10-Q 1 cia-2016930x10q.htm 10-Q Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
FORM 10-Q
___________________________

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2016
or
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from  _____ to _____
Commission File Number:  000-16509
citizenslogoa09.jpg
CITIZENS, INC.
(Exact name of registrant as specified in its charter)
Colorado
84-0755371
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
400 East Anderson Lane, Austin, TX
78752
(Address of principal executive offices)
(Zip Code)
 
(512) 837-7100
 
(Registrant's telephone number, including area code)
 
N/A
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o  No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

As of October 28, 2016, the Registrant had 49,080,114 shares of Class A common stock, no par value, outstanding and 1,001,714 shares of Class B common stock outstanding.



 



























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citizenslogoa09.jpg
TABLE OF CONTENTS
 
 
 
Page Number
Part I.
Financial Information
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
Part II.
Other Information
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.


1


PART I.  FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Financial Position
(In thousands)
 
 
 
 
 
 
 
 
 
September 30, 2016
 
December 31, 2015
Assets
(Unaudited)
 
 
Investments:
 
 
 
Fixed maturities available-for-sale, at fair value (cost: $826,271 and $714,137 in 2016 and 2015, respectively)
$
875,217

 
735,648

Fixed maturities held-to-maturity, at amortized cost (fair value:  $264,176 and $264,966 in 2016 and 2015, respectively)
251,637

 
259,953

Equity securities available-for-sale, at fair value (cost: $22,577 and $23,727 in 2016 and 2015, respectively)
23,347

 
23,438

Mortgage loans on real estate
237

 
594

Policy loans
64,714

 
60,166

Real estate held for investment (less $1,831 and $1,721 accumulated depreciation in 2016 and 2015, respectively)
7,862

 
7,956

Other long-term investments
39

 
75

Short-term investments
514

 
251

Total investments
1,223,567

 
1,088,081

Cash and cash equivalents
32,323

 
82,827

Accrued investment income
16,739

 
15,406

Reinsurance recoverable
3,682

 
4,166

Deferred policy acquisition costs
166,849

 
165,362

Cost of customer relationships acquired
19,546

 
21,585

Goodwill
17,255

 
17,255

Other intangible assets
968

 
971

Deferred tax asset
65,506

 
68,764

Property and equipment, net
6,816

 
6,338

Due premiums, net (less $1,393 and $1,490 allowance for doubtful accounts in 2016 and 2015, respectively)
10,937

 
11,819

Prepaid expenses
844

 
162

Other assets
1,306

 
1,304

Total assets
$
1,566,338

 
1,484,040


(Continued)

See accompanying notes to consolidated financial statements.

2



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Financial Position
(In thousands, except share amounts)
 
 
 
 
 
 
 
 
 
September 30, 2016
 
December 31, 2015
Liabilities and Stockholders' Equity
(Unaudited)
 
 
Liabilities:
 
 
 
Policy liabilities:
 
 
 
Future policy benefit reserves:
 
 
 
Life insurance
$
1,045,531

 
995,972

Annuities
68,288

 
64,933

Accident and health
1,051

 
1,118

Dividend accumulations
20,220

 
18,465

Premiums paid in advance
45,254

 
43,220

Policy claims payable
9,265

 
9,653

Other policyholders' funds
7,358

 
7,518

Total policy liabilities
1,196,967

 
1,140,879

Commissions payable
2,387

 
2,757

Federal income tax payable
78,479

 
71,225

Payable for securities in process of settlement
1,476

 
2,457

Other liabilities
24,258

 
24,205

Total liabilities
1,303,567

 
1,241,523

Commitments and contingencies (Note 7)


 


Stockholders' equity:
 

 
 

Class A, no par value, 100,000,000 shares authorized, 52,215,852 shares issued and outstanding in 2016 and 2015, including shares in treasury of 3,135,738 in 2016 and 2015
259,383

 
259,383

Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2016 and 2015
3,184

 
3,184

Accumulated deficit
(20,712
)
 
(22,626
)
Accumulated other comprehensive income:
 

 
 

Unrealized gains on securities, net of tax
31,927

 
13,587

Treasury stock, at cost
(11,011
)
 
(11,011
)
Total stockholders' equity
262,771

 
242,517

Total liabilities and stockholders' equity
$
1,566,338

 
1,484,040



See accompanying notes to consolidated financial statements.


