollar-denominated ordinary whole life insurance and endowment policies to high net worth, high income residents in Latin America and the Pacific Rim.  We have successfully participated in the foreign marketplace since 1975, and we continue to seek opportunities for expansion of our foreign operations.  We believe positive attributes of our international insurance business include:

larger face amount policies typically issued when compared to our U.S. operations, which results in lower underwriting and administrative costs per unit of coverage;
premiums typically paid annually rather than monthly or quarterly, which saves us administrative expenses, accelerates cash flow and results in lower policy lapse rates than premiums with more frequently scheduled payments; and


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persistency experience and mortality rates that are comparable to our U.S. policies.
 
We have implemented several policies and procedures to reduce the risks of asset and premium loss relating to our international business.  Approvals for policy issuance are made in our Austin, Texas office and policies are issued and delivered to our independent consultants, who deliver the policies to the insureds.  We have no offices, employees or assets outside of the United States.  Insurance policy applications and premium payments are submitted by the independent consultants or customers to us, and we review the applications in our home offices in Austin, Texas.  Premiums are paid in U.S. Dollars through a U.S. financial institution by check, wire or credit card.  The policies we issue contain limitations on benefits for certain causes of death, such as homicide and careless driving.  We have also developed disciplined underwriting criteria, which include medical reviews of applicants as well as background and reference checks.  In addition, we have a claims policy that requires investigation of substantially all death claims.  Furthermore, we perform background reviews and reference checks of prospective marketing firms and consultants.

Independent marketing firms and consultants specialize in marketing life insurance products and generally have several years of insurance marketing experience.  We maintain standard contracts with the independent marketing firms pursuant to which they provide recruitment, training and supervision of their managers and associates in the service and placement of our products; however, all associates of these firms also contract directly with us as independent contractors and receive their compensation directly from us.  Accordingly, should an arrangement between any independent marketing firm and us be terminated for any reason, we believe we would continue with the existing marketing arrangements with the associates of these firms without a material loss of sales.  Our standard agreement with independent marketing firms and consultants provides they are independent contractors responsible for their own operation expenses, and that they are the representative of the prospective insured.  In addition, the marketing firms guarantee any debts of their associates to us.  The marketing firms receive commissions on all new and renewal policies serviced or placed by them or their associates.  All of these contracts provide that the independent marketing firms and consultants are aware of and responsible for compliance with local laws.

International Products

We offer several ordinary whole life insurance and endowment products designed to meet the needs of our non-U.S. policyowners.  These policies have been structured to provide:

U.S. Dollar-denominated cash values that accumulate, beginning in the first policy year, to a policyholder during his or her lifetime;
premium rates that are competitive with or better than most foreign local companies;
a hedge against local currency inflation;
protection against devaluation of foreign currency;
capital investment in a more secure economic environment (i.e., the United States); and
lifetime income guarantees for an insured or for surviving beneficiaries.

Our international products have living benefit features.  Every policy contains guaranteed cash values and is participating (i.e., provides for cash dividends as apportioned by the board of directors).  Once a policyowner pays the annual premium and the policy is issued, the owner becomes entitled to a cash dividend as well as an annual guaranteed endowment, if elected.  The policyowner has several options with regard to the dividend and annual guaranteed endowments, including the right to assign policy values to the Citizens, Inc. Stock Investment Plan, registered under the Securities Act of 1933 (the "Securities Act"), and administered in the United States by our unaffiliated transfer agent.

International Competition

The life insurance business is highly competitive.  We compete with a large number of stock and mutual life companies internationally and domestically, as well as with financial institutions that offer insurance products.  There are more than 1,000 life insurance companies in the United States, some of which also provide insurance to foreign residents.

We face competition primarily from companies formed and operated in the country in which the insureds reside, from companies that operate in the same manner as we do and from companies that are foreign to the countries in which policies are sold, but issue insurance policies denominated in the local currency of those countries.  A substantial number of companies may be deemed to have a competitive advantage over us due to their significantly greater financial resources, histories of successful operations and larger marketing forces.  However, we believe that our experience, combined with our product portfolio features, allows us to compete effectively in pursuing new business.



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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Because premiums on our international policies are paid in U.S. Dollars drawn on U.S. financial institutions, and we pay claims and benefits in U.S. Dollars, we provide a product that is different from the products offered by foreign-domiciled companies.  Our international policies are usually acquired by individuals with significant net worth and earnings that place them in the upper income brackets of their respective countries.  The policies sold by our foreign competitors are generally offered broadly and are priced using the mortality of the entire population of the geographic region.  Our mortality charges are therefore typically lower, which provides a competitive advantage.  Additionally, the assets backing the reserves for our foreign competitors' policies must be substantially invested in their respective countries and, therefore, are exposed to the inflationary risks and social or economic crises that have been more common in these foreign countries.

Domestic Sales

The majority of our domestic inforce business results from blocks of business of insurance companies we have acquired over the past 15 years.  Our acquisition transition strategy focuses on the introduction of our cash accumulation ordinary whole life products to independent marketing consultants associated with companies we have acquired, while continuing to service the needs of acquired policyholders.

In the Mountain West, Midwest and the southern United States, we seek to serve middle income households through the sale of cash accumulation ordinary whole life insurance products.  Our distribution strategy is through marketing consultants, comprised primarily of part-time, second-career sales associates (such as teachers, coaches, community leaders and others) in rural and urban areas.  Over the past few years, new product sales have been modest while existing policies have been running off at a greater pace compressing the block of insurance in force.

Domestic Products

Our domestic life insurance products focus primarily on living needs and provide benefits focused toward accumulating money for the policyowner.  The features of our domestic life insurance products include:

cash accumulation/living benefits;
tax-deferred interest earnings;
guaranteed lifetime income options;
monthly income for surviving family members;
accidental death benefit coverage options; and
an option to waive premium payments in the event of disability.

Our life insurance products are principally designed to address the insured's concern about outliving his or her monthly income, while at the same time providing death benefits.  The primary purpose of our product portfolio is to help the insured create capital for needs such as retirement income, children's higher education funds, business opportunities, emergencies and health care needs.

Domestic Competition

The U.S. life insurance industry is a mature industry that, in recent years, has experienced little to no growth.  Competition is intense because the life insurance industry is consolidating, with larger, more efficient and more effective organizations emerging from consolidation.

Many domestic life insurance companies have significantly greater financial, marketing forces and other resources, longer business histories and more diversified lines of insurance products than we do.  We also face competition from companies marketing in person as well as with direct mail and Internet sales campaigns.  Although we may be at a competitive disadvantage to these entities, we believe our premium rates and policy features are generally competitive with those of other life insurance companies selling similar types of ordinary whole life insurance.
 
Home Service Insurance

Our Home Service segment operates in this market through our subsidiaries Security Plan Life Insurance Company ("SPLIC"), Magnolia Guaranty Life Insurance Company ("MGLIC") and Security Plan Fire Insurance Company ("SPFIC"), and focuses on the life insurance needs of the middle and lower income markets, primarily in Louisiana, Mississippi and Arkansas.  Our policies are sold and serviced through a home service marketing distribution system of approximately 306 employee-agents who work on a route system and through over 200 funeral homes and independent agents to sell policies, collect premiums and service


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

policyholders.  To a lesser extent, our Home Service segment sells limited-liability, named peril property policies covering dwelling and contents.

Home Service Products and Competition

Our home service insurance products consist primarily of small face amount ordinary whole life and pre-need policies, which are designed to fund final expenses for the insured, primarily consisting of funeral and burial costs.  The average life insurance policy face amount issued was approximately $6,700 in 2014; therefore, the underwriting performed on these applications is limited.  Our property coverages are limited to $30,000 maximum coverage on any one dwelling and contents, while content-only coverage and dwelling-only coverage is limited to $20,000.   We face competition in Louisiana, Mississippi and Arkansas from other companies specializing in home service distribution of insurance.  We seek to compete based upon our emphasis on personal service to our customers.  We intend to continue premium growth within this segment via direct sales and acquisitions.

Other Non-Insurance Enterprises

Other Non-insurance Enterprises includes Computing Technology, Inc., which provides data processing services to the Company, and Insurance Investors, Inc., which provides aviation transportation to the Company.  This segment also includes the results of Citizens, Inc., the parent Company.

Operations and Technology

Our administrative operations principally serve our life insurance segment and are conducted primarily at our executive offices in Austin, Texas through approximately 120 administrative, operating and underwriting personnel.  Our Home Service operations are conducted to a large degree from our district offices in Louisiana, Arkansas and Mississippi, as well as our support center in Donaldsonville, Louisiana through approximately 70 operations personnel.  At our executive offices, we also perform policy design, marketing oversight, underwriting, accounting and reporting, customer service, administration and investing activities.

Our senior management has significant experience in insurance company application system design and implementation.  Since the mid-1960's, our senior management has been leading development of evolving insurance applications.  We have a single integrated system for our entire Company, which is a centrally-controlled, mainframe-based administrative system.  Functions of our policy administrative system include policy set up, administration, billing and collections, commission calculation, valuation, automated internal audit functions, storage backup, image management and other related functions.  Each company we acquire is ultimately converted onto our administrative system.  This system has been in place for many years, and we believe it is a significant asset to us.  We update our administrative system on an ongoing basis but it does require programmers experienced in our IT environment.  This system is also capable of significant expansion of volume without substantial capital outlay or increase in staff.  

Regulation

We do not believe issuance of insurance policies to residents of foreign countries subjects us to the jurisdiction of those countries. We have never qualified to do business in any foreign country and have never submitted our insurance policies issued to residents of foreign countries for approval by any foreign or domestic insurance regulatory agency.  We sell our policies to residents of foreign countries using foreign independent marketing firms and independent consultants, and we rely on those persons to comply with laws applicable to them in marketing our insurance products in their respective countries.

Our U.S. insurance operations are subject to a wide variety of laws and regulations.  State insurance laws establish supervisory agencies with broad regulatory authority to regulate most aspects of our U.S. insurance businesses, and our insurance subsidiaries are regulated by the insurance departments of each state in which they are licensed.  In addition, U.S. laws, such as the USA Patriot Act of 2001, the Foreign Corrupt Practices Act (“FCPA”), the Gramm-Leach-Bliley Act of 1999, the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act ("the Dodd-Frank Act"), are examples of U.S. regulations that affect our business.  We are subject to comprehensive regulations under the USA Patriot Act with respect to money laundering, as well as federal regulations regarding privacy and confidentiality.  Our insurance products and thus our businesses also are affected by U.S. federal, state and local tax laws.  The Dodd-Frank Act focuses on financial reform and may result in significant changes to the regulation of institutions operating in the financial services industry, including the Company.  Legislative or regulatory requirements imposed by or promulgated in connection with this Act may make it more expensive for the Company to conduct its business, may have a material adverse effect on the overall business climate and could materially affect the profitability of the results of operations and financial condition of financial institutions. The Company is uncertain as to all of the impacts this legislation will have and cannot provide


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assurance it will not adversely affect its results of operations and financial condition.  In general, government regulation at the federal level may increase and may result in unpredictable consequences for the Company.  In addition, other federal laws and regulations apply to us in areas such as pension regulations, privacy, tort reform and taxation.
 
The purpose of the laws and regulations that affect our insurance business is primarily to protect our insureds and not our stockholders.  Many of the laws and regulations to which we are subject are regularly re-examined, and existing or future laws and regulations may become more restrictive or otherwise adversely affect our operations.  In addition, insurance regulatory authorities (including state law enforcement agencies and attorneys general) periodically make inquiries and regularly conduct examinations regarding compliance by us and our subsidiaries with insurance, and other laws and regulations regarding the conduct of our insurance businesses.  We cooperate with such inquiries and examinations and take corrective action when warranted.
 
Our insurance subsidiaries are collectively licensed to transact business in 32 states.  We have insurance subsidiaries domiciled in the states of Colorado, Louisiana, Mississippi and Texas.  Our U.S. insurance subsidiaries are licensed and regulated in all U.S. jurisdictions in which they conduct insurance business.  The extent of this regulation varies, but most jurisdictions have laws and regulations based upon the National Association of Insurance Commissioners (“NAIC”) model rules governing the financial condition of insurers, including standards of solvency, types and concentration of investments, establishment and maintenance of reserves, credit for reinsurance and requirements of capital adequacy, and the business conduct of insurers, including marketing and sales practices and claims handling.  In addition, statutes and regulations usually require the licensing of insurers and their agents, the approval of policy forms and related materials and the approval of rates for certain types of insurance products.
 
All U.S. jurisdictions in which our U.S. insurance subsidiaries conduct insurance business have enacted legislation that requires each U.S. insurance company in a holding company system, except captive insurance companies, to register with the insurance regulatory authority of its jurisdiction of domicile and to furnish that regulatory authority financial and other information concerning the operations of, and the interrelationships and transactions among, companies within its holding company system that may materially affect the operations, management or financial condition of the insurers within the system.  These laws and regulations also regulate transactions between insurance companies and their parents and affiliates.  Generally, these laws and regulations require that all transactions within a holding company system between an insurer and its affiliates be fair and reasonable and that the insurer's statutory capital and surplus following any transaction with an affiliate be both reasonable in relation to its outstanding liabilities and adequate to its financial needs.  Statutory surplus is the excess of admitted assets over the sum of statutory liabilities and capital.  For certain types of agreements and transactions between an insurer and its affiliates, these laws and regulations require prior notification to, and non-disapproval or approval by, the insurance regulatory authority of the insurer's jurisdiction of domicile.

The payment of dividends or other distributions to us by our insurance subsidiaries is regulated by the insurance laws and regulations of their respective states of domicile.  The laws and regulations of some of these jurisdictions also prohibit an insurer from declaring or paying a dividend except out of its earned surplus or require the insurer to obtain regulatory approval before it may do so.  In addition, insurance regulators may prohibit the payment of ordinary dividends or other payments by our insurance subsidiaries to us (such as a payment under a tax sharing agreement or for employee or other services) if they determine such payment could be adverse to policyholders or insurance contract holders of the subsidiary.
 
The laws and regulations of the jurisdictions in which our U.S. insurance subsidiaries are domiciled require that a controlling party obtain the approval of the insurance commissioner of the insurance company's jurisdiction of domicile prior to acquiring control of the insurer and may delay, deter or prevent a transaction our shareholders might consider desirable.
 
