0000024090-18-000027.txt : 20181107 0000024090-18-000027.hdr.sgml : 20181107 20181107162709 ACCESSION NUMBER: 0000024090-18-000027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 68 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181107 DATE AS OF CHANGE: 20181107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIZENS INC CENTRAL INDEX KEY: 0000024090 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 840755371 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16509 FILM NUMBER: 181166706 BUSINESS ADDRESS: STREET 1: 2900 ESPERANZA CROSSING STREET 2: 2ND FLOOR CITY: AUSTIN STATE: TX ZIP: 78758 BUSINESS PHONE: 5128377100 MAIL ADDRESS: STREET 1: P O BOX 149151 CITY: AUSTIN STATE: TX ZIP: 78714 FORMER COMPANY: FORMER CONFORMED NAME: CONTINENTAL INVESTORS LIFE INC DATE OF NAME CHANGE: 19881222 10-Q 1 cia-201893010q.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, 2018
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
citizenslogoa28.jpg
CITIZENS, INC.
(Exact name of registrant as specified in its charter)
Colorado
84-0755371
(State or other jurisdiction of
(I.R.S. Employer
 incorporation or organization)
Identification No.)
 
 
2900 Esperanza Crossing, 2nd Floor
 
Austin, Texas
78758
(Address of principal executive offices)
(Zip Code)
 
(Registrant's telephone number, including area code:) (512) 837-7100
 
(Former name, former address and former fiscal year, if changed since last report:)    N/A
_______________________________________________________________________
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act:
 
Large accelerated
filer ¨
Accelerated
filer x
Non-accelerated
filer ¨
Smaller reporting
company ¨
Emerging growth
company ¨
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
As of November 2, 2018, the Registrant had 49,080,114 shares of Class A common stock, no par value, outstanding and 1,001,714 shares of Class B common stock outstanding.
 





























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


1


PART I.  FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Financial Position
(In thousands)
 
 
 
 
 
 
 
 
 
September 30, 2018
 
December 31, 2017
Assets
(Unaudited)
 
 
Investments:
 
 
 
Fixed maturities available-for-sale, at fair value (cost: $1,193,211 and $935,977 in 2018 and 2017, respectively)
$
1,200,154

 
974,609

Fixed maturities held-to-maturity, at amortized cost (fair value: $241,377 in 2017)

 
233,961

Equity securities, at fair value (cost: $15,289 in 2017)
15,529

 
16,164

Mortgage loans on real estate
188

 
195

Policy loans
79,012

 
73,735

Real estate held for investment (less $1,258 and $5,479 accumulated depreciation in 2018 and 2017, respectively)
5,743

 
7,416

Real estate held for sale (less $4,411 accumulated depreciation in 2018)
1,483

 

Other long-term investments
22

 
36

Total investments
1,302,131

 
1,306,116

Cash and cash equivalents
68,753

 
46,064

Accrued investment income
18,389

 
19,062

Reinsurance recoverable
3,626

 
3,715

Deferred policy acquisition costs
158,253

 
167,063

Cost of customer relationships acquired
16,163

 
17,499

Goodwill
12,624

 
12,624

Other intangible assets
958

 
961

Deferred tax asset

 
50,797

Property and equipment, net
6,329

 
6,624

Due premiums, net (less $1,564 and $1,611 allowance for doubtful accounts in 2018 and 2017, respectively)
12,338

 
12,765

Prepaid expenses
1,134

 
251

Other assets
1,214

 
912

Total assets
$
1,601,912

 
1,644,453


(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, 2018
 
December 31, 2017
Liabilities and Stockholders' Equity
(Unaudited)
 
 
Liabilities:
 
 
 
Policy liabilities:
 
 
 
Future policy benefit reserves:
 
 
 
Life insurance
$
1,165,443

 
1,133,875

Annuities
75,803

 
73,688

Accident and health
923

 
990

Dividend accumulations
25,513

 
23,713

Premiums paid in advance
50,651

 
51,431

Policy claims payable
7,327

 
8,610

Other policyholders' funds
10,159

 
8,483

Total policy liabilities
1,335,819

 
1,300,790

Commissions payable
1,947

 
2,430

Federal income tax payable
47,637

 
93,365

Deferred federal income tax liability
10,374

 

Other liabilities
25,396

 
24,355

Total liabilities
1,421,173

 
1,420,940

Commitments and contingencies (Note 8)


 


Stockholders' equity:
 

 
 

Class A, no par value, 100,000,000 shares authorized, 52,215,852 shares issued and outstanding in 2018 and 2017, including shares in treasury of 3,135,738 in 2018 and 2017
259,693

 
259,383

Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2018 and 2017
3,184

 
3,184

Accumulated deficit
(75,812
)
 