3


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

 
2016
 
2015
Revenues:
 
 
 
Premiums:
 
 
 
 
 
Life insurance
 
 
$
47,513

 
 
 
47,219

Accident and health insurance
 
 
385

 
 
 
387

Property insurance
 
 
1,274

 
 
 
1,302

Net investment income
 
 
12,320

 
 
 
11,325

Realized investment gains (losses), net
 
 
46

 
 
 
(2,407
)
Other income
 
 
203

 
 
 
298

Total revenues
 
 
61,741

 
 
 
58,124

Benefits and expenses:
 
 
 

 
 
 
 

Insurance benefits paid or provided:
 
 
 
 
 
 
 
Claims and surrenders
 
 
21,014

 
 
 
19,528

Increase in future policy benefit reserves
 
 
19,267

 
 
 
19,276

Policyholders' dividends
 
 
1,620

 
 
 
2,719

Total insurance benefits paid or provided
 
 
41,901

 
 
 
41,523

Commissions
 
 
10,852

 
 
 
11,388

Other general expenses
 
 
5,076

 
 
 
6,958

Capitalization of deferred policy acquisition costs
 
 
(7,890
)
 
 
 
(8,482
)
Amortization of deferred policy acquisition costs
 
 
6,889

 
 
 
6,271

Amortization of cost of customer relationships acquired
 
 
641

 
 
 
605

Total benefits and expenses
 
 
57,469

 
 
 
58,263

Income (loss) before federal income tax
 
 
4,272

 
 
 
(139
)
Federal income tax expense (benefit)
 
 
1,728

 
 
 
(242
)
Net income
 
 
2,544

 
 
 
103

Per Share Amounts:
 
 
 

 
 

 
 

Basic earnings per share of Class A common stock
$
0.05

 
 

 

 
 

Basic earnings per share of Class B common stock
0.03

 
 

 

 
 

Diluted earnings per share of Class A common stock
0.05

 
 

 

 
 

Diluted earnings per share of Class B common stock
0.03

 
 

 

 
 

Other comprehensive income (loss):
 
 
 

 
 

 
 

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

 
 

 
 

 
 

Unrealized holding gains (losses) arising during period
 

 
(1,261
)
 
 

 
(1,803
)
Reclassification adjustment for (gains) losses included in net income
 

 
(47
)
 
 

 
2,405

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

 
(1,308
)
 
 

 
602

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

 
(458
)
 
 

 
210

Other comprehensive income (loss)
 

 
(850
)
 
 

 
392

Comprehensive income
 

 
$
1,694

 
 

 
495

 
See accompanying notes to consolidated financial statements.

4


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

 
2016
 
2015
Revenues:
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
Life insurance
 
 
$
137,637

 
 
 
136,866

Accident and health insurance
 
 
1,170

 
 
 
1,183

Property insurance
 
 
3,811

 
 
 
3,885

Net investment income
 
 
36,051

 
 
 
33,595

Realized investment losses, net
 
 
(1,776
)
 
 
 
(2,486
)
Other income
 
 
610

 
 
 
1,020

Total revenues
 
 
177,503

 
 
 
174,063

Benefits and expenses:
 
 
 

 
 
 
 

Insurance benefits paid or provided:
 
 
 

 
 
 
 

Claims and surrenders
 
 
60,988

 
 
 
58,171

Increase in future policy benefit reserves
 
 
52,932

 
 
 
56,334

Policyholders' dividends
 
 
4,985

 
 
 
7,568

Total insurance benefits paid or provided
 
 
118,905

 
 
 
122,073

Commissions
 
 
31,097

 
 
