form10q.htm


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, 2011

or

o   Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the transition period from  _____ to ____

Commission File Number:  000-16509

CITIZENS, INC.
(Exact name of registrant as specified in its charter)
         
 
Colorado
 
84-0755371
 
 
(State of 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 small reporting company.  (Check one):
 
Large accelerated filer  o   Accelerated filer  x Non-accelerated filer  o Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes   x No

As of November 1, 2011, the Registrant had 48,946,546 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
 
 

Part I. Financial Information  Page
Number
  Item 1. Financial Statements  
       
   
2
       
   
4
       
   
5
       
   
6
       
   
8
       
 
Item 2.
28
       
 
Item 3.
48
       
 
Item 4.
49
       
Part II.
Other Information
 
     
 
Item 1.
49
       
 
Item 1A.
50
       
 
Item 2.
50
       
 
Item 3.
50
       
 
Item 4.
50
       
 
Item 5.
50
       
 
Item 6.
51


 
1

 
PART I.  FINANCIAL INFORMATION


Item 1.   FINANCIAL STATEMENTS
 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Financial Position
(In thousands)

 
Assets
 
September 30,
2011
   
December 31,
2010
 
   
(Unaudited)
       
Investments:
           
Fixed maturities available-for-sale, at fair value (cost:  $536,537 and $578,412 in 2011 and 2010, respectively)
  $ 564,269       575,737  
Fixed maturities held-to-maturity, at amortized cost (fair value:  $133,951 and $79,103 in 2011 and 2010, respectively)
    131,820       80,232  
Equity securities available-for-sale, at fair value (cost:  $44,340 and $19,844 in 2011 and 2010, respectively)
    45,366       23,304  
Mortgage loans on real estate
    1,453       1,489  
Policy loans
    38,075       35,585  
Real estate held for investment (less $1,115 and $1,017 accumulated depreciation in 2011 and 2010, respectively)
    9,126       9,200  
Other long-term investments
    141       148  
Short-term investments
    2,066       -  
Total investments
    792,316       725,695  
                 
Cash and cash equivalents
    64,425       49,723  
Accrued investment income
    8,465       7,433  
Reinsurance recoverable
    9,890       9,729  
Deferred policy acquisition costs
    134,587       125,684  
Cost of customer relationships acquired
    29,108       31,631  
Goodwill
    17,160       17,160  
Other intangible assets
    913       1,019  
Federal income tax receivable
    344       1,914  
Property and equipment, net
    7,992       7,101  
Due premiums, net (less $1,466 and $1,568 allowance for doubtful accounts in 2011 and 2010, respectively)
    7,807       8,537  
Prepaid expenses
    1,027       474  
Other assets
    727       406  
Total assets
  $ 1,074,761       986,506  
 
 See accompanying notes to consolidated financial statements
            (Continued) 

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
Consolidated Statements of Financial Position
(In thousands, except share amounts)

 
Liabilities and Stockholders' Equity
 
September 30,
2011
   
December 31,
2010
 
   
(Unaudited)
       
Liabilities:
           
Policy liabilities:
       
 
 
Future policy benefit reserves:
           
Life insurance
  $ 679,257       637,140  
Annuities
    45,891       42,096  
Accident and health
    5,553       5,910  
Dividend accumulations
    10,291       9,498  
Premiums paid in advance
    25,360       23,675  
Policy claims payable
    9,517       10,540  
Other policyholders' funds
    8,489       8,191  
Total policy liabilities
    784,358       737,050  
                 
Commissions payable
    2,368       2,538  
Deferred federal income tax
    18,543       9,410  
Payable for securities in process of settlement
    6,654       -  
Warrants outstanding
    133       1,587  
Other Liabilities
    8,188       8,287  
Total liabilities
    820,244       758,872  
                 
Commitments and contingencies (Note 8)
               
Stockholders' equity:
               
Common stock:
               
Class A, no par value, 100,000,000 shares authorized, 52,082,284 shares issued in 2011 and 51,822,497 shares issued in 2010, including shares in treasury of 3,135,738 in 2011 and 2010
    258,496       256,703  
Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2011 and 2010
    3,184       3,184  
Accumulated deficit
    (15,337 )     (22,581 )
Accumulated other comprehensive income:
               