(54,375
)
Accumulated other comprehensive income:
 

 
 

Unrealized gains on securities, net of tax
4,685

 
26,332

Treasury stock, at cost
(11,011
)
 
(11,011
)
Total stockholders' equity
180,739

 
223,513

Total liabilities and stockholders' equity
$
1,601,912

 
1,644,453



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)

 
2018
 
2017
Revenues:
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
Life insurance
 
 
$
45,898

 
 
 
48,644

Accident and health insurance
 
 
323

 
 
 
360

Property insurance
 
 
1,208

 
 
 
1,243

Net investment income
 
 
13,587

 
 
 
13,828

Realized investment losses, net
 
 
(498
)
 
 
 
(404
)
Other income
 
 
643

 
 
 
660

Total revenues
 
 
61,161

 
 
 
64,331

Benefits and expenses:
 
 
 

 
 
 
 

Insurance benefits paid or provided:
 
 
 

 
 
 
 

Claims and surrenders
 
 
25,076

 
 
 
21,454

Increase in future policy benefit reserves
 
 
1,653

 
 
 
19,597

Policyholders' dividends
 
 
1,595

 
 
 
1,613

Total insurance benefits paid or provided
 
 
28,324

 
 
 
42,664

Commissions
 
 
8,656

 
 
 
10,801

Other general expenses
 
 
12,402

 
 
 
7,254

Capitalization of deferred policy acquisition costs
 
 
(5,561
)
 
 
 
(7,756
)
Amortization of deferred policy acquisition costs
 
 
11,412

 
 
 
7,623

Amortization of cost of customer relationships acquired
 
 
366

 
 
 
635

Total benefits and expenses
 
 
55,599

 
 
 
61,221

Income before federal income tax
 
 
5,562

 
 
 
3,110

Federal income tax expense (benefit)
 
 
20,316

 
 
 
(339
)
Net income (loss)
 
 
(14,754
)
 
 
 
3,449

Per Share Amounts:
 
 
 

 
 

 
 

Basic and diluted earnings (losses) per share of Class A common stock
$
(0.30
)
 
 

 
0.07

 
 

Basic and diluted earnings (losses) per share of Class B common stock
(0.14
)
 
 

 
0.03

 
 

Other comprehensive income (loss):
 

 
 

 
 
 
 

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

 
 

 
 

 
 

Unrealized holding gains (losses) arising during period
 

 
(2,236
)
 
 

 
3,875

Reclassification adjustment for losses included in net income
 

 
656

 
 

 
370

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

 
(1,580
)
 
 

 
4,245

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

 
454

 
 

 
1,486

Other comprehensive income (loss)
 

 
(2,034
)
 
 

 
2,759

Total comprehensive income (loss)
 

 
$
(16,788
)
 
 

 
6,208




4


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

 
2018
 
2017
Revenues:
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
Life insurance
 
 
$
133,058

 
 
 
138,603

Accident and health insurance
 
 
915

 
 
 
1,033

Property insurance
 
 
3,615

 
 
 
3,731

Net investment income
 
 
41,169

 
 
 
39,640

Realized investment gains (losses), net
 
 
(1,251
)
 
 
 
742

Other income
 
 
930

 
 
 
1,015

Total revenues
 
 
178,436

 
 
 
184,764

Benefits and expenses:
 
 
 

 
 
 
 

Insurance benefits paid or provided:
 
 
 

 
 
 
 

Claims and surrenders
 
 
66,844

 
 
 
62,130

Increase in future policy benefit reserves
 
 
32,816

 
 
 
51,953

Policyholders' dividends
 
 
4,516

 
 
 
4,418

Total insurance benefits paid or provided
 
 
104,176

 
 
 
118,501

Commissions
 
 
26,284

 
 
 
30,620

Other general expenses
 
 
33,375

 
 
 
26,765

Capitalization of deferred policy acquisition costs
 
 
(17,164
)
 
 
 
(21,540
)
Amortization of deferred policy acquisition costs
 
 
26,218

 
 
 
22,640

Amortization of cost of customer relationships acquired
 
 
1,517

 
 
 
1,629

Total benefits and expenses
 
 
174,406

 
 
 
178,615

Income before federal income tax
 
 
4,030

 
 
 
6,149

Federal income tax expense
 
 
21,305

 
 
 
72

Net income (loss)
 
 
(17,275
)
 
 
 
6,077

Per Share Amounts:
 
 
 

 
 

 
 

Basic and diluted earnings (losses) per share of Class A common stock
$
(0.35
)
 
 

 
0.12

 
 

Basic and diluted earnings (losses) per share of Class B common stock
(0.17
)
 
 

 
0.06

 
 

Other comprehensive income (loss):
 

 
 

 
 
 
 

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

 
 

 
 

 
 

Unrealized holding gains (losses) arising during period
 

 
(32,663
)
 
 

 
13,585

Reclassification adjustment for losses included in net income
 

 
1,002

 


 
329

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

 
(31,661
)
 
 

 
13,914

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

 
(5,852
)
 
 

 
4,870

Other comprehensive income (loss)
 

 
(25,809
)
 
 

 
9,044

Total comprehensive income (loss)
 

 
$
(43,084
)
 
 

 
15,121


See accompanying notes to consolidated financial statements.