 
32,052

Other general expenses
 
 
22,960

 
 
 
24,954

Capitalization of deferred policy acquisition costs
 
 
(22,257
)
 
 
 
(23,374
)
Amortization of deferred policy acquisition costs
 
 
20,424

 
 
 
17,217

Amortization of cost of customer relationships acquired
 
 
1,588

 
 
 
1,768

Total benefits and expenses
 
 
172,717

 
 
 
174,690

Income (loss) before federal income tax
 
 
4,786

 
 
 
(627
)
Federal income tax expense
 
 
2,872

 
 
 
759

Net income (loss)
 
 
1,914

 
 
 
(1,386
)
Per Share Amounts:
 
 
 

 
 

 
 

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

 
 

 
$
(0.03
)
 
 

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

 
 

 
(0.02
)
 
 

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

 
 

 
(0.03
)
 
 

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

 
 

 
(0.02
)
 
 

Other comprehensive income (loss):
 

 
 

 
 

 
 

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

 
 

 
 

 
 

Unrealized holding gains (losses) arising during period
 

 
26,446

 
 

 
(13,574
)
Reclassification adjustment for losses included in net income
 

 
1,769

 
 

 
2,449

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

 
28,215

 
 

 
(11,125
)
Income tax expense (benefit) on unrealized gains (losses) on available-for-sale securities
 

 
9,875

 
 

 
(3,894
)
Other comprehensive income (loss)
 

 
18,340

 
 

 
(7,231
)
Comprehensive income (loss)
 

 
$
20,254

 
 

 
(8,617
)

See accompanying notes to consolidated financial statements.

5



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30,
(In thousands)
(Unaudited)
 
 
 
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income (loss)
$
1,914

 
(1,386
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Realized losses on sale of investments and other assets
1,776

 
2,486

Net deferred policy acquisition costs
(1,833
)
 
(6,157
)
Amortization of cost of customer relationships acquired
1,588

 
1,768

Depreciation
600

 
571

Amortization of premiums and discounts on investments
10,709

 
8,785

Deferred federal income tax benefit
(6,616
)
 
(1,291
)
Change in:
 

 
 

Accrued investment income
(1,333
)
 
(1,763
)
Reinsurance recoverable
484

 
371

Due premiums
882

 
(242
)
Future policy benefit reserves
51,559

 
56,185

Other policyholders' liabilities
3,241

 
5,487

Federal income tax payable
7,254

 
(1,250
)
Commissions payable and other liabilities
(317
)
 
(121
)
Other, net
(670
)
 
(717
)
Net cash provided by operating activities
69,238

 
62,726

Cash flows from investing activities:
 

 
 

Sale of fixed maturities, available-for-sale

 

Maturities and calls of fixed maturities, available-for-sale
44,301

 
46,723

Maturities and calls of fixed maturities, held-to-maturity
9,790

 
15,755

Purchase of fixed maturities, available-for-sale
(165,539
)
 
(88,107
)
Purchase of fixed maturities, held-to-maturity
(5,507
)
 
(41,291
)
Sale of equity securities, available-for-sale
403

 

Calls of equity securities, available-for-sale
422

 
150

Purchase of equity securities, available-for-sale

 
(602
)
Principal payments on mortgage loans
357

 
29

Increase in policy loans, net
(4,548
)
 
(4,936
)
Sale of other long-term investments
1

 
59

Purchase of other long-term investments
(36
)
 

Sale of property and equipment
59

 

Purchase of property and equipment
(978
)
 
(240
)
Maturity of short-term investments
250

 

Purchase of short-term investments
(522
)
 
(254
)
Net cash used in investing activities
(121,547
)
 
(72,714
)

6


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Nine Months Ended September 30,
(In thousands)
(Unaudited)
 
2016
 
2015
Cash flows from financing activities:
 
 
 
Annuity deposits
$
6,243

 
6,077

Annuity withdrawals
(4,438
)
 
(3,966
)
Net cash provided by financing activities
1,805

 
2,111

Net decrease in cash and cash equivalents
(50,504
)
 
(7,877
)
Cash and cash equivalents at beginning of year
82,827

 
50,708

Cash and cash equivalents at end of period
$
32,323

 
42,831

Supplemental disclosures of operating activities:
 

 
 

Cash paid during the period for income taxes, net
$
2,234

 
3,300


Supplemental Disclosures of Non-Cash Investing Activities:
None.