Risk-based capital ("RBC") requirements are imposed on life and property and casualty insurance companies.  The NAIC has established minimum capital requirements in the form of RBC.  RBC factors the type of business written by an insurance company, the quality of its assets, and various other aspects of an insurance company's business to develop a minimum level of capital called "authorized control level risk-based capital" and compares this level to adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves.  Should the ratio of adjusted statutory capital to control level risk-based capital fall below 200%, a series of actions by the affected company would begin.



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Potential Changes in Regulation

Government actions in response to the recent financial crisis and market volatility could significantly impact our current regulations.  As part of a comprehensive reform of financial services regulation known as the Dodd-Frank Act, Congress established an office within the federal government to collect information about the insurance industry, recommend standards, and represent the United States in dealing with foreign insurance regulators.
 
Item 1A.   RISK FACTORS

Investing in our Company involves certain risks. Set forth below are certain risks with respect to our Company.  Readers should carefully review these risks, together with the other information contained in this report.  The risks and uncertainties we have described in this report are not the only ones we face.  Additional risks and uncertainties not presently known to us, or that we currently deem not material, may also adversely affect our business.  Any of the risks discussed in this report or that are presently unknown or not material, if they were to actually occur, could result in a significant adverse impact on our business, operating results, prospects or financial condition.  References in the risk factors below to "we," "us," "our," "Citizens" and like terms relate to Citizens, Inc. and its subsidiaries on a U.S. GAAP consolidated financial statement basis, unless specifically identified otherwise. We operate our subsidiaries as separate and distinct entities with respect to corporate formalities.  

Risks Relating to Our Business

A substantial amount of our revenue comes from residents of foreign countries and is subject to risks associated with widespread political instability, foreign insurance laws and asset transfer restrictions.

A substantial part of our insurance policy sales are from foreign countries, primarily those in Latin America and the Pacific Rim.   There is a risk that we may lose a significant portion of these sales should widespread political instability occur in these countries.   We cannot confidently predict what impact we might see relative to widespread political instability in the foreign countries we operate, but it could significantly impact our business.

Traditionally, we have sought to address risks associated with foreign countries by, among other things, not accepting insurance applications outside of the U.S., maintaining all of our assets in the U.S. and requiring policy premiums be paid to us in U.S. Dollars.  Accordingly, we have never qualified to do business in any foreign country and have never submitted our insurance policies issued to residents of foreign countries for approval by any foreign or domestic insurance regulatory agency.  We sell our policies to residents of foreign countries using foreign independent marketing firms and independent consultants, and we rely on those persons to comply with applicable laws in marketing our insurance products.

The Company’s future sales and financial results are dependent upon avoiding significant regulatory interruptions in receiving insurance policy applications for residents outside of the United States. Currency control laws in foreign countries, if implemented, could materially adversely affect our revenues by imposing restrictions on asset transfers outside of a country where our insureds reside. There can be no assurance that such situations will not occur and that our revenues, results of operations and financial condition will not be materially, adversely affected if they do occur. The government of a foreign country could also determine its residents may not buy life insurance from us unless we became qualified to do business in that country or unless our policies purchased by its residents receive prior approval from its insurance regulators.  Also, new laws or regulations could be implemented or new applications of existing laws or regulations could occur, which could result in the cessation of marketing activities by our independent marketing firms and consultants.  From time to time we have become aware of new foreign laws, regulations or new interpretations of foreign laws or regulations that may have an adverse effect on the marketing efforts of our foreign independent marketing firms and consultants.

Although we believe foreign regulatory authorities have no jurisdiction over us and any actions, including fines, would be unenforceable against us, we cannot assure you any of these laws, regulations, or application of them by foreign regulatory authorities will not have an adverse effect on the marketing efforts of our independent marketing consultants and, in turn, on our revenues.  Further, there is no assurance we would be able to qualify to do business in any foreign country or that its insurance regulatory authorities would approve our policies if we decided to submit our insurance policies for approval.  Any of the foregoing could reduce our revenues and materially adversely affect our results of operations and financial condition.  Also, we do not determine whether our independent consultants are required to be licensed to sell insurance in the countries in which they market our policies.  If our independent consultants were not in compliance with applicable laws, including licensing laws, they could be required to cease operations, which would reduce our revenues.  We are unable to quantify the effect of foreign regulation on our


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business if regulation were to be imposed on us due to the lack of uniformity of regulation in our foreign markets, but we believe we could expend time and incur expense in assessing and complying with foreign regulation which we deem may impact our business in a particular country. Consequently, we may decide to remove ourselves from or avoid a market if foreign regulation were deemed untenable.

Our operating results and financial condition may be affected if the liabilities actually incurred differ, or if our estimates of those liabilities change, from the amounts we have reserved for in connection with the noncompliance of a substantial portion of our insurance policies with Sections 7702 and 7702A under the Internal Revenue Code.

In the first quarter of 2015, we announced that we identified that a substantial portion of the life insurance policies issued by our subsidiary insurance companies failed to qualify for the favorable U.S. federal income tax treatment afforded by Sections 7702 and 7702A of the Internal Revenue Code ("IRC") of 1986. As a result, we have established a reserve of $11.4 million for probable expenses and liabilities associated with this tax compliance matter, which amount represents the low end of management’s estimated range of those probable expenses and liabilities of $11.4 million to $40.0 million net of tax. This estimated range includes projected toll charges and fees as well as increased claims liability for past claims, reserves increases to bring policies into compliance and other probable liabilities resulting from this tax compliance matter. Our estimated range reflects the uncertainties with respect to the required course of action and other matters unknown at this time. Currently, management believes there is not a specific estimable amount for these probable liabilities and expenses which is more likely than other specific amounts within our estimated range. The process of determining our estimated range was a complex undertaking and involved management’s judgment based upon a variety of factors known at the time. Given the number of factors considered and the significant variables assumed in establishing our estimated range, actual amounts incurred may exceed our reserve and the high end of our estimated range of expenses and liabilities. To the extent the amount reserved by the Company is insufficient to meet the actual amount of our liability, or if our estimates of those liabilities change in the future, our financial condition and results of operation may be materially adversely affected.


The majority of our foreign policyholders elect to invest their policies’ annually payable cash benefits in our Class A common stock through the Citizens, Inc. Stock Investment Plan (the “Plan”), a stock investment plan registered with the United States Securities and Exchange Commission (“SEC”).  If a securities regulatory authority were to deem the Plan's operation contrary to securities laws, a reduction in the amount of Class A common stock purchased on the open market through the Plan could occur.

On or about April 2001, the Company adopted the Plan, as amended and restated from time to time. The Plan is registered with the SEC pursuant to a Registration Statement on Form S-3 of the Securities Exchange Act of 1933. For further information on the filing history of the Plan’s Registration Statement, please see the risk factor directly below titled “The previous Registration Statement covering the Plan was not declared effective under the Securities Act of 1933.”

The general purpose of the Plan is to provide a convenient and economical means for new investors to make an initial investment in our Class A common stock and for existing investors to purchase additional shares of our Class A common stock. Specifically, the Plan offers employees, agents, policyholders, independent consultants and potential investors stock purchase opportunities of the Company’s Class A common stock, no par value per share (“Common Stock”). It also offers security holders the ability to maintain registered ownership of their securities in a manner which facilitates efficient purchases and sales of Citizens Class A common stock in the open market. The Plan is administered by Computershare Trust Company, N.A., located in Canton Massachusetts, (“Computershare”), a company which operates in 20 countries around the globe and also serves as our transfer agent. Computershare is deemed an independent agent of the Company. Computershare satisfies applicable U.S. legal requirements (including, without limitation, the requirements of Regulation M under the Securities Exchange Act of 1934), and facilitates open market purchases and sales of Citizens Class A common stock under the Plan through registered brokers and dealers. Additional disclosures concerning the Plan’s impact on our Capital Stock can be found in our Item 1A. Risk Factors under the heading, “Risks Relating to Our Capital Stock.”

Any electing person who has met the requirements to participate in the Plan and has not revoked such election to participate in the Plan is considered a “Plan Participant.” More than 89% percent of the shares of Class A common stock that have been purchased under the Plan have been purchased by foreign holders of life insurance policies (or related brokers); the remaining shares of Class A common stock that have been purchased under the Plan have been purchased by approximately 1,400 participants resident in the United States. International holders of life insurance policies underwritten by the Company may assign annually payable cash benefits from their insurance policies to the Plan and employees participating in the Plan may allocate a portion of their compensation to the Plan and the Company remits these amounts to Computershare.  Computershare uses these proceeds to purchase shares of


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Class A common stock in the open market from time to time through independent broker dealers selected by the Computershare.  None of the shares of Class A common stock purchased by the Plan Participants is issued by the Company, and the Company does not receive any proceeds from these purchases. An international policyholder must first consent in writing to be contacted by Citizens regarding the Plan before they are given the option to assign annually payable cash benefits from their insurance policies to the Plan. At the point of introduction to the Plan, international policyholders receive a copy of the Plan prospectus explaining the risks associated with purchasing Citizens Class A common stock through the Plan.

Since the distribution of our Class A common stock is registered and publicly traded in the U.S. and because we believe that foreign regulatory authorities have no jurisdiction over us, the offer and sale of our Class A common stock through the Plan is not registered under the laws of any foreign jurisdiction.  If a foreign securities regulatory authority were to determine the offer and sale of our Class A common stock under the Plan were contrary to applicable laws and regulations of its jurisdiction, such authority may issue or assert a fine, penalty or cease and desist order against us. While we would vigorously dispute the ability of such authority to assert jurisdiction over us, such a dispute may distract from our business and may have a material adverse impact on our financial position. Additionally, in such a situation participation in the Plan by our international policyholders in that foreign jurisdiction could decrease.  This also could materially reduce the amount of our Class A common stock purchased and sold in the open market under the Plan, as historically a significant volume of shares have been purchased under the Plan by policyholders through annually payable cash benefits assigned to the Plan.

We face financial and capital market risks in our operations.

As an insurance holding company with significant investment exposure, we face material financial and capital markets risk in our operations.  Due to the low interest rate environment over the past three years, we experienced significant call activity on our fixed income portfolio that decreased our investment yields compared to prior years.  Also, we recorded other-than-temporary impairments in the past several years due to credit related market declines

Economic uncertainty has recently been exacerbated by the increased potential for default by one or more European sovereign debt issuers, the potential partial or complete dissolution of the Eurozone and its common currency and the negative impact of such events on global financial institutions and capital markets generally.  Actions or inactions of European governments may impact these actual or perceived risks.  In the recent past, one rating agency downgraded the U.S.'s long-term debt credit rating from AAA.  Future actions or inactions of the United States government, including a shutdown of the federal government, could increase the actual or perceived risk that the U.S. may not ultimately pay its obligations when due and may disrupt financial markets.

Changes in market interest rates may significantly affect our profitability.

Some of our products, principally traditional whole life insurance with annuity riders, expose us to the risk that changes in interest rates will reduce our "spread," or the difference between the amounts we are required to pay under our contracts to policyholders and the rate of return we are able to earn on our investments intended to support obligations under the contracts.  Our spread is an integral component of our net income.

As interest rates decrease or remain at low levels, we may be forced to reinvest proceeds from investments that have matured, prepaid, been sold, or called at lower yields, reducing our investment margin.  Our fixed income bond portfolio is exposed to interest rate risk as a significant portion of the portfolio is callable.  Lowering interest crediting rates can help offset decreases in investment margins on some of our products.   However, our ability to lower these rates could be limited by competition or contractually guaranteed minimum rates, and may not match the timing or magnitude of changes in asset yields. 

Our investment portfolio is subject to various risks that may result in realized investment losses. In particular, decreases in the fair value of fixed maturities may significantly reduce the value of our investments, and as a result, our financial condition may suffer.

We are subject to credit risk in our investment portfolio. Defaults by third parties in the payment or performance of their obligations under these securities could reduce our investment income and realized investment gains or result in the recognition of investment losses. The value of our investments may be materially adversely affected by increases in interest rates, downgrades in the bonds included in our portfolio and by other factors that may result in the recognition of other-than-temporary impairments. Each of these events may cause us to reduce the carrying value of our investment portfolio.



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In particular, at December 31, 2014, fixed maturities represented $932.2 million or 87.5% of our total investments of $1,065.0 million. The fair value of fixed maturities and the related investment income fluctuates depending on general economic and market conditions. The fair value of these investments generally increases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income realized by us will generally increase or decrease in line with changes in market interest rates. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations. An investment has prepayment risk when there is a risk that the timing of cash flows resulting from the repayment of principal might occur earlier than anticipated because of declining interest rates or later than anticipated because of rising interest rates. The impact of value fluctuations affects our consolidated financial statements, as a large portion of our fixed maturities are classified as available-for- sale, with changes in fair value reflected in our stockholders' equity (accumulated other comprehensive income or loss). No similar adjustment is made for liabilities to reflect a change in interest rates. Therefore, interest rate fluctuations and economic conditions could adversely affect our stockholders' equity, total comprehensive income and/or cash flows. For mortgage-backed securities, credit risk exists if mortgagees default on the underlying mortgages. Although at December 31, 2014, approximately 96.6% of our fixed maturities were investment grade with 81.4% rated A or above, all of our fixed maturities are subject to credit risk. If any of the issuers of our fixed maturities suffer financial setbacks, the ratings on the fixed maturities could fall (with a concurrent fall in fair value) and, in a worst case scenario, the issuer could default on its financial obligations. If the issuer defaults, we could have realized losses associated with the impairment of the securities.

Gross unrealized losses on fixed maturity and equity securities may be realized or result in future impairments, resulting in a reduction in our net income.

Fixed maturity and equity securities classified as available-for-sale are reported at fair value.  Unrealized gains and losses on available-for-sale securities are recognized as a component of other comprehensive income (loss) and are, therefore, excluded from our net income.  Our total gross unrealized losses on our available-for-sale securities portfolio at December 31, 2014 were $3.4 million.  The accumulated change in estimated fair value of these securities is recognized in net income when the gain or loss is realized upon sale of the security or in the event that the decline in estimated fair value is determined to be other-than-temporary and an impairment charge to earnings is taken.  Realized losses or impairments may have a material adverse effect on our net income in a particular quarterly or annual period.

Our actual claims losses may exceed our reserves for claims and we may be required to establish additional reserves, which in turn may adversely impact our results of operations and financial condition.