5


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Nine Months Ended September 30, 2018 and 2017
(In thousands)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Accumulated
deficit
 
Accumulated other comprehensive income (loss)
 
Treasury
stock
 
Total
Stockholders'
equity
 
Class A
 
Class B
 
 
 
 
Balance at December 31, 2016
$
259,383

 
3,184

 
(16,248
)
 
13,792

 
(11,011
)
 
249,100

Comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 
6,077

 

 

 
6,077

Unrealized investment gains, net

 

 

 
9,044

 

 
9,044

Total comprehensive income

 

 
6,077

 
9,044

 

 
15,121

Balance at September 30, 2017
259,383

 
3,184

 
(10,171
)
 
22,836

 
(11,011
)
 
264,221

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
259,383

 
3,184

 
(54,375
)
 
26,332

 
(11,011
)
 
223,513

Accounting standards adopted January 1, 2018

 

 
(4,162
)
 
4,162

 

 

Balance at January 1, 2018
259,383

 
3,184

 
(58,537
)
 
30,494

 
(11,011
)
 
223,513

Comprehensive loss:
 

 
 

 
 

 
 

 
 

 
 

Net loss

 

 
(17,275
)
 

 

 
(17,275
)
Unrealized investment losses, net

 

 

 
(26,629
)
 

 
(26,629
)
Unrealized gain from held-to-maturity securities transferred to available-for-sale, net

 

 

 
820

 

 
820

Total comprehensive loss

 

 
(17,275
)
 
(25,809
)
 

 
(43,084
)
Stock-based compensation
310

 

 

 

 

 
310

Balance at September 30, 2018
$
259,693

 
3,184

 
(75,812
)
 
4,685

 
(11,011
)
 
180,739



See accompanying notes to consolidated financial statements.



6


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30,
(In thousands)
(Unaudited)
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(17,275
)
 
6,077

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

 
 

Realized (gains) losses on sale of investments and other assets
1,251

 
(742
)
Net deferred policy acquisition costs
9,054

 
1,100

Amortization of cost of customer relationships acquired
1,517

 
1,629

Depreciation
921

 
763

Amortization of premiums and discounts on investments
12,781

 
12,398

Stock-based compensation
310

 

Deferred federal income tax benefit
67,040

 
(2,975
)
Change in:
 

 
 

Accrued investment income
673

 
(340
)
Reinsurance recoverable
89

 
(55
)
Due premiums
427

 
1,947

Future policy benefit reserves
33,425

 
51,876

Other policyholders' liabilities
1,413

 
5,619

Federal income tax payable
(45,744
)
 
2,532

Commissions payable and other liabilities
558

 
(10,307
)
Other, net
(1,205
)
 
(663
)
Net cash provided by operating activities
65,235

 
68,859

Cash flows from investing activities:
 

 
 

Purchase of fixed maturities, available-for-sale
(109,642
)
 
(135,538
)
Sale of fixed maturities, available-for-sale
1,084

 
508

Maturities and calls of fixed maturities, available-for-sale
51,190

 
65,456

Maturities and calls of fixed maturities, held-to-maturity
20,699

 
7,685

Sale of equity securities, available-for-sale

 
1,940

Calls of equity securities, available-for-sale

 
450

Purchase of equity securities, available-for-sale
(9
)
 

Principal payments on mortgage loans
7

 
35

Increase in policy loans, net
(5,277
)
 
(4,543
)
Sale of other long-term investments and real estate
14

 
3,040

Sale of property and equipment

 
41

Purchase of property and equipment
(437
)
 
(1,223
)
Maturity of short-term investments

 
500

Net cash used in investing activities
(42,371
)
 
(61,649
)
 
 
 
 
 
 
 
 


7


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Nine Months Ended September 30,
(In thousands)
(Unaudited)
 
2018
 
2017
Cash flows from financing activities:
 
 
 
Annuity deposits
$
5,222

 
7,240

Annuity withdrawals
(5,397
)
 
(4,960
)
Net cash provided by (used in) financing activities
(175
)
 
2,280

Net increase in cash and cash equivalents
22,689

 
9,490

Cash and cash equivalents at beginning of year
46,064

 
35,510

Cash and cash equivalents at end of period
$
68,753

 
45,000

Supplemental disclosures of operating activities:
 

 
 

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

 
515



Supplemental disclosures of noncash investing and financing activities:

During 2018 and 2017, various fixed maturity issuers exchanged securities with book values of $2.5 million and $4.8 million, respectively, for securities of equal value.