See accompanying notes to consolidated financial statements.


7

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


(1) Financial Statements

Basis of Presentation and Consolidation

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

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

The consolidated statement of financial position for September 30, 2016, and the consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2016 and 2015 and cash flows for the nine-month periods ended September 30, 2016 and 2015, have been prepared by the Company without audit.  In the opinion of management, all adjustments to present fairly the financial position, results of operations, and changes in cash flows at September 30, 2016 and for comparative periods have been made.  The consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”).  Accordingly, the financial statements do not include all of the information and footnotes required for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended December 31, 2015.  Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

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

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

Use of Estimates

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

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



8

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

Significant Accounting Policies

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

(2) Accounting Pronouncements

Accounting Standards Recently Adopted

None.

Accounting Standards Not Yet Adopted

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

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

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

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

9

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

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

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), with the main objective to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this ASU require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. Credit losses on available-for-sale debt securities should be measured in a manner similar to current GAAP; however the credit losses are recorded through an allowance for credit losses rather than as a write-down. This approach is an improvement to current GAAP because an entity will be able to record reversals of credit losses (in situations in which the estimate of credit losses declines) in current period net income, which in turn should align the income statement recognition of credit losses with the reporting period in which changes occur. Current GAAP prohibits reflecting those improvements in current-period earnings. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is evaluating the impact this guidance will have on our consolidated financial statements.



10

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

(3) Segment Information

The Company has three reportable segments:  Life Insurance, Home Service Insurance, and Other Non-Insurance Enterprises.  The accounting policies of the segments are in accordance with U.S. GAAP and are the same as those used in the preparation of the consolidated financial statements.  The Company evaluates profit and loss performance based on U.S. GAAP income before federal income taxes for its three reportable segments.

The Company has no reportable differences between segments and consolidated operations.
 
Three Months Ended
 
September 30, 2016
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
37,572

 
11,600

 

 
49,172

Net investment income
8,473

 
3,467

 
380

 
12,320

Realized investment gains, net

 
46

 

 
46

Other income
166

 
2

 
35

 
203

Total revenue
46,211

 
15,115

 
415

 
61,741

Benefits and expenses:
 
 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
14,980

 
6,034

 

 
21,014

Increase in future policy benefit reserves
18,319

 
948

 

 
19,267

Policyholders' dividends
1,604

 
16

 

 
1,620

Total insurance benefits paid or provided
34,903

 
6,998

 

 
41,901

Commissions
6,973

 
3,879

 

 
10,852

Other general expenses
1,074

 
3,610

 
392

 
5,076

Capitalization of deferred policy acquisition costs
(6,346
)
 
(1,544
)
 

 
(7,890
)
Amortization of deferred policy acquisition costs
5,870

 
1,019

 

 
6,889

Amortization of cost of customer relationships acquired
119

 
522

 

 
641

Total benefits and expenses
42,593

 
14,484

 
392

 
57,469

Income before income tax expense
$
3,618

 
631

 
23

 
4,272


11

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

 
Nine Months Ended
 
September 30, 2016
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
107,531

 
35,087

 

 
142,618

Net investment income
24,534

 
10,386

 
1,131

 
36,051

Realized investment losses, net
(660
)
 
(1,116
)
 

 
(1,776
)
Other income
537

 
5

 
68

 
610

Total revenue
131,942

 
44,362

 
1,199

 
177,503

Benefits and expenses:
 
 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
43,601

 
17,387

 

 
60,988

Increase in future policy benefit reserves
49,482

 
3,450

 