We maintain reserves to cover our estimated exposure for claims relating to our issued insurance policies.  Reserves, whether calculated under U.S. generally accepted accounting principles or statutory accounting practices prescribed by various state insurance regulators, do not represent an exact calculation of exposure, but instead represent our best estimates, generally involving actuarial projections, of what we expect claims will be based on mortality assumptions that are determined by various regulatory authorities.  Many reserve assumptions are not directly quantifiable, particularly on a prospective basis.  In addition, when we acquire other domestic life insurance companies, our assessment of the adequacy of acquired policy liabilities is subject to our estimates and assumptions.  Reserve estimates are refined as experience develops, and adjustments to reserves are reflected in our statements of operations for the period in which such estimates are updated.  Because establishing reserves is an inherently uncertain process involving estimates of future losses, future developments may require us to increase claims reserves, which may have a material adverse effect on our results of operations and financial condition in the periods in which such increases occur.

We may be required to accelerate the amortization of deferred acquisition costs and the costs of customer relationships acquired, which would increase our expenses and adversely affect our results of operations and financial condition.

At December 31, 2014, we had $157.5 million of deferred policy acquisition costs, or DAC.  DAC represents costs that vary with and are primarily related to the successful sale and issuance of our insurance policies and are deferred and amortized over the estimated life of the related insurance policies.  These costs include commissions in excess of ultimate renewal commissions, solicitation and printing costs, sales material costs and some support costs, such as underwriting and contract and policy issuance expenses.  Under U.S. GAAP, DAC is amortized to income over the lives of the underlying policies, in relation to the profit stream.

In addition, when we acquire a block of insurance policies, we assign a portion of the purchase price to the right to receive future net cash flows from existing insurance and investment contracts and policies.  This intangible asset, called the cost of customer relationships acquired, or CCRA, represents the actuarially estimated present value of future cash flows from the acquired policies.  At December 31, 2014, we had $23.5 million of CCRA.  We amortize the value of this intangible asset in a manner similar to the amortization of DAC.


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Our amortization of DAC and CCRA generally depends upon anticipated profits from investments, surrender and other policy charges, mortality, morbidity, persistency and maintenance expense margins.  For example, if our insurance policy lapse and surrender rates were to exceed the assumptions upon which we priced our insurance policies, or if actual persistency proves to be less than our persistency assumptions, especially in the early years of a policy, we would be required to accelerate the amortization of expenses we deferred in connection with the acquisition of the policy.  We regularly review the quality of our DAC and CCRA to determine if they are recoverable from future income.  If these costs are not recoverable, they are charged to expenses in the financial period in which we make this determination.

Unfavorable experience with regard to expected expenses, investment returns, surrender and other policy charges, mortality, morbidity, lapses or persistency may cause us to increase the amortization of DAC or CCRA, or both, or to record a current period expense to increase benefit reserves, any of which could have a material adverse effect on our results of operations and financial condition.

We may be required to recognize an impairment on the value of our goodwill, which would increase our expenses and materially adversely affect our results of operations and financial condition.

Goodwill represents the excess of the amount paid by us to acquire various life insurance companies over the fair value of their net assets at the date of the acquisition.  Under U.S. GAAP, we test the carrying value of goodwill for impairment at least annually at the "reporting unit" level, which is either an operating segment or a business that is one level below the operating segment.  Goodwill is impaired if its carrying value exceeds its implied fair value.  This may occur for various reasons, including changes in actual or expected earnings or cash flows of a reporting unit, generation of earnings by a reporting unit at a lower rate than similar businesses or declines in market prices for publicly traded businesses similar to our reporting units.  If any portion of our goodwill becomes impaired, we would be required to recognize the amount of the impairment as a current-period expense, which could have a material adverse effect on our results of operations and financial condition.  Goodwill in our consolidated financial statements was $17.3 million as of December 31, 2014.

We are a defendant in lawsuits, which may adversely affect our financial condition and detract from the time our management is able to devote to our business, and we are subject to risks related to litigation and regulatory matters.

We may from time to time be subject to a variety of legal and regulatory actions relating to our business operations, including, but not limited to:

disputes over insurance coverage or claims adjudication;
regulatory compliance with state laws;
regulatory compliance with insurance and securities laws;
disputes with our marketing firms, consultants and employee-agents over compensation, termination of contracts
and related claims;
disputes regarding our tax liabilities;
disputes relating to reinsurance and coinsurance agreements; and
disputes relating to businesses acquired and operated by us.

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

A number of U.S. jurisdictions have been investigating life insurer practices for compliance with unclaimed property laws. In highly publicized incidents, the practice by certain companies of using data available on the U.S. Social Security Administration's Death Master File or a similar data base in order to avoid paying periodic benefits under annuity contracts but not using the same data base to determine when death benefits were owed was disclosed. This asymmetric conduct by certain insurers has led a number of jurisdictions to require life insurers to use this same data to identify instances where amounts under life insurance policies and annuity contracts are payable and to locate and pay beneficiaries under such contracts. The National Conference of Insurance Legislators ("NCOIL") has adopted the Model Unclaimed Life Insurance Benefits Act ("Model Act") and several states have adopted legislation that is substantially similar to the Model Act adopted by NCOIL. The Model Act imposes new requirements on insurers to periodically compare their in force life insurance and annuity policies against the Death Master File, investigate any identified matches to confirm the death of the insured and determine whether benefits are due and attempt to locate the


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beneficiaries or, if no beneficiary can be located, escheat the policy benefit to the respective state government as unclaimed property. The Model Act could result in additional payments to beneficiaries, additional escheatment of funds deemed abandoned under state laws, and/or administrative penalties. It is also possible that life insurers may be subject to claims regarding their business practices as a result given the legal uncertainty in this area. However, recent court decisions in West Virginia and Florida have upheld the well established insurance law principal that life insurance policies are not due and payable until the insurance company receives due proof of death, and have further held an insurance company has no duty to search the Death Master File or other databases to determine whether deaths have occurred that have not been reported to the company.

Despite the fact we have no history of the asymmetric conduct in question, we have received notices from Louisiana Department of Treasury, Arkansas Auditor of State and the Texas State Comptroller, indicating they intend to audit Citizens, Inc. and certain of its affiliates for compliance with unclaimed property laws.  The audits may result in additional payments to beneficiaries, additional escheatment of funds deemed abandoned under state laws, administrative penalties, interest, and changes to the Company's procedures for the identification and escheatment of abandoned property.  The Company believes additional escheatment of funds in Arkansas or Texas will not be material to our financial condition or results. However, additional escheatment of funds in Louisiana, which may subsequently be deemed abandoned under the Louisiana Department of Treasury’s audit, could be substantial for SPLIC. At this time, the Company is not able to estimate any of these possible amounts.

Reinsurers with which we do business could increase their premium rates and may not honor their obligations, leaving us liable for the reinsured coverage.

We reinsure certain risks underwritten by our various insurance subsidiaries.  Market conditions beyond our control determine the availability and cost of the reinsurance protection we purchase.  The high cost of reinsurance or lack of affordable coverage could adversely affect our results of operations and financial condition.

Our reinsurance facilities are generally subject to annual renewal.  We may not be able to maintain our current reinsurance facilities and, even if highly desirable or necessary, we may not be able to obtain replacement reinsurance facilities in adequate amounts or at rates economic to us.  If we are unable to renew our expiring facilities or to obtain new reinsurance facilities, either our net exposures would increase or, if we are unwilling or unable to bear an increase in net exposures, we may have to reduce the level of our underwriting commitments.  In addition, our reinsurance facilities may be canceled, pursuant to their terms, upon the occurrence of certain specified events, including a change of control of our Company (generally defined as the acquisition of 10% or more of our voting equity securities) or the failure of our insurance company subsidiaries to maintain the minimum required levels of statutory surplus.  Any of these potential developments could materially adversely affect our revenues, results of operations and financial condition.

In 2014, we reinsured $516.6 million of face amount of our life insurance policies.  Amounts reinsured in 2014 represented 10.5% of the face amount of direct life insurance in force in that year.  Although the cost of reinsurance is, in some cases, reflected in premium rates, under certain reinsurance agreements, the reinsurer may increase the rate it charges us for reinsurance.  If our cost of reinsurance were to increase, we might not be able to recover these increased costs, and our results of operations and financial condition could be materially adversely affected.  See Note 5 to the Company's Consolidated Financial Statements.

We may not be able to continue our past strategy of acquiring other U.S. life insurance companies, and we may not realize improvements to our financial results as a result of our past or any future acquisitions.

We have acquired 17 U.S. life insurance companies since 1987.  Our objective in this strategy has been to increase our assets, revenues and capital, improve our competitive position and increase our earnings, in part by realizing certain operating efficiencies associated with economies of scale.

We evaluate possible acquisitions of other insurance companies on an ongoing basis.  While our business model is not dependent primarily upon acquisitions, the time frame for achieving or further improving our market positions can be shortened through acquisitions.  There can be no assurance that suitable acquisitions presenting opportunities for continued growth and operating efficiencies will be available to us, or that we will realize the anticipated financial results from completed acquisitions.  In addition, we face intense competition in seeking to make acquisitions, much of which is from companies with greater financial and operational resources than we have.

Even if we identify and complete insurance company acquisitions, we may be unable to integrate them on an economically favorable basis.  Implementation of an acquisition strategy entails a number of risks, including, among others, inaccurate assessment of


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

assets, liabilities or contingent liabilities and the failure to achieve anticipated operating efficiencies, revenues, earnings or cash flow.  The occurrence of any of these events could have a material adverse effect on our results of operations and financial condition.

Our international and domestic operations face significant competition.

Our international marketing plan focuses on making available U.S. Dollar-denominated life insurance products to high net worth, high income individuals residing in more than 30 countries.  New competition could increase the supply of available insurance, which could affect our ability to price our products at attractive profitable rates to us, thereby adversely affecting our revenues, results of operations and financial condition.  Existing barriers to entry in the foreign markets we serve may not be sufficient to impede potential competitors from entering such markets.  In connection with our business with foreign nationals, we experience competition primarily from the following sources, many of which have substantially greater financial, marketing and other resources than we have:

Foreign operated companies with U.S. Dollar policies.  We face direct competition from companies that operate in the
same manner as we operate in our international markets.

Companies foreign to the countries in which their policies are sold but that issue local currency policies.  Another group
of our competitors in the international marketplace consists of companies that are foreign to the countries in which their policies are sold but issue life insurance policies denominated in the local currencies of those countries.  Local currency policies provide the benefit of assets located in the country of foreign residents, but entail risks of uncertainty due to local currency fluctuations, as well as the perceived instability and weakness of local currencies.

Locally operated companies with local currency policies.  We compete with companies formed and operated in the country
in which our foreign insureds reside.  Generally, these companies are subject to risks of currency fluctuations, and they primarily use mortality tables based on experience of the local population as a whole.  These mortality tables are typically based on significantly shorter life spans than those we use.  As a result, the cost of insurance from these companies tends to be higher than ours. Although these companies typically market their policies to a broader section of the population than do our independent marketing firms and independent consultants, there can be no assurance that these companies will not endeavor to place a greater emphasis on our target market and compete more directly with us.

In the United States, we compete with more than 1,000 other life insurance companies of various sizes.  The life insurance business in the United States is highly competitive, in part because it is a mature industry that, in recent years, has experienced little to no growth in life insurance sales.  Many domestic life insurance companies have substantially greater financial resources, longer business histories and more diversified lines of insurance coverage than we do.  These companies also have larger sales forces than we have. Competition in the United States has also increased recently because the life insurance industry is consolidating, with larger, more efficient organizations emerging from the consolidation.

In addition, from time to time, companies enter and exit the markets in which we operate, thereby increasing competition at times when there are new entrants.  We may lose business to competitors offering competitive products at lower prices, or for other reasons.

There can be no assurance that we will be able to compete effectively in any of our markets.  If we do not, our business, results of operations and financial condition will be materially adversely affected.

Sales of our products may be reduced if we are unable to (i) establish and maintain commercial relationships with independent marketing firms and independent consultants (ii) attract and retain employee agents or (iii) develop and maintain our distribution sources.

We distribute our insurance products through several distribution channels, including independent marketing firms and independent consultants and our employee agents.  These relationships are significant for both our revenues and our profits.  In our life insurance segment, we depend almost exclusively on the services of independent marketing firms and independent consultants.  In our home service insurance segment, we depend on employee agents whose role in our distribution process is integral to developing and maintaining relationships with policyholders.  Significant competition exists among insurers in attracting and maintaining marketers of demonstrated ability.  Some of our competitors may offer better compensation packages for marketing firms, independent consultants and agents and broader arrays of products and have a greater diversity of distribution resources, better brand recognition, more competitive pricing, lower cost structures and greater financial strength or claims paying ratings than we do.  We compete with other insurers for marketing firms, independent consultants and employee agents primarily on the basis of


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our compensation and support services.  Any reduction in our ability to attract and retain effective sales representatives could materially adversely affect our revenues, results of operations and financial condition.

Loss of the services of our senior management team would likely hinder development of our operating and marketing programs and our strategy for expanding our business.

We rely on the participation of our Chairman of the Board and Chief Executive Officer, Harold E. Riley (age 86), and our Vice Chairman of the Board and President, Rick D. Riley (age 61), in connection with the development and execution of our operating and marketing plans and strategy for expanding our business.  We anticipate that their expertise will continue to be of substantial value in connection with our operations.  The loss of the services of either of these individuals could have a significant adverse effect on our business and prospects.  We do not have an employment agreement with either of these persons nor do we carry a key-man insurance policy on either of their lives.

We are subject to extensive governmental regulation in the United States, which increases our costs of doing business and could restrict the conduct of our business.

We are subject to extensive regulation and supervision in U.S. jurisdictions wherein we do business, as well as anti-money laundering regulations adopted under the USA Patriot Act.  Insurance company regulation is generally designed to protect the interests of policyholders, with substantially lesser protections to shareholders of the regulated insurance companies.  To that end, all the states in which we do business have insurance regulatory agencies with broad powers under law with respect to such things as: licensing companies to transact business; mandating capital and surplus requirements; regulating trade and claims practices; approving policy forms; and restricting companies' ability to enter and exit markets.

The capacity for an insurance company's growth in premiums is partially a function of its required statutory surplus.  Maintaining appropriate levels of statutory surplus, as measured by statutory accounting practices prescribed or permitted by a company's state of domicile, is considered important by all state insurance regulatory authorities.  Failure to maintain required levels of statutory surplus could result in increased regulatory scrutiny and enforcement action by regulatory authorities.
 