See accompanying notes to consolidated financial statements.



8

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)


(1) Financial Statements

Basis of Presentation and Consolidation

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

The consolidated statements of financial position as of September 30, 2018, the consolidated statements of comprehensive income for the three and nine-months ended September 30, 2018 and September 30, 2017 and the consolidated statements of stockholders' equity and cash flows for the nine-month periods ended September 30, 2018 and September 30, 2017, have been prepared by the Company without audit.  In the opinion of management, all normal and recurring adjustments to present fairly the financial position, results of operations, and changes in cash flows at September 30, 2018 and for comparative periods have been made.  The consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles ("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 consolidated financial statements do not include all 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 included in our Annual Report on Form 10-K for the year ended December 31, 2017.  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, CICA Ltd., SPLIC, MGLIC and CNLIC.  Until the end of 2016, CICA and CNLIC issued ordinary whole-life policies, credit life and disability, burial insurance, pre-need policies, and accident and health related policies, throughout the Midwest and southern United States.  Beginning January 1, 2017, CICA and CNLIC ceased selling life products domestically. Prior to July 1, 2018, CICA primarily issued ordinary whole-life and endowment policies to non-U.S. residents.  From and after July 1, 2018, CICA Ltd. will issue such policies. Effective on July 1, 2018, the Company effected a novation of all of the international policies issued by CICA to CICA Ltd., a newly established Bermuda entity that began operations in July 2018. While this novation transaction has been eliminated in consolidation of affiliated entities, there are tax effects reflected in the consolidated financial statements as a result of the transaction being executed between our subsidiaries that reside in different tax jurisdictions. The tax accounting implications of the novation transaction are further described in Note 9 - Income Taxes in these notes to the consolidated financial statements. 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 is currently not active. We plan to dissolve III and merge it into Citizens.
 


9

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)

As of July 1, 2018, we implemented a new actuarial valuation software solution impacting the life segment that provides enhanced modeling capabilities for ordinary whole life and endowment policies of CICA and CICA Ltd., which are included in the life insurance segment. The impact of this system conversion resulted in changes in estimates due to refinements reflected as a decrease in reserves of $10.2 million and a decrease in DAC of $4.3 million, before tax. The total impact of this system conversion reflected in the accompanying consolidated financial statements as of and for the three and nine months ended September 30, 2018 is summarized in the table below.

Impact on financial balances:
 
Increase (Decrease)
Consolidated Statements of Financial Position
 
(In thousands)
Deferred policy acquisition costs
 
$
(4,339
)
Future policy benefit reserves:
 
 
Life insurance
 
(10,197
)
 
 
 
Consolidated Statements of Comprehensive Income
 
 
Decrease in future policy benefit reserves
 
(10,197
)
Amortization of deferred policy acquisition costs
 
4,339

Income (loss) before federal income tax
 
5,858

Federal income tax expense
 
1,230

Net income (loss)
 
$
4,628


We are continuing to convert other information to the new valuation system and will report those items as information becomes available and in accordance with applicable accounting guidance. It is our expectation that we will convert SPLIC's insurance products to the new valuation system during 2019.

Use of Estimates

The preparation of consolidated 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 consolidated 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, actuarially determined assets and liabilities and assumptions, tests of goodwill impairment, valuation allowance on deferred tax assets, valuation of uncertain tax positions and contingencies relating to litigation and regulatory matters.  Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the consolidated financial statements.

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of the notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017, which should be read in conjunction with these accompanying consolidated financial statements.



10

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)

(2) Accounting Pronouncements

Accounting Standards Recently Adopted

On February 14, 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.  It allows a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings of the stranded tax effects that occurred due to the enactment of the Tax Cuts and Jobs Act of 2017 (the "New Tax Act"). The updated guidance is effective for reporting periods beginning after December 15, 2018 and is to be applied retrospectively to each period in which there are items impacted by the New Tax Act remaining in AOCI or at the beginning of the period of adoption. Early adoption is permitted. The Company adopted the updated guidance effective January 1, 2018 and elected to reclassify the income tax effects of the New Tax Act from AOCI to accumulated deficit as of January 1, 2018. This reclassification resulted in an increase in accumulated deficit of $4.7 million as of January 1, 2018 and an increase in AOCI by the same amount.