 
52,932

Policyholders' dividends
4,942

 
43

 

 
4,985

Total insurance benefits paid or provided
98,025

 
20,880

 

 
118,905

Commissions
19,544

 
11,553

 

 
31,097

Other general expenses
9,199

 
11,357

 
2,404

 
22,960

Capitalization of deferred policy acquisition costs
(17,764
)
 
(4,493
)
 

 
(22,257
)
Amortization of deferred policy acquisition costs
17,813

 
2,611

 

 
20,424

Amortization of cost of customer relationships acquired
419

 
1,169

 

 
1,588

Total benefits and expenses
127,236

 
43,077

 
2,404

 
172,717

Income (loss) before income tax expense
$
4,706

 
1,285

 
(1,205
)
 
4,786






12

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

 
Three Months Ended
 
September 30, 2015
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
37,213

 
11,695

 

 
48,908

Net investment income
7,512

 
3,436

 
377

 
11,325

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

 
(2,407
)
Other income
217

 
8

 
73

 
298

Total revenue
43,041

 
14,633

 
450

 
58,124

Benefits and expenses:
 

 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
13,727

 
5,801

 

 
19,528

Increase in future policy benefit reserves
18,337

 
939

 

 
19,276

Policyholders' dividends
2,708

 
11

 

 
2,719

Total insurance benefits paid or provided
34,772

 
6,751

 

 
41,523

Commissions
7,609

 
3,779

 

 
11,388

Other general expenses
3,026

 
3,391

 
541

 
6,958

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

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

 
912

 

 
6,271

Amortization of cost of customer relationships acquired
171

 
434

 

 
605

Total benefits and expenses
43,887

 
13,835

 
541

 
58,263

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

 
(91
)
 
(139
)


13

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

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

 
35,035

 

 
141,934

Net investment income
22,130

 
10,341

 
1,124

 
33,595

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

 
(2,486
)
Other income
591

 
78

 
351

 
1,020

Total revenue
127,661

 
44,927

 
1,475

 
174,063

Benefits and expenses:
 

 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
40,752

 
17,419

 

 
58,171

Increase in future policy benefit reserves
52,964

 
3,370

 

 
56,334

Policyholders' dividends
7,530

 
38

 

 
7,568

Total insurance benefits paid or provided
101,246

 
20,827

 

 
122,073

Commissions
20,450

 
11,602

 

 
32,052

Other general expenses
11,057

 
11,680

 
2,217

 
24,954

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

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

 
2,368

 

 
17,217

Amortization of cost of customer relationships acquired
493

 
1,275

 

 
1,768

Total benefits and expenses
129,279

 
43,194

 
2,217

 
174,690

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

 
(742
)
 
(627
)




14

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


(4) Earnings Per Share

The following tables set forth the computation of basic and diluted earnings per share.
 
Three Months Ended
 
September 30, 2016
 
September 30, 2015
 
(In thousands,
except per share amounts)
Basic and diluted earnings per share:
 
 
 
Numerator:
 
 
 
 Net income
$
2,544

 
103

 Net income allocated to Class A common stock
$
2,519

 
102

 Net income allocated to Class B common stock
25

 
1

 Net income
$
2,544

 
103

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

 
49,080

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

 
49,080

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

 
1,002

Basic earnings per share of Class A common stock
$
0.05

 

Basic earnings per share of Class B common stock
0.03

 

Diluted earnings per share of Class A common stock
0.05

 

Diluted earnings per share of Class B common stock
0.03

 

 
Nine Months Ended
 
September 30, 2016
 
September 30, 2015
 
(In thousands,
except per share amounts)
Basic and diluted earnings per share:
 
 
 
Numerator:
 
 
 
Net income (loss)
$
1,914

 
(1,386
)
Net income (loss) allocated to Class A common stock
$
1,895

 
(1,372
)
Net income (loss) allocated to Class B common stock
19

 
(14
)
Net loss
$
1,914

 
(1,386
)
Denominator:
 
 
 
Weighted average shares of Class A outstanding - basic
49,080

 
49,080

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

 
49,080

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

 
1,002

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

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

 
(0.02
)
Diluted earnings (losses) per share of Class A common stock
0.04

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

 
(0.02
)


15

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

(5) Investments

The Company invests primarily in fixed maturity securities, which totaled 89.7% and 85.0% of total cash, cash equivalents and investments at September 30, 2016 and December 31, 2015, respectively.
 