Unrealized gains on securities, net of tax
    19,185       1,339  
Treasury stock, at cost
    (11,011 )     (11,011 )
Total stockholders' equity
    254,517       227,634  
Total liabilities and stockholders' equity
  $ 1,074,761       986,506  
 
See accompanying notes to consolidated financial statements.                                                                                                                                          

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

 
   
2011
   
2010
 
Revenues:
           
Premiums:
           
Life insurance
  $ 38,639       36,433  
Accident and health insurance
    383       392  
Property insurance
    1,277       1,230  
Net investment income
    7,693       7,272  
Realized investment gains (losses), net
    35       (103 )
Decrease in fair value of warrants
    239       128  
Other income
    282       103  
Total revenues
    48,548       45,455  
Benefits and expenses:
               
Insurance benefits paid or provided:
               
Claims and surrenders
    14,803       15,739  
Increase in future policy benefit reserves
    14,365       11,398  
Policyholders' dividends
    2,169       1,977  
Total insurance benefits paid or provided
    31,337       29,114  
                 
Commissions
    9,224       9,229  
Other general expenses
    6,857       6,587  
Capitalization of deferred policy acquisition costs
    (7,121 )     (6,973 )
Amortization of deferred policy acquisition costs
    4,500       3,800  
Amortization of cost of customer relationships acquired
    708       719  
Total benefits and expenses
    45,505       42,476  
                 
Income before federal income tax
    3,043       2,979  
Federal income tax expense
    820       1,313  
Net income
  $ 2,223       1,666  
 
               
Per Share Amounts:
               
Basic earnings per share of Class A common stock
  $ 0.05       0.03  
Basic earnings per share of Class B common stock
    0.02       0.02  
Diluted earnings per share of Class A common stock
    0.05       0.03  
Diluted earnings per share of Class B common stock
    0.02       0.02  
 
See accompanying notes to consolidated financial statements.

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

 
   
2011
   
2010
 
Revenues:
           
Premiums:
           
Life insurance
  $ 112,481       105,114  
Accident and health insurance
    1,151       1,215  
Property insurance
    3,781       3,592  
Net investment income
    22,924       23,896  
Realized investment gains, net
    41       648  
Decrease in fair value of warrants
    1,454       380  
Other income
    509       602  
Total revenues
    142,341       135,447  
Benefits and expenses:
               
Insurance benefits paid or provided:
               
Claims and surrenders
    44,587       46,410  
Increase in future policy benefit reserves
    39,683       30,726  
Policyholders' dividends
    5,751       5,324  
Total insurance benefits paid or provided
    90,021       82,460  
                 
Commissions
    28,226       26,385  
Other general expenses
    20,386       20,562  
Capitalization of deferred policy acquisition costs
    (22,170 )     (19,946 )
Amortization of deferred policy acquisition costs
    13,249       13,962  
Amortization of cost of customer relationships acquired
    2,113       2,311  
Total benefits and expenses
    131,825       125,734  
                 
Income before federal income tax
    10,516       9,713  
Federal income tax expense
    3,270       3,257  
Net income
  $ 7,246       6,456  
                 
Per Share Amounts:
               
Basic earnings per share of Class A common stock
  $ 0.15       0.13  
Basic earnings per share of Class B common stock
    0.07       0.07  
Diluted earnings per share of Class A common stock
    0.15       0.13  
Diluted earnings per share of Class B common stock
    0.07       0.07  

See accompanying notes to consolidated financial statements.

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
Consolidated Statements of Cash Flows
Nine Months Ended September 30,
(In thousands)
(Unaudited)
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net income
  $ 7,246       6,456  
Adjustments to reconcile net income to net cash
               
provided by operating activities:
               
Realized gains on sale of investments and other assets
    (41 )     (648 )
Net deferred policy acquisition costs
    (8,921 )     (5,984 )
Amortization of cost of customer relationships acquired
    2,113       2,332  
Decrease in fair value of warrants
    (1,454 )     (380 )
Depreciation
    753       787  
Amortization of premiums and discounts on fixed maturities and short-term investments
    3,208       2,548  
Deferred federal income tax benefit
    (567 )     (61 )
Change in:
               