In January 2016, the FASB released ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The updated guidance requires equity investments, except those accounted for under the equity method of accounting, that have readily determinable fair values to be measured at fair value with any changes in fair value recognized in net income. Equity securities that do not have readily determinable fair values may be measured at estimated fair value or cost less impairment, if any, adjusted for subsequent observable price changes, with changes in the carrying value recognized in net income. A qualitative assessment for impairment is required for equity investments without readily determinable fair values. The updated guidance also eliminates the requirement to disclose the method and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet. The updated guidance was effective for the first quarter ended March 31, 2018. The adoption of this guidance resulted in the recognition of $560,000 of net after-tax unrealized gains on equity investments as a cumulative effect adjustment that decreased retained deficit as of January 1, 2018 and decreased AOCI by the same amount. The Company elected to report changes in the fair value of equity investments in realized investment gains (losses), net. At December 31, 2017, equity investments were classified as available-for-sale on the Company's balance sheet. However, upon adoption, the updated guidance eliminated the available-for-sale balance sheet classification for equity investments.

Accounting Standards Not Yet Adopted

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 the rights and obligations created by those leases on the balance sheet. The ASU also will require additional disclosures so 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 consolidated 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 has several lease agreements, such as district office locations related to our Home Service segment, which are currently considered operating leases, and therefore, not recognized on the Company’s balance sheet. The Company intends to adopt this standard effective January 1, 2019 and expects the new guidance will require these lease agreements to be recognized on the balance sheet as a right-of-use asset and a corresponding lease liability. The Company is nearing completion of its effort to compile a complete inventory of arrangements containing a lease and accumulating the lease data necessary to apply the amended guidance. The Company is evaluating the impact this guidance will have on our consolidated financial statements.

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 ASU requires a financial asset (or a group of


11

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)

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 U.S. 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 U.S. 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 U.S. GAAP prohibits reflecting those improvements in current-period earnings. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is evaluating the impact this guidance will have on our consolidated financial statements, but it is not expected to have a material impact on the Company's consolidated financial statements.

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

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share-based compensation. ASU 2018-07 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted but no earlier than an entity’s adoption date of Topic 606. We will adopt the provisions of this ASU in the first quarter of 2019. The Company is evaluating the impact this guidance will have on our consolidated financial statements.

In September 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU requires an entity in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. Capitalized implementation costs should be presented in the same line item on the balance sheet as amounts prepaid for the hosted service, if any (generally as an “other asset”). The capitalized costs will be amortized over the term of the hosting arrangement, with the amortization expense being presented in the same income statement line item as the fees paid for the hosted service. ASU 2018-15 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. We are evaluating the impact of this guidance on our limited cloud computing arrangements and our consolidated financial statements.

In July 2018, the FASB issued ASU No. 2018-11, Leases - Targeted Improvements to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for the Company). The Company expects to elect both transition options. ASU 2018-11 is not expected to have a material impact on the Company’s consolidated financial statements.



12

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)

In August 2018, the FASB issued ASU 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. This ASU amends four key areas of the accounting and impacts disclosures for long-duration insurance and investment contracts:

Requires updated assumptions for liability measurement. Assumptions used to measure the liability for traditional insurance contracts, which are typically determined at contract inception, will now be reviewed at least annually, and, if there is a change, updated, with the effect recorded in net income;

Standardizes the liability discount rate. The liability discount rate will be a market-observable discount rate (upper-medium grade fixed-income instrument yield), with the effect of rate changes recorded in other comprehensive income;

Provides greater consistency in measurement of market risk benefits. The two previous measurement models have been reduced to one measurement model (fair value), resulting in greater uniformity across similar market-based benefits and better alignment with the fair value measurement of derivatives used to hedge capital market risk;

Simplifies amortization of deferred acquisition costs. Previous earnings-based amortization methods have been replaced with a more level amortization basis; and

Requires enhanced disclosures. The new disclosures include rollforwards and information about significant assumptions and the effects of changes in those assumptions.

For calendar-year public companies, the changes will be effective in 2021. The Company is evaluating the impact this guidance will have on our consolidated financial statements and will begin planning for adoption in 2019. This new guidance is expected to have a material impact on our consolidated financial statements as we consider this to be one of the most substantial changes in the insurance industry guidance in the last 40 years.

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities are also allowed to elect early adoption the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s consolidated financial statements.

No other new accounting pronouncement issued or effective during the fiscal year had, or is expected to have, a material impact on our consolidated financial statements.

(3) Segment Information

The Company has two reportable segments:  Life Insurance and Home Service Insurance.  The Life Insurance and Home Service portions of the Company constitute separate businesses. In addition to the Life Insurance and Home Service business, the Company also operates other non-insurance ("Other Non-Insurance Enterprises") portions of the Company, which primarily include the Company's IT and Corporate-support functions, which are included in the tables presented below to properly reconcile the segment information with the consolidated financial statements of the Company.