Most insurance regulatory authorities have broad discretion to grant, renew, suspend and revoke licenses and approvals, and could preclude or temporarily suspend us from carrying on some or all of our activities, including acquisitions of other insurance companies, require us to add capital to our insurance company subsidiaries, or fine us.  If we are unable to maintain all required licenses and approvals, or if our insurance business is determined not to comply fully with the wide variety of applicable laws and regulations and their interpretations, including the USA Patriot Act, our revenues, results of operations and financial condition could be materially adversely affected.

Although the U.S. federal government has not historically regulated the insurance business, the Dodd-Frank Act, enacted in July 2010, expands the federal presence in insurance oversight. The Act's requirements include streamlining the state-based regulation of reinsurance and non-admitted insurance (also known as surplus lines insurance, which is property or casualty insurance written by a company that is not licensed to sell policies of insurance in a given state). This legislation also establishes a new Federal Insurance Office within the U.S. Department of the Treasury with powers over all lines of insurance except health insurance, certain long-term care insurance and crop insurance. The Federal Insurance Office is authorized to, among other things, gather data and information to monitor aspects of the insurance industry, identify issues in the regulation of insurers about insurance matters and preempt state insurance measures under certain circumstances. As this Act calls for numerous studies and contemplates further regulation, the future impact of the Act on our results of operations or our financial condition cannot be determined at this time, but could have an adverse impact on profitable operations.



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Changes in U.S. regulation may adversely affect our results of operations and financial condition and limit our prospective growth.

Currently, the U.S. Federal Government does not directly regulate the insurance business, although initiatives for Federal regulation of insurance are proposed by members of the U.S. Congress from time to time.  However, Federal legislation, regulations and administrative policies in several other areas can materially and adversely affect insurance companies, including our business.  These areas include U.S. anti-money laundering laws and related regulations, including the Bank Secrecy Act and its implementing regulations (collectively, the “BSA”), other financial services regulations, securities regulation, including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act, pension regulation, privacy, tort reform legislation and taxation.  In addition, various forms of direct federal regulation of insurance have been proposed from time to time.

Our failure to maintain effective information systems could adversely affect our business.

We must maintain and enhance our existing information systems and develop new information systems in order to keep pace with continuing changes in information processing technology, evolving industry and regulatory standards and changing customer preferences.  If we do not maintain adequate systems, we could experience adverse consequences, including products acquired through acquisition, inadequate information on which to base pricing, underwriting and reserve decisions, regulatory problems, failure to meet prompt payment obligations, increases in administrative expenses and loss of customers.

Some of our information technology systems and software are mainframe-based, legacy-type systems that require an ongoing commitment of resources to maintain current standards.  Our systems utilize proprietary code requiring highly skilled personnel.  Due to the unique nature of our proprietary operating environment, we could have difficulty finding personnel with the skills required to provide ongoing system maintenance and development as we seek to keep pace with changes in our products and business models, information processing technology, evolving industry and regulatory standards and policyholder needs.  Our success is dependent upon, among other things, maintaining and enhancing the effectiveness of existing systems, as well as continuing to integrate, develop and enhance our information systems to support business processes in a cost-effective manner.

Our failure to maintain effective and efficient information systems, or our failure to efficiently and effectively consolidate our information systems to eliminate redundant or obsolete applications, could have a material adverse effect on our results of operations and financial condition.

Our failure to protect confidential information and privacy could result in the loss of customers, subject us to fines and penalties and adversely affect our results of operations and financial condition.

Our insurance subsidiaries are subject to privacy regulations.  The actions we take to protect confidential information include among other things: monitoring our record retention plans and policies and any changes in state or federal privacy and compliance requirements; maintaining secure storage facilities for tangible records; and limiting access to electronic information in order to safeguard certain information.
 
In addition, the Gramm-Leach-Bliley Act requires that we deliver a notice regarding our privacy policy both at the delivery of an insurance policy and annually thereafter.  Certain exceptions are allowed for sharing of information under joint marketing agreements. However, certain state laws may require us to obtain a policyholder's consent before we share information.

We have a written information security program with appropriate administrative, technical and physical safeguards to protect such confidential information.  Cyber security attacks are on the rise throughout the World and while we believe we have taken reasonable steps to secure our customer information we could experience a breach of data. We closely monitor cyber attack attempts on our system, however, we have no evidence our system has ever been penetrated or client data has been breached. Nevertheless, it is possible a cyber attack could go undetected but based upon our daily monitoring we believe our exposure to undetected attacks is limited.

If we do not comply with privacy regulations and protect confidential information, we could experience adverse consequences, including regulatory sanctions, loss of reputation and litigation, any of which could have a material adverse effect on our business, results of operations and financial condition.


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General economic, financial market and political conditions may materially adversely affect our results of operations and financial condition.

Our results of operations and financial condition may be materially adversely affected from time to time by general economic, financial market and political conditions, both in the United States and in the foreign countries where our policyowners reside.  These conditions include economic cycles such as:  levels of consumer spending; levels of inflation; movements of the financial markets; availability of credit; fluctuations in interest rates, monetary policy or demographics; and legislative and competitive changes.

During periods of economic downturn, such as the ones recently experienced, our insureds may choose not to purchase our insurance products, may terminate existing policies, permit policies to lapse or may choose to reduce the amount of coverage purchased, any of which could have a material adverse effect on our results of operations and financial condition.  Also, our sales of new insurance policies might decrease.

Our insurance subsidiaries are restricted by applicable laws and regulations in the amounts of fees, dividends and other distributions they may make to us.  The inability of our subsidiaries to make payments to us in sufficient amounts for us to conduct our operations could adversely affect our ability to meet our obligations or expand our business.

As a holding company, our principal asset is the stock of our subsidiaries.  We rely primarily on statutorily permissible payments from our insurance company subsidiaries, principally through service agreements we have with our subsidiaries, to meet our working capital and other corporate expenses.  The ability of our insurance company subsidiaries to make payments to us is subject to regulation by the states in which they are domiciled, and these payments depend primarily on approved service agreements between us and these subsidiaries and, to a lesser extent, the statutory surplus (which is the excess of assets over liabilities as determined under statutory accounting practices prescribed by an insurance company's state of domicile), future statutory earnings (which are earnings as determined in accordance with statutory accounting practices) and regulatory restrictions.
 
Generally, the net assets of our insurance company subsidiaries available for dividends are limited to either the lesser or greater (depending on the state of domicile) of the subsidiary's net gain from operations during the preceding year and 10% of the subsidiary's net statutory surplus as of the end of the preceding year as determined in accordance with accounting practices prescribed by insurance regulatory authorities.

Except to the extent that we are a creditor with recognized claims against our subsidiaries, claims of our subsidiaries' creditors, including policyholders, have priority with respect to the assets and earnings of the subsidiaries over the claims of our creditors and shareholders.  If any of our subsidiaries becomes insolvent, liquidates or otherwise reorganizes, our creditors and shareholders will have no right to proceed in their own right against the assets of that subsidiary or to cause the liquidation, bankruptcy or winding-up of the subsidiary under applicable liquidation, bankruptcy or winding-up laws.

Adverse capital and credit market conditions may significantly affect our access to debt and equity capital and our cost of capital in seeking to expand our business.

The capital and credit markets experienced extreme volatility over the past several years.  In some cases, the markets exerted significant downward pressure on availability of debt and equity capital for certain issuers (including short term liquidity and credit capacity).  We believe the availability of debt and equity capital has decreased significantly compared to prior years.

The availability of equity and debt financing to us will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the financial services industry, our credit capacity, as well as the possibility that investors or lenders could develop a negative perception of our long- or short-term financial prospects.  Disruptions, uncertainty or volatility in the capital markets may also limit our access to equity capital for us to seek to expand our business.  As such, we may be forced to delay raising debt or equity capital, or bear an unattractive cost of capital, which could adversely affect our ability to seek any acquisitions and negatively impact profitability of an acquisition.

Unexpected losses in future reporting periods may require us to adjust the valuation allowance against our deferred tax assets.

We evaluate our deferred tax asset (“DTA”) quarterly for recoverability based on available evidence.  This process involves management's judgment about assumptions, which are subject to change from period to period due to tax rate changes or variances between our projected operating performance and our actual results.  Ultimately, future adjustments to the DTA valuation allowance,


16


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

if any, will be determined based upon changes in the expected realization of the net deferred tax assets.  The realization of the deferred tax assets depends on the existence of sufficient taxable income in either the carry back or carry forward periods under applicable tax law.  Due to significant estimates utilized in establishing the valuation allowance and the potential for changes in facts and circumstances, it is reasonably possible that we may be required to record a valuation allowance in future reporting periods.  Such an adjustment could have a material adverse effect on our results of operation, financial condition and capital position.

We may experience greater risks associated with certain deficiencies recently identified in our BSA Program.

As required by the BSA regulations applicable to insurance companies, we have developed and implemented an anti-money laundering program that includes policies and procedures for complying with applicable BSA program, reporting and recordkeeping requirements and for preventing and detecting potential money laundering and other criminal activity (“BSA Program”). Based on an internal risk assessment and review we began in the first quarter of 2015, we have identified certain deficiencies in our BSA Program, and we are in the process of addressing them and enhancing the BSA Program in order to mitigate further the risk of inadvertently becoming involved in illegal activity.


We face risk from a 2001 technical error made in our original Registration Statement on Form S-3 covering the Plan and filed with the SEC.

In December 2012 it was discovered that the original Registration Statement on Form S-3 covering the Plan and filed with the SEC was not declared effective under the Securities Act of 1933, due to a technical error in the 2001 filing. As such, sales under the Plan may not have fully complied with an exemption from registration under that Act.  This technical error could grant security holders who purchased shares of Class A common stock a right to rescind their purchases or other damages.

In 2001, we filed with the SEC a Registration Statement on Form S-3 under the Securities Act of 1933 ("Securities Act") covering the sale of shares of Class A common stock (“2001 Registration Statement”). On December 18, 2006, and again on December 18, 2009, the 2001 Registration Statement was amended (the “Amendments”).

The 2001 Registration Statement and the Amendments treated the Plan and its predecessors as a Dividend or Interest Reinvestment Plan (a “DRIP”) as defined in Rule 405 of the Securities Act and, accordingly, the 2001 Registration Statement and the Amendments checked the DRIP box on Form S-3 and we treated the Registration Statement and Amendments as effective immediately upon filing with the SEC. In connection with the preparation of a further amendment to the Registration Statement to be filed on December 18, 2012, and further analysis of the Plan, the Company came to believe that the characterization of the Plan solely as a DRIP may not be appropriate.  As a result, the Company determined not to file a further amendment to the Registration Statement but instead to file a new registration statement covering a Rule 415 continuous offering under the Plan.   On December 18, 2012, we suspended operation of the Plan with respect to the purchase of Class A common stock. On December 21, 2012, we filed with the SEC a new registration statement pursuant to Rule 415 on Form S-3 with respect to the Plan (the "New Registration Statement"), which was declared effective by the SEC on January 14, 2013.

Despite our full disclosure of this technical error since 2012, if and to the extent participants purchased shares of Class A common stock in the open market that were not effectively registered under the Securities Act, or exempt from such registration, prior to the time the New Registration Statement was declared effective such participants could have certain remedies available to them, including state law claims for rescission and damages. Should a significant number of these purchasers bring state law claims for rescission or damages it could have a material and adverse effect on our business and reputation and our results of operations and financial condition.

 
Risks Relating to Our Capital Stock

The price of our Class A common stock may be adversely affected by decreased  participation in the Citizens, Inc. Stock Investment Plan (the "Plan").

If an international applicant for insurance submits a “Consent to be Contacted” form to Citizens with his or her insurance application, then Citizens will submit a copy of the Plan Prospectus once the applicant’s insurance policy is fully underwritten. At that time the international applicant is invited by Citizens to participate in the Plan and afforded the opportunity to invest certain policy


17


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

dividends into the Plan. Most all of our international policyholders participate in the Plan and they invest their policy dividends and benefits in our Class A common stock pursuant to the Plan.  Once a policyholder elects to participate in the Plan, his or her policy benefits are assigned to purchase Citizens Class A common stock under the Plan in the open market.  There is a risk our Class A common stock price could be negatively impacted by a decrease in participation in the Plan.  If fewer policyholders elect to participate in the Plan, or our international premium collections were to decrease as a result of regulatory, economic, or marketing impediments, the trading volume of our Class A stock may decline from its present levels and the demand for our Class A common stock could be negatively impacted.

Control of our Company, through the ownership of our Class B Common Stock, may transfer from our Founder to a 501(c)(3) charitable foundation established by our Founder and we cannot determine whether any change in our management, operations, or operating strategies will occur as a result of such an ownership change.

Harold E. Riley, our Founder, Chairman and CEO, is the beneficial owner of 100% of the Citizens Class B common stock, which is held in the name of the Harold E. Riley Trust ("Trust"), of which he serves as Trustee.  Citizens' Class A and Class B common stock are identical in all respects, except the Class B common stock elects a simple majority of the Board and receives one-half of any cash dividends paid, on a per share basis, to the Class A shares.  Therefore, Mr. Riley controls our Company.  The Class A common stock elects the remainder of the Board.   The Trust documents provide that upon Mr. Riley's death, the Class B common stock will be transferred from the Trust to the Harold E. Riley Foundation, a charitable organization established under 501(c)(3) of the Internal Revenue Code (the "Foundation").  In addition, the Trust documents provide that Mr. Riley may at any time transfer the Class B common stock held by the Trust to the Foundation.  It is unclear what, if any, changes would occur to our board, management structure, or corporate operating strategies as a result of different ownership of our Class B common stock.

There are a substantial number of our shares of Class A common stock issued to our executive officers, directors and management which are eligible for future sale in the public market.  The sale of these shares could cause the market price of our Class A common stock to fall.

There were 49,080,114 shares of our Class A common stock issued as of December 31, 2014.  Our executive officers, directors and management owned approximately 3,170,704 shares of our Class A common stock as of December 31, 2014, representing approximately 6.5% of our then outstanding Class A common stock.  Almost all of these shares have been registered for public resale and generally may be sold freely.   In the event of a sale of some or all of these shares or the perceived sale of these shares, the market price of our Class A common stock could fall substantially.

The price of our Class A common stock may be volatile and may be affected by market conditions beyond our control.

Our Class A common stock price has historically fluctuated and is likely to fluctuate in the future and could decline materially because of the volatility of the stock market in general, decreased participation in the Plan referred to above or a variety of other factors, many of which are beyond our control, including: quarterly or annual variations in actual or anticipated results of our operations; interest rate fluctuations; changes in financial estimates by securities analysts; competition and other factors affecting the life insurance business generally; and conditions in the U.S. and world economies.