Accrued investment income
    (1,032 )     (951 )
Reinsurance recoverable
    (161 )     1,176  
Due premiums and other receivables
    730       1,736  
Future policy benefit reserves
    39,308       30,223  
Other policyholders' liabilities
    1,747       5,897  
Federal income tax receivable
    1,570       2,120  
Commissions payable and other liabilities
    (269 )     (4,754 )
Other, net
    (668 )     (1,021 )
Net cash provided by operating activities
    43,562       39,476  
Cash flows from investing activities:
               
Sale of fixed maturities, available-for-sale
    -       7,074  
Maturity and calls of fixed maturities, available-for-sale
    127,342       137,506  
Maturity and calls of fixed maturities, held-to-maturity
    52,900       150,350  
Purchase of fixed maturities, available-for-sale
    (82,184 )     (246,238 )
Purchase of fixed maturities, held-to-maturity
    (104,466 )     (71,452 )
Sale of equity securities, available-for-sale
    -       591  
Calls of equity securities, available-for-sale
    682       100  
Purchase of equity securities, available-for-sale
    (25,000 )     (205 )
Principal payments on mortgage loans
    36       33  
Increase in policy loans
    (2,464 )     (2,874 )
Sale of other long-term investments
    5       42  
Purchase of other long-term investments
    (25 )     (1,799 )
Sale of property and equipment
    2       -  
Purchase of property and equipment
    (1,662 )     -  
Maturity of short-term investments
    -       2,500  
Purchase of short-term investments
    (2,066 )     -  
Proceeds from assumption reinsurance agreement
    4,550       -  
Net cash used in investing activities
    (32,350 )     (24,372 )
 
 See accompanying notes to consolidated financial statements. 
            (Continued) 

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
Consolidated Statements of Cash Flows, Continued
Nine Months Ended September 30,
(In thousands)
(Unaudited)
 
   
2011
   
2010
 
Cash flows from financing activities:
           
Warrants exercised
  $ 1,791       -  
Annuity deposits
    4,818       4,041  
Annuity withdrawals
    (3,119 )     (2,404 )
Net cash provided by financing activities
    3,490       1,637  
                 
Net increase in cash and cash equivalents
    14,702       16,741  
Cash and cash equivalents at beginning of year
    49,723       48,625  
Cash and cash equivalents at end of period
  $ 64,425       65,366  
Supplemental disclosures of operating activities:
               
Cash paid during the period for income taxes
  $ 2,267       1,200  

 
Supplemental Disclosures of Non-Cash Investing Activities:

In 2010, the Company sold a parcel of real estate and issued a mortgage loan for $102,000.

See accompanying notes to consolidated financial statements.

 
7

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2011
(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"), Computing Technology, Inc. ("CTI"), Insurance Investors, Inc. ("III"), Citizens National Life Insurance Company ("CNLIC"), Security Plan Life Insurance Company ("SPLIC"), and Security Plan Fire Insurance Company ("SPFIC").  Integrity Capital Corporation and Integrity Capital Life Insurance Company were merged into CICA effective April 1, 2011.  All significant inter-company accounts and transactions have been eliminated.  Citizens and its wholly-owned subsidiaries are collectively referred to as "the Company," "we," "us" or "our."

The consolidated statements of financial position for September 30, 2011, the consolidated statements of operations for the three and nine-month periods ended September 30, 2011 and 2010, and the consolidated statements of cash flows for the nine-month periods then ended 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, 2011, and for comparative periods have been made.

We provide primarily life insurance and a small amount of health insurance policies through our insurance subsidiaries:  CICA, SPLIC, and CNLIC.  CICA and CNLIC issue ordinary whole-life policies, burial insurance, pre-need policies, and accident and health related policies, throughout the Midwest and southern United States.  CICA also issues ordinary whole-life 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.

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 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.

Acquisitions

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

 
8

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2011
(Unaudited)
 
Reclassification

Reclassifications have been made in the current year related to certain prior year reported amounts to provide consistent presentation.  The Company recorded reclassifications related to DAC amounts capitalized and amortized to properly reflect the amount used to develop the DAC asset balance and to provide consistent presentation with the current year.  We recorded increases to DAC capitalized of $0.8 million and $2.5 million and an increase in amortization for the same amounts for the three and nine months ended September 30, 2010, respectively.