The accounting policies of the segments and other non-insurance enterprises 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 two reportable segments.



13

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)

The Company's Other Non-Insurance Enterprises are the only reportable difference between segments and consolidated operations.
 
Three Months Ended
 
September 30, 2018
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
35,784

 
11,645

 

 
47,429

Net investment income
10,062

 
3,276

 
249

 
13,587

Realized investment gains (losses), net
(475
)
 
(32
)
 
9

 
(498
)
Other income
643

 

 

 
643

Total revenue
46,014

 
14,889

 
258

 
61,161

Benefits and expenses:
 
 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
19,212

 
5,864

 

 
25,076

Increase in future policy benefit reserves
544

 
1,109

 

 
1,653

Policyholders' dividends
1,581

 
14

 

 
1,595

Total insurance benefits paid or provided
21,337

 
6,987

 

 
28,324

Commissions
4,712

 
3,944

 

 
8,656

Other general expenses
6,583

 
4,502

 
1,317

 
12,402

Capitalization of deferred policy acquisition costs
(3,873
)
 
(1,688
)
 

 
(5,561
)
Amortization of deferred policy acquisition costs
10,132

 
1,280

 

 
11,412

Amortization of cost of customer relationships acquired
150

 
216

 

 
366

Total benefits and expenses
39,041

 
15,241

 
1,317

 
55,599

Income (loss) before income tax expense
$
6,973

 
(352
)
 
(1,059
)
 
5,562



14

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)

 
Nine Months Ended
 
September 30, 2018
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
102,537

 
35,051

 

 
137,588

Net investment income
30,331

 
9,894

 
944

 
41,169

Realized investment losses, net
(684
)
 
(535
)
 
(32
)
 
(1,251
)
Other income (loss)
931

 
(1
)
 

 
930

Total revenue
133,115

 
44,409

 
912

 
178,436

Benefits and expenses:
 
 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
49,522

 
17,322

 

 
66,844

Increase in future policy benefit reserves
29,509

 
3,307

 

 
32,816

Policyholders' dividends
4,483

 
33

 

 
4,516

Total insurance benefits paid or provided
83,514

 
20,662

 

 
104,176

Commissions
14,717

 
11,567

 

 
26,284

Other general expenses
12,607

 
15,438

 
5,330

 
33,375

Capitalization of deferred policy acquisition costs
(12,663
)
 
(4,501
)
 

 
(17,164
)
Amortization of deferred policy acquisition costs
22,912

 
3,306

 

 
26,218

Amortization of cost of customer relationships acquired
434

 
1,083

 

 
1,517

Total benefits and expenses
121,521

 
47,555

 
5,330

 
174,406

Income (loss) before income tax expense
$
11,594

 
(3,146
)
 
(4,418
)
 
4,030




15

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)

 
Three Months Ended
 
September 30, 2017
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
38,472

 
11,775

 

 
50,247

Net investment income
10,051

 
3,355

 
422

 
13,828

Realized investment losses, net
(355
)
 
(49
)
 

 
(404
)
Other income
561

 

 
99

 
660

Total revenue
48,729

 
15,081

 
521

 
64,331

Benefits and expenses:
 

 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
15,700

 
5,754

 

 
21,454

Increase in future policy benefit reserves
18,045

 
1,552

 

 
19,597

Policyholders' dividends
1,602

 
11

 

 
1,613

Total insurance benefits paid or provided
35,347

 
7,317

 

 
42,664

Commissions
6,892

 
3,909

 

 
10,801

Other general expenses
2,200

 
4,025

 
1,029

 
7,254

Capitalization of deferred policy acquisition costs
(6,242
)
 
(1,514
)
 

 
(7,756
)
Amortization of deferred policy acquisition costs
6,431

 
1,192

 

 
7,623

Amortization of cost of customer relationships acquired
118

 
517

 

 
635

Total benefits and expenses
44,746

 
15,446

 
1,029

 
61,221

Income (loss) before income tax expense
$
3,983

 
(365
)
 
(508
)
 
3,110




16

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)

 
Nine Months Ended
 
September 30, 2017
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
107,995

 
35,372

 

 
143,367

Net investment income
28,678

 
9,864

 
1,098

 
39,640

Realized investment gains (losses), net
(419
)
 
1,161

 

 
742

Other income
856

 
2

 
157

 
1,015

Total revenue
137,110

 
46,399

 
1,255

 
184,764

Benefits and expenses:
 

 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
45,218

 
16,912

 

 
62,130

Increase in future policy benefit reserves
47,818

 
4,135

 

 
51,953

Policyholders' dividends
4,387

 
31

 

 
4,418

Total insurance benefits paid or provided
97,423

 
21,078

 