The international aspects of our operations, and the specific manner in which we conduct our business in those jurisdictions, may be subject to periodic negative social media publicity, which may negatively impact the market price of our Class A common stock.

We interface with and distribute our products to residents of foreign countries that may be subject to the risks disclosed in our Item 1A. Risk Factor under the heading, “A substantial amount of our revenue comes from residents of foreign countries and is subject to risks associated with widespread political instability, foreign insurance laws and asset transfer restrictions”. Venezuela is one such example.  Accordingly, from time to time, bloggers or other social media outlets relevant to investors may focus attention on our exposure to these countries and the negative circumstances surrounding their governments, thereby subjecting us to periodic negative publicity.  Negative publicity on investor blogs could impact trading in our stock and ultimately cause the market price of our Class A common stock to fall.

Our Class A common shareholders do not control us and have a limited ability to influence our business policies and corporate actions and are not by themselves able to elect any of our directors.

It is difficult for Class A common shareholders to elect any of our directors or otherwise exert any significant influence over our business.  The sole holder of our outstanding Class B common stock is entitled to elect a simple majority of our board of directors


18


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

and therefore controls us.  All of our Class B common stock is currently owned by the Harold E. Riley Trust, of which Harold E. Riley, our founder, Chairman of the Board and Chief Executive Officer, is the sole trustee.  Additionally, Harold E. Riley beneficially owns approximately 5% of the issued shares of our Class A common stock.
 
Our articles of incorporation and bylaws, as well as applicable state insurance laws, may discourage takeovers and business combinations that our shareholders might consider to be in their best interests.

Our articles of incorporation and bylaws, as well as various state insurance laws, may delay, deter, render more difficult or prevent a takeover attempt our shareholders might consider in their best interests.  As a result, our shareholders will be prevented from receiving the benefit from any premium to the market price of our Class A common stock that may be offered by a bidder in a takeover context.  Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our Class A common stock if they are viewed as discouraging takeover attempts in the future.

The following provisions in our articles of incorporation and bylaws make it difficult for our Class A shareholders to replace or remove our directors and have other anti-takeover effects that may delay, deter or prevent a takeover attempt:

holders of shares of our Class B common stock elect a simple majority of our board of directors, and all of these shares
are owned by the Harold E. Riley Trust; and
our board of directors may issue one or more series of preferred stock without the approval of our shareholders.

State insurance laws generally require prior approval of a change in control of an insurance company.  Generally, such laws provide that control over an insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing 10% or more of the voting securities of the insurer.  In considering an application to acquire control of an insurer, an insurance commissioner generally will consider such factors as the experience, competence and financial strength of the proposed acquirer, the integrity of the proposed acquirer's board of directors and executive officers, the proposed acquirer's plans for the management and operation of the insurer, and any anti-competitive results that may arise from the acquisition.  In addition, a person seeking to acquire control of an insurance company is required in some states to make filings prior to completing an acquisition if the acquirer and the target insurance company and their affiliates have sufficiently large market shares in particular lines of insurance in those states.  These state insurance requirements may delay, deter or prevent our ability to complete an acquisition.

We have never paid any cash dividends on our Class A common stock and do not anticipate doing so in the foreseeable future.

We have never paid cash dividends on our Class A common stock, as it is our policy to retain earnings for use in the operation and expansion of our business.  We do not expect to pay cash dividends on our Class A common stock for the foreseeable future.

Item 1B.    UNRESOLVED STAFF COMMENTS

None.

Item 2.    PROPERTIES

We own our principal office in Austin, Texas, consisting of an 80,000 square foot office building in addition to approximately one acre of land nearby that houses storage facilities.  Approximately 50,000 square feet is occupied or reserved for our operations.  We also own a training facility at Lake Buchanan, Texas.  In addition, we own other properties in Texas, Arkansas and Louisiana that are incidental to our operations.

Item 3.   LEGAL PROCEEDINGS

Since August 6, 1999, the Company has been a defendant in a lawsuit filed in an Austin, Texas District Court, styled Delia Bolanos Andrade, et al., Plaintiffs, v. Citizens Insurance Company of America, et al., Defendants. In consideration of a Texas Supreme Court ruling on the case, the District Court ruled in December of 2009 the plaintiffs must proceed individually, and not as a class, if they intend to pursue their claims against us. There were 17 plaintiffs in the case. The plaintiffs’ underlying claims allege that certain life insurance policies CICA made available to non-U.S. residents were actually offers and sales of securities that occurred in Texas by unregistered dealers in violation of the Texas securities laws.  The remedy sought is rescission and return of the insurance premium payments. The total net insurance premium for the 17 plaintiffs was approximately $150,000. We received a final judgment on this matter in March of 2015 and paid a settlement amount of $183,000.


19


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES


The Company is vigorously defending a number of matters in various stages of development and a number of individual lawsuits, which are immaterial to the Company's financial statements.

Item 4.   MINE SAFETY DISCLOSURES
 
Not applicable.




20


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

PART II

Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our Class A common stock is traded on the New York Stock Exchange ("NYSE") under the symbol CIA.

Quarterly high and low closing prices per share of our Class A common stock as reported by the NYSE are shown below.

 
2014
 
2013
Quarter Ended
High
 
Low
 
High
 
Low
March 31
8.49

 
6.20

 
11.46

 
8.39

June 30
7.50

 
6.04

 
8.22

 
5.98

September 30
7.44

 
6.27

 
8.64

 
6.07

December 31
8.41

 
6.00

 
9.29

 
7.77

 
Equity Security Holders

The number of stockholders on record on March 31, 2015 was as follows:

Class A Common Stock - 97,064
Class B Common Stock - 1

We have never paid cash dividends on our Class A or B common stock and do not expect to pay cash dividends in the foreseeable future.  For restrictions on our present and future ability to pay dividends, see Note 6 of the "Notes to Consolidated Financial Statements."

We did not purchase any of our equity securities during any quarter in 2012, 2013 or 2014.

Securities Authorized for Issuance Under Equity Compensation Plans

We do not maintain any equity compensation plans or arrangements.  Thus, we do not have any securities authorized for issuance under these types of plans, nor have we issued any options, warrants or similar instruments to purchase any of our equity securities.



21


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Performance Comparison

The following graph compares the change in the Company’s cumulative total stockholder return on its common stock over a five-year period.  The following graph assumes a $100 investment on December 31, 2009, and reinvestment of all dividends in each of the Company’s common shares, the New York Stock Exchange (“NYSE”) Composite and the Hemscott Group Index, a peer group of major U.S.-based insurance companies.

 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
Citizens, Inc.
100.00

 
114.09

 
148.39

 
169.22

 
134.00

 
116.39

NYSE Composite
100.00

 
113.39

 
109.04

 
126.47

 
159.71

 
170.49

Peer Group
100.00

 
107.16

 
81.97

 
103.67

 
159.79

 
167.63

 


22


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

The peer group index weights individual company returns for stock market capitalization. The companies included in the peer group index are shown in the following table.

American Equity Investment Life Holding
 
Investors Heritage Capital Corp.
 
Protective Life Corp.
Atlantic American Corp.
 
Kansas City Life Ins. Co.
 
Prudential Financial, Inc.
Aviva PLC
 
Life Partners Holdings, Inc.
 
Prudential PLC
China Life Ins Co. Limited
 
Lincoln National Corp.
 
Reins Group of America, Inc.
Citizens, Inc.
 
Manulife Financial Corp.
 
Symetra Financial Corp.
Genworth Financial, Inc.
 
Metlife, Inc.
 
Phoenix Companies, Inc.
Imperial Holdings, Inc.
 
National Western Life Ins. Co.
 
Torchmark, Corp.
Independence Holding Co.
 
Primerica, Inc.
 
UTG, Inc.

Item 6.    SELECTED FINANCIAL DATA

The following table presents selected financial data of the Company.  This should be read in conjunction with Item 7.  "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8.  "Financial Statements and Supplementary Data" of this Form 10-K.

 
Years ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
 
 
 
 
(In thousands, except per share data)
Operating items
 
 
 
 
 
 
 
 
 
Insurance premiums
$
188,532

 
176,158

 
169,873

 
161,395

 
152,052

Net investment income
41,062

 
36,597

 
31,725

 
30,099

 
29,220

Realized investment gains (losses)
(19
)
 
(247
)
 
196

 
765

 
8,012

Change in fair value of warrants

 

 
451

 
1,136

 
232

Total revenues
230,225

 
213,636

 
202,759

 
194,156

 
190,324

Net income (loss)
(6,505
)
 
4,793

 
4,529

 
8,482

 
14,704

Balance sheet data
 

 
 

 
 

 
 

 
 

Total assets
1,417,555

 
1,216,280

 
1,174,948

 
1,079,512

 
974,583

Total liabilities
1,159,196

 
970,471

 
911,840

 
831,470

 
754,699

Total stockholders' equity
258,359

 
245,809

 
263,108

 
248,042

 
219,884

Life insurance in force
4,662,660

 
4,616,128

 
4,976,157

 
5,244,200

 
5,115,662

Per share data
 

 
 

 
 

 
 

 
 

Book value per share
5.16

 
4.91

 
5.25

 
4.97

 
4.48

Basic and diluted earnings (losses) per Class A share
(0.13
)
 
0.10

 
0.09

 
0.17

 
0.30

 
See Item 1.  "Business" and Item 7.  "Management's Discussion and Analysis of Financial Condition and Results of Operations," for information that may affect the comparability of the financial data contained in the above table.



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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Item 7.  
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management's discussion and analysis of the consolidated financial condition and consolidated results of operations of the Company.  It is intended to be a discussion of certain key financial information regarding the Company and should be read in conjunction with the Consolidated Financial Statements and related Notes to this report on Form 10-K.

Overview

We conduct operations as an insurance holding company emphasizing ordinary life insurance and endowment products in niche markets where we believe we can achieve competitive advantages.  As an insurance provider, we collect premiums on an ongoing basis to pay future benefits to our policy and contract holders.  Our core operations include issuing:
 
whole life insurance;
endowments;
credit insurance;
final expense; and
limited liability property policies.

The Company derives its revenues principally from 1) premiums earned for insurance coverages provided to insureds;  2) net investment income; and 3) net realized capital gains and losses.

Profitability of our insurance operations depends heavily upon the Company’s underwriting discipline, as we seek to manage exposure to loss through favorable risk selection and diversification, management of claims, use of reinsurance, the size of our in force block, actual mortality and morbidity experience, and our ability to manage our expense ratio, which we accomplish through economies of scale and management of acquisition costs and other underwriting expenses.

Pricing adequacy depends on a number of factors, including the ability to obtain regulatory approval for rate changes, proper evaluation of underwriting risks, the ability to project future losses based on historical loss experience adjusted for known trends, the Company’s response to competitors, and expectations about regulatory and legal developments and expense levels. The Company seeks to price our insurance policies such that insurance premiums and future net investment income earned on premiums received will cover underwriting expenses and the ultimate cost of paying claims reported on the policies and provide for a profit margin.  For many of our insurance products, the Company is required to obtain approval for the premium rates from state insurance departments. The profitability of fixed annuities, riders and other “spread-based” product features depends largely on the Company’s ability to earn target spreads between earned investment rates on assets and interest credited to policyholders.

The investment return, or yield, on invested assets is an important element of the Company’s earnings since insurance products are priced with the assumption that premiums received can be invested for a period of time before benefits are paid.  The majority of the Company’s invested assets have been held in available-for-sale and held-to-maturity securities, primarily in asset classes of corporate bonds, municipal bonds, and government obligation bonds. The current and projected low interest rate environment is having a significant impact on the determination of insurance contract liabilities and assets regarding reserves and deferred acquisition costs.
 
The primary investment objective for the Company is to maximize economic value, consistent with acceptable risk parameters, including the management of credit risk and interest rate sensitivity of invested assets, while generating sufficient after-tax income to meet policyholder and corporate obligations. The Company maintains a conservative investment strategy that may vary based on a variety of factors including business needs, regulatory requirements and tax considerations.

In the first quarter of 2015, we announced that we identified that a substantial portion of the life insurance policies issued by our subsidiary insurance companies failed to qualify for the favorable U.S. federal income tax treatment afforded by Sections 7702 and 7702A of the Internal Revenue Code ("IRC") of 1986. As a result, we have established a reserve of $11.4 million for probable expenses and liabilities associated with this tax compliance matter, which amount represents the low end of management’s estimated range of those probable expenses and liabilities of $11.4 million to $40.0 million net of tax. This estimated range includes projected toll charges and fees as well as increased claims liability for past claims, reserves increases to bring policies into compliance and other probable liabilities resulting from this tax compliance matter. Our estimated range reflects the uncertainties with respect to the required course of action and other matters unknown at this time. Currently, management believes there is not a specific


24


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

estimable amount for these probable liabilities and expenses which is more likely than other specific amounts within our estimated range. The process of determining our estimated range was a complex undertaking and involved management’s judgment based upon a variety of factors known at the time. Given the number of factors considered and the significant variables assumed in establishing our estimated range, actual amounts incurred may exceed our reserve and the high end of our estimated range of expenses and liabilities. In addition, there is a reasonable possibility that we will incur other expenses related to this issue in 2015, including consulting fees and potential system costs. We are not able to reasonably estimate these amounts as of the reporting date.

Current Financial Highlights

The 2014 financial results are driven by our conservative business management and traditional life product sales. The interest rate environment continues to impact our results and our industry as investment yields are an integral component of our business operations.


Our assets grew $201 million in 2014 and totaled $1.4 billion as of December 31, 2014.  

Total stockholders' equity increased from $245.8 million at December 31, 2013, to $258.4 million at December 31, 2014 due primarily to changes in unrealized gains on securities marked to market.

Insurance premiums rose 7.0% and 3.7% in 2014 and 2013, respectively, primarily from our life insurance segment, which increased $9.9 million from amounts reported in 2013.

Net investment income increased 12.2% and 15.4% for 2014 and 2013, respectively, as rates have risen in 2014 compared to the prior two years.  The average yield on the consolidated investment portfolio has changed from a yield of 3.81% in 2012 up to 4.11% in 2013 and increasing to a yield of 4.21% in 2014 as rates have risen slightly and our new investments have been focused on municipals and corporates.  The increase in the investment asset balances due to premium revenue growth has also contributed to the increase in net investment income.

Realized net investment losses during 2014 and 2013 of $19 thousand and $0.3 million were recognized due to losses of $0.4 million which were recorded on equity mutual fund issuers in both 2014 and 2013, offset by gains from bond securities. 2012 gains resulted primarily from sales of securities that had been previously impaired due to declines in market values.  Other-than-temporary impairments on investment securities and other long-term assets were recorded in 2014 and 2012 of $427,000 and $1,319,000, respectively, and are reported as realized losses.

During 2014, claims and surrenders expense increased 6.0% from the comparable period in 2013 primarily due to an increase in surrender benefits in the life segment compared to the 2013 levels. The home service segment was impacted in 2012 by Hurricane Isaac which hit the Louisiana coast on August 29, 2012 and caused increased property claims.

2014 change in reserves resulted in liability increases resulting from increased sales of endowment products that build up reserves at a faster pace than whole life longer term mortality based products. Additionally, the sustained low interest rate environment also results in a higher reserve development due to the lower interest yield assumptions over the past several years.

General expense increased in 2014 by $10.0 million primarily due to the tax compliance issue noted above relating to product qualification under IRC section 7702 and remediation costs that have been identified.

We completed the acquisition of MGLIC in the first quarter of 2014 and the related results have been included in our financial results. MGLIC is now a wholly owned subsidiary of SPLIC and is reported in the home service segment.

Life Insurance.  For over thirty-five years, CICA and its predecessors have accepted policy applications from foreign nationals for U.S. Dollar-denominated ordinary whole life insurance and endowment policies.  We make our insurance products available using third-party marketing organizations and independent marketing consultants.



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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Endowment product sales have been on the rise and represented approximately 76.1% of new sales.  The Company offers a ten, fifteen and twenty year endowment and our top selling endowment is a product that matures at age sixty-five.  We also introduced a new product in 2012 that is an endowment at age eighteen with a payout over four or five years.  

Through the domestic market of our Life Insurance segment, we provide ordinary whole life, credit life insurance, and final expense policies to middle and lower income families and individuals in certain markets in the mountain west, mid-west and southern U.S.  The majority of our domestic revenues are generated by the policies of domestic life insurance companies we have acquired since 1987.

Home Service Insurance.  We provide final expense ordinary and industrial life insurance to middle and lower income individuals in Louisiana, Mississippi and Arkansas.  Our policies in this segment are sold and serviced through a home service marketing distribution system utilizing employee-agents who work on a route system to collect premiums and service policyholders, and through networks of funeral homes that collect premiums and provide personal policyholder service.

Economic and Insurance Industry Developments

Significant economic issues impacting our business and industry currently and into the future are discussed below.

It is predicted that the interest rate environment will remain low for the foreseeable future, which translates into lower profit margins for insurers.  We have been impacted by the historically low interest rate environment over the past several years as our fixed income investment portfolio, primarily invested in callable securities, has been reinvested at lower yields.  The Company’s conservative investment strategy has not changed but we have focused new purchases into holding of state, municipalities and essential service issuers compared to our historical investment in U.S. government holdings. Our investment earnings also impact the reserve and Deferred Acquisition Costs (“DAC”) balances, as assumptions are used in the development of the balances.  Due to the recent decline in investment yields on our portfolio, our projection of long-term investment returns has declined.  This has resulted in increasing the reserves on policies issued in the current year, as well as reducing the DAC asset.

As an increasing percentage of the world population reaches retirement age, we believe we will benefit from increased demand for living benefit products rather than death products, as aging baby boomers will require cash accumulation to pay expenses to meet their lifetime income needs.  Our ordinary life products are designed to accumulate cash values to provide for living expenses in a policy owner's later years, while continuously providing a death benefit.

We believe there is a trend toward consolidation of domestic life insurance companies, due to significant losses incurred by the life insurance industry as a result of the credit crisis and recent economic pressures, as well as increasing costs of regulatory compliance for domestic life insurance companies.  We believe this trend should be a benefit to our acquisition strategy as more complementary acquisition candidates may become available for us to consider.

Many of the events and trends affecting the life insurance industry have had an impact on the life reinsurance industry.  These events have led to a decline in the availability of reinsurance.  While we currently cede a limited amount of our primary insurance business to reinsurers, we may find it difficult to obtain reinsurance in the future, forcing us to seek reinsurers who are more expensive to us.  If we cannot obtain affordable reinsurance coverage, either our net exposures will increase or we will have to reduce our underwriting commitments.

While our management has more than 41 years of experience in writing life insurance policies for foreign residents, changes related to foreign government laws and regulations and application of them, along with currency controls affecting our foreign resident insureds could adversely impact our revenues, results of operations and financial condition.

Acquisition History - Last Five Years

On August 1, 2011, SPLIC entered into assumption reinsurance agreements with Escude Life Insurance Company in Rehabilitation, and Benton Life Insurance Company in Rehabilitation. At the time the agreements were executed, both companies were under receivership with the Louisiana Department of Insurance.  In total, SPLIC assumed approximately $4.5 million in reserve liabilities and received approximately $4.6 million in cash, with a minimal reinsurance ceding commission being paid.  These transactions are accounted for under business combination accounting and are not deemed material.



26


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

On March 7, 2014, the Company acquired Magnolia Guaranty Life Insurance Company ("MGLIC") in the amount of $5.2 million. MGLIC is a Mississippi domiciled company that began writing business in 1992 and issues primarily industrial life policies through independent funeral homes in the state of Mississippi. We recorded $0.1 million of goodwill as a result of this transaction. MGLIC is reported in our home service segment.

Consolidated Results of Operations

A discussion of consolidated results is presented below, followed by a discussion of Segment Operations and financial results by segment.

Revenues

Insurance revenues are primarily generated from premium revenues and investment income.  In addition, realized gains and losses on investment holdings can significantly impact revenues from year to year.

 
Years Ended December 31,
 
2014
 
2013
 
2012
 
(In thousands)
Revenues:
 
 
 
 
 
Premiums:
 
 
 
 
 
Life insurance
$
181,857

 
169,683

 
163,170

Accident and health insurance
1,557

 
1,529

 
1,635

Property insurance
5,118

 
4,946

 
5,068

Net investment income
41,062

 
36,597

 
31,725

Realized investment gains (losses), net
(19
)
 
(247
)
 
196

Decrease in fair value of warrants

 

 
451

Other income
650

 
1,128

 
514

Total revenues
230,225

 
213,636

 
202,759

Exclude decrease in fair value of warrants

 

 
(451
)
Total revenues excluding fair value adjustments of warrants outstanding
$
230,225

 
213,636

 
202,308

 
Premium Income.  Premium income derived from life, accident and health, and property insurance sales, increased 7.0% during 2014.  The increase resulted primarily from renewal premiums, which increased 6.5% and 5.3% in the life segment for 2014 and 2013 and totaled $159.7 million, $150.3 million and $144.7 million on the consolidated level in 2014, 2013 and 2012, respectively.  New sales, termed as first year premiums, increased 13.2%, 4.0%, and 6.1% in the life segment in 2014, 2013 and 2012. Endowment sales represent a significant portion of new business sales internationally with the 20 year endowment and endowment to age 65 as our top products. In addition, most of our life insurance policies contain a policy loan provision, which allows the policyholder to use cash value of a policy to pay premiums.  The policy loan asset balance increased 10.6% and 13.7% in 2014 and 2013, year over year.

Net Investment Income.  Net investment income increased to $41.1 million in 2014 compared to $36.6 million in 2013, due to an increase in yields from new investments primarily in municipal and corporate issues and as we experienced higher average invested assets as a result of investment of new premium revenue.



27


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Net investment income performance is summarized as follows.

 
Years Ended December 31,
 
2014
 
2013
 
2012
 
(In thousands, except for %)
Net investment income
$
41,062

 
36,597

 
31,725

Average invested assets, at amortized cost
976,079

 
891,215

 
832,066

Yield on average invested assets
4.21
%
 
4.11
%
 
3.81
%
 
We have traditionally invested in fixed maturity securities with a large percent held in callable issues. In recent years, we have experienced significant call activity related to fixed maturity security holdings due to the historically low interest rate environment. The low yield rates have leveled off and are now beginning to rise as noted in the table above.  If market interest rates begin to rise, our call risk will diminish and our portfolio yield will rise more slowly over time, as new money investments would be made at higher rates.

Investment income from fixed maturity securities accounted for approximately 84.9% of total investment income for the year ended December 31, 2014.  We have increased our investment purchases of corporate and municipal securities over the past several years, focusing on utility service sectors in these security categories.  In addition, we currently have $67.8 million invested in equity securities related to bond and stock mutual funds as these securities offer a competitive yield with a shorter duration.

 
Years Ended December 31,
 
2014
 
2013
 
2012
 
(In thousands)
Gross investment income:
 
 
 
 
 
Fixed maturity securities
$
36,670

 
32,604

 
27,470

Equity securities
1,986

 
1,839

 
2,158

Mortgage loans
42

 
68

 
104

Policy loans
4,172

 
3,637

 
3,332

Long-term investments
287

 
229

 
234

Other
45

 
64

 
99

Total investment income
43,202

 
38,441

 
33,397

Less investment expenses
(2,140
)
 
(1,844
)
 
(1,672
)
Net investment income
$
41,062

 
36,597

 
31,725


Investment income from fixed maturity investments increased for the year of 2014 due to a rise in overall bond yields and an increase in the portfolio from new money investment purchases as noted above relative to the fixed maturity portfolio.  In addition, the increase in the policy loans asset balance, which represents policyholders utilizing their accumulated policy cash value, contributed to the increase to investment income. 

Realized Gains (Losses) on Investments. In 2014, investment gains on fixed maturities of $0.4 million were recorded due to calls by issuers and several sales and net gains on equity securities of $49,000 was related to the sale of several mutual funds in the current year. In 2013, we sold two equity bond funds which resulted in a realized loss of $0.4 million. The Company sold equity mutual funds in 2012, which were previously impaired, and realized gains of $0.6 million.



28


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Realized investment gains (losses) are as follows.
 
Years Ended December 31,
 
2014
 
2013
 
2012
 
(In thousands)
Realized investment gains (losses):
 
 
 
 
 
Sales, calls and maturities
 
 
 
 
 
Fixed maturities
$
359

 
199

 
824

Equity securities
49

 
(436
)
 
636

Other long-term investments

 
(10
)
 
55

Net realized investment gains (losses)
408

 
(247
)
 
1,515

Other-than-temporary impairments ("OTTI"):
 

 
 

 
 

Fixed maturities

 

 
(1,319
)
Equity securities
(427
)
 

 

Other long-term investments

 

 

Realized losses on OTTI
(427
)
 

 
(1,319
)
Net realized investment gains (losses)
$
(19
)
 
(247
)
 
196

 
Included in net realized investment gains and losses are OTTI on investments.  We recorded an OTTI write-down in 2014 of $427,000 related to two bond mutual fund issuers we no longer intend to hold until recovery of market value. In 2012 the write down related to a coal powered energy issuer.

Decrease in Fair Value of Warrants.  In 2012, all of the remaining warrants outstanding were either exercised or converted into our Class A common stock, due to an election by the warrant holders, or expiration. We recognized a gain on the decrease in fair value of warrants of $0.5 million in 2012.  The 2012 gain was the result of the significant decrease in the number of warrants outstanding due to expirations and exercises.  The warrant liability was calculated using the Black-Scholes option pricing model, which projects the future value of the warrants when they expire.  Current accounting standards require the change in the value of the warrant liability be recorded as a component of revenues.  When the liability increased we incurred a loss, and when the liability decreased we recognized income.  There were no warrants outstanding during 2013 or 2014.

Benefits and Expenses

 
Years Ended December 31,
 
2014
 
2013
 
2012
 
 
 
 
(In thousands)
Benefits and expenses:
 
 
 
 
 
Insurance benefits paid or provided:
 
 
 
 
 
Claims and surrenders
$
68,269

 
64,427

 
64,656

Increase in future policy benefit reserves
82,847

 
74,220

 
66,676

Policyholders' dividends
10,102

 
9,470

 
9,091

Total insurance benefits paid or provided
161,218

 
148,117

 
140,423

Commissions
44,021

 
40,477

 
39,398

Other general expenses
36,591

 
26,590

 
25,664

Capitalization of deferred policy acquisition costs
(32,071
)
 
(29,398
)
 
(29,074
)
Amortization of deferred policy acquisition costs
21,064

 
18,511

 
17,845

Amortization of cost of customer relationships acquired
2,182

 
2,408

 
2,467

Total benefits and expenses
$
233,005

 
206,705

 
196,723

 


29


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Claims and Surrenders.  As noted in the table below, claims and surrenders increased from $64.4 million in 2013 to $68.3 million in 2014.
 
 
Years Ended December 31,
 
2014
 
2013
 
2012
 
(In thousands)
Death claims
$
22,452

 
21,723

 
22,730

Surrender expenses
24,321

 
21,989

 
21,217

Endowment benefits
16,534

 
15,718

 
15,814

Property claims
1,535

 
2,010

 
2,309

Accident and health benefits
520

 
425

 
368

Other policy benefits
2,907

 
2,562

 
2,218

Total claims and surrenders
$
68,269

 
64,427

 
64,656


The Company monitors death claims based upon expectations. These values may routinely fluctuate from year to year.

Policy surrenders increased in 2014, 2013 and 2012, but remained at a level that represents approximately 0.6% of direct ordinary whole life insurance inforce.  The increase in surrender expense is primarily related to our international business and is expected to increase over time due to the aging of this block of business.  A significant portion of surrenders relates to policies that have been in force over fifteen years and no longer have a surrender charge associated with them.  Total direct insurance inforce reported in 2014 was $4.9 billion compared to $4.7 billion in 2013 and $4.6 billion 2012.

Endowment benefits increased in 2014 compared to 2013 and 2012 amounts. We have a series of international policies that carry an immediate endowment benefit of an amount selected by the policy owner.  These benefits have been popular in the Pacific Rim and Latin America, where the Company has experienced increased interest in our guaranteed products in recent years.  Like policy dividends, annual guaranteed endowments are factored into the premium and, as such, the increase has no impact on profitability.  The Company expects these benefits to continue to increase as this block of business increases and persists.

Property claims decreased 24% to approximately $1.5 million in 2014 compared with the amount reported for 2013 due a decrease in weather related claims. The Hurricane Issac claims experience in 2012 included $0.5 million of losses within our retention limits.