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements included in our 2010 Form 10-K Annual Report, which should be read in conjunction with these accompanying Consolidated Financial Statements.

(2)           Accounting Pronouncements

Accounting Standards Not Yet Adopted

In October 2010, the Financial Accounting Standards Board ("FASB") issued guidance modifying the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts.  The guidance specifies that the costs must be based on successful efforts.  The guidance also specifies that advertising costs should be included as deferred acquisition costs only when the direct-response advertising accounting criteria are met.  If application of the guidance would result in the capitalization of acquisition costs that had not been capitalized prior to adoption, the entity may elect not to capitalize those additional costs.  The new guidance is effective for reporting periods beginning after December 15, 2011, and should be applied prospectively, with retrospective application permitted.  The Company is in the process of evaluating the impact of adoption of the guidance on the results of operations and financial position.  Based upon its initial review of this guidance, the Company will adopt this standard on January 1, 2012, with a retrospective application.  The financial impact is currently estimated to result in a reduction in the DAC asset upon implementation between $10.0 million and $13.0 million as a retrospective adjustment to beginning of year retained earnings at the date of adoption, and an estimated increase in pre-tax earnings of $0.5 million to $1.0 million.

In June 2011, the FASB amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The provisions of this new guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance will have no impact on our financial statements.

Accounting Standards Update ("ASU") 2011-04, “Fair Value Measurement ("Topic 820") – Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

Accounting Standards Recently Adopted

In December 2010, the FASB issued disclosure guidance for entities that enter into business combinations that are material.  The guidance specifies that if an entity presents comparative financial statements, the entity should disclose pro forma revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period.  The guidance expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination.  The Company will apply the guidance to any business combinations entered into on or after January 1, 2011.

 
9

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2011
(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, 2011
 
   
Life
Insurance
   
Home
Service
Insurance
   
Other
Non-Insurance
Enterprises
   
Consolidated
 
   
(In thousands)
 
Revenues:
       
 
             
Premiums
  $ 29,491       10,808       -       40,299  
Net investment income
    4,309       3,178       206       7,693  
Realized investment gains, net
    25       4       6       35  
Decrease in fair value of warrants
    -       -       239       239  
Other income
    240       6       36       282  
Total revenue
    34,065       13,996       487       48,548  
                                 
Benefits and expenses:
                               
Insurance benefits paid or provided:
                               
Claims and surrenders
    9,834       4,969       -       14,803  
Increase in future policy benefit reserves
    13,133       1,232       -       14,365  
Policyholders' dividends
    2,152       17       -       2,169  
Total insurance benefits paid or provided
    25,119       6,218       -       31,337  
                                 
Commissions
    5,516       3,708       -       9,224  
Other general expenses
    2,983       3,233       641       6,857  
Capitalization of deferred policy acquisition costs
    (5,484 )     (1,637 )     -       (7,121 )
Amortization of deferred policy acquisition costs
    3,680       820       -       4,500  
Amortization of cost of customer relationships acquired
    206       502       -       708  
Total benefits and expenses
    32,020       12,844       641       45,505  
Income (loss) before income tax expense
  $ 2,045       1,152       (154 )     3,043  
 
 
10


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2011
(Unaudited)
 
   
Nine Months Ended September 30, 2011
 
   
Life
Insurance
   
Home
Service
Insurance
   
Other
Non-Insurance
Enterprises
   
Consolidated
 
   
(In thousands)
 
Revenues:
       
 
             
Premiums
  $ 85,027       32,386       -       117,413  
Net investment income
    12,662       9,690       572       22,924  
Realized investment gains, net
    29       6       6       41  
Decrease in fair value of warrants
    -       -       1,454       1,454  
Other income
    404       20       85       509  
Total revenue
    98,122       42,102       2,117       142,341  
                                 
Benefits and expenses:
                               
Insurance benefits paid or provided:
                               
Claims and surrenders
    29,691       14,896       -       44,587  
Increase in future policy benefit reserves
    36,957       2,726       -       39,683  
Policyholders' dividends
    5,696       55       -       5,751  
Total insurance benefits paid or provided
    72,344       17,677       -       90,021  
                                 
Commissions
    16,916       11,310       -       28,226  
Other general expenses
    8,936       9,488       1,962       20,386  
Capitalization of deferred policy acquisition costs
    (16,971 )     (5,199 )     -       (22,170 )
Amortization of deferred policy acquisition costs
    11,290       1,959       -       13,249  
Amortization of cost of customer relationships acquired
    705       1,408       -       2,113  
Total benefits and expenses
    93,220       36,643       1,962       131,825  
Income before income tax expense
  $ 4,902       5,459       155       10,516  
 
 
11

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2011
(Unaudited)

   
Three Months Ended September 30, 2010
 
   
Life
Insurance
   
Home
Service
Insurance
   
Other
Non-Insurance
Enterprises
   
Consolidated
 
   
(In thousands)
 
Revenues:
       
 
             
Premiums
  $ 27,514       10,541       -       38,055  
Net investment income
    3,893       3,244       135       7,272  
Realized investment gains (losses), net
    1       (96 )     (8 )     (103 )
Decrease in fair value of warrants
    -       -       128       128  
Other income
    78       10       15       103  
Total revenue
    31,486       13,699       270       45,455  
                                 
Benefits and expenses:
                               
Insurance benefits paid or provided:
                               
Claims and surrenders
    10,498       5,241       -       15,739  
Increase in future policy benefit reserves
    10,688       710       -       11,398  
Policyholders' dividends
    1,965       12       -       1,977  
Total insurance benefits paid or provided
    23,151       5,963       -       29,114  
                                 
Commissions
    5,572       3,657       -       9,229  
Other general expenses
    2,603       3,529       455       6,587  
Capitalization of deferred policy acquisition costs
    (5,414 )     (1,559 )     -       (6,973 )
Amortization of deferred policy acquisition costs
    3,448       352       -       3,800  
Amortization of cost of customer relationships acquired
    232       487       -       719  
Total benefits and expenses
    29,592       12,429       455       42,476  
Income (loss) before income tax expense
  $ 1,894       1,270       (185 )     2,979  
 
 
12

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2011
(Unaudited)

   
Nine Months Ended September 30, 2010
 
   
Life
Insurance
   
Home
Service
Insurance
   
Other
Non-Insurance
Enterprises
   
Consolidated
 
   
(In thousands)
 
Revenues:
       
 
             
Premiums
  $ 78,364       31,557       -       109,921  
Net investment income
    13,239       10,251       406       23,896  
Realized investment gains (losses), net
    116       585       (53 )     648  
Decrease in fair value of warrants
    -       -       380       380  
Other income
    487       63       52       602  
Total revenue
    92,206       42,456       785       135,447  
                                 
Benefits and expenses:
                               
Insurance benefits paid or provided:
                               
Claims and surrenders
    30,644       15,766       -       46,410  
Increase in future policy benefit reserves
    28,123       2,603       -       30,726  
Policyholders' dividends
    5,267       57       -       5,324  
Total insurance benefits paid or provided
    64,034       18,426       -       82,460  
                                 
Commissions
    15,316       11,069       -       26,385  
Other general expenses
    8,234       10,964       1,364       20,562  
Capitalization of deferred policy acquisition costs
    (15,097 )     (4,849 )     -       (19,946 )
Amortization of deferred policy acquisition costs
    13,108       854       -       13,962  
Amoritzation of cost of customer relationships acquired
    837       1,474       -       2,311  
Total benefits and expenses
    86,432       37,938       1,364       125,734  
Income (loss) before income tax expense
  $ 5,774       4,518       (579 )     9,713  
 
(4)Total Comprehensive Income
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(In thousands)
 
 
       
 
             
Net income
  $ 2,223       1,666       7,246       6,456  
Other comprehensive income net of effects of deferred acquisiton costs and taxes:
                               
Unrealized gains on available-for-sale securities
    15,431       11,288       27,546       21,554  
Tax expense
    (5,460 )     (2,700 )     (9,700 )     (7,135 )
Other comprehensive income
    9,971       8,588       17,846       14,419  
Total comprehensive income
  $ 12,194       10,254       25,092       20,875  
 
 
13


 
 
 
(5)
Earnings Per Share

 
The following tables set forth the computation of basic and diluted earnings per share.
 
   
Three Months Ended
September 30,
 
   
2011
   
2010
 
   
(In thousands,
except per share amounts)
 
Basic and diluted earnings per share:
           
Numerator:
       
 
 
Net income
  $ 2,223       1,666  
                 
Net income allocated to Class A common stock
  $ 2,200       1,649  
Net income allocated to Class B common stock
    23       17  
Net income available to common stockholders
  $ 2,223       1,666  
Denominator:
               
Weighted average shares of Class A outstanding - basic and diluted
    48,912       48,687  
Weighted average shares of Class B outstanding - basic and diluted
    1,002       1,002  
                 
Basic and diluted earnings per share of Class A common stock
  $ 0.05       0.03  
Basic and diluted earnings per share of Class B common stock
    0.02       0.02  
 
 
   
Nine Months Ended
September 30,
 
   
2011
   
2010
 
   
(In thousands,
except per share amounts)
 
Basic and diluted earnings per share:
           
Numerator:
       
 
 
Net income
  $ 7,246       6,456  
                 
Net income allocated to Class A common stock
  $ 7,172       6,390  
Net income allocated to Class B common stock
    74       66  
Net income available to common stockholders
  $ 7,246       6,456  
Denominator:
               
Weighted average shares of Class A outstanding - basic
    48,762       48,687  
Weighted average shares of Class A outstanding - diluted
    48,764       48,687  
Weighted average shares of Class B outstanding - basic and diluted
    1,002       1,002  
                 
Basic earnings per share of Class A common stock
  $ 0.15       0.13  
Basic earnings per share of Class B common stock
    0.07       0.07  
Diluted earnings per share of Class A common stock
    0.15       0.13  
Diluted earnings per share of Class B common stock
    0.07       0.07  
 
The diluted earnings per share calculation has assumptions regarding the exercise of warrants issued to certain investors as discussed below in Note 9 - Convertible Preferred Stock: Warrants.  For the three months ended September 30, 2011, no dilution occurred.  The calculation for the nine months ended September 30, 2011 assumes the issue of 1,851 additional shares with a reduction in net income of $0.1 million.
 
 
14

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2011
(Unaudited)
 
(6)
Investments

 
The Company invests primarily in fixed maturity securities, which totaled 81.2% of total investments and cash and cash equivalents at September 30, 2011.
 
   
September 30, 2011
   
December 31, 2010
 
   
Carrying
Value
   
% of Total
Carrying Value
   
Carrying
Value
   
% of Total
Carrying Value
 
   
(In thousands)
         
(In thousands)
       
                         
Fixed maturity securities
  $ 696,089       81.2     $ 655,969       84.6  
Equity securities
    45,366       5.3       23,304       3.0  
Mortgage loans
    1,453       0.2       1,489       0.2  
Policy loans
    38,075       4.4       35,585       4.6  
Real estate
    9,126       1.1       9,200       1.2  
Other long-term investments
    141       -       148       -  
Short-term investments
    2,066       0.3       -       -  
Cash and cash equivalents
    64,425       7.5       49,723       6.4  
Total cash, cash equivalents and investments
  $ 856,741       100.0     $ 775,418       100.0  
 
 
During the nine months ended September 30, 2011, we reinvested $24.0 million of proceeds received from calls and prepayments of bonds in bond mutual funds.  This resulted in a decrease of our fixed maturity holdings and an increase of our equity securities holdings as a percentage of total investments.  Our cash balances fluctuate until excess available funds are invested.
 
 
15

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2011
(Unaudited)
 
The following tables represent gross unrealized gains and losses for fixed maturities and equity securities as of the periods indicated.
 
   
September 30, 2011
 
   
Cost or
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In thousands)
 
Fixed maturities:
                       
Fixed maturities available-for-sale:
       
 
             
U.S. Treasury securities
  $ 10,241       3,654       -       13,895  
U.S. Government-sponsored enterprises
    206,139       3,256       61       209,334  
States of the United States and political subdivisions of the states
    139,253       9,424       1,660       147,017  
Foreign governments
    105       39       -       144  
Corporate
    171,472       14,221       1,732       183,961  
Securities not due at a single maturity date
    9,327       598       7       9,918  
Total available-for-sale securities
    536,537       31,192       3,460       564,269  
                                 
Held-to-maturity securities:
                               
U.S. Government-sponsored enterprises
    84,588       426       43       84,971  
States of the United States and political subdivisions of the states
    47,232       1,862       114       48,980  
Total held-to-maturity securities
    131,820       2,288       157       133,951  
Total fixed maturities
  $ 668,357       33,480       3,617       698,220  
                                 
Equity securities:
                               
Stock mutual funds
  $ 18,931       1,295       815       19,411  
Bond mutual funds
    24,000       -       68       23,932  
Common stock
    17       10       -       27  
Preferred stock
    1,392       604       -       1,996  
Total equity securities
  $ 44,340       1,909       883       45,366  
 
 
16

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2011
(Unaudited)
 
   
December 31, 2010
 
   
Cost or
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In thousands)
 
Fixed maturities:
                       
Available-for-sale securities:
       
 
             
U.S. Treasury securities
  $ 10,908       1,917       -       12,825  
U.S. Government-sponsored enterprises
    290,904       441       6,390       284,955  
States of the United States and political subdivisions of the states
    107,214       539       6,034       101,719  
Foreign governments
    106       26       -       132  
Corporate
    155,277       7,237       1,216       161,298  
Securities not due at a single maturity dates
    14,003       833       28       14,808  
Total available-for-sale securities
    578,412       10,993       13,668       575,737  
                                 
Held-to-maturity securities:
                               
U.S. Government-sponsored enterprises
    80,232       272       1,401       79,103  
Total fixed maturities
  $ 658,644       11,265       15,069       654,840  
                                 
Equity securities:
                               
Stock mutual funds
  $ 17,931       2,566       19       20,478  
Common stock
    17       29       -       46  
Preferred stock
    1,896       884       -       2,780  
Total equity securities
  $ 19,844       3,479       19       23,304  
 
 
At September 30, 2011, the Company had $9.3 million of mortgage-backed security holdings based on amortized cost, of which $8.5 million, or 91.4%, were residential U.S. Government-sponsored issues.  Mortgage-backed securities are also referred to as securities not due at a single maturity date throughout this report.  The majority of the Company's equity securities are diversified stock and bond mutual funds.

Valuation of Investments in Fixed Maturity and Equity Securities

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

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

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

 
17

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2011
(Unaudited)
 
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 extent 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.

The Company did not recognize any other-than-temporary impairments ("OTTI") during the nine months ended September 30, 2011 and September 30, 2010.
 
 
18

 
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2011
(Unaudited)
 
The tables below 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, 2011
 
   
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. Government-sponsored enterprises
  $ 15,955       46       15       1,005       15       1       16,960       61       16  
Securities issued by states and political subdivisions
    4,653       54       7       10,778       1,606       8       15,431       1,660       15  
Corporate
    30,327       1,235       31       5,998       497       6       36,325       1,732       37  
Securities not due at a single maturity date
    563       2       1       70       5       2       633       7       3  
Total available-for-sale securities
    51,498       1,337       54       17,851       2,123       17       69,349       3,460       71  
Held-to-maturity securities:
                                                                       
U.S. Government-sponsored enterprises
    21,164       28       10       1,124       15       1       22,288       43       11  
Securities issued by states and political subdivisions
    5,783       114       6       -       -       -       5,783       114       6  
Total held-to-maturity securities
    26,947       142       16       1,124       15       1       28,071       157       17  
Total fixed maturities
  $ 78,445       1,479       70       18,975       2,138       18       97,420       3,617       88  
                                                                         
Equity securities:
                                                                       
Stock mutual funds
  $ 9,649       815       3       -       -       -       9,649       815       3  
Bond mutual funds
    23,932       68       10       -       -       -       23,932       68       10  
Total equity securities
  $ 33,581       883       13       -       -       -       33,581       883       13  
 
 
   
December 31, 2010
 
   
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:
                                                &#