 
118,501

Commissions
18,765

 
11,855

 

 
30,620

Other general expenses
10,399

 
13,182

 
3,184

 
26,765

Capitalization of deferred policy acquisition costs
(16,843
)
 
(4,697
)
 

 
(21,540
)
Amortization of deferred policy acquisition costs
19,350

 
3,290

 

 
22,640

Amortization of cost of customer relationships acquired
434

 
1,195

 

 
1,629

Total benefits and expenses
129,528

 
45,903

 
3,184

 
178,615

Income (loss) before income tax expense
$
7,582

 
496

 
(1,929
)
 
6,149




17

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)

(4) Earnings Per Share

The following tables set forth the computation of basic and diluted earnings per share.
 
Three Months Ended
 
September 30, 2018
 
September 30, 2017
 
(In thousands,
except per share amounts)
Basic and diluted earnings per share:
 
 
 
Numerator:
 
 
 
Net income (loss)
$
(14,754
)
 
3,449

Net income (loss) allocated to Class A common stock
$
(14,605
)
 
3,415

Net income (loss) allocated to Class B common stock
(149
)
 
34

Net income (loss)
$
(14,754
)
 
3,449

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

 
49,080

Weighted average shares of Class A outstanding - diluted
49,127

 
49,080

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

 
1,002

Basic and diluted earnings (loss) per share of Class A common stock
$
(0.30
)
 
0.07

Basic and diluted earnings (loss) per share of Class B common stock
(0.14
)
 
0.03


 
Nine Months Ended

September 30, 2018
 
September 30, 2017
 
(In thousands,
except per share amounts)
Basic and diluted earnings per share:
 
 
 
Numerator:
 
 
 
Net income (loss)
$
(17,275
)
 
6,077

Net income (loss) allocated to Class A common stock
$
(17,101
)
 
6,016

Net income (loss) allocated to Class B common stock
(174
)
 
61

Net income (loss)
$
(17,275
)
 
6,077

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

 
49,080

Weighted average shares of Class A outstanding - diluted
49,127

 
49,080

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

 
1,002

Basic and diluted earnings (loss) per share of Class A common stock
$
(0.35
)
 
0.12

Basic and diluted earnings (loss) per share of Class B common stock
(0.17
)
 
0.06




18

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)

(5) Investments

The Company invests primarily in fixed maturity securities, which totaled 87.6% of total cash, cash equivalents and investments at September 30, 2018. The Company's cash, cash equivalents and investments are listed below.
 
September 30, 2018
 
December 31, 2017
 
Carrying
Value
 
% of Total
Carrying Value
 
Carrying
Value
 
% of Total
Carrying Value
 
(In thousands)
 
 
 
(In thousands)
 
 
Fixed maturity securities
$
1,200,154

 
87.6

 
$
1,208,570

 
89.3

Equity securities
15,529

 
1.1

 
16,164

 
1.2

Mortgage loans
188

 

 
195

 

Policy loans
79,012

 
5.8

 
73,735

 
5.5

Real estate and other long-term investments
7,248

 
0.5

 
7,452

 
0.6

Cash and cash equivalents
68,753

 
5.0

 
46,064

 
3.4

Total cash, cash equivalents and investments
$
1,370,884

 
100.0

 
$
1,352,180

 
100.0


Cash and cash equivalents increased during the current quarter ended September 30, 2018 as we held cash in anticipation of the novation transaction accounting settlement and those funds had not yet been reinvested into fixed maturities as of the end of the current reporting period.

The following tables represent the cost, gross unrealized gains and losses and fair value for fixed maturities as of the periods indicated.
 
September 30, 2018
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
9,887

 
1,250

 
6

 
11,131

U.S. Government-sponsored enterprises
3,546

 
662

 

 
4,208

States and political subdivisions
740,333

 
4,973

 
4,376

 
740,930

Foreign governments
118

 

 
1

 
117

Corporate
404,183

 
9,655

 
4,706

 
409,132

Commercial mortgage-backed
3,662

 
13

 
49

 
3,626

Residential mortgage-backed
31,482

 
105

 
577

 
31,010

Total fixed maturities
$
1,193,211

 
16,658

 
9,715

 
1,200,154


We reclassified all of our fixed maturity holdings that were previously classified as held-to-maturity to available-for-sale based upon our intent and investment strategy as of September 30, 2018. The net carrying value of the fixed maturities held-to-maturity reclassified as available-for-sale amounted to $209.7 million and resulted in a net unrealized gain of $0.5 million being recorded in other comprehensive income before tax.