Reserves.  The change in future policy benefit reserves has increased 11.6% and 11.3% in 2014 and 2013 due primarily to the current low interest rate environment necessitating higher reserves for policies issued in the last few years due to lower long term yield projections compared to prior assumptions. In addition, we continue to experience growth in new sales of endowment products, which require higher initial reserve levels, than whole life products. Endowment sales totaled approximately $16.9 million, $14.3 million and $14.3 million in 2014, 2013 and 2012, respectively.  In addition, we recorded an increase to reserves of $1.4 million due to estimated required additional death benefits on those life products we intend to remediate for compliance with IRC sections as noted above.

Policyholder Dividends.  Policyholder dividends have risen at a rate corresponding with the growth rate in new international life insurance premiums.  The Company issues long duration participating policies to foreign residents that are expected to pay dividends to policyholders based upon actual experience.  Policyholder dividends are factored into the premiums and have no impact on profitability.

Commissions.  Commission expense fluctuates in a direct relationship to new and renewal insurance premiums and has increased 8.8% in 2014 compared to 2013 as premium revenues have increased.

Other General Expenses.  Total general expenses have increased significantly on a consolidated basis in 2014 due to the tax compliance issue we identified in 2015, which resulted in a $10.2 million expense for future liabilities recorded in the current year. In 2013, claims cost increased compared to 2012, related to our self insurance health plan for our employees resulting in approximately $0.5 million increase to our overall benefit expenses. We also had an increase in temporary labor staffing costs of


30


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

$0.2 million related to assistance with operations projects. In 2013, we also settled litigation in the amount of $0.2 million which was filed in the aftermath of Hurricane Katrina by the Louisiana Attorney General against all insurers writing homeowner policies in Louisiana.

We perform an expense study on an annual basis, utilizing an enterprise-wide time study, and we adjust cost allocations among entities as needed based upon this review.   Any allocation changes are reflected in the segment operations, but do not impact total expenses.

Deferred Policy Acquisition Costs.  Capitalized deferred policy acquisition costs ("DAC") were $32.1 million, $29.4 million and $29.1 million in 2014, 2013 and 2012.  These costs will vary based upon successful efforts related to newly issued policies and renewal business.  Significantly lower amounts are capitalized related to renewal business in correlation with the lower commissions paid on that business compared to first year business which have higher commission rates.  

Amortization of deferred policy acquisition costs is impacted by persistency and may fluctuate from year to year. Amortization in 2014 increased as we experienced lower persistency in the life segment. Amortization costs increased in 2013 compared to 2012 as persistency began to decline from previous levels primarily in the life segment.  In addition, the prolonged low interest rate environment impacted the assumptions used in the development of the DAC asset for new policies issued.

Cost of Customer Relationships Acquired and Other Intangibles.  The lower amortization in 2014 was related primarily to lower amortization in SPLIC offset somewhat by amortization in MGLIC which was not in prior years amortization. The amortization level recorded in 2013 and 2012 was consistent due to no acquisition changes.

Federal Income Tax.  Federal income tax expense was $3.7 million, $2.1 million and $1.5 million in 2014, 2013 and 2012, respectively, resulting in effective tax rates of (134.0)%, 30.8% and 25.0%, respectively. The current year impact is the result of the tax compliance issue we identified in 2015 which impacted our current year effective tax rate negatively by approximately $3.5 million due to approximately $10.0 million of these costs not being deductible for tax. Additionally, the Company set up a tax expense of $2.1 million for an uncertain tax position that is effecting the 2014 tax rate. The Company began purchasing tax-exempt state and local bonds in the second half of 2011 and continued to do so the last several years in the non-insurance companies where the full tax benefit can be realized. In addition, the fair value change related to outstanding warrants of $0.5 million was reported as an increase in revenues in 2012 which was not taxable and also impacted our corporate tax rate. Differences between our effective tax rate and the statutory tax rate result from income and expense items that are treated differently for financial reporting and tax purposes.

Segment Operations

Our business is comprised of three operating business segments, as detailed below.

Life Insurance
Home Service Insurance
Other Non-insurance Enterprises

Our insurance operations are the primary focus of the Company, as those segments generate the majority of our income.  The amount of insurance, number of policies, and average face amounts of policies issued during the periods indicated are shown below.

 
Years Ended December 31,
 
2014
 
2013
 
Amount of
Insurance
Issued
 
Number of
Policies
Issued
 
Average Policy
Face Amount
Issued
 
Amount of
Insurance
Issued
 
Number of
Policies
Issued
 
Average Policy
Face Amount
Issued
Life
$
407,384,480

 
6,568

 
$
62,026

 
$
366,116,625

 
6,129

 
$
59,735

Home Service
191,505,610

 
28,471

 
6,726

 
185,982,185

 
27,466

 
6,771

 


31


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

These segments are reported in accordance with U.S. GAAP.  The Company evaluates profit and loss performance based on net income before federal income taxes.

 
Income (Loss) Before Federal Income Taxes
 
Years Ended December 31,
 
2014
 
2013
 
2012
 
 
 
 
(In thousands)
Life Insurance
$
(4,907
)
 
2,054

 
519

Home Service Insurance
2,870

 
6,027

 
6,365

Other Non-Insurance Enterprises
(743
)
 
(1,150
)
 
(848
)
Total
$
(2,780
)
 
6,931

 
6,036


Life Insurance

Our Life Insurance segment primarily issues ordinary whole life insurance and endowment policies in U.S. Dollar-denominated amounts to foreign residents in approximately 30 countries through approximately 1,500 independent marketing consultants, and domestically through over 400 independent marketing firms and consultants throughout the United States.

 
Years Ended December 31,
 
2014
 
2013
 
2012
 
 
 
 
(In thousands)
Revenue:
 
 
 
 
 
Premiums
$
142,358

 
132,479

 
126,032

Net investment income
26,454

 
22,237

 
17,828

Realized investment gains (losses), net
(182
)
 
(222
)
 
512

Other income
504

 
891

 
319

Total revenue
169,134

 
155,385

 
144,691

Benefits and expenses:
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

Claims and surrenders
46,021

 
42,908

 
43,537

Increase in future policy benefit reserves
77,707

 
71,100

 
63,481

Policyholders' dividends
10,045

 
9,400

 
8,846

Total insurance benefits paid or provided
133,773

 
123,408

 
115,864

Commissions
28,863

 
26,033

 
24,895

Other general expenses
19,274

 
11,326

 
10,961

Capitalization of deferred policy acquisition costs
(26,242
)
 
(23,830
)
 
(23,371
)
Amortization of deferred policy acquisition costs
17,759

 
15,701

 
15,077

Amortization of cost of customer relationships acquired
614

 
693

 
746

Total benefits and expenses
174,041

 
153,331

 
144,172

Income (loss) before federal income tax expense
$
(4,907
)
 
2,054

 
519

 
Premiums.  Premium revenues increased for 2014 compared to 2013 and 2012, due to higher international renewal premiums, which have experienced strong persistency as this block of insurance ages.  First year premiums increased in the current year, reflecting improved new business production in all products internationally.  Sales from Colombia, Ecuador, Taiwan and Venezuela represented the majority of the first year premium increase.



32


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Life Insurance premium breakout is detailed below.

 
Years Ended December 31,
 
2014
 
2013
 
2012
 
(In thousands)
Premiums:
 
 
 
 
 
First year
$
22,142

 
19,568

 
18,819

Renewal
120,216

 
112,911

 
107,213

Total premium
$
142,358

 
132,479

 
126,032


Endowment sales represent a significant portion of new business sales internationally, as these products continue to exceed our whole life sales in the current markets.  In addition, most of our life insurance policies contain a policy loan provision, which allows the policyholder to use cash value of a policy to pay premiums.  The policy loan asset balance increased 10.6% year over year.

The following table sets forth, by country, our direct premiums from our international life insurance business for the periods indicated. Our international business and premium collections could be impacted by future changes relative to laws, regulations or economic events in the countries from which we accept applications.

 
Years ended December 31,
 
2014
 
2013
 
2012
 
(In thousands, except for %)
Country
 
 
 
 
 
 
 
 
 
 
 
Venezuela
$
31,175

 
22.8
%
 
$
28,329

 
22.3
%
 
$
27,295

 
23.1
%
Colombia
27,472

 
20.1

 
24,734

 
19.5

 
25,088

 
21.3

Taiwan
16,686

 
12.2

 
15,684

 
12.4

 
16,223

 
13.8

Ecuador
15,364

 
11.2

 
14,969

 
11.8

 
15,333

 
13.0

Argentina
8,979

 
6.6

 
9,343

 
7.4

 
10,360

 
8.8

Other Non-U.S.
37,298

 
27.1

 
33,702

 
26.6

 
23,684

 
20.0

Total
$
136,974

 
100.0
%
 
$
126,761

 
100.0
%
 
$
117,983

 
100.0
%
 
We continue to report strong first year and renewal premiums in our top producing countries as noted above, however this business is dependent on our clients having access to U.S. dollars. Our international business and premium collections could be impacted by future changes relative to laws, regulations or economic events in the countries from which we accept applications. Currently Venezuela is experiencing civil unrest due to local demonstrations against crime, corruption and soaring inflation. In addition, there could be law changes in countries that may impact activities of our independent consultants. See "Item 1A. Risk Factors" on pages 7 and 13 for additional information.


33


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES


The following table sets forth our direct premiums by state from our domestic business for the periods indicated.

 
Years ended December 31,
 
2014
 
2013
 
2012
 
(In thousands, except for %)
State
 
 
 
 
 
 
 
 
 
 
 
Texas
$
2,630

 
36.1
%
 
$
2,701

 
34.6
%
 
$
5,318

 
42.0
%
Indiana
1,363

 
18.7

 
2,000

 
25.6

 
1,726

 
13.6

Florida
687

 
9.4

 
634

 
8.1

 
606

 
4.8

Missouri
467

 
6.4

 
573

 
7.3

 
735

 
5.8

Kentucky
467

 
6.4

 
490

 
6.3

 
566

 
4.5

Other States
1,678

 
23.0

 
1,400

 
18.1

 
3,696

 
29.3

Total
$
7,292

 
100.0
%
 
$
7,798

 
100.0
%
 
$
12,647

 
100.0
%
 
A number of domestic life insurance companies we acquired had blocks of accident and health insurance policies. We entered a coinsurance agreement with an unaffiliated insurance company, Unified Life Insurance Company ("Unified"), under which it assumes substantially all of our accident and health policies. The coinsurance agreement allows for full assumption by Unified of this business upon approval by state insurance authorities. The decrease in premiums for 2014 and 2013 was due to the fact that Unified received state approval in many states and has obtained over 98% assumption of all policies through 2014.

Net Investment Income.  Net investment income has increased as the annual yield has increased 19 basis points in this segment from 2013, as discussed in the Consolidated Results of Operations above.

 
For the Years Ended December 31,
 
2014
 
2013
 
2012
 
(In thousands, except for %)
Net investment income
$
26,454

 
22,237

 
17,828

Average invested assets, at amortized cost
623,498

 
549,578

 
494,289

Annualized yield on average invested assets
4.24
%
 
4.05
%
 
3.61
%

Realized Investment Gains (losses), Net.  Realized losses of $0.2 million in 2014 and 2013 and gains of 0.5 million in 2012 were recognized due to the write-down and sale of mutual fund holdings in 2014 and 2013 and due to disposals in 2012 of previously impaired equity mutual funds.  

Claims and Surrenders. A breakout of claims and surrender benefits is detailed below.

 
For the Years Ended December 31,
 
2014
 
2013
 
2012

(In thousands)
Death claims
$
5,461

 
5,627

 
7,134

Surrender expenses
21,265

 
19,123

 
18,601

Endowment benefits
16,506

 
15,702

 
15,790

Accident and health benefits
287

 
303

 
260

Other policy benefits
2,502

 
2,153

 
1,752

Total claims and surrenders
$
46,021

 
42,908

 
43,537




34


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Death claims expense decreased 3.0% in 2014 and decreased 21.1% in 2013 compared to 2012. Mortality experience has reflected improved results the past two years which is likely due to increased endowment sales and a client base that results in lower deaths reported. Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.

The increase in surrender expense is primarily related to our international business and is expected to increase over time due to the aging of this block of business.  The majority of policy surrender benefits paid is attributable to our international business and was related to policies that have been in force over fifteen years, where surrender charges are no longer applicable.

Endowment benefit expense results from the election by policyholders of a product feature that provides an annual benefit.  This is a fixed benefit over the life of the contract, and this expense will increase with new sales and improved persistency.

Other policy benefits increased in the current year due primarily to premium deposits and dividend accumulations policyholder liability accounts which have increased as these amounts credit a 4% interest rate, making them an attractive deposit in this low interest rate environment.

Increase in Future Policy Benefit Reserves.   Policy benefit reserves in 2014 increased compared to the same period in 2013, primarily from the effect of the current low interest rate environment on reserve development for policies issued in the last few years which have higher reserve build up compared to prior issue years. The accounting guidance of long duration contracts we sell requires the Company to “lock in” the original assumptions such as mortality, interest, surrenders and expenses at the time the initial policies are written, therefore gains or losses attributable to actual experience that differs from the original assumptions flows through the income statement in the period where in the differences occur.

In addition, reserves have risen year over year for all periods presented due to the increased sales of endowment products, which build up reserve balances more quickly compared to other life product sales.  Endowment sales totaled approximately $16.9 million, $14.3 million and $14.3 million, representing approximately 76.1%, 73.0% and 76.0% of total new first year premium in 2014, 2013, and 2012, respectively.

Policyholder Dividends.  Policyholder dividends have risen at a rate that corresponds with the growth rate in new international life insurance premiums.  The Company issues long duration participating policies to foreign residents that are expected to pay dividends to policyholders based upon actual experience.  Policyholder dividends are factored into the premiums and have no impact on profitability.

Capitalization and Amortization of Deferred Policy Acquisition Costs.  Capitalized costs increased, as commission related costs have increased in the current year compared to 2013.  Amortization of DAC increased in the current year by 13.1% from 2013 as we experienced increased lapse activity and the asset balance has increased in the current year.

Commissions.  Commission expense increase is directly related to the increase in premiums as noted above.  First year policy premiums pay a higher commission rate than renewal policy premiums.

Other General Expenses.  The expenses are allocated by segment, based upon an annual expense study performed by the Company. 2014 amounts are higher by $7.9 million as compared to 2013. This increase is due to the estimated remediation costs of $8.3 million associated with the tax compliance issue we identified in 2015. In 2013 expenses were up from 2012 amounts due to employee health claims, as we are self-insured, and employee costs associated with temporary employees assisting on operations projects that did not reappear in the current year.



35


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Home Service Insurance

Our Home Service Insurance segment provides pre-need and final expense ordinary life insurance and annuities to middle and lower income individuals primarily in Louisiana, Mississippi and Arkansas.  Our policies in this segment are sold and serviced through funeral homes and a home service marketing distribution system utilizing over 500 employees and independent agents.
 
 
Years Ended December 31,
 
2014
 
2013
 
2012
 
 
 
 
(In thousands)
Revenue:
 
 
 
 
 
Premiums
$
46,174

 
43,679

 
43,841

Net investment income
13,234

 
13,075

 
12,724

Realized investment gains (losses), net
116

 
(19
)
 
(343
)
Other income
29

 
141

 
80

Total revenue
59,553

 
56,876

 
56,302

Benefits and expenses:
 

 
 

 
 

Insurance benefits paid or provided:
 
 
 

 
 

Claims and surrenders
22,248

 
21,519

 
21,119

Increase in future policy benefit reserves
5,140

 
3,120

 
3,195

Policyholders' dividends
57

 
70

 
245

Total insurance benefits paid or provided
27,445

 
24,709

 
24,559

Commissions
15,158

 
14,444

 
14,503

Other general expenses
15,036

 
12,739

 
12,089

Capitalization of deferred policy acquisition costs
(5,829
)
 
(5,568
)
 
(5,703
)
Amortization of deferred policy acquisition costs
3,305

 
2,810

 
2,768

Amortization of cost of customer relationships acquired
1,568

 
1,715

 
1,721

Total benefits and expenses
56,683

 
50,849

 
49,937

Income before federal income tax expense
$
2,870

 
6,027

 
6,365

 
Premiums.  The premiums in this segment increased 5.7% in 2014 due to $2.0 million of premiums recorded related to the MGLIC acquisition in the current year. Premiums for 2013 compared to 2012 were flat as there was an increase in 2012 of approximately $180,000 of single premium revenues related to a system error in recording increasing policy benefits that are used to pay for paid up additions and were reflected as a one time adjustment as noted below under Policyholders' dividends.

The following table sets forth our direct premiums by state for the periods indicated.

 
Years ended December 31,
 
2014
 
2013
 
2012
 
(In thousands)
State
 
 
 
 
 
 
 
 
 
 
 
Louisiana
$
42,057

 
89.2
%
 
$
41,769

 
93.2
%
 
$
41,665

 
92.8
%
Mississippi
2,631

 
5.6

 
493

 
1.1

 
451

 
1.0

Arkansas
1,652

 
3.5

 
1,690

 
3.8

 
1,863

 
4.1

Other States
832

 
1.7

 
875

 
1.9

 
937

 
2.1

Total
$
47,172

 
100.0
%
 
$
44,827

 
100.0
%
 
$
44,916

 
100.0
%
 
The increase in Mississippi is related to the MGLIC acquisition in the current year which is domiciled and licensed in Mississippi. Sales are made by independent funeral home agents.


36


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES


Net Investment Income.  Net investment income has increased as our overall portfolio yield has increased 2 basis points from 2013 yield as discussed in the Consolidated Results of Operations above. MGLIC investment income is included for 10 months, the period of ownership during 2014.

Net investment income for our home service insurance segment is summarized as follows:

 
For the Years Ended December 31,
 
2014
 
2013
 
2012
 
(In thousands, except for %)
Net investment income
$
13,234

 
13,075

 
12,724

Average invested assets, at amortized cost
296,355

 
290,340

 
291,229

Annualized yield on average invested assets
4.52
%
 
4.50
%
 
4.37
%

Realized Investment Gains (Losses), Net.  In 2014 we recorded net gains of $0.1 million resulting from gains from calls and sales related to bonds of $0.2 million less an OTTI adjustment on mutual funds of $0.1 million. In 2013 we sold two bond mutual fund issues which resulted in a realized loss of $57,000 which was offset by bond gains on calls of $36,000. Net losses on investments of $0.3 million in 2012 is related to an OTTI adjustment on one coal energy provider debt issuer.

Claims and Surrenders.  A breakout of claims and surrender benefits is detailed below.

 
For the Years Ended December 31,
 
2014
 
2013
 
2012
 
(In thousands)
Death claims
$
16,991

 
16,096

 
15,596

Surrender expenses
3,056

 
2,866

 
2,616

Endowment benefits
28

 
16

 
24

Property claims
1,535

 
2,010

 
2,309

Accident and health benefits
233

 
122

 
108

Other policy benefits
405

 
409

 
466

Total claims and surrenders
$
22,248

 
21,519

 
21,119


Death claims expense was higher in 2014 compared to 2013 primarily from increased claims liability of $0.6 million as part of the remediation costs associated with the tax compliance issue we identified in 2015. In addition, there were more reported claims totaling approximately $0.5 million related to MGLIC that are included in the current year.  Claims experience in 2013 and 2012 was flat. Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.

Surrender expenses have increased as the Home Service block grows, and is consistent with expectations for the current economic conditions.

Property claims decreased in 2014 compared to 2013 as we noted more weather related claims in the prior year. In 2012 results reflected increased activity related to Hurricane Issac. Gross Isaac losses recorded were approximately $740,000 with reinsurance recoverable of $240,000.

Increase in Future Policy Benefit Reserves.  The current year change in reserves was minimal, excluding MGLIC additional reserves, as premiums were relatively flat and lapse experience was comparable for all three periods presented.

Policyholders' dividends. The increase in 2012 compared to subsequent years resulted from a manual adjustment that was properly set up in 2012 in the policy administration system to appropriately reflect increasing policy values from annual paid up additions. This one time increase in dividends paid and single premium revenue of approximately $180,000 had no impact on the overall


37


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

segment earnings for the year 2012. The reserve liability had been previously set up relative to this policy feature and was decreased by $35,000 based upon the system calculated value.

Commissions.  Commission expense, excluding MGLIC amounts of $0.5 million, were comparable for all three periods presented based upon premiums collected. We consolidated some collection routes in 2012, which resulted in elimination of one district office and its related staffing thereby also reducing some commission expense.

Other General Expenses.  These expenses are allocated by segment based upon an annual expense study performed by the Company. 2014 amounts are higher by $2.4 million as compared to 2013. This increase is due to the estimated remediation costs of $1.9 million associated with the tax compliance issue we identified in 2015. In addition, expenses in 2014 increased as MGLIC related expenses are included in this segment in the current year. Overall expenses were up in 2013 compared to 2012 due to an increase in employee health claims, as we are self insured and due to temporary employee labor costs as we had added staffing to assist with operations projects. In 2013, we also settled litigation in the amount of $0.2 million which was filed in the aftermath of Hurricane Katrina by the Louisiana Attorney General against all insurers writing homeowner policies in Louisiana.

Capitalization and Amortization of Deferred Policy Acquisition Costs ("DAC").  DAC capitalization is directly correlated to fluctuations in first year commissions.  Amortization was relatively level, excluding MGLIC, as we experienced comparable lapse rates in the three years presented in this segment.  We monitor lapse rates as a key component of our insurance operations.   

Other Non-Insurance Enterprises

This segment represents the administrative support entities to the insurance operations whose revenues are primarily intercompany and have been eliminated in consolidation under GAAP, which typically results in a segment loss. In 2012 the fair value adjustment related to the Company's warrants to purchase Class A common stock were recorded which resulted in a gain of $0.5 million.  These amounts fluctuated due to the movement in our Class A common stock price and fair value calculation for warrants using the Black-Scholes valuation model. There were no warrants outstanding during 2014 or 2013.

Investments

Financial stability and the prevention of capital erosion are important investment considerations for the Company.  A primary investment goal is the conservation of assets due to the long-term nature of a significant portion of our liabilities.   The administration of our investment portfolios is handled internally, pursuant to board-approved investment guidelines, with all trading activity approved by a committee of each entity’s respective board of directors.  The guidelines used require that securities are of high quality and investment grade.  State insurance statutes prescribe the quality and percentage of the various types of investments that may be made by insurance companies and generally permit investment in qualified state, municipal, federal and foreign government obligations, high quality corporate bonds, preferred and common stock, mortgage loans and real estate within certain specified percentages.  The assets selected are intended to mature in accordance with the average maturity of the insurance products and to provide the cash flow for our insurance company subsidiaries to meet their respective policyholder obligations.



38


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested assets.

 
December 31, 2014
 
December 31, 2013
 
Carrying
Value
 
% of Total
Carrying Value
 
Carrying
Value
 
% of Total
Carrying Value
 
(In thousands)
 
(In thousands)
Fixed maturity securities:
 
 
 
 
 
 
 
U.S. Treasury and U.S. Government-sponsored enterprises
$
55,246

 
5.0
%
 
$
75,908

 
7.6
%
Corporate
257,867

 
23.1

 
378,807

 
38.2

Municipal bonds (2)
615,230

 
55.1

 
374,039

 
37.7

Mortgage-backed (1)
3,681

 
0.3

 
4,071

 
0.4

Foreign governments
135

 

 
127

 

Total fixed maturity securities
932,159

 
83.5

 
832,952

 
83.9

Cash and cash equivalents
50,708

 
4.5

 
54,593

 
5.5

Other investments:
 

 
 
 
 

 
 
Policy loans
54,032

 
4.8

 
48,868

 
4.9

Equity securities
69,879

 
6.3

 
47,259

 
4.8

Mortgage loans
628

 
0.1

 
671

 
0.1

Real estate and other long-term investments
8,266

 
0.8

 
8,485

 
0.8

Total cash, cash equivalents and investments
$
1,115,672

 
100.0
%
 
$
992,828

 
100.0
%
 
(1) Includes $3.2 million and $3.8 million of U.S. Government agencies and government-sponsored enterprise for the years ended December 31, 2014 and 2013, respectively.
(2) Includes $272.0 million and $226.6 million of securities guaranteed by third parties for the years ended December 31, 2014 and 2013, respectively.

The current year decline in U.S. government-sponsored securities is due to call activity from this sector and reinvestment into fixed maturity corporate and municipal bond categories.  The Company has increased investments in municipals primarily related to Build America taxable bonds, essential services and corporate issuer holdings in the utility sector.

At December 31, 2014, investments in fixed maturity and equity securities were 89.8% of our total cash, cash equivalents and investments.  All of our fixed maturities were classified as either available-for-sale or held-to-maturity securities at December 31, 2014 and 2013.  We had no fixed maturity or equity securities that were classified as trading securities at December 31, 2014 or 2013.

As previously discussed, our investment portfolios have been impacted significantly by the low interest rate environment over the past several years.  The following table shows investment yields by segment operations as of December 31 for each year presented.
 
 
 
Business Segment
Year
 
Life
Insurance
 
Home
Service
 
Consolidated
2014
 
4.24
%
 
4.52
%
 
4.21
%
2013
 
4.05
%
 
4.50
%
 
4.11
%
2012
 
3.61
%
 
4.37
%
 
3.81
%



39


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Yields on investment assets vary between segment operations due to different portfolio mixes and durations in the segments.  The life segment previously invested more in U.S. Government securities however over the past few years it has invested in municipal and corporate issuers and is now more similar to the home service segment which has had concentrations primarily in the corporate and municipal sectors.  

Credit ratings reported for the periods indicated are assigned by a Nationally Recognized Statistical Rating Organization ("NRSRO") such as Moody’s Investors Service, Standard & Poor’s and Fitch Ratings.  A credit rating assigned by a NRSRO is a quality based rating, with AAA representing the highest quality and D the lowest, with BBB and above being considered investment grade.  In addition, the Company may use credit ratings of the National Association of Insurance Commissioners ("NAIC") Securities Valuation Office ("SVO") as assigned, if there is no NRSRO rating.  Securities rated by the SVO are grouped in the equivalent NRSRO category as stated by the SVO and securities that are not rated by a NRSRO are included in the "other" category.

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value.

 
December 31, 2014
 
December 31, 2013
 
Carrying
Value
 
% of Total
Carrying Value
 
Carrying
Value
 
% of Total
Carrying Value
 
(In thousands)
 
(In thousands)
AAA
$
70,572

 
7.6
%
 
$
55,093

 
6.6
%
AA
431,779

 
46.3

 
391,054

 
46.9

A
256,626

 
27.5

 
231,004

 
27.7

BBB
141,690

 
15.2

 
125,597

 
15.1

BB and other
31,492

 
3.4

 
30,204

 
3.7

Totals
$
932,159

 
100.0
%
 
$
832,952

 
100.0
%

The Company made new investments in municipals and corporate bonds, primarily public utility issuers.  Non-investment grade securities are the result of downgrades of issuers or securities acquired during acquisitions of companies, as the Company does not purchase below investment grade securities.

As of December 31, 2014, the Company held municipal securities that include third party guarantees.  Detailed below is a presentation by NRSRO rating of our municipal holdings by funding type.
 
Municipals shown including third party guarantees

 
December 31, 2014
 
General Obligation
 
Special Revenue
 
Other
 
Total
 
% Based on
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
 
(In thousands, except percentages)
AAA
$
49,431

 
46,539

 
18,946

 
18,109

 

 

 
68,377

 
64,648

 
10.8
%
AA
132,374

 
127,221

 
211,326

 
200,560

 
14,823

 
14,009

 
358,523

 
341,790

 
57.2

A
40,889

 
40,905

 
118,788

 
115,173

 
8,333

 
7,967

 
168,010

 
164,045

 
27.5

BBB
2,618

 
2,619

 
18,866

 
18,021

 

 

 
21,484

 
20,640

 
3.5

BB and other
531

 
475

 
5,186

 
5,354

 
513

 
578

 
6,230

 
6,407

 
1.0

Total
$
225,843

 
217,759

 
373,112

 
357,217

 
23,669

 
22,554

 
622,624

 
597,530

 
100.0
%



40


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Municipals shown excluding third party guarantees
 
 
December 31, 2014
 
General Obligation
 
Special Revenue
 
Other
 
Total
 
% Based on
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
 
(In thousands, except percentages)
AAA
$
20,494

 
20,102

 
4,335

 
4,274

 

 

 
24,829

 
24,376

 
4.1
%
AA
108,807

 
104,153

 
154,545

 
146,104

 
11,803

 
10,988

 
275,155

 
261,245

 
43.7

A
39,199

 
37,701

 
138,846

 
133,670

 
9,938

 
9,610

 
187,983

 
180,981

 
30.3

BBB
7,917

 
8,348

 
24,484

 
22,998

 

 

 
32,401

 
31,346

 
5.2

BB and other
49,426

 
47,455

 
50,902

 
50,171

 
1,928

 
1,956

 
102,256

 
99,582

 
16.7

Total
$
225,843