September 30, 2016
 
December 31, 2015
 
Carrying
Value
 
% of Total
Carrying Value
 
Carrying
Value
 
% of Total
Carrying Value
 
(In thousands)
Fixed maturity securities
$
1,126,854

 
89.7

 
$
995,601

 
85.0

Equity securities
23,347

 
1.9

 
23,438

 
2.0

Mortgage loans
237

 

 
594

 
0.1

Policy loans
64,714

 
5.2

 
60,166

 
5.1

Real estate and other long-term investments
7,901

 
0.6

 
8,031

 
0.7

Short-term investments
514

 

 
251

 

Cash and cash equivalents
32,323

 
2.6

 
82,827

 
7.1

Total cash, cash equivalents and investments
$
1,255,890

 
100.0

 
$
1,170,908

 
100.0



16

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


The following tables represent the cost, gross unrealized gains and losses and fair value for fixed maturities and equity securities as of the periods indicated.
 
September 30, 2016
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
9,946

 
2,968

 

 
12,914

U.S. Government-sponsored enterprises
7,670

 
1,302

 

 
8,972

States and political subdivisions
528,607

 
27,241

 
1,179

 
554,669

Foreign governments
103

 
29

 

 
132

Corporate
277,550

 
20,447

 
2,075

 
295,922

Commercial mortgage-backed
73

 
2

 

 
75

Residential mortgage-backed
2,322

 
213

 
2

 
2,533

Total available-for-sale securities
826,271

 
52,202

 
3,256

 
875,217

Held-to-maturity securities:
 

 
 

 
 

 
 

U.S. Government-sponsored enterprises
2,005

 
57

 

 
2,062

States and political subdivisions
228,564

 
12,515

 
539

 
240,540

Corporate
21,068

 
1,040

 
534

 
21,574

Total held-to-maturity securities
251,637

 
13,612

 
1,073

 
264,176

Total fixed maturities
$
1,077,908

 
65,814

 
4,329

 
1,139,393

 
 
 
 
 
 
 
 
Short-term investments
$
514

 

 

 
514

 
 
 
 
 
 
 
 
Equity securities:
 

 
 

 
 

 
 

Stock mutual funds
$
2,866

 
57

 

 
2,923

Bond mutual funds
18,451

 
521

 
2

 
18,970

Common stock
39

 
2

 
17

 
24

Preferred stock
1,221

 
209

 

 
1,430

Total equity securities
$
22,577

 
789

 
19

 
23,347



17

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

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

 
2,597

 

 
12,592

U.S. Government-sponsored enterprises
19,676

 
1,104

 

 
20,780

States and political subdivisions
470,319

 
15,815

 
3,085

 
483,049

Foreign governments
104

 
27

 

 
131

Corporate
211,245

 
9,683

 
4,847

 
216,081

Commercial mortgage-backed
140

 
5

 

 
145

Residential mortgage-backed
2,658

 
214

 
2

 
2,870

Total available-for-sale securities
714,137

 
29,445

 
7,934

 
735,648

Held-to-maturity securities:
 

 
 

 
 

 
 

U.S. Government-sponsored enterprises
2,010

 
110

 

 
2,120

States and political subdivisions
236,776

 
6,756

 
883

 
242,649

Corporate
21,167

 
530

 
1,500

 
20,197

Total held-to-maturity securities
259,953

 
7,396

 
2,383

 
264,966

Total fixed maturity securities
$
974,090

 
36,841

 
10,317

 
1,000,614

 
 
 
 
 
 
 
 
Short-term investments
$
251

 

 

 
251

 
 
 
 
 
 
 
 
Equity securities:
 

 
 

 
 

 
 

Stock mutual funds
$
3,270

 

 
237

 
3,033

Bond mutual funds
18,798

 
55

 
349

 
18,504

Common stock
65

 

 
22

 
43

Preferred stock
1,594

 
266

 
2

 
1,858

Total equity securities
$
23,727

 
321

 
610

 
23,438

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

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

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

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

18

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

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

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

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

Other-than-temporary impairments ("OTTI") were recognized on investment securities during the nine months ended September 30, 2016 totaling $2.3 million. No OTTIs were recognized during the three months ended September 30, 2016. OTTIs were recognized during the three and nine months ended September 30, 2015 totaling $2.4 million.


19

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

The following tables present the fair values and gross unrealized losses of fixed maturities and equity securities that have remained in a continuous unrealized loss position for the periods indicated.
 
September 30, 2016
 
Less than 12 months
 
Greater than 12 months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
(In thousands, except for # of securities)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
30,962

 
219

 
32

 
$
8,568

 
960

 
7

 
$
39,530

 
1,179

 
39

Corporate
30,891

 
1,588

 
25

 
10,286

 
487

 
13

 
41,177

 
2,075

 
38

Residential mortgage-backed
120

 
1

 
3

 
107

 
1

 
2

 
227

 
2

 
5

Total available-for-sale securities
61,973

 
1,808

 
60

 
18,961

 
1,448

 
22

 
80,934

 
3,256

 
82

Held-to-maturity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
4,947

 
510

 
6

 
2,853

 
29

 
2

 
7,800

 
539

 
8

Corporate

 

 

 
5,339

 
534

 
4

 
5,339

 
534

 
4

Total held-to-maturity securities
4,947

 
510

 
6

 
8,192

 
563

 
6

 
13,139

 
1,073

 
12

Total fixed maturities
$
66,920

 
2,318

 
66

 
$
27,153

 
2,011

 
28

 
$
94,073

 
4,329

 
94

Equity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Bond mutual funds
$
1,968

 
2

 
1

 
$

 

 

 
$
1,968

 
2

 
1

Common stocks

 

 

 
1

 
17

 
1

 
1

 
17

 
1

Total equities
$
1,968

 
2

 
1

 
$
1

 
17

 
1

 
$
1,969

 
19

 
2


As of September 30, 2016, the Company had 22 available-for-sale fixed maturity securities and 6 held-to-maturity fixed maturity securities that were in an unrealized loss position for greater than 12 months. We reported 1 equity security holding in an unrealized loss position for greater than 12 months as of September 30, 2016.


20

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

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

 
1,474

 
129

 
$
12,633

 
1,611

 
12

 
$
149,495

 
3,085

 
141

Corporate
70,081

 
4,330

 
69

 
3,308

 
517

 
3

 
73,389

 
4,847

 
72

Residential mortgage-backed
57

 
1

 
2

 
133

 
1

 
3

 
190

 
2

 
5

Total available-for-sale securities
207,000

 
5,805

 
200

 
16,074

 
2,129

 
18

 
223,074

 
7,934

 
218

Held-to-maturity securities:
 

 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
74,628

 
774

 
59

 
2,404

 
109

 
5

 
77,032

 
883

 
64

Corporate
4,585

 
641

 
4

 
2,160

 
859

 
2

 
6,745

 
1,500

 
6

Total held-to-maturity securities
79,213

 
1,415

 
63

 
4,564

 
968

 
7

 
83,777

 
2,383

 
70

Total fixed maturities
$
286,213

 
7,220

 
263

 
$
20,638

 
3,097

 
25

 
$
306,851

 
10,317

 
288

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock mutual funds
$
3,030

 
237

 
4

 
$
2

 

 
1

 
$
3,032

 
237

 
5

Bond mutual funds
10,158
<