19

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)

 
December 31, 2017
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
U.S. Treasury securities
$
9,860

 
1,948

 

 
11,808

U.S. Government-sponsored enterprises
3,570

 
926

 

 
4,496

States and political subdivisions
550,536

 
18,507

 
1,540

 
567,503

Foreign governments
103

 
18

 

 
121

Corporate
370,043

 
20,212

 
1,552

 
388,703

Residential mortgage-backed
1,865

 
118

 
5

 
1,978

Total available-for-sale securities
935,977

 
41,729

 
3,097

 
974,609

Held-to-maturity securities:
 

 
 

 
 

 
 

States and political subdivisions
213,054

 
7,585

 
629

 
220,010

Corporate
20,907

 
1,118

 
658

 
21,367

Total held-to-maturity securities
233,961

 
8,703

 
1,287

 
241,377

Total fixed maturity securities
$
1,169,938

 
50,432

 
4,384

 
1,215,986

 
The majority of the Company's equity securities are diversified stock and bond mutual funds.
 
 
September 30, 2018
 
December 31, 2017
 
Fair Value
 
Fair Value
 
(In thousands)
Equity securities:
 
 
 
Stock mutual funds
$
3,196

 
3,217

Bond mutual funds
12,096

 
12,367

Common stock
96

 
24

Preferred stock
141

 
556

Total equity securities
$
15,529

 
16,164


The Company recognized net realized gain of $156,000 and net realized losses of $232,000 on equity securities held for the three and nine months ended September 30, 2018, respectively.

Valuation of Investments in Fixed Maturity and Equity Securities

Held-to-maturity securities are reported in the consolidated financial statements at amortized cost and available-for-sale securities are reported at fair value. Equity securities are measured at fair value with the change in fair value recorded through net income pursuant to the adoption of ASU 2016-01 as described in Note 2.

The Company monitors all debt 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 ("OTTI") 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


20

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)

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 it is more likely that the Company will be required to sell the security before recovery of its amortized cost basis, the other-than-temporary impairment is recognized in earnings equal to the entire difference between the investment's cost and its fair value at the balance sheet date.  If the Company does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security before recovery of its amortized cost basis, the other-than-temporary impairment is separated into the following: (a) the amount representing the credit loss; and (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 fixed maturity 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.

There were other-than-temporary impairments recorded on several bond issuers for the three and nine months ended September 30, 2018 of $551,000 and $776,000, respectively. No impairments were recognized on equity securities for the three and nine months ended September 30, 2018.

No other-than-temporary impairments were recorded for the three months ended September 30, 2017 but one equity security totaling $17,000 was impaired during the nine months ended September 30, 2017.



21

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2018
(Unaudited)

The following tables present the fair values and gross unrealized losses of fixed maturity securities that have remained in a continuous unrealized loss position for the periods indicated.
 
September 30, 2018
 
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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
757

 
6

 
2

 

 

 

 
757

 
6

 
2

States and political subdivisions
494,116

 
3,659

 
479

 
31,452

 
717

 
42

 
525,568

 
4,376

 
521

Corporate
206,965

 
4,193

 
160

 
6,366

 
513

 
6

 
213,331

 
4,706

 
166

Commercial mortgage-backed
2,725

 
49

 
4

 

 

 

 
2,725

 
49

 
4

Residential mortgage-backed
27,048

 
574

 
21

 
101

 
3

 
3

 
27,149

 
577

 
24

Foreign
117

 
1

 
1

 

 

 

 
117

 
1

 
1

Total available-for-sale securities
$
731,728

 
8,482

 
667

 
37,919

 
1,233

 
51

 
769,647

 
9,715

 
718


As of September 30, 2018, the Company had 51 available-for-sale fixed maturity securities that were in an unrealized loss position for greater than 12 months.

 
December 31, 2017
 
Less than 12 months
 
Greater than 12 months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
(In thousands, except for # of securities)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
49,408

 
312

 
46

 
47,233

 
1,228

 
46

 
96,641

 
1,540

 
92

Corporate
61,071

 
732

 
39

 
7,651

 
820

 
10

 
68,722

 
1,552

 
49

Residential mortgage-backed
132

 
3

 
4

 
157

 
2

 
4

 
289

 
5

 
8

Total available-for-sale securities
110,611

 
1,047

 
89

 
55,041

 
2,050

 
60

 
165,652

 
3,097

 
149

Held-to-maturity securities:
 

 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
14,178

 
45

 
15

 
7,460

 
584

 
14

 
21,638

 
629

 
29

Corporate

 

 

 
2,169

 
658

 
2

 
2,169

 
658

 
2

Total held-to-maturity securities
14,178

 
45

 
15

 
9,629

 
1,242

 
16

 
23,807

 
1,287

 
31

Total fixed maturities
$
124,789

 
1,092

 
104

 
64,670

 
3,292

 
76

 
189,459

 
4,384

 
180

Equity securities: